Page 2 :
1st Edition : 2008-09, 13rd Revised Edition : 2020-21, , q ys[kk'kkL= : MkW- ,l- osG flag, q Accountancy : Dr. S. K. Singhq Prob. & Sol. in Accountancy :, Dr. S. K. Singhq Project Work in Accountancy :, Dr. Singh & Guptaq m|ferk : MkW- flag ,oa xqIrk, q Entrepreneurship : Dr. Singh & Guptaq izSfDVdy m|ferk : MkW- flag ,oa xqIrk, q O;kolkf;d v/;;u : MkW- flag ,oa xqIrk, q O;kolkf;d v/;;u : MkW- vkj- ;w- flag, , q Business Studies : Dr. Singh & Guptaq Business Studies : Dr. R.U. Singhq Project Work in Business Studies :, Dr. Singh & Guptaq vFkZ'kkL= : MkW- vuqie vxzoky, q Economics : Dr. Anupam Agrawalq Prob. & Sol. in Economics :, Dr. Anupam Agrawalq Project Work in Economics :, Dr. Anupam Agrawalq Lab Manual Mathematics :, Dr. Sharma & Goyal-, , To protect you against counterfeit/fake/duplicate books we have put a Hologram on the cover of our titles. The, hologram displays a unique 3-D multilevel, multicolor effect of our logo from different angles, a flying bird is on right, lower side which is shown as flying when the Hologram is moved, Gradient lines top right of the hologram which, move with the movement of Hologram, SBPD in switch of SBPD logo when u turn the hologram 90º then you can see, SBPD or when tilted properly illuminated under a single source of light., A fake hologram does not show above qualities of Original Hologram., , ã, , Authors, Book Code : 5065, ISBN : 978-93-83697-99-1, Price : ` 530.00, No part of this publication can be reproduced or copied in any form or by any means without permission in writing of, the Publisher. Breach of this condition is liable for legal action., Note : This publication is being sold on the condition and understanding that the information, comments and views, it contains are merely for guidance and reference and must not be taken as having the authority of, or being binding, in any way on, the author, editors, publishers and sellers, who do not owe any responsibility whatsoever for any loss,, damage or distress to any person, whether or not a purchaser of this publication, on account of any action taken or, not taken on the basis of this publication. Despite all the care taken, errors or omissions may have crept, inadvertently into this publication., All disputes are subject to the jurisdiction of competent courts in Agra., , SBPD Publications, , , 3/20B, Agra-Mathura Bye Pass Road, Near Tulsi Cinema, Agra-282 002, Phones : (0562) 2527707, 2854327, 2858183, 4042977, 4304545; Mobile : 09358177555,, 09412258082-86; e-mail : sbpd.publications@gmail.com; visit us at : www.sbpdpublications.com
Page 3 :
Preface, The present book 'Accountancy' has been written to meet the specific requirements of the, students of Class XII preparing for CBSE, Delhi, JAC, Ranchi and other State Boards, examinations. The book is divided into two parts, viz. Part A and Part B.., Distinctive Features :, The book has a number of distinctive features, some of which are as follows :, q Learning objectives in the form of chapter outline have been given at the beginning of, each chapter., q Systematic accounting treatment of the subject in simple language and lucid manner., q Accounting treatment in conformity with the various laws and New Companies Act,, 2013 and Accounting Standards issued by the Institute of Chartered Accountants of, India., q Treatment of Goodwill as per AS-26 (New Indian AS-38)., q Problems relating to Cash Flow Statement have been solved as per revised, AS-3 issued by ICAI., q Exhibits and diagrams have been given to explain and illustrate the material., q Questions have been arranged under (i) Useful Questions (A) Long Answer,, (B) Short Answer, (C) Very Short Answer and (D) Objective Type Questions and (ii), Practical Problems which have further been sub-classified under appropriate, headings, that too, according to the serial order of Illustrations., q Practical problems have been arranged in order of their standard so that logical, sequence and flow from simple to hard and to harder could be maintained., q Chapterwise Objective type Questions is also Provided Separately in form of Booklets., This will help Students in preparation of Board Exam as well as CA-CPT Exam., q In addition, the book contains latest model papers and board question papers., q The Chapter on redemption of debentures is fully revised pertaining to Companies, Act, 2013 with the following descriptions:, (i) Creating Debenture Redemption Reserve @ 25%/10% as per Section 71(4) of the, Companies Act, 2013, Rule 18(7b) of the Companies (Share Capital and Debentures), Rules 2014 and 2019., (ii) Investment or deposit of 15% of the face value of debentures to be redeemed towards, Debentures Redemption Investment as per Rule 18(7C) of the Companies (Share, Capital and Debentures) Rules, 2014., (iii) As per Section 53 of the Companies Act, 2013, Companies would no longer be, permitted to issue shares at discount. Hence, teachers are requested not to teach issue, of shares at discount, however they should be acquainted with the concept of issue of, shares at discount ., The authors are highly grateful to M/s SBPD Publications for the initiative and pains, taken to get the book printed and published so nicely and that, too, in a very short period of time., We are also thankful to the teachers and students who have appreciated the book and, given feed back for the improvement of the book and look forward for their Valuable, Suggestions., Authors
Page 4 :
Highlights of the Companies Act, 2013 and, Companies (Share Capital and Debentures) Rule 2014, From Accounting Point of View, 1. Law provides for uniform financial year (April to March) for all Companies (Section, 129 : Financial Year)., 2. The maximum number of partners in case of Partnership Firms would be 50 as per, Companies (Miscellaneous) Rules, 2014., 3. As per Companies (Amendment) Act, 2015, the requirement of minimum paid up, capital for Public Company and Private Company of ` 5,00,000 and ` 1,00,000, respectively has been removed., 4. Shares, other than Sweat Equity Share, cannot be issued at a discount. (Section 53, Prohibition on Issue of Shares at Discount)., 5. Rate of Maximum Interest on Calls-in-advance (increased from 6% p.a. to) 12% p.a., 6. Rate of Maximum Interest on Calls-in-arrears (increased from 5% p.a. to) 10% p.a., 7. Schedule-VI of the 1956 Companies Act has been replaced by Schedule III of the, Companies Act, 2013., 8. As per SEBI Circular No. 12 of June 17, 2014, Rule 1(C) Condition of 90% as, minimum subscription of issue size has been withdrawn. Now it requires merely, disclosure of minimum subscription in the offer document (i.e., prospectus) as, required under Section 39(1) of Companies Act, 2013., 9. (i) According to Section 39(2) of the Companies Act, 2013, the amount payable on, every security shall not be less than 5% of the nominal amount of the security or, such other percentage of amount, as may be prescribed by SEBI by making, regulations., (ii) As per SEBI, guidelines, application money on each share should not be less than, 25%/10% of the issue price of each share., 10. As per Rule 18(7) of Companies (Share Capital and Debentures) Rule, 2014, atleast, 25%/10% (Companies Rule 2019) of debentures issued must be transferred from, Surplus of Profit and Loss Statement to Debenture Redemption Reserve (DRR), before the commencement of redemption of debentures., 11. Every Company which is required to create DRR shall on or before 30th April each, year, must invest or deposit in specified securities, a sum of 15% of debentures to be, redeemed maturing during the year ending 31st March of the next year., 12. According to Accounting Standard (AS) 4 Revised the proposed dividend will not be, treated as current liability of that year.
Page 5 :
Syllabus, Central Board of Secondary Education (CBSE), Delhi, ACCOUNTANCY XII, One Paper, , 3 Hours, , Units, Part A :, Unit 1., Unit 2., Unit 3., Part B :, Unit 4., Unit 5., Part C :, , Theory : 80 Marks, Periods, , Marks, , Accounting for Not for Profit Organizations,, Partnership Firms and Companies, Financial Statements of Not-for-Profit Organizations, Accounting for Partnership Firms, Accounting for Companies, , 25, 90, 35, , 10, 30, 20, , 150, , 60, , 30, 20, , 12, 8, , 50, , 20, , 20, , 20, , Financial Statement Analysis, Analysis of Financial Statements, Cash Flow Statement, Project Work, Project work will include :, Project File, Written Test, Viva Voce, , 4 Marks, 12 Marks (One Hour), 4 Marks, OR, , Part B :, , Computerized Accounting, , Unit 4., , Computerized Accounting, , 50, , 20, , Practical Work, , 20, , 20, , Part C :, , Practical work will include :, Practical File, Practical Examination, Viva Voce, , 4 Marks, 12 Marks (One Hour), 4 Marks, , Part A : Accounting for Not for Profit Organizations, Partnership Firms and Companies, 60 Marks, Unit 1 : Financial Statements of Not-for-Profit Organisation, q Not-for-Profit Organisations : Concept, q Receipts and Payments Account : Features and Preparation., q Income and Expenditure Account : Features, Preparation of Income and Expenditure, Account and Balance Sheet from the given receipts and payments account with additional, information.
Page 6 :
(ii), Unit 2 : Accounting for Partnership Firms, q Partnership : Features, Partnership Deed., q Provisions of the Indian Partnership Act 1932 in the Absence of Partnership Deed., q Fixed v/s Fluctuating Capital Accounts. Preparation of Profit & Loss Appropriation, Account-Division of Profit among Partners, Guarantee of Profits., q Past Adjustments (relating to interest on Capital, Interest on Drawing, Salary and Profit, Sharing Ratio)., q Goodwill : Nature, Factors Affecting and Methods of Valuation-Average Profit, Super, Profit and Capitalization., Note : Interest on partner’s loan is to be treated as a charge against profits., Accounting for Partnership Firms Reconstitution and Dissolution, q Change in the Profit Sharing Ratio among the Existing Partners-Sacrificing Ratio,, Gaining Ratio, Accounting for Revaluation of Assets and Reassessment of Liabilities and, Treatment of Reserves and Accumulated Profits, Preparation of Revaluation Account and, Balance Sheet., q Admission of a Partner : Effect of Admission of a Partner on Change in the Profit Sharing, Ratio, Treatment of Goodwill (as per AS-26), Treatment for Revaluation of Assets and Reassessment of Liabilities, Treatment of Reserves and Accumulated Profits, Adjustment of, Capital Accounts and Preparation of Balance Sheet., q Retirement and Death of a Partner : Effect of Retirement/Death of a Partner on Change in, Profit Sharing Ratio, Treatment of Goodwill (as per AS-26), Treatment for Revaluation of, Assets and Re-assessment of Liabilities, Adjustment of Accumulated Profits and, Reserves, Adjustment of Capital Accounts and Preparation of Balance Sheet. Preparation, of Loan Account of the Retiring Partner., Calculation of Deceased Partner s Share of Profit till the Date of Death. Preparation of, Deceased Partner sCapital Account and his Executor sAccount., q Dissolution of a Partnership Firm : Meaning of Dissolution of Partnership and, Partnership Firm, Types of Dissolution of a Firm. Settlement of Accounts-Preparation of, Realization Account, and other Related Accounts : Capital Accounts of Partners and, Cash/Bank A/c (Excluding Piecemeal Distribution, Sale to a Company and Insolvency of, Partner(s))., Note : (i) The realised value of each asset must be given, at the time of dissolution., (ii) In case, the realisation expenses are borne by a partner, clear indication should be given, regarding the payment thereof., Unit 3 : Accounting for Companies, Accounting for Share Capital, q Share and Share Capital : Nature and Types., q Accounting for Share Capital : Issue and Allotment of Equity and Preferences Shares., Public Subscription of Shares-over Subscription and Under Subscription of Shares; Issue, at Par and at Premium, Calls in Advance and Arrears (Excluding Interest), Issue of Shares, for Consideration Other than Cash., q Concept of Private Placement and Employee Stock Option Plan (ESOP)., q Accounting Treatment of Forfeiture and Re-issue of Shares., q Disclosure of Share Capital in the Balance Sheet of a Company., Accounting for Debentures, q Debentures : Issue of Debentures at Par, At a Premium and at a Discount. Issue of, Debentures for Consideration other than Cash, Issue of Debentures with terms of, Redemption; Debentures as Collateral Security-Concept, Interest on Debentures. Writing, off Discount/Loss on Issue of Debentures., q Redemption of Debentures-Methods : Lump-sum, Draw of Lots, Creation of Debenture, Redemption Reserve., Note : Related sections of the Companies Act, 2013 will apply., Part B : Financial Statement Analysis, 20 Marks, Unit 4 : Analysis of Financial Statements, q Financial Statements of a Company : Statement of Profit and Loss and Balance Sheet in, the Prescribed Form with Major Headings and Sub-Headings (as per Schedule III to the, Companies Act, 2013)., Note : Exceptional Items, extraordinary items and profit (loss) from discontinued
Page 7 :
(iii), operations are excluded., Financial Statement Analysis : Objectives, Importance and Limitations., Tools for Financial Statement Analysis : Comparative Statements, Common Size, Statements, Cash Flow Analysis, Ratio Analysis., q Accounting Ratios : Meaning, Objectives, Classification and Computation., q Liquidity Ratios : Current Ratio and Quick Ratio., q Solvency Ratios : Debt to Equity Ratio, Total Assets to Debt Ratio, Proprietary Ratio and, Interest Coverage Ratio., q Activity Ratios : Inventory Turnover Ratio, Trade Receivables Turnover Ratio, Trade, Payables Turnover Ratio and Working Capital Turnover Ratio., q Profitability Ratios : Gross Profit Ratio, Operating Ratio, Operating Profit Ratio, Net, Profit Ratio and Return on Investment., Note : Net Profit Ratio is to be calculated on the basis profit before and after tax., Unit 5 : Cash Flow Statement, q Meaning, Objectives and Preparation (as per AS-3 (Revised) (Indirect Method only), Note : (i) Adjustments relating to depreciation and amortisation, profit or loss on sale of, assets including investments, dividend (both final and interim) and tax., (ii) Bank overdraft and cash credit to be treated as short-term borrowings., (iii) Current investments to be taken as marketable securities unless otherwise specified., Project Work, 20 Marks, Note : Kindly refer to the guidelines published by the CBSE., OR, Part B : Computerised Accounting, 20 Marks, Unit 3 :, Computerised Accounting, Overview of Computerised Accounting System., q Introduction : Application in Accounting., q Features of Computerised Accounting System., q Structure of CAS., q Software Packages : Generic, Specific, Tailored, Accounting Application of Electronic Spreadsheet., q Concept of Electronic Spreadsheet., q Features Offered by Electronic Spreadsheet., q Application in Generating Accounting Information, Bank Reconciliation Statement;, Asset Accounting; Loan Repayment of Loan Schedule, Ratio Analysis., q Data Representation Graphs, Charts and Diagrams., Using Computerised Accounting System., q Steps in installation of CAS, codification and Hierarchy of account heads, creation of, accounts., q Data : Entry, validation and verification., q Adjusting entries, preparation of balance sheet, profit and loss account with closing, entries and opening entries., q Need and security features of the system., Database Management System (DBMS), q Concept and Features of DBMS., q DBMS in Business Application., q Generating Accounting information-Payroll., q, q
Page 8 :
(iv), , Jharkhand Academic Council (JAC), Ranchi, , ACCOUNTANCY, One Paper, , 3 Hours, , Unit, Part A :, 1., 2., 3., 4., Part B :, 5., 6., 7., , Part C :, 5., 6., 7., 8., , 80 Marks, Periods Marks, , Accounting for Not-For-Profit Organisations,, Partnership Firms and Companies, Accounting for Not-for-Profit Organisations, Accounting for Partnership Firms, Reconstitution of Partnership, Accounting for Share Capital and Debenture, Financial Statement Analysis, Analysis of Financial Statements, Cash Flow Statement, Project Work, Unit 1 : Project File, 4 marks, Unit 2 : Written Test, 12 marks (one hour), Unit 3 : Viva Voce, 4 marks, OR, Computerized Accounting, Overview of Computerized Accounting System, Accounting using Data Base Management System (DBMS), Accounting Applications of Electronic Spread Sheet, Practical Work in Computerized Accounting, Unit 1 : File, 4 marks, Unit 2 : Practical Examination, 12 marks (one hour), Unit 3 : Viva Voce, 4 marks, , 22, 14, 34, 54, 124, , 10, 5, 20, 25, 60, , 33, 33, 18, , 12, 8, 20, , 84, , 40, , 12, 26, 24, 22, , 5, 8, 7, 20, , 84, , 40, , Part A : Accounting for Not-for-Profit Organizations,, Partnership Firms and Companies, (Periods 124), Unit 1 :Accounting for Not-for-Profit Organisations, (Periods 22), q Not-for-Profit Organisations : Meaning and Examples., q Receipts and Payments Account : Meaning and Concept of Fund based Accounting, q Preparation of Income and Expenditure Account and Balance Sheet from Receipt, and Payment Account with Additional Information., Unit 2 : Accounting for Partnership Firms, (Periods 14), q Nature of Partnership Firm, Partnership Deed Meaning, Importance., q Partners Capital Accounts : Fixed Vs. Fluctuating Capital, Division of Profit, among Partners, Profit and Loss Appropriation Account including Past, Adjustments.
Page 9 :
(v), Unit 3 : Reconstitution of Partnership, (Periods 34), q Changes in Profit Sharing Ratio among the Existing Partners Sacrificing Ratio, and Gaining Ratio., q Accounting for Revaluation of Assets and Liabilities and Distribution of Reserves, and Accumulated Profits., q Goodwill : Nature, Factors affecting and Methods of Valuation : Average Profit,, Super Profit and Capitalisation Methods., q Admission of a Partner : Effect of Admission of Partners, Change in Profit Sharing, Ratio, Accounting Treatment for Goodwill (as per AS -10), Revaluation of Assets, and Liabilities, Reserves (Accumulated Profit) and Adjustment of Capitals., q Retirement/Death of a Partner : Change in Profit Sharing Ratio, Accounting, Treatment of Goodwill, Revaluation of Assets and Liabilities, Adjustment of, Accumulated Profits (Reserve) and Capitals., Unit 4 : Accounting for Share Capital and Debenture, (Periods 54), q Share Capital : Meaning, Nature and Types., q Accounting for Share Capital : Issue and Allotment of Equity and Preference, Shares; Private placement of shares, meaning of employee stock option plan., Public Subscription of Shares : Over Subscription and Under Subscription; Issue, at Par, Premium and at Discount; Calls in Advance, Calls in Arrears, Issue of, Shares for Consideration other than Cash., q Forfeiture of Shares : Accounting Treatment, Re-issue of Forfeited Shares., q Presentation of Share Capital and Debenture in Company sBalance Sheet., q Issue of Debenture : At Par, at Premium, Issue of Debentures for Consideration, other than Cash., q Redemption of Debentures out of Capital Redemption Methods : Lump-sum, Payment, Draw by Lots, Purchase in the Open Market and Conversion (Excluding, Cum-interest and Ex-interest)., Part B : Financial Statement Analysis, Unit 5 : Analysis of Financial Statements, (Periods 33), q Financial Statements of a Company : Preparation of Simple Balance Sheet of a, Company in the Prescribed Form with Major Headings only., q Financial Statement Analysis : Meaning, Significance and Limitations., q Tools for Financial Statement Analysis : Comparative Statements, Common Size, Statements., Accounting Ratios : Meaning and Objectives, Types of Ratios, Liquidity Ratios : Current Ratio, Liquid Ratio, Solvency Ratios : Debt to Equity, Total Assets to Debt, Proprietary Ratio., Activity Ratios, : Inventory Turnover, Debtors Turnover, Payable, Turnover, Working Capital Turnover, Fixed Assets, Turnover., Profitability Ratio : Gross Profit, Operating Ratio, Net Profit Ratio, Return on, Investment, Earning per Share, Dividend per Share, Price, Earning Ratio.
Page 10 :
(vi), Unit 6 : Cash Flow Statement, (Periods 33), q Cash Flow Statement : Meaning and Objectives, Preparation, Adjustments, related to Depreciation, Dividend and Tax, Sale and Purchase of Non-Current, Assets (as per revised standard issued by ICAI)., Unit 7 : Project Work in Accounting, (Periods 18), (Please refer to the Guidelines published by the CBSE), OR, Part C : Computerised Accounting, (Periods 84), Unit 5 : Overview of Computerized Accounting System, (Periods 12), q Concept and Types of Computerised Accounting System (CAS), q Features of a Computerized Accounting System, q Structure of a Computerised Accounting System, Unit 6 : Accounting Using Data Base Management System (DBMS), (Periods 26), q Concept of DBMS, q Objects in DBMS : Tables, Queries, Forms, Reports, q Creating Data Tables for Accounting, q Using Queries, Forms and Reports for Generating Accounting Information., Applications of DBMS in Generating Accounting Information such as, Shareholders Records, Sales Reports, Customers' Profile, Suppliers' Profile,, Payroll, Employees' Profile, Petty Cash Register., Unit 7 : Accounting Applications of Electronic Spreadsheet, (Periods 24), q Concept of an Electronic Spreadsheet (ES), q Features offered by Electronic Spreadsheet, q Applications of Electronic Spreadsheet in generating Accounting Information,, Preparing Depreciation Schedule, Loan Repayment Schedule, Payroll Accounting, and other such Applications., Unit 8 : Practical Work in Computerised Accounting, (Periods 22), (Please refer to the Guidelines published by the CBSE), Using Computerized Accounting System, q Steps in Installation of CAS, Codification and Hierarchy of Account Heads,, Creation of Accounts., q Data : Entry, Validation and Verification., q Adjusting Entries, Preparation of Balance Sheet, Profit and Loss Account with, Closing Entries and Opening Entries., q Need and Security Features of the System., Database Management System (DBMS), q Concept and Features of DBMS., q DBMS in Business Application., q Generating Accounting Information Payroll, Part C :, q, , Practical Work, Please refer to the guidelines published by CBSE., , 20 Marks 26 Periods
Page 11 :
Contents, Chapter, , Page No., , Part A : Accounting for Not-for-Profit Organisations and, Partnership Firms, 1. Accounting for Not-for-Profit Organisations/Non -Trading Organisations, , 1—75, , [1.1 Meaning of Not-for-Profit Organisations, 1.2 Accounting Records of Not-for-Profit, Organisations, 1.3 Receipts and Payments Account, 1.4 Fund-based Accounting and Nonfund-based Accounting, 1.5 Explanation and Treatment of Some Important Items,, 1.6 Income and Expenditure Account, 1.7 Preparation of Balance Sheet, 1.8 Incidental, Trading Activities, 1.9 Fast Revision l Useful Questions l Practical Problems.], , 2. Accounting for Partnership Firms—Fundamentals, , 77—152, , [2.1 Meaning, Definition and Nature of Partnership, 2.2 Characteristics/ Features/Essential, Elements of Partnership, 2.3 Essentials of an Ideal Partnership, 2.4 Limited Liability, Partnership (LLP), 2.5 Rights of Partners, 2.6 Duties of Partners, 2.7 Partnership, Deed/Agreement, 2.8 Partnership Accounts 2.9 Guarantee of Profit to a New Partner,, 2.10 Past Adjustments/Adjustments in Closed Accounts 2.11 Final Accounts of Partnership, Firm, 2.12 Fast Revision l Useful Questions l Practical Problems.], , 3. Goodwill : Meaning, Nature, Factors Affecting and Methods, of Valuation, , 153—176, , [3.1 Meaning and Definitions of Goodwill, 3.2 Characteristics (Features) of Goodwill,, 3.3 Classification of Goodwill, 3.4 Nature of Goodwill, 3.5 Need for Valuation of Goodwill,, 3.6 Factors Affecting the Value of Goodwill, 3.7 Methods of Valuation of Goodwill, 3.8 Fast, Revision l Useful Questions l Practical Problems.], , 4. Reconstitution of Partnership—Change in Profit-Sharing, Ratio Among the Existing Partners, , 177—214, , [4.1 Meaning of Reconstitution of Partnership Firm, 4.2 Occasions/Circumstances of, Reconstitution, 4.3 Change in Profit-Sharing Ratio among Existing Partners, 4.4 Fast, Revision l Useful Questions l Practical Problems.], , 5. Admission of a Partner, , 215—304, , [5.1 Position of Incoming (New) Partner, 5.2 Need for Admission of a New Partner, 5.3 Main, Adjustments on Admission of a New Partner, 5.4 Fast Revision l Useful Questions, l Practical Problems.], , 6. Retirement of a Partner, , 305—366, , [6.1 Meaning of Retirement of a Partner, 6.2 Adjustments at the Time of Retirement of a, Partner, 6.3 Fast Revision l Useful Questions l Practical Problems.], , 7. Death of a Partner, , 367—406, , [7.1 Death of a Partner, 7.2 Effects of the Death of a Partner, 7.3 Adjustments at the Time of, Death of a Partner, 7.4 Fast Revision l Useful Questions l Practical Problems.]
Page 12 :
(ii), , Chapter, 8. Dissolution of Partnership Firm, , Page No., 407—472, , [8.1 Meaning of Dissolution of Partnership, 8.2 Meaning of Dissolution of Firm,, 8.3 Difference between Dissolution of Partnership and Dissolution of Firm, 8.4 Circumstances of Dissolution of Partnership, 8.5 Types or Modes of Dissolution of Partnership Firm,, 8.6 Settlement of Accounts on Dissolution, 8.7 Accounting Treatment on Dissolution of, Partnership Firm, 8.8 When Balance Sheet of the Firm is not given, 8.9 Fast Revision, l Useful Questions l Practical Problems.], , Part A : Company Accounts, 1. Company : General Introduction, , 1—10, , [1.1 Meaning of a Company, 1.2 Essential Features of a Company, 1.3 Nature of Company,, 1.4 Types (or Kinds) of Companies, 1.5 Important Documents of a Company l Useful, Questions.], , 2. Accounting for Share Capital : Share and Share Capital, , 11—32, , [2.1 Share Capital of a Company, 2.2 Shares, 2.3 Disclosure or Presentation of Share Capital, in Company’s Balance Sheet, l Useful Questions l Practical Problems.], , 3. Accounting for Share Capital : Issue of Shares, , 33—74, , [3.1 Issue of Shares for Cash, 3.2 Issue of Shares for Consideration other than cash,, 3.3 Preferential Allotment of Shares, 3.4 Issue of Right Shares [Section 62(1)], 3.5 Fast, Revision l Useful Questions l Practical Problems.], , 4. Forfeiture and Re-Issue of Shares, , 75—116, , [4.1 Meaning of Forfeiture of Shares, 4.2 Effect of Forfeiture of Shares, 4.3 Procedure of, Forfeiture of Shares, 4.4 Accounting Treatment on Forfeiture of Shares, 4.5 Re-Issue of, Forfeited Shares, 4.6 Surrender of Shares, 4.7 Difference between Surrender of Shares and, Forfeiture of Shares, 4.8 Fast Revision l Useful Questions l Practical Problems.], , 5. Issue of Debentures, , 117—162, , [5.1 Meaning of Debenture, 5.2 Difference between Share and Debenture, 5.3 Types of, Debentures, 5.4 Issue of Debentures, 5.5 Issue of Debentures as Collateral Security, 5.6 Different Terms of Issue and Redemption of Debentures, 5.7 Interest on Debentures and, Income-tax thereon, 5.8 Writing-off of Discount and Loss on Issue of Debentures, 5.9 Zero, Interest Bond and Deep Discount Bond, 5.10 Fast Revision l Useful Questions l Practical, Problems.], , 6. Redemption of Debentures, , 163—220, , [6.1 Meaning of Redemption of Debentures, 6.2 Sources of Funds for Redemption of, Debentures, 6.3 Methods of Redemption of Debentures, 6.4 Fast Revision l Useful, Questions l Practical Problems.], , Part B : Financial Statements Analysis, 7. Financial Statement of a Company : Balance Sheet and Statement, of Profit and Loss, , 221—256, , [7.1 Meaning of Financial Statements, 7.2 Objectives of Financial Statements, 7.3 Elements, of Financial Statements, 7.4 Nature of Financial Statements, 7.5 Types of Financial, Statements, 7.6 Contents or Components of Annual Report, 7.7 Importance of Financial
Page 13 :
(iii), , Chapter, , Page No., , Statements, 7.8 Limitations of Financial Statements, 7.9 Balance Sheet of a Company,, 7.10 Statement of Profit and Loss, 7.11 Fast Revision l Useful Questions l Practical, Problems.], , 8. Analysis of Financial Statements, , 257—266, , [8.1 Concept of Financial Analysis or Meaning of Analysis of Financial Statements,, 8.2 Meaning of Interpretation of Financial Statements, 8.3 Features of Financial, (Statement) Analysis, 8.4 Objectives or Purposes of Financial Analysis, 8.5 Importance or, Advantages of Analysis of Financial Statements, 8.6 Importance of Financial Analysis to, User Groups, 8.7 Types or Methods of Financial Analysis, 8.8 Limitations of Financial, Analysis, 8.9 Fast Revision l Useful Questions.], , 9. Tools for Financial Statement Analysis : Comparative Statements, , 267—290, , [9.1 Meaning of Tools of Financial Analysis, 9.2 Tools or Techniques or Methods of Financial, Analysis, 9.3 Comparative Statements, 9.4 Fast Revision l Useful Questions l Practical, Problems.], , 10. Common-Size Statements, , 291—312, , [10.1 Meaning of Common-size Statements, 10.2 Purpose or Objectives of Common-size, Statements, 10.3 Utility or Importance of Common-size Statements, 10.4 Types of Commonsize Statements, 10.5 Limitations of Common-size Statements, 10.6 Common-size Income, Statement, 10.7 Common-size Balance Sheet, 10.8 Trend Analysis, 10.9 Fast Revision, l Useful Questions l Practical Problems.], , 11. Accounting Ratios, , 313—396, , [11.1 Meaning of Accounting Ratios, 11.2 Objectives (or Purposes) of Accounting Ratios,, 11.3 Importance of Accounting Ratios, 11.4 Limitations of Accounting Ratios, 11.5 Steps, involved in the Analysis of Accounting Ratios, 11.6 Types or Classification of Accounting, Ratios, 11.7 Fast Revision, l Useful Questions l Practical Problems.], , 12. Cash Flow Statement, , 397—500, , [12.1 Meaning of Cash Flow Statement (C.F.S.), 12.2 Nature of Cash Flow Statement,, 12.3 Objectives of Cash Flow Statement, 12.4 Utility/Importance or Uses of Cash Flow, Statement, 12.5 Limitations of Cash Flow Statement, 12.6 Preparation of Cash Flow, Statement (As per AS-3 Revised) New Ind. A. S.-7, 12.7 Method of Preparation of Cash Flow, Statement, (As per AS-3 Revised) 12.8 Fast Revision lUseful Questions l Practical, Problems.], , Part C : Computer in Accounting, 1. Introduction to Computer and Accounting Information System (AIS), , 1—13, , 2. Overview of Computerised Accounting System (CAS), , 14—23, , 3. Database Management System (DBMS), , 24—39, , 4. Electronic Spreadsheet, , 40—60, , l Project Work, l Chapter-wise Value/Multi-Disciplinary based Questions with Answers, l Latest Model Paper, l Board Examination Papers, , 1—72, 1—32, (i), (i)
Page 14 :
LIST OF ABBREVIATIONS, A, A/c, AICPA, AS, ASB, B/d, B/E, B/F, B/P, B/R, Bros., B/S, B/R/S (B.R.S.), B.S.E.B., B.V., C, C, CBDT., C.D., C/d, C/N, COSDASYL, CPU, C/R, D.B., D.B.M., D.D., D.D., D.E.R., D/N, DDL, D.P.S., D.T.R., E, E.P.S., F.S., GAAP, G.P., G.P.R., IAS, IASC, ICAI, , Assets, Account, American Institute of Certified, Public Accounts, Accounting Standards, Accounting Standards Board, Brought down, Bills of Exchange, Brought Forward, Bills Payable, Bills Receivable, Brothers, Balance Sheet, Bank Reconciliation Statement, Bihar School Examination Board, Bill Value, Capital/Owner’s Capital, Contra Entry, Central Board of Direct Taxes, Cash Discount, Carried down, Credit Note, Conference on Data System, Languages, Central Processing Unit, Current Ratio, Data Base, Data Base Management, Doubtful Debts, Demand Draft, Debt Equity Ratio, Debit Note, Data Definition Language, Dividend Per Share, Debtors Turnover Ratio, Equity, Earning Per Share, Financial Statements, Generally Accepted Accounting, Principles, Gross Profit, Gross Profit Ratio, International Accounting, Standards, International Accounting, Standards Committee, Institute of Chartered, Accountants of India, , IICA, ICWAI, ISO, J.F., L, L.F., L.R., N.L., N.P., N.P.R., N.R., O.D., O.R., O/S, P.A.T., P.B.D.D., P.B.I.T., P.B.T., P.L. or P/L, P.N., P.P., P.R., Q.R., RAM, RBI, R.D.D., R/I, R.O.I., R.O.C.E., ROM, SEBI, S.L.M., S.N./Sl.N., S/R, SQL, T.B., T.D., T.D.S., U.S.E.B., V. No., W.D.L., , Indian Institute of Chartered, Accountants, Institute of Cost & Works, Accountants of India, International Standard, Organisation, Journal Folio, Liabilities, Ledger Folio, Liquid Ratio, Net Loss, Net Profit, Net Profit Ratio, New Reserve, Overdraft, Old Reserve/Operating Ratio, Outstanding, Profit After Tax, Provision for Bad and, Doubtful Debts, Profit Before Interest and, Tax, Profit Before Tax, Profit Loss, Promissory Note, Prepaid, Purchase Returns, Quick Ratio, Random Access Memory, Reserve Bank of India, Reserve for Doubtful Debts, Returns Inward, Return on Investment, Return on Capital Employed, Read Only Memory, Securities Exchanges Board, of India, Straight Line Method, Serial Number, Sales Returns, Structured Querry Language, Trial Balance, Trade Discount, Tax Deduction at Source, Uttarakhand School, Examination Board, Voucher Number, Written Down Value
Page 15 :
Part A : Accounting for, Not-for-Profit Organisations, and Partnership Firms, , 1, , Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 1.1 Meaning of Not-for Profit Organisations, l Objectives and Features of Not-for-Profit Organisations l Difference, between Not-for-Profit Organisation and Profit Earning Organisation, , 2, , 1.2 Accounting Records of Not-for-Profit Organisations, l Objectives of Accounting Records l Financial Statements or Final, Accounts of Non-Trading Organisations, , 3, , 1.3 Receipts and Payments Account, l Meaning l Difference between Receipts and Payments Account and Cash, Book l Features l Limitations l Format l Process or Steps of Preparing, Receipts and Payments Account, , 4, , 1.4 Fund-based Accounting and Non-fund-based Accounting, l Meaning l Features l Objectives l Classification l Accounting, Treatment l Non-fund based Accounting l Difference between Fund, Accounting and Non-fund Accounting, , 9, , 1.5 Explanation and Treatment of Some Important Items, , 13, , 1.6 Income and Expenditure Account, l Meaning l Features l Difference between Receipts and Payments, Account and Income and Expenditure Account l Distinction between, Income and Expenditure Account and Profit and Loss Account l Format of, Income & Expenditure Account l Preparation of Income and Expenditure, Account, , 18, , 1.7 Preparation of Balance Sheet, , 40, , 1.8 Incidental Trading Activities, , 55, , 1.9 Fast Revision, , 55, , ❑ Useful Questions, , 56, , ❑ Practical Problems, , 61, , 1
Page 16 :
SBPD Pub li ca tions Ac countancy (XII), , 1.1 Meaning of ‘Not-for-Profit’ Organisations, The primary objective of a business organisation is to earn profit. Hence, all the, business or commercial organisations are called ‘Profit-making’ Organisations. On the, other hand, there are some organisations or institutions or associations which are called, ‘non-trading’ organisations or ‘not-for-profit’ organisations. The main objective of these, organisations is to provide service to their members or beneficiaries or to the society as a, whole without any intention to seek profit., ‘Not-for-Profit’ Organisations refer to concerns or institutions which render services to the, members or society and work for the promotion of charity, religion, education, literature, art, and culture, etc. without aiming at profit. The surplus of these organisations is not, distributed among their members rather it is used for the promotion of activities of the, good of the organisation., SBPD Publications Financial Accounting (XII), Examples of Not-for-Profit Organisations :, (i) Educational Institutions :, Schools, Colleges, Universities., (ii) Religious Organisations :, Mandir, Masjid, Gurudwara and Church etc., (iii) Sports Institutions :, Sports Club, Vyayamshala., (iv) Social Institutions :, Hospital, Libraries, Charitable Trusts, Nursing Homes, etc., (v) Recreation and Cultural Organisations :, Recreation Club, Cultural Societies, Literary Society, etc., (vi) Professional Bodies or Institutions : Chamber of, Commerce, Trade Unions, Medical Council of India,, Institute of Chartered Accountants of India etc., (vii) Professional Persons : Doctors, Engineers, Lawyers, Professors, Chartered, Accountants, Actors, Singers, Players, etc., 1.1.1 Objectives of Not-for-Profit Organisations, Main objectives of a non-profit-earning organisation are as, follows :, 1. To provide service or recreations to its members or group or, the public at large., 2. To work for the welfare of the society or promotion of religion,, education, art, culture and sports etc., 1.1.2 Main Features or Characteristics of Not-for-Profit, Organisations, 1. Not-for-profit organisations are established for the welfare and, service of the society and their members., 2. They promote art, culture, religion, education, sports etc., 3. They do not operate with the objective of earning profit., 4. These organisations are set-up as charitable societies, trust or club etc., 5. The major sources of funds of these organisations are :, (a) subscriptions from their members, (b) donations, (c) contributions from outsiders, and (d) Government aid or grants., 6. These organisations are managed by a managing or executive committee elected, by their members., , 2
Page 17 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, 7. These organisations prepare Receipts and Payments A/c,, Income and Expenditure A/c and Balance Sheet., 8. The surplus of these organisations are not distributed amongst, the members. It is added to the capital fund., 1.1.3 Difference between Not-for-Profit Organisation and Profit-Earning Organisation (Business Firm), The points of distinction between a profit-earning organisation and not-for-profit, organisation are as follows :, S.N., 1., 2., , 3., , 4., , Basis of, Difference, , Profit-Earning Organisation, , The primary motive of such an organisation is to earn profit., It is represented by owner’s capital,, accumulated reserves and surplus., Here the fund is known as ‘Owner’s, Fund’., Net Results The net result of the activities of such, of Activities an organisation is known as ‘Net Profit’, or ‘Net Loss’., Financial, The Financial Statements of such type, Statements of organisation include :, (i) Manufacturing A/c or Trading A/c,, (ii) Profit & Loss A/c,, (iii) Balance Sheet., Primary, Motive, Fund, , Not-for-Profit Organisation, The primary motive of such an entity, (organisation) is to serve people., In case of not-for-profit organisation,, there is ‘Capital Fund’ or ‘General, Fund’. It is represented by Donation,, Subscription, Surplus etc., The net result of this type of organisation is known as the ‘Surplus’ or, ‘Deficit’., Financial Statements of non-trading, organisations include :, (i) Receipts and Payments A/c,, (ii) Income and Expenditure A/c,, (iii) Balance Sheet., , 1.2 Accounting Records of Not-for-Profit Organisations, A majority of the profit organisations maintain their accounting records under the, single entry system. They usually maintain a Cash Book, Supplier’s Ledger and Members’, Register. Where the size of the organisation is large, the accounts are kept under complete, double entry system. It should be noted that a non-profit organisation, too, employs the, same accrual basis of accounting used by a business entity., Non-trading organisations or institutions are required to keep proper accounting, records and keep control over the utilisation of their fund. With this end in view they, maintain their accounts on double entry system. But their system of keeping accounts is, quite different than that of the trading concerns. Since, the objective of non-trading, institutions is not to earn profit like that of the trading concerns, they keep accounts on, ‘Cash System’ instead of ‘Mercantile System’., Under this system, ‘Cash Book’ is the most important book of accounting record. But, various institutions and professional persons keep the following books according to their, requirements :, (1) Cash Book : In this book all cash receipts and payments are duly recorded., (2) Memorandum or Waste Book : In this book all transactions of credit nature are, recorded., (3) Stock Register : In this register records of all fixed assets and consumable items, are maintained., (4) Salaries and Wages Register : This register contains the records of salaries of, staff employed by the organisation and wages paid to the workmen., (5) Members Register : This register contains full details of members of the, organisation, subscription received from them, outstanding subscription and that of, advance subscription., , 3
Page 18 :
SBPD Pub li ca tions Ac countancy (XII), (6) Other Registers : Such as Subscription Register, Donor’s Book, Fee Collection, Register etc., 1.2.1 Necessity or Objectives of Accounting Records, These organisations/institutions are required to keep proper accounting records to, fulfil the following objectives :, (1) To keep proper control over the utilisation of their funds., (2) To avoid or minimise the chances of misappropriations or embezzlement of the, funds contributed by the members, donors, Government and other bodies., (3) To facilitate preparation of financial statements at the end of the year., (4) To facilitate comparison of the financial results with that of the budget., (5) To show that the expenses are made in the light of the objective of the, institutions., (6) To arrive at the ‘Surplus’ or ‘Deficit’ at the end of the accounting year., (7) To comply with the statutory requirements and for seeking financial grants., Sequence for Preparing Accounts :, 1. Preparation of Receipts and Payments Account, 2. Fund-based Accounting, 3. Treatment of some important Items, e.g., Subscriptions, Donation, Consumable, Items etc., 4. Preparation of Income and Expenditure Account, 5. Preparation of Balance Sheet, 1.2.2 Financial Statements or Final Accounts of Non-Trading Organisations, Not-for-Profit Organisations prepare their annual accounts (that is, final accounts) at, the end of every financial year. The objectives of preparing financial statements are two fold :, 1. To apprise the members about the financial affairs of the organisation, and, 2. To submit the same to the Government departments for financial grants/aids., Usually a non-profit-organisation prepares the following statements :, Financial Accounts of Not-for-Profit Organisation, , 1. Receipts and Payments, Account, , 2. Income and Expenditure, Account, , 3. Balance Sheet., , 1.3 Receipts and Payments Account, 1.3.1 Meaning of Receipts and Payments Account, A Receipts and Payments Account is a summary of cash receipts and cash payments, relating to a given period. According to William Pickles, ‘’Receipts and Payments Account is, nothing more than a summary of the Cash Book (Cash and Bank transactions) over a, certain period, analysed and classified under suitable headings. It is the form of account, most commonly adopted by the treasurers of societies, clubs, associations, etc. when, preparing the results of the year’s working.’’, The Receipts and Payments Account is an Asset Account or Real Account., It is, in fact, a summary of the Cash Book. It is prepared at the end of the period, under consideration. All receipts (relating to past, present or future period) are shown on, the debit side and all payments (relating to past, present or future) are shown on the credit, side of this account. It should be noted that in Receipts and Payments Account both revenue, and capital items are shown. It does not give the date of transactions. Thus, both Cash Book, , 4
Page 19 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, and ‘Receipts and Payments’ Account provide the same information but in different manner., Hence, in some respects they differ from each other., 1.3.2 Difference between Receipts and Payments Account and Cash Book, S., No., 1., 2., 3., , Basis of, Difference, Date, Entries, Period, , Receipts and Payments Account, , 5., , Entries are not made datewise., Entries are made in classified form., This account is prepared at the end of, the accounting year., Institutions This is prepared by the not-for-profit, organisations., Ledger Folio There is no column of ledger folio., , 6., , Side, , 4., , Cash Book, All entries are made datewise., Entries are made in chronological order., Cash book is recorded on daily basis., , This is prepared by all the organisations, trading and non-trading., This has a separate column for ledger, folio., Left side is receipts side and right side Left side is debit side and right side is, is payments side., credit side., , 1.3.3 Main Features of Receipts and Payments Account, (1) It is like a Cash Book ., (2) It is the summary of Cash and Bank transactions., (3) All the cash receipts (whether they are of capital nature or revenue nature) are, shown on the debit side of this account., (4) Likewise, all cash payments (whether they are of capital nature or revenue nature), are shown on the credit side of this account., (5) It starts with the opening cash and bank balances (shown on the debit side of this, account) and ends with closing balances of Cash/Bank (being shown on the credit side)., (6) The closing balance of this account indicates the cash left after meeting the, expenses. It is carried forward., (7) It does not record non-cash items (such as depreciation)., (8) It includes all receipts and payments, whether they are related to current, past or, future periods., (9) It ignores outstanding expenses or accrued incomes., , (1), (2), (3), (4), (5), , Important Points to Remember in Respect of Receipts, and Payments Account, In Receipts and Payments Account all cash transactions made in the current year, are recorded whether they relate to past year, current year or future year., Non-cash transactions (e.g., depreciation) are not recorded in this account., Credit transactions, outstanding expenses, accrued income, unaccrued income, etc. are not recorded in this account., In this account transactions are recorded with actual cash., This account shows cash balance at the end of the year., , 1.3.4 Limitations of Receipts and Payments Account, Following are the limitations of Receipts and Payments Account :, (1) It is prepared on cash basis of accounting and does not contain any non-cash items, of expenses, e.g., depreciation., (2) It does not provide information about income and expenses of the accounting, period. It only reveals the amount of income and expenses in cash., (3) It does not help in judging the financial position of the organisation as it shows, cash and bank transactions only. It does not show other assets and liabilities., (4) It does not show ‘Surplus/Deficit’., (5) It is not prepared on accrual basis., , 5
Page 20 :
SBPD Pub li ca tions Ac countancy (XII), 1.3.5 Format of Receipts and Payments Account, A specimen of Receipts and Payments Account is given below :, Receipts and Payments Account, Dr., (for the year ending ..............20.....), Receipts, To Balance b/d :, Cash in hand, Cash at Bank, To Revenue Receipts :, Subscriptions, General Donation, Entrance Fees, Sale of Newspapers/Magazines/, Periodicals, Sale of Old Sports Material, Proceeds from Charity, Proceeds from Use of Hall, Proceeds from Lectures/Entertainments, Receipts from Show/Concerts, Interest on Fixed Deposits, Interest on Investment, Locker's Rent, Sale of Scrap, Sale of Grass, Grants-in-aid from Govt., Miscellaneous Receipts, To Capital Receipts :, Specific/Purpose Donation, Legacies, Life Membership Fees, Sale of Fixed Assets, Sale of Investments, Endowment Funds, Sale of Sports Equipments, , `, , ....., ....., ....., ....., ....., ....., ....., ....., , ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., , ....., , Payments, By Balance c/d, if any, (Bank Overdraft), By Revenue Payments :, Salaries and Wages, Rent, Rates and Taxes, Insurance, Audit Fee, Printing and Stationery, Honorarium, Postage and Courier, Advertisement, Telephone, Repairs and Renewals, Upkeep of Ground, Entertainment Expenses, Gardening, Conveyance, Bank Charges, Water and Electricity, Municipal Taxes, Newspapers/Magazines/Periodicals, Bar Expenses, Miscellaneous Expenses, By Capital Payments :, Purchase of Fixed Assets, (e.g. Furniture, Building), Purchase of Books, Investments, Fixed Deposits, Prize Fund Investment etc., By Balance c/d :, Cash in hand, Cash at Bank, , Cr., `, , ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., ....., , ....., ....., ....., ....., ....., ....., ....., ....., , Note : Normally the total of the debit side of Receipts and Payments A/c will be more than the credit side. Hence,, to tally the total of both the sides, the difference will be shown as ‘By Balance c/d’. In case, the total of, credit side is more, then the difference will be Bank Overdraft and it should be shown as to Balance b/d on, the debit side of Receipts and Payments A/c., , 1.3.6 Process or Steps of Preparing Receipts and Payments Account, Step 1 : Show the opening balances of cash in hand and cash at bank on the debit side of, the Receipts and Payments Account. In case, there is bank overdraft in the, beginning of the year, enter the same on the credit side of this account., , 6
Page 21 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Step 2 : Show amounts of all receipts items or its debit side irrespective of their nature, whether capital or revenue and whether they relate to past, current and future, periods., Step 3 : Show the amounts of all payments items on its credit side irrespective of their, nature whether capital or revenue and whether they relate to past, current and, future period., Step 4 : None of the outstanding or payable expenses and depreciation and none of the, accrued or receivable income is shown in this account, the reason being that they, do not involve in-flow or out-flow of cash., Step 5 : Lastly, find out the difference between the total of debit side and that of the total, of credit side of this account and enter the difference on the credit side as, closing balance of Cash/Bank. In case, however, the total of the credit side is, more than that of the total of the debit side, show the difference on the debit side, as bank overdraft; thus, the account is closed., ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., , Details, , Practical Problem No., , 1(A), 1(B), 1(C), , Preparation of Receipts and Payments Account, , 1(A) to 2, , 2 to 4(B), 5 to 9, , Fund-based Accounting (Without Adjustment), Calculation of Income from Subscriptions, , 3(A) to 6, 7(A) to 11, , 10(A) to 10(E), 11, 12, 13, 14 to 17, , Calculation of Consumable Goods : Medicines and, Stationery, Calculation of Salary/Profit from Sale of Tennis, Balls, Calculation of Depreciation and Profit or Loss on, Sale of Asset, Preparation of Income and Expenditure Account, , 12 to 16, 17(A), 17(B), 18, 19, 20 to 23, , 18 to 22, , Preparation of Income and Expenditure Account, (With Adjustments), , 23, , Preparation of Receipts and Payments Account and, Income and Expenditure Account, B/S of Not-for-Profit Organisations, Calculation of Capital Fund, , 31, , 33, 34, , 33, , Preparation of Income and Expenditure A/c and, Ascertainment of Capital Fund, Preparation of Income and Expenditure Account, and Balance Sheet, Preparation of Income and Expenditure A/c and, Balance Sheet from Trial Balance, Miscellaneous and Boards’ Questions, , 33, , Total, , 24, 25(A), 25(B), 26, 27 to 31, 32, , 24 to 30, , —, 32, , 35 to 38, 39, 40 to 44, 44, , Illustration 1(A) (Preparation of Receipts and Payments Account), A Rotary Club has kept its accounts on cash basis and figures for the last year are, given below. Prepare Receipts and Payments Account for the year :, `, Entrance Fees received, 5,000, Subscriptions : Received during the year, 39,600, Mr. X’s Fees received during the year, 1,200, Expenses paid during the year, 54,500, Expenses unpaid this year, 2,940, , 7
Page 22 :
SBPD Pub li ca tions Ac countancy (XII), Surplus on Bar Account, Secretary’s Honorarium, Cash in hand in the beginning of the year, Locker Rent received, Investment made during the year (at cost), Solution, Dr., , 15,000, 3,000, 4,700, 1,000, 2,200, (U.S.E.B., 2009), , Receipts and Payments Account, Receipts, , To Balance b/d (Cash in hand opening), To Entrance Fees, To Subscriptions, To Mr. X’s Fees, To Locker Rent, To Surplus on Bar A/c, , Amount, `, , 4,700, 5,000, 39,600, 1,200, 1,000, 15,000, 66,500, , Cr., , Payments, , Amount, `, , By Expenses, By Secretary’s Honorarium, By Investment, By Balance c/d (Cash in hand closing), , 54,500, 3,000, 2,200, 6,800, , 66,500, , Note : Unpaid expenditure is not shown in Receipts and Payments Account but it is shown in Income &, Expenditure Account., , Illustration 1(B), Maurya Club has 300 members paying subscription ` 10 each per month. The Club, has a fixed deposit of ` 80,000 @ 10% p.a. interest in a bank. The Club rents some portion of, building @ ` 2,000 per day., From the following information, prepare Receipts and Payments Account of the Club, for the year ending 31st December, 2018 :, (i) On 1st January, 2018 Cash Balance is ` 6,300., (ii) Interest received for 9 months on Bank Fixed Deposit., (iii) 40 members have not paid subscription for the last two months., (iv) During the year building was rented for 10 days., (v) Paid for salary ` 28,000 and other expenses ` 17,000., (vi) Purchased Furniture for ` 15,000., Solution, Maurya Club, Receipts and Payments Account, Dr., (for the year ending 31st Dec., 2018), Cr., Receipts, To, To, To, To, , Balance b/d (1.1.2018), Subscriptions, Interest on Bank Fixed Deposit, Rent Received, , Amount, `, , 6,300, 35,2001, 6,0002, 20,000, , Payments, , Amount, , By Salary, By Other Expenses, By Furniture, By Balance c/d (31.12.2018) (Bal. fig.), , 67,500, Working Notes :, 1. Subscriptions Received :, Payable : 300 × ` 10 × 12, Less : Outstanding 40 × ` 10 × 2, , Subscriptions received, 9, 10, 2. Interest on Fixed Deposit : 80,000 ×, ×, = ` 6,000., 100 12, , 8, , `, , 28,000, 17,000, 15,000, 7,500, 67,500, , `, 36,000, 800, 35,200
Page 23 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Illustration 1(C), On the basis of following information, prepare Receipts and Payments Account in the, books of Vijay Club for the period of 31st December, 2018 :, Subscription received for the previous year, ` 40, Subscription received for the current year, ` 360, Subscription not received for the current year, ` 60, Receipts : Rent of Room ` 20; Games Fee ` 120; Cash received from Canteen ` 250., Payments : Salaries ` 200; Repairing ` 24; Printing and Stationery ` 60; Canteen, Articles ` 170; Wages of Watchman ` 136; Electricity ` 80; Rent and Taxes ` 100., Outstanding Expenditures : Repairing Exps. ` 16; Canteen Articles ` 44; Cash, Balance on January 1st, 2018 ` 36 and on 31st December, 2018 ` 56. (U.S.E.B., 2011), Solution, Dr., , Receipts and Payments Account of Vijay Club, (for the year ending 31st Dec., 2018), Receipts, , Amount, , Payments, , Cr., Amount, , `, To Balance b/d : Cash (1-1-2018), To Subscription received (2017), To Subscription received (2018), To Rent of Room, To Games Fee, To Cash received from Canteen, , 36, 40, 360, 20, 120, 250, , `, By Salaries, By Repairing, By Printing and Stationery, By Canteen Articles, By Wages of Watchman, By Electricity, By Rent and Taxes, By Balance c/d (Cash 31.12.2018), , 200, 24, 60, 170, 136, 80, 100, 56, 826, , 826, , 1.4 Fund-based Accounting and Non-fund-based Accounting, 1.4.1 Meaning and Concept of Fund-based Accounting, Fund-based accounting is a system of accounting where fund is taken as an, independent fiscal and accounting entity with a self-balancing set of accounts. In other, words,, ‘‘Fund-based Accounting is a technique of book-keeping under which separate selfbalancing set of assets, liabilities, incomes and expenses are maintained for each fund for a, specific purpose.’’, Under Fund-based Accounting, receipts and incomes relating to a particular fund is, credited to that particular fund and payments and expenses are debited to it. Examples of, such (special) funds are : Match Fund, Sports Fund, Prize Fund, Building Fund, Library, Fund etc., It should be noted that a fund sets aside cash or other assets to achieve specific, objective(s). Such funds may be invested in securities and the income earned on such, investments is added to the respective funds and not credited to Income and Expenditure, Account. Funds are used only for such specific purpose for which the same have been, contributed by the donors., The special funds are shown in Balance Sheet because these are capital receipts., However, if after adjustment of income and expenses, the balance in special or specific, fund is negative (i.e., if the amount of expenses relating to that fund is more than that of, the fund and interest on specific fund investment), it is shown on the debit side of Income, and Expenditure Account. Capital in this type of accounting is called ‘Capital Fund’., Fund-based accounting system can be adopted by the government non-profit organisations as well as by the non-government non-profit organisations. For example,, , 9
Page 24 :
SBPD Pub li ca tions Ac countancy (XII), Government Non-Profit Organisations : Central Universities, State Universities, Colleges, Schools, Government Hospitals, etc., Non-Government Non-Profit Organisations : Trust, Hospitals, Club, Private, Educational Institutions, Libraries, etc., 1.4.2 Features of Fund-based Accounting, 1. A separate set of book for each fund is maintained under fund-based accounting., Thus, fund is treated as separate entity and accounted for accordingly., 2. If the organisation receives a legally restricted fund, it has to set up a restricted, fund for it., 3. The financial resources of not-for-trading organisations include grants, aid and, contributions. These resources are used as per instructions., 4. Fund-based accounting is used by non-profit organisations., 1.4.3 Objectives of Fund-based Accounting, Following are the objectives of Fund-based Accounting : (i) To compare the actual, financial results of various activities with the budget. (ii) To assess the financial, performance of the not-for-profit entity during the year. (iii) To ensure that rules,, regulations and legal provisions are being compiled with. (iv) To assess the efficiency in, spending money on approved activities and tasks., 1.4.4 Classification of Funds, Following are the different types of funds used in Fund Accounting :, Funds, ● Revenue Funds, ● Restricted Fund, ● Unrestricted Fund, (Revenue Nature), , ● Specific or Special Funds, ● Endowment Fund, ● Fixed Asset Fund, ● Debt Fund, ● Annuity Fund (Capital Nature), (i) General Fund or Unrestricted Fund : General Fund means a fund created to, carryout the general activities. There are no restrictions on the use of the assets, of constituting General Fund. General Fund is made of annual subscriptions, general gifts, general grants etc., (ii) Restricted Fund : Restricted Fund means a fund arising from the contributions, received for carrying out those activities for which contributions are made., (iii) Fixed Asset Fund or Development Fund : It is a fund which is created out of, specific grants or general funds for acquisitions of the assets such as land and, building, furniture, etc. or for development of assets., (iv) Endowment Fund : Endowment Fund means a fund arising from a gift or, legacy with the legal condition that the principal amount will be maintained, permanently and income from such amount can be used for the various activities, of the organisation., (v) Debt or Loan Fund : Debt Fund means a fund meant for raising loan, debt or, borrowings of long-term nature., Thus, Revenue Funds essentially record normal revenue transactions whereas special, Funds record transactions of capital nature, 1., 2., 3., 4., , 10, , KEY POINTS TO REMEMBER, , Special Funds record the transactions of capital nature., Contributions and transfers are directly credited to the respective fund accounts., A statement showing changes in balances of each of specific funds is prepared., Balance sheet of each of specific funds is prepared.
Page 25 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, 1.4.5 Accounting Treatment of Items relating to Specific Fund, Case 1 :Amount to be shown on the liabilities side of the Balance Sheet (If, expenses relating to such fund is less) : Take example of Match Fund :, Calculation of Match Fund :, `, , Opening Balance, Add : Sale of Match Tickets, Add : Donations received for Match Fund, Add : Interest on Match Fund Investments, Less : Match Expenses, Amount of Match Fund to be shown on the Liabilities side of the Balance Sheet, , ................., ................., ................., ................., ................., ................., ................., , Case 2 : If the amount of expenses relating to Specific Fund is more than the, amount of Specific Fund, In this case, the difference between the two, i.e., negative figure, being excess of, expenses over the fund amount is shown on the debit side of Income and Expenditure, Account and not in the Balance Sheet., ❏ Fund-based Accounting, Illustration 2 (Match Fund), Show how will you deal with the following items in the final accounts of Star Club :, Match Fund ` 80,000, Match Expenses ` 30,000, Sale of Match Tickets ` 32,000., Solution, There is a specific Match Fund. The accounting treatment will be made as under :, Balance Sheet (as on ...............), Liabilities, Match Fund, Add : Sale of Match, Tickets, Less : Match Expenses, , `, , Assets, , `, , `, 80,000, 32,000, 1,12,000, 30,000, , 82,000, , Illustration 3 (Match Fund), Show how would you deal with the following items in the case of a ‘Not-for-Profit, Organisation’ :, Match Fund ` 80,000, Match Fund Investments ` 80,000, Match Expenses ` 1,50,000,, Donations for Match Fund received during the year ` 26,000, Sale of Match Tickets, ` 36,000., Solution, `, Match Fund, 80,000, Add : Donations for Match Fund, 26,000, Add : Sale of Match Tickets, 36,000, 1,42,000, Less : Match Expenses, 1,50,000, To be shown in Income & Expenditure A/c as Expenses, (8,000), Since the balance of Match Fund becomes negative by ` 8,000, it will be shown on the, debit side of Income and Expenditure Account and Match Investment will be shown on, assets side of Balance Sheet., , 11
Page 26 :
SBPD Pub li ca tions Ac countancy (XII), Illustration 4(A) (Prize Fund), Show how would you deal with the following items while preparing the Income &, Expenditure Account and Balance Sheet for the year ending on 31st March, 2019, in each, of the following cases :, Case (i) : Prizes awarded ` 5,000., Case (ii) : Prizes awarded ` 5,000; Prize Fund as on 31st March, 2018 ` 40,000;, Donations for prizes received during the year 2018-19 ` 7,200., Case (iii) :Prizes awarded ` 5,000; Prize Fund as on 31st March, 2018 ` 40,000;, Donations for prizes received during the year 2018-19 ` 7,200; 9% Prize, Fund Investments as on 31st March, 2018 ` 40,000; Interest received on, Prize Fund Investments ` 2,700., Solution, Case (i), Income and Expenditure Account, Dr., (for the year ended 31st March, 2019), Cr., Expenditure, To Prizes awarded, , Income, , `, 5,000, , `, , Prizes awarded are taken to Income & Expenditure Account because there does not, exist a prize fund., Case (ii), Balance Sheet, (as on 31st March, 2019), Liabilities, Prize Fund :, Opening Balance, Add : Donations received, Less : Prizes awarded, , Case (iii), Liabilities, Prize Fund :, Opening Balance, Add : Donations received, Add : Interest on Prize Fund, Investments (` 2,700, + 900), Less : Prizes awarded, , Assets, , `, `, 40,000, 7,200, 47,200, 5,000, , `, , 42,200, , Balance Sheet, (as on 31st March, 2019), `, `, 40,000, 7,200, , 3,600, 50,800, 5,000, , Assets, 9% Prize Fund Investments, Interest accrued on 9% Prize Fund, Investments, , `, 40,000, 9001, , 45,800, , Note : (1) Total Interest on Prize Fund Investments of ` 40,000 @ 9% p.a., Less : Received during the year, , `, 3,600, 2,700, 900, , Accrued Interest, , Illustration 4(B), Present the following information for the year ended 31st March, 2018 in the, financial statements of a not-for-profit organisation :, (C.B.S.E., A.I., 2019), Particulars, Opening Balance of Match Fund, Sale of Match Tickets, Donations for Match Fund received during the year, Match Expenses, , 12, , `, , 5,00,000, 3,75,000, 1,24,000, 10,00,000
Page 27 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Solution, , Balance Sheet, (as on 31st March, 2018), Liabilities, , `, , `, Match Fund, 5,00,000, Add : Sale of Match Tickets 3,75,000, Add : Donation received, 1,24,000, 9,99,000, Less : Match Expenses, (Note 1), 9,99,000, , Assets, , `, , Nil, , Income and Expenditure Account, (for the year ended 31st March, 2018), , Dr., , Expenditure, To Match Expenses (Note 1), , `, 1,000, , Cr., , Income, , `, , Note : Match expenses are ` 10,00,000. Out of which ` 9,90,000 are met through match fund as per the, availability of the fund. Hence, remaining ` 1,000 are debited to Income and Expenditure A/c. It means, the balance of match fund will be nil in the Balance Sheet., , 1.4.6 Non-fund-based Accounting, Non-fund Accounting is based on matching revenue and cost principle. This system is, followed by the business concerns having earning of profit as the prime objective. Under, this system transactions are identified and recorded according to double entry system on, accrual system. Under this system (i) Profit and Loss Account is prepared to calculate, profit or loss earned during a period, and (ii) Balance Sheet is prepared to find out the, financial position of the company., Under Non-fund-based Accounting system, no separate sets of books are maintained, for each fund. In this system, all items of income and expenses of the current year are, taken to Income and Expenditure Account. As such revenue expenses are recorded on debit, side and revenue income are recorded on credit side of the Income and Expenditure Account., 1.4.7 Difference between Fund Accounting and Non-Fund Accounting, Basis of, Difference, 1. Basis, , Fund Accounting, It is based on cash., , 2. Use of Funds Funds are used for specific purposes., 3. Financial, Statements, , Non-fund Accounting, It is based on accrual concept., Funds can be used for any profit earning, purpose., , Under this system (i) Receipts and Under this system (i) Trading and Profit, Payments Account, (ii) Income and and Loss Account, and (ii) Balance Sheet, Expenditure Account, and (iii) Balance are prepared., Sheet are prepared., , 4. Entity, of Each fund is fiscal and treated as Business enterprise in treated as the, Accounting financial accounting entity., accounting entity., 5. Economic, Interest, , In fund accounting, owners have no In non-fund accounting, owners have, economic interest in the organisation. their economic interest in the form of, profit., , 1.5 Explanation and Treatment of Some Important Items, (1) Subscriptions, It is the main source of income of non-profit organisation. It is the amount paid by the, members at regular intervals. As such, subscriptions are treated as revenue receipts (that, , 13
Page 28 :
SBPD Pub li ca tions Ac countancy (XII), is income) and recorded on the credit side of Income & Expenditure Account. Care must be, taken to take credit for only those subscriptions which are relevant and, connected with current year., However, special subscriptions received should be separated from, general subscriptions. Special subscription should be shown on the, liabilities side of the Balance Sheet until they are utilised for the, special purpose, special subscriptions are meant for special purpose., Calculation of Income from Subscriptions : Amount of, subscriptions to be credited to Income & Expenditure Account may be, calculated by (i) Preparing a Statement, or (ii) Preparing Subscription, Account., ❏ Method No. 1 : By Preparing Statement, A statement may be prepared to calculate subscription., Calculation of Subscription for the year, Particulars, `, Total Subscription received during current year, (as per Cash Book or Receipts & Payments A/c), Add : Outstanding Subscriptions for Current Year, Add : Subscriptions received in advance in last year belonging to Current Year, , ........., ........., , Less : Outstanding Subscription of Previous Year received in Current Year, Less : Subscriptions received in advance in current year belonging to next year, , ........., ........., , Amount, `, ........., , Net Subscriptions to be credited to Income and Expenditure A/c, , ........., ........., ........., ........., , ❏ Method No. 2 : By Preparing Subscription Account, Dr., Subscription Account, Particulars, To Outstanding Subscriptions A/c, (Outstanding Subscriptions, in the beginning), To Income and Expenditure A/c, (Bal. fig.), To Advance Subscription A/c, (Subscriptions received in, advance at the end), , Particulars, By Advance Subscriptions A/c, (Subscriptions received in, ........., advance in the beginning), By Bank or Cash A/c, ........., (Total Subscriptions received), By Outstanding Subscription A/c, (Outstanding Subscriptions, ........., at the end), ........., `, , Cr., `, ........., ........., ........., ........., , While preparing Income and Expenditure A/c and Balance Sheet remember the, following :, (1) Regarding Revenue Income (e.g. Subscription, Rent, Interest, Sale of Old, Newspapers etc.) Adjustments :, (a) Closing outstanding subscription is added to the subscription in Income & Expenditure A/c and shown on assets side of closing B/S., (b) Opening outstanding subscription is deducted from the subscription in Income, Expenditure A/c and shown on assets side of opening B/S., (c) Closing advance subscription is deducted from the subscription in Income &, Expenditure A/c and shown on liability side of closing B/S., , 14
Page 29 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, (d) Opening advance subscription is added to the subscription in Income &, Expenditure A/c and shown on liability side of opening B/S., (2) Regarding ‘Revenue Expenditures’ (e.g. Salary, Rent, Interest etc.), Adjustments :, (a) Closing outstanding expenses are shown on liability side of closing B/S., (b) Opening outstanding expenses are shown on liability side of opening B/S., (c) Closing prepaid expenses are shown on assets side of closing B/S., (d) Opening prepaid expenses are shown on assets side of opening B/S., (2) Donation, Donation is the amount received from any person, firm, company or any other body by, a way of gift. It is contributed in the form of cash or if it is received in kind, it is properly, valued. It appears on the debit side of the Receipts and Payments Account in the year of, receipt., Types of Donation :, (a) Special or Specific Donation : Donations received for specific purposes are, always capitalised. As such, specific donation or special donation, is treated as, liabilities and is shown on the liabilities side of the Balance Sheet. Examples of, such donations are : donation for building, donation for library, donation for, pavialion etc. Such donations are not recurring in nature., (b) General Donation : When the purpose for which the donation is to be utilised is, not mentioned, it is called general donation. It can be of two types : (i) General, donation of big amount, and (ii) General donation of small amount., General donations of big amounts and of non-recurring nature are, generally, treated, as capital receipts. These are taken to the liabilities side of the Balance Sheet. On the other, hand, general donations of small amounts (and recurring in nature) are treated as revenue, receipts or incomes. Such donations can be expected every year. Thus, the general, donations of relatively small amount are credited to Income and Expenditure Account., Whether the amount of donation is big or small it is a matter of fact. It depends on the, size and nature of the institution and above all, the and nature of circumstances of each, case., Note : If nothing is mentioned about the nature of donation, it (donation) should be treated as general, donation and is recorded in the credit side of Income and Expenditure A/c., , Adjustments regarding Donation : If additional information or instruction is given, with respect to donation, it should be followed accordingly. For instance, (i) if it is, mentioned that ‘half of donation should be capitalised’ or ‘half of donation should be, treated as income’. Then, show half of donation on the credit side of Income and, Expenditure, as income and the rest on the liabilities side of Balance Sheet as liability., (ii) If it is mentioned in the adjustments that ‘donation should be capitalised’, then even if, the amount of donation is small, it will be shown on the liabilities side of the, Balance Sheet., (3) Legacies, Legacy is an amount given to a non-trading concern as per the ‘will’ of a deceased, person. It is a kind of donation. It appears on the debit side of the Receipts and Payments, Account. Generally, legacy is of non-recurring nature. So, it is always capitalised and shown, on the liabilities side of the Balance Sheet. However, if the amount is small, it can be treated, as income., l In the absence of any clear information it should be treated as capital item., (4) Entrance Fees/Admission Fees, Fees paid by the new members at the time of joining the organisation or institution is, called ‘entrance fees or admission fees’. Since, these fees are paid only once by members, it, , 15
Page 30 :
SBPD Pub li ca tions Ac countancy (XII), is clearly of non-recurring nature. As such, it should be treated as capital receipts and be, shown on the liabilities side of the Balance Sheet., But some accountants are of the view that though each member pays the entrance, fees only once, on account of the constant change in the membership, entrance fees are, received regularly. So, they are recurring in nature. Hence, entrance fees may be treated, as income and entered on the credit side of Income and Expenditure Account., If no instruction is given, it should be treated as income., Remember : General Rules, 1. Treat ‘Donation’/‘General Donation’ as revenue receipt (i.e., income)., 2. Treat ‘Specific Donation’ as a capital receipt, i.e., liability., 3. Entrance Fees/Admission Fees are to be treated as revenue receipts, i.e., income., 4. Subscriptions received for specific purpose should be treated as capital receipts,, that is, liability., 5. Subscriptions : Revenue Receipt, i.e., Income., 6. Life Membership Fees : Capital Receipt i.e., Liability., 7. Endowment Fund : Capital Receipt i.e., Liability., 8. Government Grants-in-aid-Income., 9. Development Grants : Capital Receipt i.e., Liability., (5) Endowment Fund, Endowment Fund is a fund which provides permanent means of support for any, person or institution. It is either deposited in the bank or invested in securities, (investments). Since, the fund provides a permanent means of support, it is a receipt of, capital in nature. It is recorded on the liabilities side of Balance Sheet. Interest earned on, investment of such fund is shown as income in the Income & Expenditure Account., (6) Sale of Old Assets, (i) Sale proceeds of old assets are not shown in Income and Expenditure Account., (ii) Profit on sale of old asset is recorded on the credit side of Income and Expenditure, Account and loss on sale of old asset is entered on the debit side of Income and, Expenditure Account. (iii) In the Balance Sheet, the book value of the concerned asset, (and not the selling price of the asset sold) should be deducted from the total value of, the asset on the assets side of the Balance Sheet., (7) Life Membership Fees, It is paid only once in life by the member. It is a capital receipt. Hence, it is recorded, on the liability side of the Balance Sheet. Sometimes a part of it is transferred to, ‘Subscriptions A/c’ and the balance is transferred to Capital Fund or General Fund., However, if contrary instruction is given, it should be treated accordingly., (8) Sale of Old Newspapers/Periodicals etc., Receipts from sale of old newspapers, magazines, periodicals, journals etc. are, treated as revenue receipts or incomes. These are credited to Income and Expenditure, Account., (9) Sale of Old Sports Materials, Receipts from sale of old sports materials, such as old bats, balls, nets etc. are treated, as revenue receipts or incomes. These are recurring in nature. Hence, these are shown on, the credit side of Income and Expenditure Account., (10) Honorarium, It is the amount paid to those persons who are not employees of the organisation. It is, a revenue expenditure (since it is paid quite regularly). Hence, it is shown on the, expenditure (debit) side of the Income and Expenditure Account., , 16
Page 31 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, (11) Government Grants, Government Schools, Colleges, Universities, Hospitals etc. get Government grants for, their activities. The recurring grants or grants-in-aid are treated as revenue receipts or, incomes and so these are credited to Income and Expenditure Account. Other grants such as, building grant, library grant or statutory grant or development grants etc. are treated as, capital receipts. Such grants are transferred to Specific Fund Account and shown on the, liabilities side of the Balance Sheet., (12) Special Funds, Sometimes special funds are created to meet specific purpose, such as Sports Fund,, Match Fund, Tournament Fund for conducting tournaments, Charity Fund for giving, charity, Building Fund for constructing buildings, Prize Fund for giving prizes etc. Such, funds are shown on the liabilities side of the Balance Sheet., It should be noted that all incomes connected with that special fund should be added, to that fund and all expenses connected there to should be deducted from that special fund, (on the liabilities side of the Balance Sheet). However, if the amount of the special fund is, less than the amount of expenses incurred connected with special fund, the balance not, covered by the said fund should be shown on the debit side of Income & Expenditure, Account., Thus, for example, `, Match Fund (Opening Balance), ........., Add : Income from Matches, Sale of Match Tickets, ........., Add : Donation for Match Fund, ........., ........., Less : Match Expenses, ........., Amount to be shown as Liability, .........., (13) Interest on Fixed Deposit and Investments, Interest on fixed deposit and investments should be calculated on the basis of rate of, interest and period. Interest on fixed deposit and investments is shown on the receipts side, of the Receipts and Payments Account and on income side of the Income and Expenditure, Account. If the amount in respect of interest shown in the Receipts and Payments Account, is less than the calculated amount of interest on the basis of rate and time (i.e., period), the, difference should be treated as accrued interest. Accrued interest should be added with, interest to be shown in the Income and Expenditure Account. Accrued interest will also be, shown on the assets side of the Balance Sheet., (14) Depreciation on Fixed Assets, Depreciation on fixed assets calculated on the basis of rate of depreciation and time, (i.e., period). If the rate of depreciation is not given, then,, Depreciation = Opening Balance of Asset + Asset purchased during the year –, Closing Balance of Asset., The amount of depreciation is shown the expenditure side of Income and Expenditure, Account. It is deducted from the value of asset while showing in the Balance Sheet., (15) Accrued Income/Outstanding Income, It is shown on the Income side of the Income and Expenditure Account and assets, side of the Balance Sheet., (16) Unaccrued Income or Income Received in Advance, It is subtracted from the related income to be shown on the credit side of Income and, Expenditure Account. It is also shown on the liabilities side of the Balance Sheet., (17) Sale of Scraps/Grass, The sale of scraps such as bottles, boxes, gunny bags etc. and sale of grass etc., is shown, on the receipts of Receipts and Payments Account. Amount received from sale of scraps and, grass is income. It is shown on the income side of Income and Expenditure Account., , 17
Page 32 :
SBPD Pub li ca tions Ac countancy (XII), , 1.6 Income and Expenditure Account, 1.6.1 Meaning of Income and Expenditure Account, Income and Expenditure Account is a Nominal Account. It is a summary of, incomes and expenses for a particular accounting period. It is like a Profit and Loss, Account of a business concern. Thus, an Income and Expenditure Account is a revenue, account of non-profit organisation. It serves the same purpose as the Profit and Loss, Account in trading concerns. This account is prepared on accrual basis., The method and technique of the preparation of an Income and Expenditure Account, is similar to that which is followed in the preparation of Profit and Loss Account of a, business concern. Hence, it is a matching exercise of the whole of the income, whether, actually received or entitled to be received, with the whole of expenses, whether actually, paid or outstanding. The items of (revenue) expenditure are shown on the debit side and, that of income on the credit side., Any excess of income over expenditure is termed as ‘Surplus’ and in case, expenditure, exceeds income, the difference is called as ‘Deficit’. The parallel terms in case of business, entity, are ‘Profit’ and ‘Loss’ respectively., ❏ Definitions, (1) “An Income and Expenditure Account is equivalent to the Profit and Loss, Account drawn up for a non-trading concern; it performs the same functions and is, complied and constructed on precisely the same principles.” —William Pickles, (2) ‘‘An Income and Expenditure Account is the Profit and Loss Account of a nontrading concern. It contains only revenue items, being debited with all expenditure and credited with all income of a period, whether or not it has actually, been paid or received within that period. The final balance of Income and Expenditure Account represents the Excess of Income over Expenditure or the Excess of, Expenditure over Income as the case may be, for the period’’., —Spicer and Pegler, 1.6.2 Main Features of Income and Expenditure Account, (1) It is a nominal account., (2) It is prepared from the Receipts and Payments Account and other relevant, information (or additional information)., (3) All revenue expenses related to current year are recorded on the debit side of the, Income and Expenditure Account., (4) All revenue incomes related to current year are shown on the credit side of, Income and Expenditure Account., (5) Items of capital nature are not shown in this account., (6) It shows income and expenditure of current year only on accrual basis., (7) Like Profit & Loss Account, it also includes the non-cash items, such as, depreciation, provision for bad and doubtful debts etc., (8) The balance at the end of the year represents ‘Surplus’ or ‘Deficit’., 1.6.3 Difference between Receipts and Payments Account and, Income and Expenditure Account, S., Basis of Difference, No., 1. Nature of Account, 2. Form of Account, , 18, , Receipts and Payments Account Income and Expenditure Account, It is a real account., It is a nominal account., It is a summary of cash transac- It is a summary of revenue items, tions. So, it is like a Cash Account. for a particular period. So, it is, like a Profit and Loss Account.
Page 33 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, 3. Beginning, , It begins with an opening cash, balance and ends with closing cash, balance., Debit side of this account records, receipts., , 4. Debit Side Items, 5. Credit Side Items, , Credit side of this account records, payments., 6. Capital and Revenue It records receipts and payments of, Items, both capital and revenue nature., 7. Record of Actual Amount It shows the actual amount of, received or paid, receipts or payments made, during the year whether it belong, to past, current or future year., 8. Cash Items, , It records only cash items., , 9. Closing Balance, , Closing balance of this account, shows closing balances of cash, and bank at the end of the period., , 10. Balance Sheet, , 11. Adjustments, , 12. Transfer, Balance, , of, , (a) This is followed by an Income, and Expenditure Account., (b) It is not essential that Balance, Sheet should accompany this, account., Adjustments are not considered, while preparing it, because it is, prepared on cash basis of accounting., Closing Closing balance of this account is, transferred to the Receipts and, Payments Account of the next, period., , It does not begin with any opening, balance., Debit side of this account shows, expenses and losses of revenue, nature., Credit side of this account records, incomes., It records income and expenditure of only revenue nature., It records income and expenditure of the current year only, whether they are received or not, received/paid or unpaid. Items, relating to the past or future, period are excluded., It records both cash and non-cash, items of income and expenditure., The balance of this account represents ‘surplus’ or ‘deficits’. Debit, balance shows deficits (loss) and, credit balance shows surplus, (profit)., (a) This is followed by Balance, Sheet., (b) Balance Sheet must accompany this account., It is necessary to consider adjustments while preparing it, because, it is prepared on accrual basis of, accounting., Closing balance of this account is, transferred to the Capital Fund in, the Balance Sheet., , 1.6.4 Distinction between Income and Expenditure Account and, Profit and Loss Account, S., Basis of, No., Difference, 1. Preparation by, 2., , Object, , 3., , Credit Balance, , 4., , Debit Balance, , Income and Expenditure Account, , Profit and Loss Account, , It is prepared by Non-trading concern. It is prepared by trading concern., It is the revenue account of a nontrading organisation or institution., It is prepared for finding out the It is prepared for finding out the ‘net, ‘surplus’ or ‘deficit’ of a particular profit’ or ‘net loss’., period., The credit balance of this account is The credit balance of this account is, known as ‘Surplus’ or ‘Excess of known as ‘Net Profit’. It is added to, Income over Expenditure’. It is added capital., to opening ‘Capital Fund’., The debit balance of this account is known The debit balance of this account is, as ‘Deficit or ‘Excess of Expenditure over called ‘Net Loss’. It is deducted from, Income’. It is deducted from opening capital., ‘Capital Fund’., , 19
Page 34 :
SBPD Pub li ca tions Ac countancy (XII), 5., , Basis, , 6., , Withdrawal, , It is prepared from Receipts and It is prepared from Trial Balance., Payments Accounts., The surplus of an accounting period The net profit may be withdrawn, cannot be withdrawn by the members. wholly or partly by the owner(s)., , 1.6.5 Format of Income and Expenditure Account, Name of the Organisation, Income and Expenditure Account, Dr., (for the year ending.................), Expenditure, To All Revenue Payments after, making adjustment for outstanding and prepaid expenses, (current and previous year), Insurance Premium, `, (paid this year), ........, Add : Prepaid in the, previous year, ........, ........, Less : Prepaid this year, ........, Salaries, (Total Salaries paid during the year), Add : Outstanding at the end, (this year), ........, ........, Less : Outstanding last year ........, ........, Add : Advance paid in the, previous year, ........, ......., Less : Advance paid in the, current year, ......., Repairs/Decorations, Depreciation, Stationery, ......., Add : Opening Stock, ......., ......., Less : Closing Stock, ......., Telephone Charges, Printing and Stationery, Electricity, Postage and Stamps, Loss on Sale of Assets, Sports Materials Consumed, Sports Materials, Charities (Dr.), Advertisements, Rent & Taxes, Cost of Entertainment, Newspapers and Periodicals, Bar Expenses, Bar Purchases, , 20, , Income, By All Revenue Receipts (i.e., income), after making adjustment for accrued, income and advance income/prepaid, income (current and previous year), Subscriptions, `, (Total amount of Subscription, received during the year), ......., Add : Outstanding at the end, of this year, ........., ........., Less : Outstanding in the, .........., beginning (or last year’s, received this year), ........, ........, Add : Advance recd. last year ........, ........, Less : Advance recd. this year ........, (General) Donation, .........., Locker’s Rent, Income from Lecture, Receipts from Dance and Show, Sale of Used Tennis/Cricket Balls, Interest on Securities, Interest on Investments, Interest on Bank Deposit, Dividend on Shares, Sale of Grass, .........., Sale of Newspapers and, Periodicals (Waste), Sale of Sports Materials, Advertisement in the year book, Proceeds of Concerts, Receipts from Entertainments, Entrance Fees, Charities (Cr.), Profit on Sale of Assets, Rent from Hire of Grounds, Rent from Sub-letting, Miscellaneous Receipts, Contribution to Dinner, Membership Fees, Admission Fees, `, , Cr., `, , ..........
Page 35 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Upkeep of Grounds, Groundman’s Wages, Gardening Expenses, Lighting, Cleaning and Sanitary, Services, Prizes Awarded (if there is no, specific fund), Bad Debts, Audit Fees, Bank Charges, Travelling Allowances, Office Expenses, Sundry Expenses, Miscellaneous Expenses, General Expenses, Interest on Loan/Bank Overdraft, Annual Dinner Expenses, Fair Expenses, To Surplus : Excess of Income over, Expenditure (if any), , Tuition Fees, Grant from Municipal Corporation/, Municipalities, Grant from State Government, Sale of Tickets, Mushaira Receipts, Income from Canteen, By Deficit : Excess of Expenditure, Balancing, over Income (if any), figure, , Balancing, figure, , Tutorial Notes. Precautions to be taken while preparing Income and Expenditure, Account. Income and Expenditure Account of a particular year should show the income, and expenditure of the same year. It should not show, income and expenditure of the, previous or following (i.e., next) year., Explanation of Some Items with Adjustments, Calculation of Amount of Subscription for Current Year, Illustration 5, From the following information, calculate the amount of subscription to be shown in, the Income and Expenditure Account :, `, Subscription received during the year 2017-18, 1,00,000, Subscription outstanding at the end of 2017-18, 16,000, Subscription outstanding in the beginning of 2017-18, 10,000, Solution, Calculation of Amount of Subscription to be, Credited to Income & Expenditure Account, Particulars, Subscription received during the year, Add : Outstanding at the end of the year, , `, 1,00,000, 16,000, 1,16,000, 10,000, 1,06,000, , Less : Outstanding in the beginning of the year, Subscription to be shown in the Income and Expenditure A/c, , Illustration 6(A) (Calculation of Income from Subscriptions), Compute the income from subscription for the year 2018 from the following, particulars :, Particulars, Outstanding Subscription, Advance Subscription, , Subscription received during the year 2018 : ` 2,24,000., , 1.1.2018, , 31.12.2018, , `, , `, , 9,000, 1,600, , 6,000, 4,400, , (J.A.C., 2013), , 21
Page 36 :
SBPD Pub li ca tions Ac countancy (XII), Solution, , Computation of Income from Subscription, (for the year, 2018), Particulars, , `, , `, , Subscription received during the year, , 2,24,000, , Add : Outstanding Subscription (31.12.2018), Advance Subscription (1.1.2018), , 6,000, 1,600, , 7,600, 2,31,600, , Less : Outstanding Subscription (1.1.2018), , 9,000, , Advance Subscription (31.12.2018), Income from Subscription for the year 2018, , 4,400, , (13,400), 2,18,200, , Alternatively, Income received from subscriptions can be calculated by preparing a Subscription, Account as under :, Dr., Subscription Account, Cr., Date, , Particulars, , J.F. Amount Date, , Particulars, , J.F. Amount, , `, , To Outstanding Subscription A/c (1.1.2018), , To Subscription received in, Advance A/c (31.12.2018), To Income and Expenditure A/c (Bal. fig.), , 9,000, 4,400, , `, , By Subscription received in, Advance A/c (1.1.2018), By Bank A/c, By Outstanding Subscription A/c (31.12.2018), , 2,18,200, 2,31,600, , 1,600, 2,24,000, 6,000, 2,31,600, , Illustration 6(B), From the following particulars prepare Subscription Account of Diamond Club for the, year ending 31st March, 2018 :, `, (i) Subscription outstanding on 31.3.2017, 13,000, (ii) Subscription received in advance on 31.3.2017, 8,200, (iii) Subscription received in advance on 31.3.2018, 5,000, (iv) Subscription outstanding on 31.3.2018, 10,800, (v) Subscription received during the year 2017-18, 1,40,000, Solution, Dr., Subscription Account, Cr., Particulars, To Outstanding Subscription A/c, (31.3.2017), To Advance Subscription A/c, (31.3.2018), To Income and Expenditure A/c, (Balancing fig.), , Amount, `, , Particulars, , Amount, `, , By Advance Subscription A/c, (31.3.2017), By Bank A/c (Subscription received, 5,000, during the year), By Outstanding Subscription A/c, 1,41,000, (31.3.2018), , 1,40,000, , 1,59,000, , 1,59,000, , 13,000, , 8,200, , 10,800, , Illustration 7(A) (Calculation of Current Year’s Subscription), From the following extracts, calculate the amount of subscriptions to be shown in the, ‘Income and Expenditure Account’ for the year 2018-19 :, , 22
Page 37 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Receipts and Payments Account, (for the year 2018-19), , Dr., Receipts, To Subscriptions :, 2017-18, 2018-19, 2019-20, , `, `, 10,000, 90,000, 8,000, , Cr., , Payments, , `, , 1,08,000, , Additional Informations :, (1) Outstanding Subscriptions 31-3-2018, (2) Outstanding Subscriptions 31-3-2018-19, (3) Subscriptions received in advance in 2017-18 for 2018-19, Solution, Calculation of Subscription for 2018-19, , `, , 15,000, 20,000, 13,000, , Particulars, Subscription received in 2018-19, Add : Subscription received in 2017-18 as advance for 2018-19, Add : Outstanding Subscriptions for 2018-19, Income from Subscription for the year 2018-19, , `, 90,000, 13,000, 20,000, 1,23,000, , If the number of members and rate of subscription per member is given, then the, number of members is multiplied by the amount of subscription per member. The, amount so obtained will be shown on the credit side of Income & Expenditure A/c., Illustration 7(B), Extracts of Receipts and Payments Account for the year ended March 31, 2019 are, given below :, Subscriptions Received :, `, 2017-18, 2,500, 2018-19, 26,750, 2019-20, 1,000, 30,250, Additional Informations :, (i) Total number of members : 230. (ii) Annual membership fee : ` 125. (iii) Subscriptions Outstanding on April 1, 2018 : ` 2,750., Prepare a statement showing all relevant items of subscriptions, viz., income,, advance, outstanding, etc., (N.C.E.R.T.), Solution, Amount of subscriptions due for the year 2018-19 irrespective of cash ` 28,750 (i.e., ` 125 × 230)., Calculation of Subscriptions for the year 2018-19, Particulars, A. Subscription received for 2018-19 as per Receipts and Payments A/c, B. Add : Outstanding Subscription for 2018-19 (230 × ` 125), Less : Amount received, C. Income from Subscription for the year 2018-19, , `, , `, , 26,750, 28,750, 26,750, , 2,000, 28,750, , Note : Subscription received for 2019-20 ` 1,000 will be treated as Advance Subscription and it will be shown as, a liability in the Balance Sheet., , 23
Page 38 :
SBPD Pub li ca tions Ac countancy (XII), Calculation of Outstanding Subscription for the year 2018-19, Particulars, , `, `, , (i) Outstanding Subscription as on 01-04-2018, 2,750, Subscription received for 2017-18, (2,500), (ii) Subscription due for 2018-19 (` 125 × 230), 28,750, Subscription received for 2018-19, (26,750), Subscription Outstanding as on 31-3-2019, , 250, 2,000, 2,250, , Illustration 7(C) (Calculation of Subscription for Current year and to be shown, in Balance Sheet), From the following particulars of Receipts and Payments Account of Star Club and, additional informations, calculate the income from subscriptions for the year ending 31st, Dec., 2018 and show them in Income and Expenditure Account and the Balance Sheet of, the Club :, Receipts and Payments Account, Dr., (for the year ending 31st Dec., 2018), Cr., Receipts, To Subscriptions :, 2017, 2018, 2019, , Payments, , `, `, 240, 12,660, 480, , `, , 13,380, , There are 450 members and each paying an annual subscription of ` 30, ` 270 being, in arrears for 2017 at the beginning of 2018., Solution, Total Members = 450, Annual Subscription per Member ` 30, (a) Total Subscriptions Receivable = 450 × ` 30, (b) Subscriptions received (2018), Subscription Outstanding for the year 2018 (a – b), Income and Expenditure Account of Star Club, Dr., (for the year ending 31st December, 2018), Expenditure, , Income, , `, , By Subscription, Add : Outstanding for, Current Year, , `, , 13,500, 12,660, 840, Cr., `, , `, 12,660, 840, , 13,500, , Balance Sheet, (as on 31st Dec., 2018), Liabilities, Subscription received in Advance, (2019), , `, , Assets, , Subscriptions Outstanding :, 480, 2017, 2018, , `, `, 301, 840, , Working Note :, 1. Subscriptions Outstanding (2017), Subscriptions Outstanding in 2017 but received in 2018, Subscriptions still outstanding for 2017, , 24, , 870, `, 270, 240, 30
Page 39 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Illustration 8, Find out income from subscription and also show the treatment in Balance Sheet :, Subscription, Subscription, Subscription, Subscription, Subscription, Solution, , `, , received during the year, Outstanding Opening, Outstanding Closing, received in Advance Opening, received in Advance Closing, Calculation of Income from Subscription, , Particulars, Subscription received during the year, Add : Outstanding Subscription Closing, Add : Subscription received in Advance : Opening, , 20,000, 4,000, 8,000, 6,000, 4,000, `, , Less : Subscription Outstanding : Opening, Less : Subscription received in Advance : Closing, Income from subscription for the year, , 4,000, 4,000, , `, 20,000, 8,000, 6,000, 34,000, 8,000, 26,000, , Balance Sheet, (as on ................), Liabilities, Subscription received in Advance, (Closing), , `, 4,000, , Assets, Outstanding Subscription (Closing), , `, 8,000, , Illustration 9 (Preparation of Subscription A/c), The following information is obtained from the Secretary of a Golf Club :, `, (i) Subscriptions received in 2018-19 as per Receipts and Payments A/c, 89,000, (ii) Advance subscriptions received in 2017-18, 5,000, (iii) Subscriptions outstanding at the end of 2018-19 (Including, ` 1,500 for 2017-18), 12,500, (iv) Advance subscriptions received for 2019-20, 3,000, (v) Subscriptions written off during 2018-19, 600, (vi) Subscriptions receivable on 1.4.2018, 8,400, Prepare Subscription Account for the year ending 31st March, 2019. (U.S.E.B., 2015), Solution, Dr., Subscription Account, Cr., Date, , Particulars, , J.F. Amount Date, , Particulars, , J.F. Amount, , `, , To Subscriptions Outstanding A/c (1.4.2018), To Subscriptions Written off, To Adv. Subscriptions A/c, To Income and Expenditure A/c (Bal. fig.), , 8,400, 600, 3,000, 94,500, 1,06,500, , `, , By Advance Subscriptions, A/c (2017-18), By Bank A/c, By Subscriptions Outstanding A/c (2018-19), , 5,000, 89,000, 12,500, 1,06,500, , ❏ Calculation of the Cost of Consumable Goods or Expenditure Involving Stocks, Some expenses involve stocks besides cash payments. In other words, sometimes, opening and closing stock of some items and also the amount of payment for such items are, given in the question. Such items are known as ‘Consumable Goods’. Usually these items, relate with stationery, postage, cutlery and crockery, medicine, sports equipments, sports, , 25
Page 40 :
SBPD Pub li ca tions Ac countancy (XII), materials, food stuffs etc. The amount of consumption of consumable goods during the year, is shown in the Income and Expenditure Account on the debit side. The actual expenditure, of such items needs to be calculated., Calculation of Consumable Goods or Actual Expenditure : The amount of, consumable goods used during the year may be calculated as under :, Opening Stock (of Consumable Goods), Add : Purchases (Cash + Credit) during the year, Less : Closing Stock (of Consumable Goods), Balance Chargeable to the Income & Expenditure A/c, , `, ........, ........, ........, ........, ........, , Notes : 1.Opening Stock of such goods is shown on the assets side of the opening Balance Sheet whereas Closing, Stock is shown on the assets side of closing Balance Sheet., 2. For ascertaining credit purchases, creditors account should be prepared., , Alternatively, when more details are given about creditors or suppliers of such goods :, `, Payment made for purchase of such goods, say stationery (as per Receipts and, Payments A/c), `, Add : Stock in the beginning, ............, Add : Advance to Suppliers in the beginning, Add : Creditors at the end of the year, , ............, ............, , Less : Stock at the end, Less : Advance to Suppliers at the end, Less : Creditors in the beginning, Stationery/Medicine Consumed during the year (to be shown in Income &, Expenditure A/c), , .........., .........., .........., , ............, , ............, ............, , ............, ............., , Illustration 10(A) (When Purchase in Given), Show the expense of stationery in the Income and Expenditure Account for the year, ended 31st March, 2019 from the following details :, 31-3-2018, 31-3-2019, `, , Stock of Stationery, 16,000, Stationery Purchased during the year ` 39,000., Solution, Income and Expenditure Account, Dr., (for the year ended 31st March, 2019), Expenditure, To Opening Stock of, Stationery, Add : Purchase, Less : Closing Stock, , `, , Income, , `, , 19,000, , Cr., `, , `, , 16,000, 39,000, 55,000, 19,000, , 36,000, , Illustration 10(B), Extract from a Receipts and Payments Account for the year ended on March 31, 2019, are as follows :, Payments : Stationery ` 23,000., , 26
Page 41 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Additional Informations :, Particulars, Stock of Stationery, Creditors for Stationery, , April, 2018, , March, 2019, , `, , `, , 4,000, 9,000, , 3,000, 2,500, , Calculate the amount which will be posted to Income and Expenditure A/c for the, year ended on March 31, 2019., Solution, Calculation of Amount of Stationery Consumed, during the year ended 31-3-2019, Particulars, Amount paid for Stationery during the year, Add : Opening Stock of Stationery, Add : Creditors Outstanding at the end of the year, Less : Closing Stock of Stationery, Less : Creditors for Stationery on 1-4-2018 (i.e. Opening), Stationery Consumed to be posted to Income & Expenditure Account, , `, 4,000, 2,500, 3,000, 9,000, , `, 23,000, 6,500, 29,500, 12,000, 17,500, , Amount which will be posted to Income & Expenditure Account for the year ended, 31st March, 2019 in respect of stationery consumed ` 17,500., Illustration 10(C) (Calculation of Consumable Goods), Calculate the amount of medicine consumed for the year 2018 :, `, (i) Opening Stock of Medicines, 10,000, (ii) Opening Creditors of Medicines, 9,000, (iii) Cash Purchase of Medicines during the year, 30,000, (iv) Closing Stock of Medicines, 15,000, (v) Closing Creditors of Medicines, 13,000, Solution, Calculation of Medicines Consumed during the Current Year 2018, Particulars, Opening Stock of Medicines, Add : Cash Purchase of Medicines, Add : Closing Creditors of Medicines, Less : Closing Stock of Medicines, Less : Opening Creditors of Medicines, , Dr., , `, 30,000, 13,000, 15,000, 9,000, Medicines Consumed during the year, , `, 10,000, 43,000, 53,000, 24,000, 29,000, , Alternatively (In Accounting Form), Creditors for Medicines Account, , Particulars, To Balance c/d (Closing Creditors), , Particulars, 13,000 By Balance b/d, (Opening Creditors), By Medicines A/c, (Purchases) (Bal. fig.), 13,000, `, , Cr., `, , 9,000, 4,000, 13,000, , 27
Page 42 :
SBPD Pub li ca tions Ac countancy (XII), Medicines Account, , Dr., Particulars, To Balance b/d, (Opening Stock), To Cash A/c, (Cash Purchases), To Creditors A/c (Purchases), , Cr., , Particulars, By Income and Expenditure A/c, 10,000, (Medicine Consumed), By Balance c/d (Closing Stock), 30,000, 4,000, 44,000, `, , `, , 29,000, 15,000, 44,000, , Thus, the amount of medicine consumed for the year is ` 29,000., Illustration 10(D) (Stock of Stationery and its Treatment), Calculate what amount of stationery will be posted to Income and Expenditure, Account for the year ended March 31, 2019 :, `, (i) Stock of Stationery on 1-4-2018, 3,000, (ii) Creditors for Stationery on 1-4-2018, 2,000, (iii) Amount paid for Stationery during 2018-19, 10,800, (iv) Stock of Stationery on 31-3-2019, 500, (v) Creditors for Stationery on 31-3-2019, 1,300, (vi) Advance paid for Stationery carried from 2017-18, 200, (vii) Advance paid for Stationery on March 31, 2019, 1,300, Solution, Calculation of Stationery Consumed, `, Stock of Stationery on 1-4-2018 (i), Add : Payments made for Stationery in 2018-19 (iii), Add : Advance paid in the last year (vi), Add : Creditors for Stationery at the end of the year (v), , 10,800, 200, 1,300, , Less : Creditors for Stationery on 1.4.2018 (ii), Less : Advance paid for Stationery at the end (vii), Less : Stock of Stationery in hand (31-3-2019) (iv), Stationery consumed in 2018-19 debited to, Income and Expenditure A/c, , 2,000, 1,300, 500, , `, 3,000, 12,300, 15,300, 3,800, 11,500, , Thus, ` 11,500 will be posted to Income and Expenditure A/c as the amount of stationery., Illustration 10(E) (Calculation of Sports Material Consumed), Calculate the amount of sports material which will be posted to the Income and, Expenditure Account for the year ending 31st December, 2018 :, Particulars, Stock of Sports Material, Creditors for Sports Material, , 1.1.2018 31.12.2018, `, `, 20,000, 15,000, 40,000, 45,000, , Payment made for sports material creditors during the year ` 2,00,000., Solution, Calculation of Sports Material Consumed during the year, Particulars, Payment made for Sports Material Creditors, Add : Opening Stock of Sports Material (1-1-2018), Add : Creditors for Sports Material (31.12.2018), Less : Closing Stock of Sport Material (31.12.2018), Less : Creditors for Sports Material (1.1.2018), Amount of Sports Material to be posted to Income and Expenditure A/c, , 28, , `, 20,000, 45,000, 15,000, 40,000, , `, 2,00,000, 65,000, 2,65,000, 55,000, 2,10,000
Page 43 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Thus, the amount of Sports Material to be posted to Income & Expenditure A/c, , ` 2,10,000., , ❏ Calculation of Current Revenue Expenditure (e.g., Salaries Chargeable to, Income and Expenditure Account) :, Total Salaries paid in Current Year (2018-19), Add : Outstanding Salaries (Current Year), Less : Outstanding Salaries (Previous Year 2017-18), Add : Prepaid Salaries (Previous Year 2017-18), Less : Prepaid Salaries this year belonging to next year (2019-20), Current Year’s Salaries debited to Income and Expenditure A/c, , `, .............., .............., .............., .............., .............., .............., .............., .............., .............., , Calculation of Amount of Insurance Chargeable (or debited) to Income and, Expenditure A/c :, `, Amount of Insurance paid (as per Receipts and Payments A/c), .........., Add : Prepaid/Paid in Advance in the previous year, ..........., .........., Less : Prepaid this year (or current year) related to coming year, .........., Amount chargeable to Income and Expenditure A/c, .........., Illustration 11 (Calculation of Salary), From the following information, calculate the amount of salaries chargeable to, Income and Expenditure Account for the year ended 31st December, 2018 :, `, , (i) Salaries paid during the year, (ii) Outstanding Salaries on 31st Dec., 2017, (iii) Outstanding Salaries on 31st Dec., 2018, (iv) Salaries paid in Advance on 31st Dec., 2018, Solution, Calculation of Salary for 2018, , 3,00,000, 10,000, 15,000, 20,000, , Salaries paid during the year, Add : Outstanding Salaries on 31.12.2018, `, Less : Outstanding Salaries on 31.12.2017, 10,000, Prepaid Salaries on 31.12.2018, 20,000, Salaries Chargeable to Income & Expenditure A/c, , `, 3,00,000, 15,000, 3,15,000, 30,000, 2,85,000, , Illustration 12, Calculate the amount which will be shown in Income and Expenditure Account for, the year ended 31st March, 2019 and the following in Balance Sheet :, Particulars, Outstanding Salary, Salary paid in Advance, , 1.4.2018 31.3.2019, `, `, 15,000, 20,000, 20,000, 18,000, , Salary paid during the year ` 80,000., , 29
Page 44 :
SBPD Pub li ca tions Ac countancy (XII), Solution, , Calculation of Actual Expenses, i,e., Salary for Current Year, Particulars, , `, , Salary paid during the year, Add : Outstanding Salary at the end of the year (31.3.2019), Add : Prepaid Salary in the beginning of the year (1.4.2018), , `, 80,000, , 20,000, 20,000, , Less : Outstanding Salary in the beginning of the year (1.4.2018), Less : Prepaid Salary at the end of the year (31.3.2019), Actual Salary to be debited to Income and Expenditure Account, , 15,000, 18,000, , 40,000, 1,20,000, 33,000, 87,000, , Balance Sheet, (as on 31st March, 2019), Liabilities, , Assets, , `, , Outstanding Salary, , `, , 20,000 Prepaid Salary, , 18,000, , Calculation of Depreciation and Profit or Loss on Sale of an Asset, Illustration 13, On 1st April, 2018 the book value of the equipments of Star Club was ` 60,000. On 1st, December, 2018 one-half of the equipments was sold for ` 25,000 and another equipment, was purchased for ` 48,000 on 1st January, 2019. Depreciation is charged @ 10% p.a., Show profit or loss on sale and depreciation of the equipment in the Income and, Expenditure Account and also show the value of equipments that will appear in the, Balance Sheet on 31st March, 2019., Solution, Income and Expenditure Account of Star Club, Dr., (for the year ended 31st March, 2019), Cr., Expenditure, To Loss on Sale of Equipments : `, Book Value (1/2) 1.4.2018 30,000, Less : Depreciation for, 8 months @ 10%, 2,000, 28,000, Less : Sale Proceeds, 25,000, To Depreciation :, On ` 30,000 for 1 year, 3,000, On ` 30,000 for 8 months, 2,000, On ` 48,000 for 3 months, 1,200, , Income, , `, , `, , 3,000, , 6,200, , Balance Sheet, (as on 31st March, 2019), Liabilities, , `, , Assets, , `, `, , Equipments (` 60,000 – 30,000) 30,000, Add : New Purchases, Less : Depreciation, (` 3,000 + 1,200), , 30, , 48,000, 78,000, 4,200, , 73,800
Page 45 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, 1.6.6 Preparation of Income and Expenditure Account, Income and Expenditure Account can be prepared :, (i) From given information,, (ii) From Receipts and Payments Account,, (iii) From Trial Balance., Income and Expenditure Account is prepared from Receipts and Payments Account, and additional information. But all the items appearing in the Receipts and Payments, Account are not shown in Income and Expenditure Account. In Income and Expenditure, Account only such receipts or expenditures are shown which are of revenue nature and that,, too, which relate to the current year. Of course, the additional information are taken into, consideration while preparing Income and Expenditure Account., (i) Preparation of Income and Expenditure Account on the basis of Given, Information, Illustration 14, From the following information, prepare Income and Expenditure Account :, Income from Subscriptions ` 2,20,000, Salary paid ` 30,000, Outstanding Salary at, the end of the year ` 6,000, Printing and Stationery ` 4,500, Entrance Fees ` 20,000,, Donation Received ` 10,000, Office Expenses ` 15,600, Rent paid ` 30,000, Miscellaneous, Expenses ` 4,000., Solution, Dr., Income and Expenditure Account, Cr., Expenditure, , `, , `, To Salary paid, 30,000, Add : Outstanding at, the end, 6,000, To Printing and Stationery, To Office Expenses, To Rent paid, To Miscellaneous Expenses, To Surplus : Excess of Income over, Expenditure, , Income, By Subscription Income, By Entrance Fees, By Donation, , `, 2,20,000, 20,000, 10,000, , 36,000, 4,500, 15,600, 30,000, 4,000, 1,59,900, 2,50,000, , 2,50,000, , (ii) Preparation of Income and Expenditure Account from the Receipts and, Payments Account and Additional Information, Receipts and Payments Account, Receipts, , Revenue, , Payments, , Capital, , Income and Expenditure Account, , Revenue, , Capital, , Balance Sheet, , 31
Page 46 :
SBPD Pub li ca tions Ac countancy (XII), Steps involved in Preparation of Income and Expenditure Account :, Following are the steps to be taken care while preparing Income and Expenditure Account, from Receipts and Payments Account :, Step 1 : Items not to be shown in Income and Expenditure Account :, Persue the Receipts and Payments Account thoroughly and exclude the following, items as they are not revenue items. In other words, do not show these items in, Income and Expenditure Account :, (i) Opening Cash and Bank Balance : They are recorded in Opening Balance Sheet., (ii) Closing Cash and Bank Balance : They are recorded in Closing Balance Sheet., (iii) Capital Receipts : Like Life Membership Fees, Endowment Fund, Legacy,, Specific Donation. These are liabilities and are shown in the liabilities side of, the closing Balance Sheet., (iv) Reserves and Funds : Match Fund, Sports Fund, Prize Fund, Cricket Fund,, Tournament Fund etc. These are shown on liabilities side of the Balance Sheet., (v) Sale of Fixed Assets : Such items are subtracted from the related asset in, Balance Sheet., (vi) Capital Payments : Like Purchase of Furniture, Land and Building,, Investment purchased, Fixed Deposits, etc. These are shown on the assets, side of the Balance Sheet., Step 2 : Items to be shown in Income and Expenditure Account :, (i) Revenue Income/Receipts :, Ascertain the Revenue Receipts/Income appearing on credit side of Receipts and, Payments Account, e.g., Subscription, Rent, Interest, Sale of Old Newspapers/, Magazines, Lecture Fees, Income from Entertainment etc. and show them on, the income side of Income and Expenditure Account. In case of additional, information/adjustments :, l Exclude (i.e. subtract) the amounts relating to the preceeding and succeeding, periods., l Include (i.e. add) the amounts relating to the current year not yet received or, received in ealier years., (a) Add : Outstanding Income at the end of current year, (b) Add : Advance Income at the end of previous year, (c) Less : Outstanding (Unpaid) Income at the end of the previous year, (d) Less : Advance Income at the end of current year, Step 3 : Revenue Expenditure/Payments :, Take the revenue expenses e.g. Salaries, Rent etc. shown on the credit side of, Receipts and Payments Account to the expenditure side of the Income and, Expenditure Account with due adjustments as per the additional information, relating to the amount received in advance and those not yet received i.e.,, outstanding expenses., l Opening prepaid expenses (i.e., paid in advance in previous year) should be, added., l Opening outstanding expenses should be subtracted (deducted)., l Closing outstanding expenses (i.e., current year) should be added., l Closing prepaid expenses (i.e., prepaid in the current year) should be deducted., Step 4 : Non-cash Items :, Ascertain the following non-cash items not appearing in the Receipts and, Payments Account. These items are given in additional information. Show these, items on the debit side (i.e., expenditure side) or credit side (i.e. income side) of, the Income and Expenditure Account, as the case may be :, l Depreciation of Fixed Assets., , 32
Page 47 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, , l Bad Debts/Provision for Doubtful Debts if required., on the debit side, l Loss on Sale of Fixed Assets (Cost Price – Selling Price)., , , Profit on sale of fixed assets on the credit side of Income and Expenditure Account., Step 5 : Cost of Material Consumed :, Ascertain the cost of material consumed and show on the expenditure side of, Income and Expenditure Account., Step 6 : Surplus/Deficit :, Lastly, calculate the difference between credit and debit side amount. If the total, of income side is more than that of the expenditure side, it will indicate ‘Surplus’, or ‘Excess of Income over Expenditure’. Show it on the debit side. If the total of, expenditure side exceeds that of the income side, it will be called ‘Deficit’ or, ‘Excess of Expenditure over Income’. Put it on the credit side., ‘Surplus’ is added to ‘Capital Fund’ and ‘Deficit’ is subtracted from, ‘Capital Fund’ in Balance Sheet., ❏ Points to be Noted, While preparing Income and Expenditure Account the following points should be, taken into consideration :, (i) If current year’s receipts of certain income includes the income of the previous or, next year, it will be deducted. If any amount remains outstanding regarding, current year that will be added., (ii) We should pick up the income and expenditure of the current year, if it is, separately given., (iii) If current year’s payment includes the expenditure of previous or next year that, should be deducted. If there is any outstanding expenditure of the current year,, it will be added., (iv) Generally we assume that outstanding expenses of the previous year must have, been paid during the current year. In the same way outstanding income of the, previous year must have been received during the current year., (v) If certain income has been received in advance during the previous year, it, should be added to the income of the current year., (vi) Income received in advance should be deducted from the current year’s, income. In the same way, prepaid expenses should also be deducted from, current year’s expenditure., Preparation of Income and Expenditure A/c from Receipts and Payments A/c, Illustration 15, From the following Receipts and Payments Account, prepare an Income and, Expenditure Account for the year ended 31st Dec., 2018 :, Dr., Cr., Receipts, Balance (1-1-2018), Donation, Subscription, Legacies, Interest, , `, , 17,000, 19,700, 22,000, 13,400, 1,275, , Payments, Charity, Salaries, Rent, Postage, Advertisement, Investment, Balance (31-12-2018), , 73,375, , Solution, Dr., , Income and Expenditure Account, (for the year ended 31st Dec ., 2018), Expenditure, , To Charity, , `, , 23,000 By Donation, , Income, , `, , 23,000, 12,100, 11,300, 1,200, 1,400, 17,700, 6,675, 73,375, , (J.A.C., 2016), Cr., `, , 19,700, , 33
Page 48 :
SBPD Pub li ca tions Ac countancy (XII), To Salaries, To Rent, To Postages, To Advertisement, , 12,100 By Subscription, 11,300 By Interest, 1,200 By Excess of Expenditure over, 1,400, Income, 49,000, , 22,000, 1,275, 6,025, 49,000, , Note : Legacies are capital receipts and investment is capital payment and so they have not been shown in the, Income and Expenditure A/c., , Illustration 16, From the following Receipts and Payments Account, prepare Income and Expenditure Account for the year ending 31st March, 2019 :, (U.S.E.B., 2011), Dr., Cr., Receipts, To Balance b/d (1.4.2018) :, `, Cash at Bank, 455, Cash in Office, 55, To Subscription, (including ` 200 for 2019-20), To Interest on Investment, To Bank Interest, To Sale Proceeds of Furniture, , Amount, `, 510, 3,000, 1,500, 10, 250, , Payments, , Amount, `, 3,500, 600, 145, 25, 480, 295, , By Salaries, By Rent, By Printing & Stationery, By Postage & Telegram, By Purchase of Defence Bonds, By Purchase of Furniture, By Balance (31.3.2019) :, Cash in Office, Cash at Bank, , 12, 213, , 5,270, , Solution, Dr., , 5,270, , Income and Expenditure Account, (for the year ended 31st March, 2019), , Amount, Income, `, To Salaries, 3,500 By Subscription, To Rent, 600, Less : Advance (2019-20), To Printing & Stationery, 145 By Interest on Investment, To Postage & Telegram, 25 By Bank Interest, To Excess of Income over Expenditure, 40, 4,310, , Cr., , Expenditures, , `, 3,000, 200, , Amount, `, 2,800, 1,500, 10, 4,310, , Illustration 17, From the following information, prepare an Income and Expenditure Account for the, year ending 31st December, 2018 :, Dr., Cr., Particulars, , Amount, , Particulars, , `, , To Balance b/d :, Cash in hand, Cash at Bank, To Subscriptions received :, 2017, 2018, 2019, To Entrance Fees received, To Life Membership Fees, , 34, , 2,000, 10,000, `, , 800, 18,000, 1,000, , 19,800, 2,500, 2,500, , Amount, `, , By Office Expenses, By Investment Purchased, By Sports Expenses, By Salary paid, By Wages paid, By Rent paid, By Sports Materials Purchased, By Balance c/d :, Cash in hand, , 2,900, 3,000, 7,400, 2,400, 1,200, 5,000, 9,000, 700
Page 49 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, To Income from Canteen, To Donation received, , Solution, Dr., , 9,400, 2,400, 48,600, , Cash at Bank, , 17,000, 48,600, , Income and Expenditure Account, (for the year ended 31st December, 2018), Expenditure, , To Office Expenses, To Sports Expenses, To Salary, To Wages, To Rent, To Surplus : Being Excess of Income, over Expenditure, , Amount, `, 2,900, 7,400, 2,400, 1,200, 5,000, , Cr., , Income, , Amount, `, 18,000, 2,500, 9,400, 2,400, , By Subscription, By Entrance Fees, By Income from Canteen, By Donation, , 13,400, 32,300, , 32,300, , Working Notes :, 1. Life Membership Fee is assumed as capital receipt. It will be shown on the liabilities side of the Balance, Sheet., 2. Donation received is a general donation. Therefore it is assumed a revenue., 3. Investment purchased is a capital expenses therefore, it is not shown in income & Expenditure A/c., 4. Sports material purchased is a capital expenditure, therefore, it is not shown in Income & Expenditure, A/c., , ❏ Preparation of Income and Expenditure Account from Receipts and Payments, Account and Additional Information, Illustration 18, From the following information received from the Receipts and Payments Account of, Himalaya Club, prepare Income and Expenditure Account for the year ended 31st, December, 2018 :, Receipts, : Cash Balance ` 480; Annual Subscription ` 652; Life Membership, Fee ` 100; Entrance Fee ` 496; Interest on Investment ` 76; Sundry, Receipts ` 32., Payments, : General Expenses ` 216; Salary and Wages ` 220; Furniture ` 320;, Rent and Tax ` 224; Newspaper ` 50; Cash Balance ` 806., Adjustments : Annual subscription ` 100 are outstanding. General Expenses ` 20, and Secretary’s Salary ` 70 are outstanding. Depreciation on, furniture is to be written off ` 50., (U.S.E.B., 2013), Solution, Income and Expenditure Account of Himalaya Club, Dr., (for the year ended 31st December, 2018), Cr., Expenditure, To Salary and Wages, `, To General Expenses, 216, Add : Outstanding Gen. Exps. 20, To Rent and Tax, To Newspaper, To Outstanding Secretary’s Salary, , Income, , `, , 220, 236, 224, 50, 70, , `, `, , By Subscription, Add : Outstanding, Subscription, By Entrance Fee, By Interest on Investment, , 652, 100, , 752, 496, 76, , 35
Page 50 :
SBPD Pub li ca tions Ac countancy (XII), To Depreciation on Furniture, To Surplus (Excess of Income over, Expenditure), , 32, , 50 By Sundry Receipts, 506, 1,356, , 1,356, , Note : Life membership fee is a capital receipt. Hence, it will not be shown in the Income and Expenditure A/c., , Illustration 19, From the following items of Receipts & Payments A/c of Young Ladies Club, prepare, an Income and Expenditure Account for the year ended 31-3-2019 :, Details, Amount, `, , Salaries paid, Lighting and Heating, Printing and Stationery (including ` 500 for the previous year), Subscriptions received (including ` 2,000 received in advance and, ` 5,000 for the previous year), Net Proceeds of Refreshment Room, Miscellaneous Expenses, Interest paid on Loan for half year, Rent and Rates (including ` 1,000 prepaid), Locker Rent received, Additional Information :, Subscriptions in arrears on 31-3-2019 were ` 8,000 and half year's interest, was outstanding., Solution, Income & Expenditure Account of Young Ladies Club, Dr., (for the year ended 31st March, 2019), Expenditure, To Salaries, To Lighting & Heating, To Printing & Stationery, Less : For P. Y., To Miscellaneous Expenses, To Interest on Loan, Add : Outstanding, To Rent and Rates, Less : Prepaid, , `, , `, 3,500, 500, 1,200, 1,200, 7,500, 1,000, , To Surplus (Excess of Income over, Expenditure), , Income, `, 40,000, 8,000, 48,000, Less : Advance, 2,000, 46,000, Less : Outstanding (P.Y.), 5,000, By Net Proceeds from Refreshment, Room, By Locker's Rent received, , 50,000, 5,000, 3,500, 40,000, 45,000, 16,000, 1,200, 7,500, 4,500, on loan, Cr., `, , 50,000 By Subscriptions, 5,000, Add : Outstanding, 3,000, 16,000, 2,400, 6,500, , 41,000, 45,000, 4,500, , 7,600, 90,500, , 90,500, , Illustration 20, From the following Receipts and Payments Account, prepare an Income and, Expenditure Account for the year ended 31st March, 2019 :, Receipts and Payments Account, Dr., (for the year ended 31st March, 2019), Cr., Receipts, To Balance b/d, , 36, , Amount, Payments, `, 5,000 By Secretary’s Honorarium, , Amount, `, 5,000
Page 51 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, To Donation for Building, To Subscription received, To Entrance Fees, To Sale of Old Newspapers, , 30,000, 28,000, 3,000, 900, , By Salaries, By Rent, By Printing & Stationery, By Investment, By Repair, By Wages, By Balance c/d, , 13,000, 1,200, 400, 20,000, 800, 1,200, 25,300, , 66,900, , 66,900, , Other Informations :, 1. Outstanding Rent, 2. Advance Subscription, 3. Entrance fee is Revenue Income., Solution, Income and Expenditure Account, Dr., (for the year ended 31st March, 2019), Expenditure, To Secretary’s Honorarium, To Salaries, `, To Rent, 1,200, Add : O/S Rent, 500, To Printing and Stationery, To Repairs, To Wages, To Surplus (Excess of Income over, Expenditure), , `, , 500, 3,000, (J.A.C., 2010), , Amount, Income, `, `, 5,000 By Subscription Received, 28,000, 13,000, Less : Advance Subscription 3,000, By Entrance Fees, 1,700 By Sale of Old Newspaper, 400, 800, 1,200, , Cr., Amount, `, 25,000, 3,000, 900, , 6,800, 28,900, , 28,900, , Note : Donation for Building will be shown in Balance Sheet because it is a specific donation., , Illustration 21, From the following Receipts and Payments Account and further informations supplied,, prepare an Income and Expenditure Account for the year ended 31st March, 2019 :, Dr., Receipts and Payments Account, Cr., Receipts, To Balance b/d (1-4-2018), To Donations, To Subscriptions, To Endowment, To Legacies, To Interest, , Amount, `, 7,700, 8,000, 4,000, 15,000, 6,000, 9,700, , 50,400, , Payments, By Charities, By Salaries, By Rent (9 months), By Printing, By Postage, By Advertisements, By Investments, By Balance c/d (31-3-2019), , Amount, `, 14,500, 2,600, 1,200, 300, 100, 1,000, 28,000, 2,700, 50,400, , Treat half of the donations and legacies as income. Endowment is all capital. ` 300, were owing for salaries and ` 50 for printing at the end of the year. ` 250 was paid for, advertisements in advance for the coming year., (J.A.C., 2011), , 37
Page 52 :
SBPD Pub li ca tions Ac countancy (XII), Solution, Dr., , Income and Expenditure Account, (for the year ended 31st March, 2019), Expenditure, , To Charities, `, To Salaries, 2,600, Add : Outstanding, 300, To Rent, 1,200, Add : Outstanding for, 3 months, 400, To Printing, 300, Add : Outstanding, 50, To Postage, To Advertisements, 1,000, Less : Advance, 250, To Surplus (Excess of Income over, Expenditure), , Cr., , Amount, Income, `, 14,500 By Donation, By Subscriptions, 2,900 By Legacies, By Interest, , Amount, `, 4,000, 4,000, 3,000, 9,700, , 1,600, 350, 100, 750, 500, 20,700, , 20,700, , Illustration 22, From the undermentioned Receipts and Payments Account for the year ending March, 31, 2019 of Negi Club, prepare Income and Expenditure Account for the same period :, Receipts and Payments Account, Dr., (for the year ending 31st March, 2019), Cr., Receipts, , Amount, , Payments, , Amount, , `, , To Balance c/d : Bank, To Subscriptions :, `, 2018, 1,500, 2019, 10,000, 2020, 500, To Donations, To Hall Rent, To Interest on Bank Deposits, To Entrance Fees, , `, , 25,000 By Purchase of Furniture (1.7.2018), , 12,000, 2,000, 300, 450, 1,000, , By Salaries, By Telephone Exp., By Electricity Charges, By Postage and Stationery, By Purchases of Books, By Entertainment Exp., By Purchase of 5% Government, , 2,000, 300, 600, 150, 2,500, 900, , Papers (1-10-2018), By Miscellaneous Exp., By Balance c/d :, Cash, Bank, , 8,000, 600, , 40,750, , The following additional informations are available :, (i) Salaries outstanding, (ii) Entertainment expenses outstanding, (iii) Bank interest receivable, (iv) Subscriptions accrued, (v) 50 percent of entrance fees is to be capitalised;, (vi) Furniture is to be depreciated at 10 percent per annum., , 38, , 5,000, , 300, 20,400, 40,750, `, , 1,500, 500, 150, 400, (N.C.E.R.T.)
Page 53 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Solution, , IN THE BOOKS OF NEGI CLUB, Income and Expenditure Account, (for the year ending 31st March, 2019), , Dr., Expenditure, , Amount, `, , To Salaries, 2,000, Add : Outstanding, 1,500, To Telephone Expenses, To Electricity Charges, To Postage and Stationery, To Entertainment Exp., 900, Add : Outstanding Exp., 500, To Miscellaneous Exp., To Depreciation on Furniture, To Surplus (Excess of Income over, Expenditure) (Bal. fig.), , Income, , 1,400, 600, 375, , Amount, `, , `, , 3,500, 300, 600, 150, , Cr., , By Subscriptions, 10,000, Add : Accrued Subscription, 400, By Donations, By Entrance Fees (50% of ` 1,000), By Bank Interest, 450, Add : Outstanding Interest, 150, By Interest on Investment, By Hall Rent, , 7,075, 14,000, , Working Notes :, 5, 000 × 10 × 9, 1. Depreciation on Furnitures =, = ` 375;, 100 × 12, 2. Interest on purchase of 5% Government Papers (Investments) =, , `, , 10,400, 2,000, 500, 600, 200, 300, , 14,000, , 8, 000 × 5 × 6, = ` 200;, 100 × 12, , 3. Donation has been treated as revenue income., , ❏ Preparation of Receipts & Payments Account and Income & Expenditure Account, Illustration 23, From the following particulars, prepare (a) Receipts and Payments Account, and, (b) Income and Expenditure Account of Purnea Club for the year ended on 31st March, 2019 :, Cash in hand and at Bank :, `, On 1-4-2018, 900, On 31-3-2019, 3,500, Subscriptions received :, For 2017-18, 1,000, For 2018-19, 9,000, Subscriptions due for 2018-19 not yet received, 1,500, Receipts from Room Hiring, 500, Tennis Court Receipts, 3,000, Refreshment Room Receipts, 6,250, Salaries paid at ` 200 per month for 12 months upto 28th February, 2019 2,400, Repairs, 600, Printing and Stationery (including ` 300 for the previous year), 1,500, Paid for Purchases for Refreshment, 4,250, Wages, 3,400, Gas and Fuel, 2,000, Rent, Rates and Taxes (for one year ending 31st December, 2019), 3,000, Amount due to Suppliers, 1,100, Solution, Receipts and Payments Account of Purnea Club, Dr., (for the year ended 31st March, 2019), Cr., Receipts, To Balance b/d (1-4-2018), , `, Payments, 900 By Salaries paid, , `, 2,400, , 39
Page 54 :
SBPD Pub li ca tions Ac countancy (XII), To Subscription received :, `, for 2017-18, 1,000, for 2018-19, 9,000, To Receipts from Room Hiring, To Tennis Court Receipts, To Refreshment Room Receipts, , 10,000, 500, 3,000, 6,250, , By Repairs, By Printing and Stationery, By Purchase for Refreshment, By Wages, By Gas and Fuel, By Rent, Rates and Taxes, By Balance c/d (31-3-2019), , 20,650, , Income and Expenditure Account, (for the year ending 31st March, 2019), , Dr., Expenditure, , `, `, , To Repairs, To Printing & Stationery, Less : Paid for previous year, To Wages, To Gas and Fuel, To Rent, Rates & Taxes, Less : Prepaid for 9 months, To Salaries, Less : Paid for previous year, , 1,500, 300, , 3,000, 2,250, 2,400, 200, 2,200, , Add : Outstanding for, March, 2019, 200, To Purchase for Refreshment :, Cash, 4,250, Add : Amount due, to Suppliers, 1,100, To Excess of Income over, Expenditure (Surplus), , Income, , `, 600 By Subscriptions Received, 9,000, Add : Outstanding, 1,500, 1,200 By Receipts from Room Hiring, 3,400 By Receipts from Tennis Court, 2,000 By Receipts from Refreshment Room, , 600, 1,500, 4,250, 3,400, 2,000, 3,000, 3,500, 20,650, , Cr., `, , 10,500, 500, 3,000, 6,250, , 750, , 2,400, , 5,350, 4,550, 20,250, , 20,250, , 1.7 Preparation of Balance Sheet, The Balance Sheet of a not-for-profit organisation can be prepared from (1) Receipts, and Payments Account, or (2) Trial Balance. The Balance Sheet of a not-for-profit, organisation contains capital items, i.e., assets, liabilities and the capital fund., In the absence of a Trial Balance, the following points should be kept in consideration, while preparing a Balance Sheet :, Assets : (1) Fixed assets appearing in the previous year’s Balance Sheet (also known, as the Opening Balance Sheet) should be adjusted for assets purchased, sold and, depreciation during the year. Only the adjusted amount will appear in the closing Balance, Sheet. The adjustment in the fixed assets will be made as under : (i) If some new asset has, been purchased during the year, the payment for such asset must have been shown on the, credit side of the Receipts and Payments Account. Such assets must be added to the, previous year’s assets and shown on the assets side of the current year’s Balance Sheet., (ii) If some asset has been sold during the year, it must be appearing on the debit side of, Receipts and Payments Account. The book value of such asset should be deducted from the, concerned asset of the previous year. (iii) If some depreciation is to be provided, it should, be deducted accordingly., , 40
Page 55 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, (2) Prepaid expenses, accrued incomes and investments should be shown on the, assets side., (3) The closing balance of cash and bank as shown by the Receipts and Payments, Account should be shown on the assets side. However, if there is overdraft balance of bank,, it will be shown on the liabilities side., Liabilities : (1) The loans appearing on the liabilities side of the previous year’s, Balance Sheet should be seen and the Receipts and Payments Account should be scanned, to find out whether any new loan has been raised or the old loans have been repaid. Only, the net amount of loan will be shown on the liabilities side of the Balance Sheet., (2) If any new loan has been raised, it will be found on the debit side of the Receipts, and Payments Account. It should also be shown on the liabilities side., (3) If there is a special receipt like donations for building, it will be shown on the, liabilities side. Similarly, special funds created for meeting expenses such as prize fund,, tournament or sports fund will be shown on the liabilities side., (4) Outstanding expenses and the incomes received for next year (unearned incomes), will be shown on the liabilities side., (5) Any excess of Assets over Liabilities in case of a non-profit seeking organisation is, called Capital Fund. It occupies the same position which the capital account occupies in case, of profit seeking entities. First of all, opening capital fund is calculated by deducting the, opening liabilities from opening assets and then the current year’s surplus as shown by, Income and Expenditure Account will be added to it or the deficit, if any, will be deducted, from it. The net amount of Capital Fund will be shown on the liabilities side., ❏ Steps to be Followed, The following steps should be taken to prepare Balance Sheet at the end of the, accounting period. This Balance Sheet is known as the closing Balance Sheet :, Step 1 : Post capital payments (as shown in Receipts & Payments Account on the credit, side) on assets side of the Balance Sheet. In fact, this indicates new purchase of, assets. This must be added to the respective assets (that is existing assets) as on, the 1st day of accounting period. Assets, if sold, must be shown as deduction, from the concerned asset or assets., Step 2 : Post capital receipts, such as Special Fund, Donation, Loan etc. (as shown in the, Receipts and Payments Accounts on the debit side) on the liabilities side of the, Balance Sheet., Step 3 : Ascertain the opening capital fund. If it is not given, it must be calculated by, preparing Opening Balance Sheet or a Statement (as explained below)., Step 4 : Show opening capital fund on the liabilities side of the Balance Sheet and add to it, the ‘Surplus’ or ‘Excess of Income over Expenditure’. In case, there is ‘Deficit’ or, Excess of Expenditure over Income, it must be deducted from the Capital Fund., Thus, the amount so arrived at will show the capital fund at the end of the period., Step 5 : Closing debit balance of Receipts and Payments Account must be shown on the, assets side of the Balance Sheet as ‘Cash in hand/Cash at Bank’, as the case may, be. The credit balance if any should be shown on the liabilities side of the, Balance Sheet as ‘Bank Overdraft’., Step 6 : Provide depreciation on fixed assets, if required., Step 7 : Adjustment items must be recorded in the Balance Sheet. So, ‘prepaid expenses’, as well as income earned but not received (such as interest on investment/bank, deposits) must be shown on the assets side of the Balance Sheet., Outstanding expenses and income received in advance should be recorded on, liabilities side., Similarly, outstanding subscription should be recorded on the asset side and, advance subscription on the liabilities side., , 41
Page 56 :
SBPD Pub li ca tions Ac countancy (XII), Step 8 : Receipts and Payments of special items must be shown separately in the, Balance Sheet., Step 9 : Closing Balance of Stationery, Closing Balance of Medicines, Closing Balance of, Materials should be shown on the assets side of the Balance Sheet., Illustration 24 (Balance Sheet of Not-for-Profit Organisation), From the following balances of a Sports Club, prepare Balance Sheet as on 31st, March, 2019 :, `, Cash in hand (31.3.2019), 5,000, Cash at Bank (31.3.2019), 15,000, Investments, 35,000, Sports Equipments, 50,000, Salaries Outstanding, 5,000, Subscriptions Outstanding, 6,000, Capital Fund (1.4.2018), 96,000, Income & Expenditure A/c Surplus, 10,000, Solution, Balance Sheet of Sports Club, (as on 31st March, 2019), Liabilities, Outstanding Salaries, Capital Fund (Bal. fig.), Add : Surplus, , `, 96,000, 10,000, , `, Assets, 5,000 Cash in hand, Cash at Bank, 1,06,000 Investments, Sports Equipments, Outstanding Subscriptions, 1,11,000, , `, 5,000, 15,000, 35,000, 50,000, 6,000, 1,11,000, , Capital Fund and Special Fund, ❏ Capital Fund/General Fund, Since there is no capital account in case of non-trading concerns, the difference between, the assets side and the liabilities side of the Balance Sheet represents the Capital Fund. This, is built up from the revenue/surplus of every year. It is also known as General Fund., ❏ Special Fund, Special Funds are such funds which are created for specific purposes in order to meet the, requirements of the contributors. Special fund can never be utilised for general purposes., ❏ Calculation of Capital Fund, When Opening Balance of Capital Fund/General Fund is not given, the same may be, ascertained by (1) preparing the Opening Balance Sheet, or (2) simply preparing a, Statement. This may be explained with the help of an example., ❏ Preparation of Opening Balance Sheet and Calculation of Capital Fund, If opening Balance Sheet (that is, Balance Sheet on the first day of the period) is not, given, prepare it after taking into account the following :, (i) Put opening balances of Cash and Bank as per Receipts and Payments Account, on the assets side of the Balance Sheet. (If opening balances of Cash and Bank, are not given, then closing balances of the last year be taken into account)., (ii) Put assets and liabilities (supplied through additional information) at the beginning, of the year on the assets and liabilities side of the Balance Sheet respectively., (iii) Put adjustment items (supplied through additional information) at the beginning, of the year on appropriate side of the Balance Sheet. For example, outstanding, subscription (previous year) on asset side and subscription in advance on, liabilities side, outstanding expenses on the liabilities side., , 42
Page 57 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, (iv) The balancing figure, that is, the difference between the Assets and Liabilities, represents the ‘Capital Fund’. Thus, the Capital Fund on any date is the, difference between assets and liabilities., Thus,, l Capital Fund = Total Assets – Liabilities, l The Capital Fund is usually made by Special Donations, Legacies,, Capitalisation of Entrance Fees, Life Membership Fees and Surplus etc., FORMAT, (Opening) Balance Sheet, (as on 1.4.20........), Liabilities, Bank Overdraft, if any, Outstanding Expenses, (of last year), Advance Subscription, (of last year), Capital Fund*, (Bal. fig.), , ``, , ×××, ×××, ×××, ×××, ×××, , Assets, Cash in hand, Cash at Bank, Fixed Assets, if any, Investments, if any, Outstanding Subscriptions, (of last year), Prepaid Expenses (of last year), , * Capital Fund = Total Assets – Total Liabilities, Illustration 25(A) (Calculation of Capital Fund), On 1.4.2018 assets of the Ruby Club were as follows :, Land and Building, Furniture, Cash in hand, Subscriptions Outstanding/Receivable, Liabilities as on 1.4.2018 :, Bank Overdraft, Outstanding Salary, Find out Capital Fund., Solution, 1st Method : By Preparing Opening Balance Sheet, Balance Sheet of Ruby Club, (as on 1.4.2018), Liabilities, Bank Overdraft, Outstanding Salaries, Capital Fund (Bal. fig.), , ``, , ×××, ×××, ×××, ×××, ×××, ×××, ×××, , `, , 2,00,000, 25,000, 15,000, 30,000, 20,000, 5,000, , `, Assets, 20,000 Cash in hand, 5,000 Subscription Outstanding, 2,45,000 Furniture, Land and Building, , `, 15,000, 30,000, 25,000, 2,00,000, , 2,70,000, , 2,70,000, , Alternative Method : By Preparing Statement :, Calculation of Opening Capital Fund, Opening Cash in hand, Outstanding Subscriptions, Furniture, Land and Building, , `, 15,000, 30,000, 25,000, 2,00,000, 2,70,000, , 43
Page 58 :
SBPD Pub li ca tions Ac countancy (XII), `, , Less : Bank Overdraft, Outstanding Salary, , 20,000, 5,000, Capital Fund in the beginning, , 25,000, 2,45,000, , Illustration 25(B) (Calculation of Capital Fund), Subscriptions outstanding at the end of 2017 were ` 4,000 and at the end of 2018 were, ` 6,000. Salaries outstanding on 31st December, 2017 and on 31st December, 2018 were, ` 2,000 and ` 2,500 respectively., On 31st December, 2017 the Club had Investments worth ` 12,000; Furniture, ` 10,000 and Sports equipments valued at ` 20,000. At the end of the year 2017 the balance, of cash was ` 2,300., Ascertain the Capital Fund on 31st Dec., 2017., Solution, Balance Sheet, (as on 31st December, 2017), Liabilities, Outstanding Salaries, Capital Fund (Bal. fig.), , Amount, , Assets, , Amount, , `, 2,000 Cash in hand, 46,300 Outstanding Subscriptions, Investments, Furniture, Sports Equipments, , `, 2,300, 4,000, 12,000, 10,000, 20,000, , 48,300, , 48,300, , Illustration 26 (Preparation of Income and Expenditure A/c and Calculation of, Capital Fund), Following is the Receipts and Payments Account of Jai Hind Club for the year ended, 31.3.2019. Prepare Income and Expenditure Account for the year 2018-19 and ascertain, Capital Fund as on 1.4.2018 :, Dr., Receipts and Payments Account, Cr., Receipts, , Amount, , Payments, , `, , `, , To Balance b/d 1.4.2018, To Subscriptions, , 1,40,000 By Salaries, 2,76,500 By Rent, , To Donation, , 1,06,000 By Electric Charges, , To Interest, To Profit from Entertainment, , 4,000 By General Expenses, 8,500 By Books, , 5,35,000, , Amount, 1,10,000, 88,000, 6,000, 15,000, 30,000, , By Investments, , 1,50,000, , By Balance c/d, , 1,36,000, 5,35,000, , Additional Information :, (i) In the beginning of the year, the Club had building worth ` 2,00,000 and, Furniture ` 60,000., (ii) On 1.4.2018 subscriptions outstanding were ` 6,000 and on 31.3.2019 ` 8,000., (iii) Salary outstanding in the beginning of the year was ` 10,000., , 44
Page 59 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Solution, , Jai Hind Club, Income and Expenditure Account, (for the year ended 31st March, 2019), , Dr., Expenditure, , `, 1,10,000, , To Salaries, Less : Outstanding, at the beginning, 10,000, To Rent, To Electric Charges, To General Expenses, To Surplus : Excess of Income Over, Expenditure, , Amount, `, , Cr., , Income, `, 2,76,500, , By Subscription, Add : Outstanding at the, 1,00,000, end, 8,000, 88,000, 2,84,500, 6,000, Less : Outstanding at the, 15,000, beginning, 6,000, By Donations, 1,88,000 By Interest, By Profit form Entertainment, 3,97,000, , Amount, `, , 2,78,500, 1,06,000, 4,000, 8,500, 3,97,000, , Calculation of Capital Fund, Balance Sheet, (as at 1st April, 2018), Liabilities, Salary Outstanding, Capital Fund (Bal. Fig.), , Amount, Assets, `, 10,000 Cash, 3,96,000 Building, Furniture, Subscription Outstanding, , Amount, `, 1,40,000, 2,00,000, 60,000, 6,000, , 4,06,000, , 4,06,000, , Illustration 27 (Preparation of Income and Expenditure A/c and Balance Sheet), Following is the Receipts and Payments Account of Jharkhand Club for the year ended on, 31st March, 2019. You are required to prepare Income and Expenditure Account and Balance, Sheet as on that date :, Receipts and Payments Account, Dr., (for the year ending on 31st March, 2019), Cr., Receipts, To Capital Receipts :, Entrance fees, Life Membership, Prize Fund, To Revenue Receipts :, Subscription, Interest on Security, Rent of Hall, Sundry Receipts, , Amount, `, 30,000, 3,000, 6,000, 2,000, 400, 500, 100, , 42,000, , Payments, By Capital Payments :, Building, Distribution of Prize, Investments, Furniture, By Revenue Payments :, Rent and Tax, Salaries, Printing & Stationery, Insurance, By Balance c/d, , Amount, `, 25,000, 600, 11,000, 900, 700, 1,200, 200, 400, 2,000, 42,000, , 45
Page 60 :
SBPD Pub li ca tions Ac countancy (XII), Additional Informations :, (i) Outstanding subscriptions for 2018-19 were ` 200., (ii) Outstanding salaries were ` 125., (iii) Subscription received included ` 75 for 2019-20., (iv) Insurance was paid up to December, 2019., Solution, Income and Expenditure Account, Dr., (for the year ending 31st March, 2019), Expenditure, `, To Rent and Tax, To Salaries, 1,200, Add : Outstanding, 125, To Printing & Stationery, To Insurance, 400, Less : Prepaid for 9 months, 300, To Surplus : Excess of Income Over, Expenditure, , Amount, Income, `, 700 By Subscription, Add : Outstanding for, 1,325, 2018-19, 200, Less : Advance, 100 By Interest on Security, By Rent of Hall, 800 By Sundry Receipts, , (J.A.C., 2017), Cr., `, 2,000, 200, 2,200, 75, , 3,125, , Amount, `, , 2,125, 400, 500, 100, 3,125, , Balance Sheet of Jharkhand Club, (as on 31st March, 2019), Liabilities, Entrance Fees, Life Membership, `, Prize Fund, 6,000, Less : Distribution of Prize, 600, Advance Subscription (2019-20), Outstanding Salary, Surplus : Excess of Income Over, Expenditure, , Amount, Assets, `, 30,000 Cash in hand, 3,000 Building, Investments, 5,400 Furniture, 75 Prepaid Insurance, 125 Outstanding Subscription (2018-19), , Amount, `, 2,000, 25,000, 11,000, 900, 300, 200, , 800, 39,400, , 39,400, , Illustration 28, From the following Trial Balance and informations, prepare the Income and, Expenditure Account and a Balance Sheet for the year ending on 31st March, 2019 :, Particulars, Billiard Table, Furniture, Repairs, Rent and Taxes, China Glass etc., Salaries and Wages, Fuel and Light, Sundry Expenses, Entertainment Expenses, Cost of Social Dinner, , 46, , `, , 1,250, 2,500, 734, 3,194, 333, 2,262, 1,618, 1,600, 2,190, 760, , Particulars, Subscriptions from Members, Sale Proceeds of Tickets, Entrance Fees, Capital Fund, Miscellaneous Receipts, Creditors, , `, , 10,560, 3,234, 448, 4,000, 1,743, 2,600
Page 61 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Cash in hand, , 174, , Cash at Bank, Debtors, , 4,800, 1,170, 22,585, , 22,585, , Also use the following informations :, 1, Depreciation to be written off at 10% on furniture, at 33 % on China Glass and 20%, 3, , on Billiard Table. Salaries ` 300 are outstanding. Subscription ` 400 have been received in, advance, while subscriptions ` 250 are outstanding. The whole of entrance fees is to be, treated as revenue income., Solution, Income and Expenditure Account, Dr., (for the year ended 31st March, 2019), Cr., Expenditure, , Income, , `, `, , To Salaries & Wages, Add : Outstanding, To Fuel and Light, To Repairs, To Rent and Rates, , `, `, , 2,262, 300, , By Subscription, 2,562, Add : Outstanding, 1,618, at the end, 734, 3,194, Less : Advance, , To Entertainment Expenses, To Dinner Expenses, To Depreciation :, Furniture, 250 1, China Glass, 1112, Billiard Table, 250 3, To Sundry Expenses, To Excess of Income over Expenditure, , 10,560, 250, 10,810, 400, , 2,190 By Entrance Fees, 760 By Sundry Receipts, By Sale of Tickets, , 448, 1,743, 3,234, , 611, 1,600, 2,566, 15,835, , Working Notes :, 1 2,500 ×, , 10, = ` 250;, 100, , 2, , 10,410, , 333 ×, , 33, , 1, 3, , 100, , 15,835, , 3 1,250 ×, , = ` 111;, , 20, = ` 250., 100, , Balance Sheet, (as on 31st March, 2019), Liabilities, Creditors, Outstanding Salaries, Subscription received in Advance `, Capital Fund, 4,000, Add : Excess of Income, over Expenditure, 2,566, , `, Assets, 2,600 Cash in hand, 300 Cash at Bank, 400 Debtors, Outstanding Subscriptions, Furniture, 6,566 Less : Dep. @ 10%, Billiard Table, Less : Dep. @ 20%, China Glass, 1, , Less : Dep. @ 33 %, 3, , 9,866, , `, , `, , 2,500, 250, 1,250, 250, 333, 111, , 174, 4,800, 1,170, 250, 2,250, 1,000, 222, 9,866, , 47
Page 62 :
SBPD Pub li ca tions Ac countancy (XII), Illustration 29, Dr. Sudhir commenced practice as an eye specialist investing ` 50,000 in equipment, on 1st April, 2018. The Receipts and Payments Account for the year was as follows :, Receipts, , Amount, , Payments, , Amount, , `, , To Fees, To Miscellaneous Receipts, To Sale of Equipment, , `, , 1,00,000 By Rent, 200 By Salary to Assistant, 4,000 By Journals, By Library Books, By Equipments, By Drawings, By Bank Balance, By Cash Balance, 1,04,200, , 6,000, 15,000, 2,000, 6,000, 8,000, 24,000, 43,000, 200, 1,04,200, , ` 3,000 of fees were still outstanding. Equipment sold and purchased was on 1st Jan.,, 2019, the cost of the equipment sold being ` 6,000. Depreciation on equipment is 20% p.a., and on library books 5%. Salaries to assistant still payable is ` 2,000., Prepare the Income and Expenditure Account and the Balance Sheet relating to, 2018-19., Solution, Income and Expenditure Account of Dr. Sudhir, Dr., (for the year ended on 31st March, 2019), Cr., Expenditure, , Amount, `, 15,000, 2,000, , To Salaries, Add : Outstanding, To Rent, To Journal, To Loss on Sale of Equipment, To Depreciation on Equipment : `, on ` 6,000, 900 1, on ` 8,000, 400 2, on ` 44,000, 8,800 3, To Depreciation on Books, (5% of ` 6,000), To Excess of Income over Expenditure, (Surplus), , Income, , `, , By Fees, 17,000, Add : Outstanding, 6,000 By Miscellaneous Receipts, 2,000, 1,1004, , `, 1,00,000, 3,000, , Amount, `, 1,03,000, 200, , 10,100, 300, 66,700, 1,03,200, , 1,03,200, , Balance Sheet, (as on 31st March, 2019), Liabilities, Salaries Payable, Capital Fund, Add : Surplus, Less : Drawings, , 48, , `, 50,000, 66,700, 1,16,700, 24,000, , Amount, Assets, `, 2,000 Cash Balance, Bank Balance, Fees Outstanding, Books, 92,700 Less : Depreciation, , `, 6,000, 300, , Amount, `, 200, 43,000, 3,000, 5,700
Page 63 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Equipment, Less : Sold, , 50,000, 6,000, 44,000, 8,800, 35,200, , Less : Depreciation, `, Add : Addition, 8,000, Less : Depreciation, 400, 94,700, Working Notes :, Calculation of Depreciation :, 1 On ` 6,000 for 9 months, 2, 3, 4, , 7,600, , 42,800, 94,700, , 9, 20, ×, = ` 900, 12 100, 3, 20, On ` 8,000 for 3 months = 8,000 × ×, = ` 400, 12 100, 20, On ` 44,000 for 1 year = 44,000 ×, = ` 8,800, 100, Loss on Sale of Equipment = ` 6,000 – 900 (Dep.) – 4,000, = ` 5,100 – 4,000 = ` 1,100 Loss, = 6,000 ×, , Illustration 30, From the following Receipts and Payments Account of Jagdamba Club and from the, given additional information, prepare Income and Expenditure Account for the year, ending 31st March, 2019 and the Balance Sheet as on that date :, Receipts and Payments Account, Dr., (for the year ended 31st March, 2019), Cr., Receipts, To Balance b/d, To Subscriptions, To Interest on Investments, @ 8% p.a. for full year, , Amount, Payments, `, 1,90,000 By Salaries, 6,80,000 By Sports Equipment, By Balance c/d, 40,000, , Amount, `, 3,30,000, 4,00,000, 1,80,000, , 9,10,000, , 9,10,000, , Additional Informations :, (i) The Club had received ` 20,000 for subscription in 2017-18 for 2018-19., (ii) Salaries had been paid only for 11 months., (iii) Stock of Sports Equipment on 31st March, 2018 was ` 3,00,000 and on 31st, March, 2019 ` 6,50,000., Solution, Balance Sheet, (as at 31st March, 2018), Liabilities, Subscription Received in Advance, Capital Fund (Bal. Fig.), , Amount, Assets, `, 20,000 Cash in hand, 9,70,000 Investment (Note 1), Stock of Sports Equipment, 9,90,000, , Note : (1) Value of Investments has been calculated as below :, If Interest is 8, the value of Investments, If Interest is ` 40,000, the value of Investments, , Amount, `, 1,90,000, 5,00,000, 3,00,000, 9,90,000, , `, 100, 100, × 40,000 = ` 5,00,000, 8, , 49
Page 64 :
SBPD Pub li ca tions Ac countancy (XII), Income and Expenditure Account, (for the year ending 31st March, 2019), , Dr., Expenditure, , Amount, , `, To Salaries, 3,30,000, Add : Outstanding for one, month salaries, (3,30,000 ÷ 11), 30,000, To Sports Equipments Consumed :, Opening Stock, 3,00,000, Add : Purchases, 4,00,000, 7,00,000, Less : Closing Stock, 6,50,000, To Surplus (Excess of Income, over Expenditure), , Cr., , Income, , Amount, , `, , `, , By Subscription, Add : Advance subscription received in, 3,60,000, , `, , 6,80,000, , 2017-18 for 2018-19 20,000, By Interest on Investments, , 7,00,000, 40,000, , 50,000, 3,30,000, 7,40,000, , 7,40,000, , Balance Sheet, (as at 31st March, 2019), Liabilities, , Amount, `, , Salaries Outstanding, Capital Fund, Add : Surplus, , Assets, , `, , Amount, `, , 30,000 Cash in hand, 9,70,000, Investment (Note 1), 3,30,000 13,00,000 Stock of Sports Equipment, 13,30,000, , 1,80,000, 5,00,000, 6,50,000, 13,30,000, , Illustration 31, From the following cash transactions relating to Royal Club, Green Park, prepare, Income and Expenditure Account for the year ended 31st December, 2018 and a Balance, Sheet as on that date :, Receipts, To Cash in hand on 1st Jan., 2018, To Subscriptions including, ` 800 for 2019, To Donations, To Proceeds from Charity Show, To Sale of Furniture, (Book value ` 4,000), To Life Membership Fees, To Interest on Investments, (Cost of Investments ` 40,000), , Amount, , `, 4,900 By Salaries, By Travelling Expenses, 52,100 By Printing & Stationery, 6,000 By Rent, 16,200 By Repairs, By Building Purchased, 1,600 By Government Bonds, 9,000 By Balance c/d (31st. Dec., 2018), , Amount, `, 20,100, 8,600, 1,720, 16,600, 450, 30,000, 5,000, 12,130, , 4,800, 94,600, , 50, , Payments, , 94,600
Page 65 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, On 1-1-2018 the Club owned land and building valued at ` 40,000 and furniture, valued at ` 10,500. There were 150 life members on that date, each of whom had paid, subscription of ` 100., Subscriptions due on 31st December, 2017 and on 31st December, 2018 were ` 3,400 and, ` 2,000 respectively. Similarly, interest on investments due at the beginning of the year, was ` 800 and at the end of the year was ` 1,000., Solution, Balance Sheet of Royal Club, (as on 1st January, 2018), Liabilities, , Amount, `, , Life Membership Fees, (150 Members @ ` 100 each), Capital Fund (Bal. fig.), , Assets, , Cash in hand, 15,000 Outstanding Subscription, 84,600 Accrued Interest, Investments, Land and Building, Furniture, 99,600, , Amount, `, 4,900, 3,400, 800, 40,000, 40,000, 10,500, 99,600, , Income and Expenditure Account, (for the year ended 31st December, 2018), , Dr., , Cr., , Expenditure, , Amount, Income, Amount, `, `, `, To Salaries, 20,100 By Subscriptions, 52,100, To Travelling Expenses, 8,600, Less : Advance Subscription, To Printing and Stationery, 1,720, received for 2019, 800, To Rent, 16,600, 51,300, To Repairs, 450, Less : Outstanding, To Loss on Furniture, Subsc. for 2017, 3,400, (` 4,000 – 1,600), 2,400, 47,900, To Excess of Income over Expenditure, Add : Outstanding, (Surplus), 27,230, Subsc. for 2018, 2,000, 49,900, By Donations, 6,000, By Proceeds from Charity Show, 16,200, By Interest on Investments, 4,800, Less : Accrued Int. at the, beginning, 800, 4,000, Add : Accrued Interest at, the end, 1,000, 5,000, 77,100, , 77,100, , Balance Sheet, (as on 31st Dec ., 2018), Liabilities, Subscriptions for 2018, received in Advance, Life Membership Fees, , Amount, `, `, 15,000, , Assets, , Cash in hand, 800 Outstanding Subscriptions, Accrued Interest, , Amount, `, 12,130, 2,000, 1,000, , 51
Page 66 :
SBPD Pub li ca tions Ac countancy (XII), Add : Life Membership, Fees of current year 9,000, Capital Fund, 84,600, Add : Surplus, 27,230, , Investments, 24,000 Government Bonds, Land and Building, 1,11,830, Add : Additions, Furniture, Less : Sold, , `, 40,000, 30,000, 10,500, 4,000, , 1,36,630, , 40,000, 5,000, 70,000, 6,500, 1,36,630, , (iii) Preparation of Income and Expenditure Account and Balance Sheet from, Trial Balance, Illustration 32, From the following Trial Balance and additional information of Patna Club, prepare, Income and Expenditure Account for the year ended 31st March, 2019 and a Balance, Sheet as on that date :, Dr., Cr., Particulars, , Amount, , Particulars, , Amount, , `, , Salaries, Rent, Lighting Expenses, Books, Office Expenses, 8% Fixed Deposits (on 1st Oct., 2018), Tournament Expenses, Cash at Bank, Furniture, , `, , 2,450, 1,800, 750, 22,480, 4,500, 12,000, 2,020, 2,600, 8,500, 57,100, , Subscriptions, Entrance Fees, Donations, Life Membership Fees, Interest on Deposit, Proceeds of Tournaments, Municipal Grant, General Fund, , 18,000, 600, 1,600, 2,500, 240, 2,350, 5,000, 26,810, 57,100, , Additional Information :, (i) Depreciate books and furniture @ 10%., (ii) Subscriptions in arrears at the end of the year amounted to ` 550., Solution, Income and Expenditure Account of Patna Club, Dr., (for the year ended 31st March, 2019), Expenditure, To Salaries, To Rent, To Lighting Expenses, To Office Expenses, To Tournament Expenses, To Depreciation :, On Books, On Furniture, To Surplus (Excess of Income over, Expenditure), , Amount, `, , 2,450 By Subscription, 1,800, Add : O/s at the end of, 750, the year, 4,500 By Entrance Fees, 2,020 By Donations, By Interest on F.D., 2,248, Add : Interest due, 850 By Tournament Proceeds, By Municipal Grant, 13,962, 28,580, , 1., , ` 12,000 ×, , 52, , Income, , 8, 6, ×, = ` 480. Interest due = 480 – 240 = ` 240., 100 12, , Cr., Amount, , `, , 18,000, 550, , 240, 240 1, , `, , 18,550, 600, 1,600, 480, 2,350, 5,000, 28,580
Page 67 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, Balance Sheet of Patna Club, (at 31st March, 2019), Particulars, , `, , I. LIABILITIES, General Fund :, Opening Balance, Add : Surplus, Add : Life Membership Fee, , `, , 26,810, 13,962, Total, , II. ASSETS, Non-current Assets :, Books, Less : Depreciation, Furniture, Less : Depreciation, 8% Fixed Deposits, Current Assets :, Cash at Bank, Subscription Outstanding, Interest Outstanding, , 22,480, 2,248, 8,500, 850, , 40,772, 2,500, 43,272, , 20,232, 7,650, 12,000, 2,600, , Total, , 550, 240, 43,272, , Miscellaneous Question, Illustration 33, From the following Receipts and Payments Account and additional information,, prepare Income and Expenditure Account and Balance Sheet of Sears Club, Noida as on, 31 March, 2018., Receipts and Payments Account of Sears Club, Dr., (for the year ended 31-3-2018), Cr., Receipts, To Balance b/d, To Subscriptions, 2016-17, 2017-18, 2018-19, To Donations for Building, To Interest on Investments, To Government Grant, To Sale of Old Furniture, (Book value ` 4,000), , `, 40,000, 94,000, 7,200, , Amount, Payments, `, 20,000 By Stationery, By 12% Investments, By Electricity Expenses, By Expenses on Lectures, 1,41,200 By Sports Equipment, 40,000 By Books, 800 By Balance c/d, 17,400, , Amount, `, 23,400, 8,000, 10,600, 30,000, 59,000, 40,000, 50,000, , 1,600, 2,21,000, , 2,21,000, , Additional Information :, (i) The club has 200 members each paying an annual subscription of ` 1,000., ` 60,000 were in arrears for last year and 25 members paid in advance in the last, year for the current year., (ii) Stock of stationery on 1-4-2017 was ` 3,000 and on 31-3-2018 was ` 4,000., , 53
Page 68 :
SBPD Pub li ca tions Ac countancy (XII), Solution, Income and Expenditure Account of Sears Club, Noida, (for the year ended 31st March, 2018), , Dr., , Expenditure, To Stationery Consumed (1), To Electricity Expenses, To Expenses on Lectures, To Loss on Sale of Old Furniture, To Surplus : Excess of, Income Over Expenditure, , Amount, Income, `, 22,400 By Annual Subscription of 200, 10,600, Members @ ` 1,000, 30,000 By Interest on Investments, Add : Accrued Interest (2), 2,400 By Government Grant, 1,52,960, 2,18,360, , Cr., Amount, `, , `, 800, 160, , 2,00,000, 960, 17,400, 2,18,360, , Working Note :, (1), Stationery Consumed = Opening Stock + Purchases – Closing Stock, = ` 3,000 + 23,400 – 4,000 = ` 22,400, 12, (2), Interest on Investments = 8,000 ×, = ` 960, 100, (–) Interest on Investments received, ` 800, Interest on Investments due 160, Balance Sheet of Sears Club, Noida, (as on 31st March, 2018), Liabilities, Donation for Building, Subscriptions received in, Advance (2018-19), Capital Fund (W/N 4), Add : Surplus, , `, 62,000, 1,52,960, , Amount, Assets, `, 40,000 Cash, Sports Equipment, 7,200 12% Investments, Books, 2,14,960 Accrued Interest on Investments, Subscription Outstanding, 2016-17 ( ` 60,000 – 40,000), 2017-18 (W/N 3), Stock Stationery, 2,62,160, , (3) Subscriptions for the year 2017-18 (200 × ` 1,000), Less : Subscriptions received for 2017-18, + Advance received in the last year (25 × ` 1,000), Subscriptions Outstanding for 2017-18, (4) Calculation of Capital Fund, , Amount, `, 50,000, 59,000, 8,000, 40,000, 160, `, 20,000, 81,000, , 1,01,000, 4,000, 2,62,160, , `, ` 2,00,000, 94,000, 25,000 1,19,000, 81,000, , Balance Sheet, (as on 1st April, 2017), Liabilities, Advance Subscriptions (25 × ` 1,000), Capital Fund (Bal. fig.), , 54, , Amount, Assets, `, 25,000 Cash, 62,000 Subscriptions Outstanding, Furniture, Stock of Stationery, 87,000, , Amount, `, 20,000, 60,000, 4,000, 3,000, 87,000
Page 69 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, , 1.8 Incidental Trading Activities, Sometimes, Not-for-Profit Organisations carry on trading activities such as, restaurant, canteen, chemist shop etc. to provide certain facilities to members or public in, general. Such activities are called incidental trading activities. In such a case, Trading, Account has to be prepared to ascertain the profit/loss from each of such incidental, activity. The profit or loss is transferred to the Income and Expenditure Account. The, Trading Account is prepared in the same manner as in the case of a business entity., It should be remembered that Income and Expenditure Account will record, in, addition to trading profit (or loss), all other incomes and expenses not recorded in the, Trading Account. Surplus or Deficit revealed by the Income and Expenditure Account will, be transferred to Capital Fund (or General Fund)., , 1.9 FAST REVISION, l Meaning of Not-for-Profit Organisations : Not-for-Profit Organisations are those, organisations which are established for the purpose of rendering services to its own members, or to the society without any profit motive., l Key Accounts and Statements : The key accounts and statements required for non-profit, organisations are as follows : (i) Receipts and Payments Account, (ii) Income and, Expenditure Account, (iii) Balance Sheet., l Receipts and Payments Account : Receipts and Payments Account is the summary of cash, and bank transactions of the accounting year. It helps in the preparation of Income and, Expenditure Account and Balance Sheet., The difference between Cash Book and Receipts and Payments Account is that the transactions are recorded date-wise in the Cash Book, whereas in Receipts and Payments Account, cash transactions are recorded in summarised manner under suitable heads for the year., l Income and Expenditure Account : Income and Expenditure A/c is similar to Profit and, Loss Account. It presents summary of incomes and expenditures of the accounting year. It is, prepared on accrual basis of accounting to ascertain ‘surplus’ or ‘deficiency’., l Balance Sheet : The Balance Sheet of the Non-trading Organisation is prepared at the end, of the entity’s accounting year to show the financial position on that date., l Main Differences between Receipts and Payments Account & Income and Expenditure Account :, (i) While Receipts and Payments Account is a real account, Income and Expenditure, Account is a nominal account., (ii) While the R/P Account records both capital and revenue receipts and payments relating, to any accounting year, the I/E Account records only revenue items relating to current, accounting year., (iii) While R/P Account is prepared on the basis of cash system of accounting, I/E Account is, prepared on the basis of mercantile or accrual system., (iv) While R/P Account has an opening and closing balance, the I/E Account does not., l Capital Fund : Capital Fund is the accumulated excess of income over expenditure. Capital, Fund also includes the items which are capitalised like special donations, legacies, entrance, fees and life membership fees. Capital Fund is used in place of the capital of the profit organisation., Capital Fund is calculated by preparing the Balance Sheet at the beginning of the year (i.e.,, Capital Fund = Total Assets – Total Liabilities)., l Fund-based Accounting or Special Funds : In fund-based accounting separate accounts, are maintained on fund-based for specific activities of the organisation such as match fund,, sports fund, prize fund etc. All items related to specific fund are recorded fundwise and credit, balance of this account is shown on the liabilities side of the Balance Sheet. However, if the, amount of the special fund is less than the amount of expenses incurred related to the special, fund, the balance should be shown on the debit side of the Income and Expenditure Account., , 55
Page 70 :
SBPD Pub li ca tions Ac countancy (XII), l Amount of Subscription to be shown in Income and Expenditure Account :, Subscription received + Outstanding Subscription at the end + Advance Subscription in the, beginning – Outstanding Subscription in the beginning – Advance Subscription at the end., l Consumable Materials : Opening Stock of Material + Purchases during the year – Closing, Stock of Material., l Capital Receipts and Revenue Receipts : Receipts of permanent or capital nature are, called Capital Receipts, e.g., legacies, donation for building/tournament etc. The receipts, which are of recurring nature and of small amount are known as revenue receipts, e.g.,, subscription, interest on Bank deposits etc., Capital Receipts are treated as liabilities whereas Revenue Receipts are treated as income., l Capital Payments and Revenue Payments : The payments made to purchase of, permanent assets or to improve them with a view to increase the earning capacity are known, as Capital Payments. They are shown on the assets side of the Balance Sheet. Examples,, Purchase of Plant and Machinery, Purchase of Building, Office Furniture, Investments, Bank, Deposits are also treated as capital payments., All the payments which are of recurring nature and of small amount are known as revenue, payments, e.g., payment of rent, salary, postage and stamp, stationery etc., l Subscriptions : These are amounts received/receivable from the members of not-for-profit, making organisation for being entitled to the service rendered by it. It is a major source of, income to the organisation., l Donations : These are amounts given by members or by outsiders for the general functioning, of a not-for-profit organisation or for a particular purpose, not in anticipation of any return;, but simply as a token of appreciation of the organisation’s services to the society. Donations, are of two types : (a) General Donations, (b) Specific Donation., l Entrance Fees : This is synonymous with admission fees. It is the amount which a club or, association may require its members to pay at the time of seeking admission., l Legacies : These are similar in nature to specific donations except that these are given to a, not-for- profit organisation as per a ‘will’ on the death of the contributor(s)., l Life Membership Fees : Certain institutions charge fee for making persons as life members,, such members have to pay fee only once in their life time. Such a receipt is of a capital nature and, should, therefore, be taken to the Balance Sheet, on the liability side., , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6 Marks), , 1. Distinguish between Receipts and Payments Account and Income and Expenditure Account., 2. Distinguish between Receipts and Payments Account and Income and Expenditure Account. How, will you convert the Receipts and Payments Account into an Income and Expenditure Account ?, 3. Explain the steps necessary to prepare an Income and Expenditure Account from a Receipts, and Payments Account., 4. What is Receipts and Payments Account ? How is it different from Income and Expenditure, Account ?, 5. How is Income and Expenditure Account is prepared from Receipts and Payments Account ?, Explain., 6. Distinguish between Income and Expenditure Account and Profit and Loss Account., 7. What do you understand by Receipts and Payments Account ? Differentiate between Receipts, and Payments Account and Income and Expenditure Account., 8. What is Capital Fund ? How is it calculated ?, , (B) Short Answer Type Questions, 1., 2., 3., 4., , (3/4 Marks), , Explain three features of Receipts and Payments Account., State the main features of Income and Expenditure Account., Give the features of Receipts and Payments Account., State any four differences between Receipts and Payments Account and Income and, Expenditure Account., , 56
Page 71 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, 5. How is Capital Fund calculated ?, 6. Write short notes on any two of the following :, (i) Receipts and Payments Account, (ii) Capital Fund, (iii) Income and Expenditure Account, (iv) Subscriptions, 7. Explain this statement, “Receipts and Payments Account is a summarised version of Cash Book.”, 8. Write note on :, (i) Capital Receipts and Revenue Receipts., (ii) Capital Payments and Revenue Payments., 9. Distinguish between Cash Book and Receipts and Payments Account., 10. What is Fund-based Accounting ?, 11. Distinguish between Fund Accounting and Non-fund Accounting., 12. How is the amount of subscriptions computed for current year ?, 13. How is consumable items dealt with in the final accounts of a not-for-profit organisation ?, 14. What are the objectives of Receipts and Payments Account ?, 15. How would you compute income to be credited to Income and Expenditure Account from the, receipt of subscription given in the Receipts and Payments Account ?, 16. What is Receipts and Payments Account ?, 17. What is Income and Expenditure Account ?, 18. Distinguish between Receipts and Payments Account and Income and Expenditure Account., 19. What is Endowment Fund ?, (C) Very Short Answer Type Questions, (1/2 Marks Questions with Answers), 1. State the meaning of ‘Not-for-Profit Organisation’., [Ans. Not-for-profit organisation refers to an institution or organisation which provides, services to its members or society without aiming at profit.], 2. Give four examples of Not-for-Profit Organisations., [Ans. (i) Religious Institution, (ii) Sports Club, (iii) College, (iv) Hospitals.], 3. Name any two financial statements prepared by a Not-for-Profit Organisation., [Ans. (i) Income and Expenditure Account, (ii) Balance Sheet.], 4. State any one feature of Not-for-Profit Organisation which distinguishes it from, business enterprises., [Ans. Its main feature is to provide services to its members or society.], 5. What are the two important sources of income for the Not-for-Profit Organisations ?, [Ans. (i) Subscription from members. (ii) General Donation/Grants from Government.], 6. In which account the funds received from different sources by the NPOs are credited ?, [Ans. Capital Fund or General Fund.], 7. (i) What is Subscription ?, (J.A.C., 2011), [Ans. It is a regular payment made by the members of the organisation. It is generally, contributed annually. It is one of the main sources of income.], (ii) What is Membership Fee ?, [Ans. Membership fee is an annual fee charged from a person who becomes a member of a notfor-profit organisation. It is a source of income of NPO.], 8. What is Life Membership Fee ?, (J.A.C., 2011), [Ans. Membership, if granted to a person for whole life, a special fee is charged from him or, her. This is called life membership fees. It is charged once in the life time of a member. It, is a capital receipt for the organisation.], 9. Name the account which shows the classified summary of transactions of a Cash, Book in a Not-for-Profit Organisation., [Ans. Receipts and Payments Account.], 10. What is Receipts and Payments Account ?, [Ans. Receipts and Payments Account is a summary of Cash Book. All cash receipts and, payments are recorded in this account. Receipts and Payments recorded in this account, may be either of revenue nature or capital nature.], , 57
Page 72 :
SBPD Pub li ca tions Ac countancy (XII), 10A. What is the object of Receipts and Payments Account ?, [Ans. The object of preparing Receipts and Payments Account is to present the summary of, cash receipts and payments for the accounting year.], 11. Name any two items which are shown in the credit side of Receipts and Payments, Account., [Ans. (i) Salary, (ii) Purchase of furniture.], 12. Name any two items which are shown on the debit side of Receipts and Payments, Account., [Ans. (i) Subscriptions, (ii) Entrance Fee.], 13. Give difference between Cash Book and a Receipts and Payments Account., [Ans. Receipts and Payments Account : Entries are not made date-wise., Cash Book : All entries are made date-wise.], 14. State any one feature of Receipts and Payments Account., [Ans. It is the summary of cash and bank transactions.], 15. Which item is shown in the beginning of the Receipts and Payments Account ?, [Ans. Opening balance of cash in hand and cash at Bank. These items are shown on the debit, side of Receipts and Payments Account.], 16. What shows the closing balance of Receipts and Payments Account ?, [Ans. The closing balance of Receipts and Payments Account shows : (i) Closing Cash in hand, and (ii) Closing Cash at Bank.], 17. Why depreciation on fixed assets is not shown in Receipts and Payments Account ?, [Ans. Depreciation is a non-cash item. Hence, it is not shown in Receipts and Payments Account.], 18. Why outstanding expenses and accrued incomes are not recorded in Receipts and, Payments Account ?, [Ans. These are adjusting items and non-cash items. So They are not shown in the Receipts, and Payments Account.], 19. Name any two items which are shown in the debit side of Receipts and Payments, Account but are not shown in the Income and Expenditure Account., [Ans. (i) Life Membership Fee, (ii) Legacy.], 20. Name any two items which are shown in the credit side of Receipts and Payments, Account but are not shown in the Income and Expenditure Account., [Ans. (i) Purchase of Furniture. (ii) Purchase of Books.], 21. What is meant by Income and Expenditure Account ?, [Ans. Income and Expenditure Account is a summary of revenue income and expenses and, losses of a not-for-profit organisation for a particular period. The balance of this account, shows either ‘Surplus’ or ‘Deficit’.], 22. Name the account in which expenses and incomes (revenues) of not-for-profit, organisation are shown in summarised form at the end of the year., [Ans. Income and Expenditure Account.], 23. State two main features of Income and Expenditure Account., [Ans. (i) All revenue receipts and payments are recorded in this account., (ii) It is a nominal account.], 24. Why is Income and Expenditure Account prepared ?, [Ans. This account is prepared to find out whether income exceeds expenditure or vice versa., The amount of difference is called as ‘Surplus’ when income exceeds expenses and, ‘Deficit’ when expenses exceed income.], 25. By whom Income and Expenditure Account is prepared ?, [Ans. It is prepared by Not-for-Profit Organisation.], 26. Point out any one difference between Income and Expenditure Account and Profit &, Loss Account., [Ans. Income and Expenditure Account is prepared to find out ‘Surplus’ or ‘Deficit’ for a, particular period whereas Profit and Loss Account is prepared to ascertain ‘net profit’ (or, ‘net loss’).], , 58
Page 73 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, 27. State any one point of difference between a Receipts and Payments Account and an, Income and Expenditure Account., [Ans. Receipts and Payments A/c : It records receipts and payments of both capital and, revenue nature., Income and Expenditure A/c : It records income and expenditure of only revenue nature.], 28. Name the account which is prepared by not-for-profit organisation in place of, Trading and Profit & Loss Account., [Ans. Income and Expenditure Account.], 29. In which account excess of Income over Expenditure is added in case of a Not-forProfit Organisation., [Ans. Capital Fund.], 30. Distinguish between Income and Expenditure Account and Receipts and Payments, Account on the basis of nature of items recorded., [Ans. Income and Expenditure Account records income and expenditure items which are of only, revenue nature. Receipts and Payments Account records both capital and revenue items.], 31. What is Honorarium ?, [Ans. It is the amount paid to the person who looks after the functioning of the organisation but, is not the employee of the organisation.], 32. What is Endowment Fund ?, [Ans. Endowment Fund is a fund arising from a gift or bequest, the income of which is devoted, for a specific purpose.], 33. Is it possible for one hospital to have an Income and Expenditure Account whereas, another hospital has a Profit and Loss Account ?, [Ans. No. Both hospitals will have to prepare Income and Expenditure Account.], 34. ‘Not-for-Profit’ Organisation do not maintain any Capital Account. What do they, maintain instead of Capital Account ?, [Ans. Capital Fund.], 35. Give two examples of capital receipts which are directly added to Capital Fund., [Ans. (i) Specific Donation. (ii) Tournament Fund/Life Membership Fee.], 36. What is Legacy ?, [Ans. Legacy is the money, which Not-for-Profit Organisation gets by the ‘will' of a person. It is, a capital receipt. So it is shown in Balance Sheet.], 37. When the Receipts and Payments Account is converted into an Income and, Expenditure Account, an accounting concept is to be followed for the provisions of the, accruals and outstanding. Name the concept that is followed., (C.B.S.E., A.I., 2009), [Ans. Accrual concept.], 38. A Sports Club sells an old Billiards Table, whose book value is ` 17,000, for ` 15,550., Show how the sale would be reflected to the Receipts and Payments Account., (C.B.S.E., A.I., 2009), [Ans. On the debit side of R/P A/c, it will be shown as ‘To Sale of Old Billiards Table’ ` 15,550], 39. State the nature of Income and Expenditure Account., (C.B.S.E., A.I., 2010), [Ans. It is a nominal account. It is prepared on the basis of accrual concept.], 40. Distinguish between Income and Expenditure A/c and Receipts and Payments A/c on, the basis of nature., (C.B.S.E., A.I. , 2010), [Ans. Receipts and Payments A/c is a real account whereas Income and Expenditure Account is, a nominal account.], 41. State the basis of accounting on which a Receipts and Payments Account is, prepared in case of a not-for-profit organisation., (C.B.S.E., Delhi, 2010), [Ans. Cash Basis.], 42. State the basis of accounting on which Income and Expenditure Account is, prepared by a not-for-profit organisation., (C.B.S.E., Delhi, 2010), [Ans. Accrual Basis.], 43. Name the term used for denoting ‘excess of income over expenditure’ in case of a, not-for-profit organisation., (C.B.S.E., Delhi, 2010), [Ans. Surplus.], , 59
Page 74 :
SBPD Pub li ca tions Ac countancy (XII), 44. What is Fund-based Accounting ?, (J.A.C., 2010), [Ans. Fund-based accounting refers to the accounting system whereby receipts and income, relating to a particular fund is credited to that particular fund and payments and, expenses related thereto are debited to it. Under fund-based accounting such funds are, created for specific purposes such as Building Fund, Match Fund etc., 45. Give four examples of Revenue Receipt and Capital Receipt., (J.A.C., 2010), [Ans. Revenue Receipts : (i) Subscriptions, (ii) General Donation, (iii) Dividend and Interest,, (iv) Profit on Sale of Assets., Capital Receipts : (i) Donation for Specific Purpose, (ii) Legacy, (iii) Life Membership, Fees, (iv) Endowment Fees.], 46. What is the basis for preparing Receipts and Payments Account ?, [Ans. Cash Basis.], (C.B.S.E., A.I. , 2011), 47. What is the basis for preparing Income and Expenditure Account in the case of, Not-for-Profit Organisations ?, (C.B.S.E., Delhi, 2011), [Ans. Accrual Basis.], , (D) Objective Type Questions, I. Select the correct alternative :, 1. Legacies should be treated as :, (a) A Liability, (b) A Revenue Receipts, (c) An Income, (d) None of these, 2. Life membership fees received by Club is shown in :, (J.A.C., 2014, 18), (a) Income and Expenditure A/c, (b) Balance Sheet, (c) Receipts and Payments A/c, (d) None of these, 3. Payment of honorarium to secretary is treated as :, (J.A.C., 2019), (a) Capital Expenditure, (b) A Revenue Expenditure, (c) An Income, (d) None of these, 4. Receipts & Payments A/c is a :, (J.A.C., 2014, 16, 18), (a) Personal A/c, (b) Real A/c, (c) Nominal A/c, (d) None of these, 5. Income & Expenditure A/c is a :, (J.A.C., 2018), (a) Personal A/c, (b) Real A/c, (c) Nominal A/c, (d) None of these, 6. Which of the following is not a not-for-profit organisation :, (a) College, (b) Sports Club, (c) Maruti Udyog, (d) Hospital, 7. Income and Expenditure Account generally indicates :, (J.A.C., 2019), (a) Surplus/Deficit, (b) Cash Balance, (c) Capital Fund, (d) Net Profit/Loss, 8. The excess of assets over liabilities in non-trading concerns is treated as :, (a) Capital Fund, (b) Capital, (c) Profit, (d) Net Profit, 9. In non-trading concerns, excess of income over expenditure is called :, (a) Profit, (b) Surplus, (c) Loss, (d) Deficit, 10. Jharkhand Academic Council as :, (J.A.C., 2014), (a) Trading Organisation, (b) Non-trading Organisation, (c) None of these, [Ans. 1. (a), 2. (b), 3. (b), 4. (b), 5. (c), 6. (c), 7. (a), 8. (a), 9. (b), 10. (b)], II. State, whether the following statements are ‘True’ or ‘False’ :, 1. The Receipts and Payments Account is a nominal account., 2. The Income and Expenditure Account is a real account., , 60
Page 75 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, 3. Receipts from the sale of an old asset is treated as income and is credited to Income and, Expenditure Account., 4. No capital item is entered in Income and Expenditure Account., 5. Subscription received in advance is not shown in Receipts and Payments Account., 6. Excess of Income over Expenditure is shown on the debit side of Income and Expenditure Account., 7. Excess of Income over Expenditure is called ‘Surplus’., [Ans. : 1. False, 2. False, 3. False, 4. True, 5. False, 6. True, 7. True.], , PRACTICAL PROBLEMS, ❐ Preparation of Receipts and Payments Account, 1A. From the following information, prepare Receipts and Payments Account of Royal Club,, Ranchi for the year ended 31st December, 2018 :, Cash on 1.1.2018 ` 9,800; Subscriptions ` 75,200; Specific Donation ` 16,000; Entrance Fees, ` 8,600; Rent of Club-hall ` 10,500; Electricity Charges ` 7,000; Salaries and Wages ` 45,000;, Honorarium to Secretary ` 5,000; Newspaper ` 2,000; Interest of Bank Deposit ` 1,000,, Furniture Purchased ` 2,000 (during year); Miscellaneous Expenses ` 10,000., [Ans. Balance of Cash (31.12.2018) ` 50,100; Total of Receipts and Payments A/c ` 1,21,100.], 1B. From the following particulars taken from the Cash Book of a Health Club, prepare a Receipts, and Payments Account :, Opening Balance :, Cash in hand, Cash at Bank, Subscription, Donations, Investment Purchased, Rent Paid, General Expenses, Postage and Stationery Expenses, Courier Charges, Sundry Expenses, Closing Cash in hand, , `, 5,000, 25,000, 1,65,000, 35,000, 80,000, 20,000, 21,500, 2,000, 1,000, 2,500, 12,000, , [Ans. Cash at Bank (Bal. fig.) ` 91,000.], (N.C.E.R.T.), 1C. Following information is received from the accounts of a Library :, On January 1, 2018 Cash balance ` 3,000; Entry fees during 2018 ` 500; Subscription received, during 2018 ` 900; Subscription received of 2017 in 2018 ` 100. Rent paid in 2018 ` 50; Books, purchased ` 1,000; Magazines and Newspapers purchased ` 500; Paper etc. purchased ` 10;, Sundry expenses ` 10; Salaries ` 100., Prepare the Receipts and Payments Account for the period 2018., [Ans. Cash Balance on 31.12.2018 ` 2,830.], 1D. Prepare Receipts and Payments Account of Chaman Club from the following information :, Receipts : Subscriptions received ` 2,400; Rent of room ` 140; Games fees ` 700; Receipts from, canteen ` 1,500; Interest on investment ` 720; Entrance fees ` 600; Donation ` 1,200., Payments : Repairs ` 144; Petty expenses ` 240; Salaries ` 1,200; Printing and Stationery ` 360;, Canteen stores ` 1,020; Wages of guard ` 816; Electric charges ` 480; Rent and Taxes ` 600., Note : There were outstanding salary ` 300 and accrued subscription ` 500 at the end of the, year. Furniture is to be depreciated by ` 200. Cash Balance 1st January, 2018 ` 1,116. Cash, Balance 31st December, 2018 ` 3,516., [Ans. Total of Receipts & Payments A/c ` 8,376.], 2. From the following particulars relating to Natraj Club, Haridwar, prepare Receipts and, Payments Account for the year ending 31st December, 2017 :, Particulars, Cash in hand as on 1st Jan., 2017, , `, 7,500, , 61
Page 76 :
SBPD Pub li ca tions Ac countancy (XII), Cash at Bank as on 1st Jan., 2017, Subscriptions :, 2016, 2017, 2018, Donation Received, Donation Received for Building, 8% Investments Purchased (1-4-2017), Purchase of Refreshment, Rent Paid, Entrance Fees Received, Honorarium to Secretary, Interest on 8% Investments, Furniture Purchased, Sale of Old Furniture (Cost of ` 6,000), Sports Materials Purchased, Sale of Refreshment, Salary paid, Sports Expenses (including unpaid expenses ` 5,000), Cash in hand as on 31st Dec., 2017, , 68,000, `, , 15,000, 2,20,000, 6,000, , 2,41,000, 25,000, 2,00,000, 2,00,000, 12,000, 6,000, 18,000, 10,000, 9,000, 20,000, 4,000, 80,000, 30,000, 74,000, 25,000, 16,200, , [Ans. Cash at Bank as on 31-12-2017 ` 1,64,300.], ❐ Fund-based Accounting, 3A. How would you treat the following items in the case of a ‘not-for-profit’ organisation : `, Tournament Fund, 40,000, Tournament Expenses, 14,000, Receipts from Tournament, 16,000, [Ans. Tournament Fund ` 42,000, it will be shown in liability side of Balance Sheet], 3B. A not-for-profit organisation maintains its accounts on fund-based accounting system. From, the following information, calculate the amount to be shown under the heading ‘Prize Fund’ in, the Balance Sheet :, `, Prize Fund, 1,00,000, Interest received on Prize Fund Investment, 10,000, Prizes awarded, 25,000, [Ans. Balance of Prize Fund ` 85,000, it will be shown in liability side of Balance Sheet.], 4. How would you treat the following items in the case of a ‘Not-for-Profit’ Organisation ? `, (i) Match Fund 1.4.2018, 40,000, (ii) Sale of Match Tickets, 15,000, (iii) Expenses on Match Events, 60,000, [Ans. ` 5,000 will be shown in Match Expenses item in debit side of Income and Expenditure, Account.], 5. From the following information of a Club show the amount of match expenses and match fund, in the Financial Statements of the Club for the year ended on 31st March, 2018 and 31st, March, 2019 :, Details, Match Expenses (Paid during the year 2018-19), Match Fund (as on 31-3-2018), Donation for Match Fund (Received during the year 2018-19), Proceeds from the Sale of Match Tickets (Received during the year 2018-19), , 62, , Amount, `, 30,000, 17,000, 9,000, 3,000
Page 77 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, [Ans. (i) In B/S of 2018 Match Fund ` 17,000 will appear on the liabilities side., (ii) Match Expenses (net) ` 1,000 will appear on the debit side of Income and Expenditure, A/c of 2019., (iii) In the Balance Sheet of 2019 Match Fund will be shown on the liabilities, but the, amount will be Nil.], 6. Show how would you deal with the following items in Income and Expenditure Account and, Balance Sheet in each of the following cases :, `, Case (i) : Prize Awarded, 10,000, Case (ii) : Prize Fund, 25,000, Prize Fund Investments, 25,000, Interest received on Prize Fund Investments, 2,500, Prize Awarded, 10,000, [Ans. (i) Prize Awarded ` 10,000 will be shown on the debit side of Income and Expenditure A/c., (ii) Balance of Prize Fund ` 17,500 will appear on the Liabilities side and Prize Fund, Investments ` 25,000 on Assets side.], ❐ Calculation of Income from Subscriptions for Current Year, 7A. Compute the income from subscriptions for the year 2018 from the following information, relating to Expo Sports Club :, 1.1.2018 31.12.2018, `, `, Subscription received in Advance, 5,000, 2,000, Outstanding Subscription, —, 5,000, Total Subscriptions received during the year ` 20,000, [Ans. Income received from subscription ` 28,000 will be credited in Income and Expenditure, Account.], 7B. As per Receipts and Payments Account for the year ended on March 31, 2019, the subscriptions, received were ` 2,50,000. Additional information given is as follows :, `, (i), Subscriptions Outstanding as on 1.4.2018, 50,000, (ii) Subscriptions Outstanding as on 31.3.2019, 35,000, (iii) Subscriptions Received in Advance as on 1.4.2018, 25,000, (iv) Subscriptions Received in Advance as on 31.3.2019, 30,000, Ascertain the amount of income from subscriptions for the year 2018-19. (U.S.E.B., 2013), [Ans. Income from Subscription for 2018-19 ` 2,30,000.], 7C. Calculate the income from subscription for the year 2015 from the following particulars :, 1-1-2015, 31-12-2015, `, , `, , Outstanding Subscription, 19,300, 18,000, Advance Subscription, 13,400, 14,100, Subscription received during 2015 is ` 31,400., (J.A.C., 2016), [Ans. Income from Subscription ` 29,400.], 7D. From the following particulars, prepare Subscription A/c for the year ending 31st December,, 2013 :, `, (i), Subscription outstanding on 31.12.2012, 6,000, (ii) Subscription received in advance on 31.12.2012, 4,500, (iii) Subscription received in advance on 31.12.2013, 2,700, (iv) Subscription outstanding on 31.12.2013, 7,500, (v) Subscription received during the year 2013, 71,700, (U.S.E.B., 2017), [Ans. Total of Subscription A/c ` 83,700. Amount of Subscription trans. to Income & Exp. A/c, ` 75,000.], 8A. Calculate the income from subscription for the year 2018 from the following information, relating to Annapurna Sports Club :, 1.1.2018 31.12.2018, `, `, Subscription received in Advance, 5,000, 2,000, , 63
Page 78 :
SBPD Pub li ca tions Ac countancy (XII), , 8B., , 9., , 10., , 11., , Total subscription received during the year 2018 is ` 20,000. There are 300 members in the, Club, each paying ` 100 per annum., [Ans. ` 30,000], From the following information, calculate the amount of subscriptions outstanding for the year, 2018-19 :, A Club has 250 members, each paying an annual subscriptions of ` 1,000. The Receipts and, Payments Account for the year showed a sum of ` 2,05,000 received as subscriptions., The following additional informations are provided :, `, (i) Subscriptions Outstanding on 31st March, 2018, 40,000, (ii) Subscriptions received in advance on 31st March, 2019, 30,000, (iii) Subscriptions received in advance on 31st March, 2018, 12,000, [Ans. Outstanding Subscriptions for 2018-19 ` 1,03,000], Receipts and Payments Account of Maitri Club for the year ended March 31, 2019, shows that, the subscriptions received were ` 25,000. Additional information are as follows :, 1.4.2018, 31.3.2019, `, `, Outstanding Subscriptions, 5,000, 3,500, Subscriptions received in Advance, 2,500, 3,000, Ascertain the amount of income from subscriptions for the year 2018-19 and show how relevant, items of subscriptions appear in opening and closing Balance Sheet., [Ans. (i) Income from Subscriptions ` 23,000, (ii) In Opening B/S : Outstanding Subscriptions ` 5,000 will appear on Assets side,, Subscriptions received in Advance ` 2,500 on Liabilities side., In Closing B/S : Outstanding Subscriptions ` 3,500 on Assets side, Subscriptions, received in Advance ` 3,000 on Liabilities side.], Subscriptions received during the year ending 31-12-2017 were as follows : `, `, For 2016, 80, For 2017, 4,220, For 2018, 160, 4,460, There are 450 members, each paying an annual subscription of ` 10. ` 90 were in arrears for, 2016 at the beginning of 2017. Calculate the income from subscription for the year ending 31st, Dec., 2017 and show subscription item in Income and Expenditure A/c and Balance Sheet., (J.A.C., 2019), [Ans. Income from Subscription ` 4,500, B/S Liabilities side : Advance Subscription ` 160,, Assets side : O/S Subscription ` 290.], From the following figures of Receipts and Payments Account and additional information, you, are required to calculate the income from subscriptions for the year ending 31st December,, 2018 and show them in the Income and Expenditure Account and the Balance Sheet :, Dr., Receipts and Payments Account, Cr., Receipts, To Subscriptions :, 2017, 2018, 2019, , ``, `, 5,000, 30,000, 6,000, , Payments, , `, , 41,000, , Additional Informations :, (i) Subscription Outstanding on 31-12-2017, (ii) Subscription Outstanding on 31-12-2018, (iii) Subscription Received in Advance on 31-12-2018, , `, 6,000, 5,000, 6,000, (J.A.C., 2009), , [Ans. (i) Amount to be transferred to Income & Expenditure A/c ` 35,000;, (ii) On Liabilities Side : Advance Subscription ` 6,000, On Assets Side : Subscription, Outstanding ` 1,000 + 5,000 = ` 6,000.], , 64
Page 79 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, ❐ Calculation of Consumable Goods : Medicines and Stationery, 12. On the basis of the following information, calculate the amount of stationery which will be, shown in Income and Expenditure Account for the year ended 31st March, 2019 :, `, Stock of Stationery on 1.4.2018, 50,000, Stock of Stationery on 31.3.2019, 40,000, Purchase of Stationery during the year, 1,90,000, [Ans. ` 2,00,000], ❐ When Amount of Purchase is Given, 13. Find out the amount of medicine consumed to be shown on the debit side of Income and, Expenditure Account :, 1-4-2018 31-3-2019, Items, `, , Stock of Medicines, , 1,75,750, , `, , 1,44,650, , Medicines Purchased during the year 2018-19 ` 60,80,700., [Ans. Medicines Consumed to be shown in Income & Expenditure A/c ` 61,11,800.], 14. Calculate the amount of medicines to be debited in the Income and Expenditure Account of a, Hospital on the basis of the following information :, 1.4.2018, 31.3.2019, `, `, Stock of Medicines, 90,000, 1,24,000, Creditors for Medicines, 2,40,000, 2,04,000, Amount paid for medicines during the year was ` 6,79,000., (J.A.C., 2018), [Ans. ` 6,09,000], 15. Calculate the amount of sports material to be debited to the Income and Expenditure Account, of Capital Sports Club for the year ended 31.3.2018 on the basis of the following information :, 1.4.2017, 31.3.2018, `, `, Stock of Sports Material, 7,500, 6,400, Creditors for Sports Material, 2,000, 2,600, Amount paid for sports material during the year was ` 19,000., [Ans. ` 20,700], 16. Calculate the amount of stationery consumed during the year 2018-19 from the following data : `, (i) Stock of Stationery on April 1, 2018, 3,000, (ii) Creditors for Stationery on April 1, 2018, 2,000, (iii) Advance paid for Stationery carried from 2017-18, 200, (iv) Amount paid for Stationery during the year 2018-19, 10,800, (v) Creditors for Stationery on March 31, 2019, 1,300, (vi) Stock of Stationery of March 31, 2019, 500, (vii) Advance paid for Stationery on 31st March, 2019, 300, [Ans. Stationery consumed in 2018-19 ` 12,500, Purchase of Stationery on credit ` 10,100.], ❐ Calculation of Actual Expense on any Item (i.e., Salary), 17A. Salaries paid in the current year ` 1,20,000, Outstanding salaries at the end of the year, ` 12,000, Salaries paid in advance last year pertaining to the current year ` 5,000, Prepaid, salaries for the next year ` 3,000. Calculate the amount of salaries that will be shown in the, Income and Expenditure Account., [Ans. ` 1,34,000], 17B. From the following information, calculate the amount of sundry expenses which will be shown, on the debit side of Income and Expenditure Account for the year ended 31st March, 2019 : `, Sundry Expenses paid during the year ended 31st March, 2019 :, 28,500, Prepaid Sundry Expenses 31.3.2018, 4,500, Sundry Expenses unpaid 31.3.2018, 5,300, Sundry Expenses unpaid 31.3.2019, 5,500, Prepaid Sundry Expenses 31.3.2019, 2,400, [Ans. Actual Sundry Expenses ` 30,800.], , 65
Page 80 :
SBPD Pub li ca tions Ac countancy (XII), ❐ Profit from Sale of Tennis Balls, 18. From the following information of Star Tennis Club, find out profit or loss on sale of Tennis, balls :, `, Stock of Tennis Balls on 1.1.2017, 400, Stock of Tennis Balls on 31.12.2017, 900, Purchase of Balls, 4,000, Sale of Balls, 3,700, [Ans. Profit on Sale of Tennis Balls ` 200], ❐ Accounting Treatment of Furniture, 19. The following informations are available regarding the furniture of a Club :, (a) The book value of furniture on 1.4.2018 was ` 60,000., (b) Half of the furniture was sold on 31st March, 2019 for ` 25,000., (c) Rate of depreciation is 10% p.a., Show what treatment will be done in this regard in the Income and Expenditure A/c and, Balance Sheet., (J.A.C., 2010), [Ans. (i) Depreciation on Furniture ` 6,000 and Loss on Sale of Furniture ` 2,000 will be shown, on the debit side of I/E A/c., (ii) In B/S Furniture will be shown at ` 27,000], ❐ Preparation of Income and Expenditure Account without Adjustment, 20. From the following informations, prepare the Income and Expenditure Account for the year, ending 31st March, 2019 :, `, Fees Collected, 4,20,000, Salary Paid, 3,00,000, Tournament Expenses, 15,000, Travelling Expenses, 18,000, Stationery Expenses, 15,000, Rent Paid, 12,000, Postage and Telephone Expenses, 10,000, Purchase of Books, 20,000, [Ans. Surplus ` 50,000.], Notes : (i) Purchase of Books will not be entered in the Income & Expenditure Account., (ii) Since there is no Tournament Fund, expenses have been shown in the Income & Expenditure Account., , 21. From the following Receipts and Payments Account, prepare an Income & Expenditure, Account for the year ended 31st March, 2018 :, Dr., Cr., Receipts, To Balance (1.4.2017), To Donation, To Subscriptions, To Legacies, To Interest, , `, , 6,700, 6,000, 10,000, 2,500, 75, , 25,275, , Payments, By Salary, By Rent, By Printing, By Postage, By Advertisement, By Investment, By Balance (31.3.2018), , `, , 2,600, 1,200, 300, 100, 250, 8,000, 12,825, 25,275, , [Ans. Surplus ` 11,625], (J.A.C., 2013), 22. From the following Receipts and Payments Account given below, prepare the Income and, Expenditure Account of Clean Delhi Club for the year ended 31st March, 2018 :, Receipts and Payments Account, Dr., (for the year ending March 31, 2018), Cr., Receipts, `, Payments, `, To Balance b/d (Cash in hand), 3,200 By Salary, 1,500, , 66
Page 81 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, To Subscriptions, To Entrance Fees, To Donations, To Rent of Hall, To Sale of Investments, , 22,500, 1,250, 2,500, 750, 3,000, , By Rent, By Electricity, By Taxes, By Printing and Stationery, By Sundry Expenses, By Books Purchased, By Govt. Bonds Purchased, By Fixed Deposit with Bank on, 31.3.2018, By Balance c/d :, `, Cash in hand, 400, Cash at Bank, 1,500, , 33,200, , 800, 3,500, 1,700, 380, 920, 7,500, 10,000, 5,000, 1,900, 33,200, , [Ans. Surplus : Excess of Income over Expenditure ` 18,200.], (N.C.E.R.T.), 23. From the following Receipts and Payments Account, prepare an Income and Expenditure, Account for the year ended 31st March, 2018 :, Receipts, Amount, Payments, Amount, To Balance (1-4-2017), To Donation, To Lagacies, To Subscriptions, To Interest, To Sale of Old Machinery, , `, , 4,500, 6,000, 3,000, 12,000, 1,500, 1,550, , By Salaries, By Rent, By Printing, By Postage, By Advertisement, By Investment, By Balance (31-3-2018), , 28,550, [Ans. Excess of Income over Expenditure ` 10,500.], , `, , 4,000, 2,500, 500, 200, 1,800, 10,000, 9,550, 28,550, (J.A.C., 2015), , Note : Legacies treated as capital receipt and donation as revenue., , ❐ Preparation of Income & Expenditure Account from Receipts & Payments A/c and, Additional Information, , 24. From the following Receipts and Payments Account, prepare Income and Expenditure, Account of Darbhanga Sports Club for the year ended 31st December, 2017 :, Dr., , Receipts, , Receipts and Payments Account, Amount, Payments, `, , To Balance b/d :, Cash, Bank, To Donations, To Subscriptions, To Legacy, To Interest, To Miscellaneous Receipts, , 10,000, 6,500, 10,000, 30,000, 8,000, 1,400, 3,600, , Cr., Amount, `, , By Administrative Expenses, By Repairs, By Rent, By Investments, By Salaries, By Furniture, By Balance c/d :, Cash, Bank, , 69,500, , 32,000, 1,600, 1,000, 8,000, 7,000, 5,200, 6,000, 8,700, 69,500, , Managing Committee decided to treat 50% of donation and legacy as capital receipts and the, balance as revenue receipts., [Ans. Surplus ` 2,400], Note : Cash, Bank, Investment and Furniture will be shown in Balance Sheet., , 67
Page 82 :
SBPD Pub li ca tions Ac countancy (XII), 25. Following is the Receipts and Payments Account of The Mithila Nari Kalyan Samiti for the, year ended 31.3.2019 :, Dr., Receipts and Payments Account, Cr., Receipts, , Amount, , Payments, , `, , To Balance b/d, To Subscriptions, To Fees from Non-members, To Municipal Grant, To Donation for Building Fund, To Interest, , Amount, `, , 20,100, 1,31,500, 2,700, 1,00,000, 1,00,000, 100, 3,54,400, , By Salaries of Staff, By Rent, By Cost of Car, By Expenses of Car, By Office Expenses, By Legal Expenses, By Closing Balance :, Cash at Bank, , 30,000, 60,000, 2,00,000, 10,000, 20,400, 5,000, 29,000, 3,54,400, , Additional Informations :, (i) A donation for ` 1,000 received for building fund was wrongly included in subscription., (ii) Salary outstanding on 31.3.2019 was ` 2,000., Prepare Income and Expenditure Account for the year ended 31.3.2019., [Ans. Surplus ` 1,05,900.], 26. Following is the Receipts and Payments Account of Amar Jyoti, Patna for the year ended 31st, December, 2018 :, Dr., Cr., Receipts, Amount, Payments, Amount, `, , To Balance b/d, To Subscription : 2018, 2019, To Tickets Sold, To Donation, To Sale of old Newspapers, , 640, 850, 25, 355, 400, 25, , `, , By General Expenses, By Drama Expenses, By Newspaper etc., By Salaries, By Donation, By Tax, By Electricity Expenses, By Balance c/d, , 2,295, , 50, 200, 300, 500, 50, 25, 335, 835, 2,295, , Prepare Income and Expenditure Account of Amar Jyoti, Patna for the year ended 31st, December, 2018., Consider following information :, There is a building for ` 20,000, on which depreciation @ 5% is to be charged. Total number of, members is ` 500 and annual fee is 5 per member., (U.S.E.B., 2018), [Ans. Surplus ` 820.], [Hint : O/S. subscription ` 1,650, Depreciation on Building ` 1,000.], 27. From the following Receipts and Payments Account, prepare an Income and Expenditure, Account for the year ended 31st March, 2018 :, Dr., Receipts and Payments Account, Cr., Receipts, Amount, Payments, Amount, `, , To Balance (1-4-2017), To Donation, To Subscriptions, To Interest on Investment, , 68, , 6,700, 8,000, 12,000, 2,500, , `, , By Charities, By Staff Salaries, By Rent and Rates, By Printing & Stationery, , 10,500, 2,600, 1,200, 300
Page 83 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, To Sale of Old Furniture, , 75 By Postage, By Advertising, By Purchase of Furniture, By Investments, By Balance (31-3-2018), 29,275, , 100, 250, 750, 5,000, 8,575, 29,275, , One-half of donation is to be treated as income, ` 100 were owing for rent, ` 300 for staff salary and, ` 50 for advertising at the end of the year. Interest on investment ` 525 had accrued but not received., [Ans. Excess of Income over Expenditure ` 3,625.], (J.A.C., 2014 without adjustments), 28. On the basis of following information, prepare Income and Expenditure Account in the books of, Hind Club for the year ending 31st December, 2018 :, Subscription received for the pervious year ` 40., Subscription received for the current year ` 360., Subscription not received for the current year ` 60., Receipts : Rent of Room ` 20; Games Fees ` 120; Cash received from Canteen ` 250., Payments : Salaries ` 200; Repairing ` 24, Printing and Stationery ` 60, Canteen articles, ` 170; Wages of Watchman ` 136; Electricity ` 80 and Rent and Taxes ` 100., Outstanding Expenditure : Repairing Expenses ` 16; Canteen Articles ` 44., Cash Balance : On 1, January 2018 ` 36 and on 31st December, 2018 ` 56., [Ans. Deficit : Excess of Expenditure over Income ` 20.], (U.S.E.B., 2016), 29. Following is the Receipts and Payments Account of Bhagalpur Pustkalaya for the year ended, 31.3.2018 :, Dr., Cr., Receipts, , Amount, , Payments, , Amount, , `, , To Balance b/d, To Subscriptions, `, 2016-17, 1,200, 2017-18, 26,500, 2018-19, 500, To Sale of Old Newspapers, To Government Grants, To Sale of Old Furniture (Book, Value ` 7,000), To Interest on F.D., , 19,550 By Salary, By Newspapers, By Electricity, By F.D. 1.7.2017 @ 9% p.a., 28,200 By Books, 1,250 By Rent, 10,000 By Furniture, 5,700 By Balance c/d, , `, , 3,000, 2,050, 1,000, 20,000, 10,600, 6,800, 10,500, 11,200, , 450, 65,150, , 65,150, , Additional Informations :, (i) Subscriptions outstanding as on 31.3.2017 were ` 2,000 and on 31.3.2018 were ` 2,500., (ii) On 31.3.2018, Salary outstanding was ` 600 and rent outstanding was ` 1,200., (iii) The Club owned furniture ` 15,000 and books ` 7,000 on 1.4.2017., Prepare Income and Expenditure Account of the Club for the year ended 31.3.2018., [Ans. Surplus ` 24,850.], 30. From the following Receipts and Payments Account of Free Medical Society for the year ended, 31st March, 2018, prepare Income and Expenditure Account for the year ended 31st March, 2018 :, Receipts and Payments Account, Dr., (for the year ended 31st March, 2018), Cr., Receipts, `, Payments, `, To Cash in hand on 1st April, 2017, To Subscriptions, , 7,000 By Payment for Medicines, 50,000 By Honorarium to Doctors, , 30,000, 10,000, , 69
Page 84 :
SBPD Pub li ca tions Ac countancy (XII), To Donation, To Interest on Investments, To Charity Show Proceeds, , 14,500 By Salaries, 7,000 By Sundry Expenses, 10,000 By Equipment Purchased, By Charity Show Expenses, By Cash in hand (31-3-2018), , 27,500, 500, 15,000, 1,000, 4,500, , 88,500, , 88,500, , Additional Informations :, , On 1st April, On 31st March,, 2017, 2018, `, `, 500, 1,000, 10,000, 15,000, —, 500, —, 2,500, , (i) Subscriptions due, (ii) Stock of Medicines, (iii) Subscriptions received in Advance, (iv) Outstanding Salary, (v) Donation should be treated as income, [Ans. Excess of Income over Expenditure ` 15,000; Medicines Consumed ` 25,000.], ❐ Preparation of Receipts and Payments Account and Income and Expenditure Account, 31. From the following, prepare (a) Receipts and Payments Account, and (b) Income and Expenditure Account for the year ending 31st December, 2017 :, `, Subscriptions received for the last year, 8,000, Subscriptions received for the current year, 72,000, Subscriptions accrued for the current year, 12,000, Receipts :, Rent of Rooms, 4,000, Receipts from Table Tennis Room, 24,000, Receipts from Canteen, 50,000, Payments :, Salaries, 40,000, Repairs, 4,800, Printing and Stationery, 12,000, Supplies for Canteen, 34,000, Wages, 27,200, Fuel and Gas, 16,000, Rent, 20,000, Outstanding Expenses :, Repairs ` 3,200, Supplies for Canteen ` 8,800, Cash in hand on 1.1.2017 ` 7,200., [Ans. (i) Cash in hand on 31.12.2017 ` 11,200; (ii) Excess of Expenditure over Income ` 4,000], ❐ Ascertainment of Capital Fund, 32. From the following particulars, find out Capital Fund of Jyoti Club as on 1.4.2018 :, Assets as on 1.4.2018 :, `, Cash at Bank, 30,000, Furniture, 25,000, Subscription due, 10,000, Stock of Balls and Bats, 5,000, Liabilities as on 1.4.2018, Subscriptions Received in Advance, 4,000, Outstanding Salary, 6,000, Cash at Bank on 31.3.2019, 25,000, [Ans. Capital Fund (1.4.2018) ` 60,000], ❐ Preparation of Income & Expenditure Account and Ascertainment of Capital Fund, 33. Following is the Receipts and Payments Account of Indian Sports Club for the year ended, 31.12.2017 :, Dr., Cr., Receipts, Amount, Payments, Amount, `, , To Balance b/d, , 70, , 10,000 By Salary, , `, , 15,000
Page 85 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, To Subscriptions, To Entrance Fee, To Tournament Fund, To Sale of Old Newspapers, To Legacy, , 52,000, 5,000, 26,000, 1,000, 37,000, , By Billiards Table, By Office Expenses, By Tournament Expenses, By Sports Equipments, By Balance c/d, , 20,000, 6,000, 31,000, 40,000, 19,000, 1,31,000, , 1,31,000, , Other Informations :, On 31.12.2017 Subscription outstanding was ` 2,000 and on 31.12.2016 subscription, outstanding was ` 3,000. Salary outstanding on 31.12.2017 was ` 1,500., On 1.1.2017 the Club had building ` 75,000, furniture ` 18,000, 12% investment ` 30,000 and, sports equipment ` 30,000. Depreciation charged on these items including purchases was 10%., Prepare Income and Expenditure Account of the Club for the year ended 31.12.2017 and, ascertain the Capital Fund on 1.1.2017., [Ans. Excess of Income over Expenditure ` 16,800, Capital Fund (1.1.2017) ` 1,66,000.], 34. From the following Receipts and Payments Account of a Club, prepare Income and Expenditure, Account for the year ended 31st December, 2018 and calculate Capital Fund as on 1st Jan., 2018 :, Receipts and Payments Account, Dr., (for the year ending on 31st December, 2018), Cr., Receipts, Amount, Payments, Amount, To Balance b/d, To Subscription :, `, 2017, 1,800, 2018, 70,000, 2019, 3,200, To Sale of Old Books (Cost ` 3,200), To Rent from Use of Hall, To Sale of Newspapers, To Profit from Entertainment, , `, , `, , 3,500 By General Expenses, By Salary, By Postage, By Electric Charges, 75,000 By Furniture, 2,000 By Books, 17,000 By Newspapers, 400 By Meeting Expenses, 7,300 By T. V. Set, By Balance c/d, 1,05,200, , 900, 16,000, 1,300, 7,800, 26,500, 13,000, 600, 7,200, 16,000, 15,900, 1,05,200, , Additional Informations :, (i) The Club has 100 members, each paying an annual subscription of ` 900. Subscriptions, Outstanding on December 31, 2017 were ` 3,600. (ii) On December 31, 2018, salary outstanding, amounted to ` 1,000, salary paid included ` 1,000 for the year 2017. (iii) On January 1, 2018 the, Club owned land and building ` 25,000, furniture ` 2,600 and books ` 6,200., [Ans. Surplus ` 79,700, Capital Fund (1.1.2018) ` 39,900], (N.C.E.R.T.), ❐ Preparation of Income and Expenditure A/c and B/S, 35. From the Receipts and Payments Account of the City Club for the year ending on 31st March,, 2019, prepare an Income and Expenditure Account and the Balance Sheet as on that date :, Dr., Receipts and Payments Account, Cr., Receipts, `, Payments, `, To Donation for Building, To Life Membership Fees, To Match Fund, To Revenue Receipts :, Subscription (including, `, ` 50 for 2019-20), 1,600, Interest on Security, 100, Cricket, 200, , 25,000 By Buildings, 2,000 By Expenses on Matches, 5,000 By Furniture, By Investments, By Revenue Payments :, Salaries, Tennis, Cricket, , `, 900, 300, 270, , 20,000, 450, 1,050, 9,000, , 71
Page 86 :
SBPD Pub li ca tions Ac countancy (XII), Tennis, Sundries, , 250, 50, , 2,200, , Insurance (paid upto, Dec., 2019), Printing, Sundry Exp., By Balance c/d, , 34,200, , 180, 225, 75, , 1,950, 1,750, 34,200, , Subscription outstanding for 2018-19 were ` 150, and salaries unpaid for March, 2019 were ` 85., [Ans. Excess of Income over Expenditure ` 400; Total of Balance Sheet ` 32,085.], [Hint : In this question opening balance of cash is not given, hence, it is assumed that the, Club was established in this year. No need to prepare opening Balance Sheet and that, the Capital Fund will be nil.], 36. From the following Receipts and Payments Account of Deoghar Club, Deoghar for the year, ended 31st December, 2017, prepare Income and Expenditure Account and the Balance Sheet, as on that date., Receipts and Payments Account, Dr., (for the year ended 31st December, 2017), Cr., Receipts, `, Payments, `, 3,30,000, To Balance b/d, 1,90,000 By Salaries, 4,00,000, To Subscriptions, 6,60,000 By Sports Equipment, To Interest on Investment @ 8%, By Balance c/d, 1,60,000, per annum for whole year, 40,000, 8,90,000, 8,90,000, Additional Informations :, (i) The Club had received ` 20,000 for subscription in 2016 for 2017., (ii) Salaries had been paid only for 11 months., (iii) The Stock of Sports Equipments as on 31st December 2016 was ` 3,00,000 and on 31st, December, 2017 ` 6,50,000., [Ans. Surplus ` 3,10,000, Capital Fund as on 31.12.2016 ` 9,70,000, Balance Sheet (31.12.2017), Total ` 13,10,000], 37. The following is the Receipts and Payments Account of Adarsh Club for the year ended 31st, Dec., 2017 :, Dr., Cr., Receipts, Amount, Payments, Amount, To Balance b/d, To Subscriptions :, 2016, 2017, To Donation, To Admission Fees, , `, , 62,500 By Salaries, By Wages, 21,000 By Rent, 1,25,000 By Telephone Exp., 17,500 By Equipment (1.1.2017), 28,000 By Office Exp., By Honorarium, By Balance c/d, 2,54,000, , `, , 50,000, 6,000, 12,000, 9,400, 1,20,000, 22,000, 11,000, 23,600, 2,54,000, , Other Informations :, (a) On 1st January, 2017 the balance was as under : Building ` 1,00,000, Machinery ` 50,000,, Furniture ` 20,000, Outstanding Salary ` 10,000, Prepaid Wages ` 2,000. (b) ` 25,600 was due, as subscription for the year 2017. (c) Depreciation on building @ 10%, on machinery @ 5% and on, equipment @ 20% p.a. is charged., On the basis of above details, prepare Income and Expenditure Account and a Balance Sheet, on 31st December, 2017., (J.A.C., 2010), [Ans. Surplus ` 57,200, Capital Fund (1.1.2017) ` 2,45,500; Total of Balance Sheet ` 3,02,700.], [Hint : Donation assumed as a revenue receipt.], , 72
Page 87 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, 38. The following is the Receipts and Payments Account of the City Club for the year ended 31st, March, 2019 :, Dr., Cr., Payments, Receipts, Amount, Amount, `, `, To Balance (April 1), 5,000 By Affiliation Fee to the Pradesh, To Subscription :, `, Club, 1,000, 2017-18, 500, By Furniture (Oct. 1), 3,000, 2018-19, 15,000, 2,500, By Sports Expenses, 2019-20, 1,000, 16,500 By Sundry Expenses, 15,200, To Life Membership Fee, 12,000 By Balance (March 31, 2019), 14,000, To Sales of Scrap, 200, To Interest on Sports Funds, 2,000, 35,700, 35,700, The Club has 1,600 members, each paying annual subscription of ` 10. Subscriptions of ` 450, are still in arrears for 2017-18. Life membership fees are to be transferred to capital reserve,, sports expenses are to be met out of the sports fund. On 1st April, 2018 the Club’s assets and, liabilities included furniture ` 2,000; sports fund and 10% sports fund investments ` 30,000 each., Provide depreciation on furniture at 20% per annum and prepare Income and Expenditure, Account for the year ended 31st March, 2019 and Balance Sheet of the Club as on that date., [Ans. Excess of Expenditure over Income ` 700, B/S Total ` 50,750.], [Hint : Capital Fund (1.4.2018) ` 7,950], ❐ Preparation of Income Expenditure A/c and Balance Sheet from Trial Balance, 39. From the Trial Balance and other informations given below for a school, prepare Income and, Expenditure Account for the year ended on 31-3-2018 and a Balance Sheet as on that date :, Debit Balance, `, Credit Balance, `, To Building, 6,25,000 By Admission Fees, 12,500, To Furniture, 1,00,000 By Tuition Fees Received, 5,00,000, To Library Books, 1,50,000 By Creditors for Supplies, 15,000, To Investments @ 12%, 5,00,000 By Rent for the School Hall, 10,000, To Salaries, 5,00,000 By Miscellaneous Receipts, 30,000, To Stationery, 40,000 By Government Grant, 3,50,000, To General Expenses, 18,000 By General Fund, 10,00,000, To Sport Expenses, 15,000 By Donation for Library Books, 62,500, To Cash at Bank, 50,000 By Sale of Old Furniture, 20,000, To Cash in hand, 2,000, , 20,00,000, , 20,00,000, , Additional Informations :, (i) Fees yet to be received for the year are ` 25,000, (ii) Salaries yet to be paid amounting to ` 30,000, (iii) Furniture costing ` 40,000 was purchased on October 1, 2017, (iv) The book value of the furniture sold was ` 50,000 on April 1, 2017, (v) Depreciation is to be charged @ 10% p.a. on furniture, 15% p.a. on library books and 5%, p.a. on building, (N.C.E.R.T.), [Ans. Surplus ` 2,97,750; B/S Total ` 14,05,250], [Hint : Total Dep. on Furniture ` 3,000], ❐ Miscellaneous and Boards' Questions, 40. Receipts and Payments Account of Uttara Golf Club for the year ended on 31st December, 2017, is as ahead :, , 73
Page 88 :
SBPD Pub li ca tions Ac countancy (XII), Dr., Receipts, To Balance b/d, To Subscriptions :, `, 2016, 2,000, 2017, 18,500, 2018, 900, To Entrance Fees (Capital Receipt), To Interest on Investment, , Cr., `, Payments, 3,800 By Sports Equipments Purchased, (on 1.9.2017), By Tournament Expenses, By Electricity Expenses, 21,400 By Printing Expenses, 800 By Salaries & Wages, 1,500 By Expenses for Exhibition, By Balance c/d, , 10,000, 4,000, 500, 300, 3,400, 2,100, 7,200, , 27,500, , 27,500, , `, , Additional Informations :, (i) Fixed Assets of the Club on Jan. 1, 2017 include the following : Sports Equipment ` 15,500;, Club ground ` 62,000; Furniture ` 2,000., (ii) Subscriptions for 2017 collected in 2016 ` 500., (iii) Unpaid subscriptions for 2017 ` 300. (iv) Depreciation to be provided @ 20% p.a. on sports, equipments and @ 5% p.a. on furniture., Prepare an Income and Expenditure Account for the year ended on 31.12.2017., [ Ans. Excess of Income over Expenditure ` 6,633], (U.S.E.B., 2010, 19), 41. The following is the Receipts and Payments Account of a Club for the year ended 31st December,, 2018:, Receipts : Cash in hand (1.1.2018) ` 1,000; Cash at Bank (1.1.2018) ` 4,000; Donation for, building ` 10,000; Sale of Furniture (Balance on 1.1.2018 ` 100) ` 80, Sale of Newspaper ` 200,, Subscription ` 20,000., Payments : Sports Materials ` 2,500, Salaries ` 3,250, Furniture ` 1,600, Newspaper ` 500,, Building Fund Investment ` 10,000, Tournament Expenses ` 11,000, Postage ` 200, Cash in, hand (Closing Balance) ` 1,030, Cash at Bank (Closing Balance) ` 5,200., Adjustments :, (i) Of the subscription collected, ` 2,000 was outstanding for 2017., (ii) On 1.1.2018 Stock of Raw Materials was ` 500 and 31.12.2018 it was ` 700., Prepare the Income and Expenditure Account for the year ended 31st December, 2018., [Ans. Surplus ` 730], (U.S.E.B., 2017), 42. From the following informations, prepare Subscription Account for the year ending 31st, December, 2012., (U.S.E.B., 2019), `, , (i) Subscription received during 2012, 12,000, (ii) Subscription received in advance for 2013, 1,600, (iii) Subscription outstanding at the beginning of 2012, 2,000, (iv) Subscription outstanding at the end of 2012, 700, [Ans. Subscription A/c Cr. Bal. ` 9,100 transferred to Income and Expenditure A/c], 43. How the following items for the year ended 31st March, 2018 will be presented in the financial, statements of Aisko Club :, Dr., Cr., Particulars, Amount Amount, `, , `, , Tournament Fund, — 1,50,000, Tournament Fund Investments, 1,50,000, —, Income from Tournament Fund Investments, —, 18,000, Tournament Expenses, 12,000, —, Additional Information :, Interest Accrued on Tournament Fund Investments ` 6,000, (C.B.S.E., A.I., 2019), [Ans. In Balance Sheet : On Liabilities side Tournament Fund ` 1,62,000., On Assets Side : Tournament Fund Investment ` 1,50,000, Accrued Interest on T.F.I., ` 6,000.], , 74
Page 89 :
Ac count ing for Not-for-Profit Or gani sa tions/Non-Trad ing Organisations, 44. From the following Receipts and Payments Account of New Patliputra Club and additional, information, prepare an Income and Expenditure Account for the year ended 31st March, 2019, and a Balance Sheet as on that date :, Receipts, To Balance b/d, To Subscriptions :, `, 2017-18, 2,000, 2018-19, 22,000, 2019-20, 3,000, To Entertainment Receipts, To Sale of Old Furniture, (Book Value ` 5,000), , `, Payments, 20,000 By Salaries, By Entertainment Expenses, By General Expenses, By Investments, 27,000 By Printing and Stationery, 15,000 By Sports Equipment, By Balance c/d, 4,000, 66,000, , `, 25,000, 5,000, 2,000, 15,000, 1,500, 8,000, 9,500, 66,000, , Additional Informations, (i) The club has 300 members, each paying an annual subscription of ` 100, ` 500 is still in, arrears for subscription for 2017-18. In 2017-18, 10 members had paid their subscriptions, for 2018-19., (ii) Salaries paid included ` 1,500 for 2017-18 and outstanding salaries for 2018-19 was, ` 2,500., (iii) Interest for 6 months at 10% per annum has accrued on investments, [Ans. Excess of Income over Expenditure ` 10,250, Total of Balance Sheet ` 40,750], [Hint : Capital Fund (31.3.2018) ` 25,000, Subscription Outstanding on 31.3.2019 ` 7,500.], , l, , 75
Page 90 :
76
Page 91 :
2, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 2.1 Meaning, Definition and Nature of Partnership, , 78, , 2.2 Characteristics/Features/Essential Elements of Partnership, , 78, , 2.3 Essentials of an Ideal Partnership, , 79, , 2.4 Limited Liability Partnership (LLP), , 79, , 2.5 Rights of Partners, , 80, , 2.6 Duties of Partners, , 80, , 2.7 Partnership Deed/Agreement, , 81, , l Meaning l Contents of Partnership Deed l Provisions of the Indian, Partnership Act, 1932 in the Absence of Partnership Deed, 2.8 Partnership Accounts, , 84, , l Partners’ Capital Accounts : Fixed and Fluctuating Capital l Division, (Distribution) of Profit among Partners l Profit and Loss Appropriation, Account, 2.9 Guarantee of Profit to a New Partner, , 122, , 2.10 Past Adjustments/Adjustments in Closed Accounts, , 128, , 2.11 Final Accounts of Partnership Firm, , 136, , 2.12 Fast Revision, , 139, , ❑ Useful Questions, , 140, , ❑ Practical Problems, , 144, , 77
Page 92 :
SBPD Pub li ca tions Accountancy (XII), , 2.1 Meaning, Definition and Nature of Partnership, When two or more persons enter into an agreement for setting up a business, to run it, and share the profits and losses, it is termed as partnership., As per Section 4 of the Partnership Act, 1932 :, ‘‘Partnership is the relation between persons who have agreed to share the profits of a, business carried on by all or any of them acting for all.’’, This definition highlights following three elements or conditions to determine, whether an association of persons is a partnership or whether a person is a partner in a, firm :, (1) There must be an agreement between all the partners;, (2) The agreement must be to share the profit of a business; and, (3) The business must be carried on either by all partners or any of them acting for all., Partners : Persons who have entered into partnership with one another are called, individually ‘partners’., Accounting for Partnership Firms—Basic Concepts, Firm : Persons who have entered into partnership with one another are called, collectively, a, ‘ firm’., Firm Name : The name under which the business of the partners is carried on is, called the ‘firm name’., ❏ Nature of Partnerhip Firm, A partnership firm has no separate legal entity apart from the partners constituting it., A firm itself cannot enter into contract for partnership though its partners can., , 2.2 Characteristics/Features/Essentials Elements of Partnership, Some of the important characteristics of a partnership firm are as follows :, Features or Elements of Partnership, Two or More Persons, Agreement, Lawful Business, Profit Sharing, Mutual Agency, No Separate Entity, Unlimited Liability, No Transfer of Interest without Consent, (i) Two or More Persons : It is necessary to have at least two, or more persons as partners to form a partnership. Thus the, minimum number of partners in a firm should not be less than two., The number of maximum partners is now restricted to 50 partners by, Rule 10 of Companies (Miscellaneons) Rules Act, 2014., Note : The Partnership Act, 1932 does not specify maximum limit of partners for a firm., , Please Remember, Partnership Act, 1932 does not specify maximum number of partners for a firm. Section 464, of the Companies Act, 2013 provides that the number of persons in any association/partnership, shall not exceed 100 subject to the limit perscribed in rules. Rule 10 of the Companies, (Miscellaneous) Rules, 2014 provides for maximum limit as 50 persons. Therefore, limit as of now, is 50 partners., If the number of partners exceeds this limit, the partnership becomes illegal association., , 78
Page 93 :
Ac count ing for Part ner ship Firms : Fun da men tals, (ii) Agreement : There should be an agreement between the partners. This, agreement may be oral, written or implied. The agreement is made to carry on business and, share its profits. The agreement forms the basis of mutual rights and duties of partners., (iii) Lawful Business : The objective of the agreement should be, to carry on a business and the business must be legal., (iv) Profit Sharing : The agreement between the partners must be, with the objective of sharing profits among all the partners. Usually,, partners also share losses. However, an agreement to share losses is not, essential., (v) Mutual Agency : Business of the partnership must be carried on by all the, partners or by any one of them acting for all, that is, there must be a mutual agency. Thus,, every partner is both an agent and the principal for himself and other partners., (vi) No Separate Entity : Partnership does not have a separate entity from its, partners., (vii) Unlimited Liability : The liabilities of all the partners of a firm are unlimited, like the sole proprietorship., (viii) No Transfer of Interest without Consent : A partner cannot transfer his, interest in the firm without the consent of all other partners., Legal Status of a Firm, A firm is not a separate legal entity. In other words, a firm is not a legal person. It is, merely a collection of persons. Hence, a firm does not acquire an identity different, from its partners. The following points must be noted :, (i) A firm cannot hold property in its own name., (ii) A firm cannot sue and be sued in its own name., (iii) Assets of the firm are the joint property of partners., (iv) All partners are jointly and severally, i.e., individually liable for all the business, obligations of the firm., , 2.3 Essentials of an Ideal Partnership, Mutual Trust and Confidence : An ideal partnership is one where there is mutal, trust and confidence, and spirit of helpfulness and goodwill among the partners. As such, every partner must be just and faithful to his co-partners., Honesty in Dealings : According to sec. 9 of the Indian Partnership Act, partners, are bound to carry on the business of the firm to the greatest common advantage. Hence,, partners should conduct business with faithfulness towards each other and avoid, cheating., Honouring the Patnership Deed : A good partnership is one where partnership, deed is honoured and followed with devotion at all times by the members., True and Fair Accounts : Like any other business, it is important for the, partnerhsip firm to maintain proper, accurate and precise books of account so that its, financial statements should depict true and fair view of financial performance and, financial position., Rendering True Accounts and Full Information : Lastly, an ideal partnership is, one where every partner renders true and proper accounts and gives full information of all, things affecting the firm to his co-partners., , 2.4 Limited Liability Patnership (L.L.P.), The concept of Limited Liability Partnership (LLP) came into existence with the, enactment of Limited Liability Partnership Act, 2008. Under this type of partnership,, liability of the partners is limited to the extent of their capital contribution., , 79
Page 94 :
SBPD Pub li ca tions Accountancy (XII), ❏ Main Features of LLP, (1) Name of the LLP is approved by the Registrar of Companies., (2) The LLP comes into existence by entering into an agreement by the partners which, defines their respective duties and responsibilities and also the profit-sharing ratio., (3) The agreement is filed with the Registrar of Companies., (4) Limited Liability : Unlike in a case of partnership, liability of the partners is, limited to the extent of their capital., (5) Designated Persons : At least two persons should be appointed ‘Designated, Persons’, one of them must be a partner., (6) Submission of Solvency Certificate : LLP must file a ‘Solvency Certificate’, with the Registrar of Companies every year., Difference between Partnership and Limited Liability Partnership (LLP), Basis of Difference, , Partnership, , 1. Act, , On Partnership, Indian Partnership Act, 1932 is applicable., 2. Existence, It comes into existence from an, agreement., 3. Registration, Registration of Partnership is, Optional., 4. Separate Legal Entity It has no separate legal entity from, its Partners., 5. Number of Partners Minimum 2 and maximum 50., 6. Partnership of Assets Partnership firm cannot hold the, property in its ownership as the, firm has no separate legal entity., Therefore, partners are the Owner, of Assets., 7. Liability, In partnership, the liability of, Partners is unlimited., , LLP, On LLP, Limited Liability Partnership Act, 2008 is applicable., It is created by law., Registration of LLP is mandatory, with ROC., It has separate legal entity., Minimum 2 and maximum no limit., LLP can become an Owner of, assets, because. It has separate, legal entity., In LLP, the liability of partners is, limited., , 2.5 Rights of Partners, 1. Every partner has a right to participate in the conduct and management of the business., 2. Every partner has the right to be consulted and give his opinion on all matters of, the firm., 3. Every partner has a right to have access to all records and books of accounts of the, firm and inspect/examine and copy them., 4. Partners are entitled to share profits (or losses) equally or in the agreed ratio., 5. Where a partner is entitled to interest on capital subscribed by him, such interest, shall be payable only out of profits., 6. A partner who has advanced loan to the firm is entitled to receive interest thereon, at the rate of 6% per annum or as agreed upon., 7. A partner has right to be indemnified in respect of payments made and liabilities, incurred by him., 8. A partner has the right to retire from the firm (after giving proper notice)., , 2.6 Duties of Partners, The following are the duties of partners :, 1. Partners are bound to carry on the business of the firm to the greatest common, advantage., , 80
Page 95 :
Ac count ing for Part ner ship Firms : Fun da men tals, 2. Partners are bound to be just and faithful to each other., 3. Partners are bound to render true accounts and full information of all things, affecting the firm to any partner or his legal representative., 4. Partner shall indemnify the firm for any loss caused to it by his neglect or fraud in, the conduct of the business of the firm., 5. A partner must not carry on business competing with the firm., 6. The partners are bound to contribute equally to the losses sustained by the firm., 7. No partner can assign or transfer the interest in the business to others., 8. It is the duty of a partner to use firm’s property exclusively for the firm., , 2.7 Partnership Deed/Agreement, 2.7.1 Meaning, A written document containing the terms of agreement, between the partners pertaining to the rights and duties of, partners is known as Partnership Deed or Partnership, Agreement. It is also known as Articles of Partnership. It may be, written or oral but due to uncertainty it must be written (and, registered)., It generally contains the details about all the aspects, affecting the relationship between the partners including the, objective of business, contribution of capital by each partner,, ratio in which the profits and losses will be shared by the partners., 2.7.2 Contents of Partnership Deed, (i) The name and address of the firm and its main business., (ii) Names, addresses and occupations of partners., (iii) The amount of capital to be contributed by each partner., (iv) (a) Rate of interest on capital, loan and drawings etc., (b) Salary, commissions etc. payable to partners., (v) The profit-sharing ratio of the partners., (vi) Date of commencement and duration of the business., (vii) The amount to be allowed to each partner for drawings and the timing of such, drawings., (viii) The method by which goodwill is to be valued and assets and liabilities revalued, on joining, retirement or death of a partner., (ix) The rights, duties and liabilities of each partner., (x) The procedures to be followed in case of admission, retirement, death of a partner., (xi) The accounting period of the firm., (xii) The procedure to be followed for settlement of disputes among the partners., (xiii) Preparation of accounts and their audit, etc., (xiv) Procedure for dissolution of the firm., (xv) Duration of partnership., (xvi) Methods of preparing accounts, etc., Partnership deed should be signed by all the partners. It must be stamped in, accordance with the Indian Stamp Act. It should preferably be registered with the, registrar of firms to avoid conflicts/disputes., 2.7.3 Provisions of the Indian Partnership Act, 1932 in the Absence of Partnership Deed, In the absence of partnership deed or express agreement, the following general rules, or provisions will be applicable :, , 81
Page 96 :
SBPD Pub li ca tions Accountancy (XII), 1. Salary and Commission, , No salary/commission is allowed (or paid) for the conduct of, business to any partner., [Sec. 13(a)], 2. Sharing of Profits/Losses Profits and losses are to be shared equally, irrespective of amount, of capital contribution., [Sec. 13(b)], 3. Interest on Capital, No interest will be allowed on capital., Where a partner is entitled to interest on capital subscribed by, him, such interest shall be payable only out of profits. [Sec. 13(c)], 4. Interest on Advances or Where a partner gives advance or loan to the firm, interest @ 6%, Loan by a Partner, per annum is to be allowed., [Sec. 13(d)], Such interest is payable even if there is loss., 5. Interest on Drawings, No interest is to be charged on drawings of partners., , Tutorial Note, 1. These provisions or rules are applicable only when Partnership Deed is silent and there is a, dispute on any point., 2. If partners agree on any point, then the above rules are not applicable and terms decided by, all the partners shall be considered., , ❏ Other Important Provision of the Indian Partnership Act, 1. Admission of a Partner : No person can be admitted as a partner into a firm, without the consent of all the existing partners., [Sec. 31], 2. Participation in Conduct of Business : Every partner has right to take part in, the conduct of the business of the firm., [Sec. 12(a)], 3. Right of access to Books : Every partner has a right to have access to and to, inspect any of the books of the firm., [Sec 12(d)], 4. Admission of a Minor : Though a minor cannot be a partner in a firm, but, with the, consent of all the partners, he may be admitted to the benefits of the firm. [Sec. 30], 5. Retirement of a Partner : A partner may retire from firm either with the consent of all, the partners or in accordance with an express agreement among the partners. [Sec 32], 6. Death of a Parnter : Unless otherwise agreed by the partners, a firm is dissolved, on the death of a partner., [Sec. 35], 2.7.4 Importance of Partnership Deed, Partnership Dead is important due to the following reasons :, 1. Regulates Various Aspects : Partnership deed regulates the rights, duties and, liabilities of the partners., 2. Defines Relationship : It defines relationship among the partners., 3. Avoids Misunderstanding and Confusions : A well-planned written, partnership deed helps in avoiding misunderstanding, confusions and conflicts amongst, the partners., 4. Basis for Settlement of Disputes : In case any dispute arises between the, partners, it may be settled easily by referring to the partnership deed because it provides, methods to resolve differences and similar other issues., 5. Facilitates Smooth Functioning : Partnership deed facilitates smooth, functioning of the firm., 6. Good Evidence : It is a good evidence in the Court., Is it Necessary to have a Partnership Deed ?, No. It is not necessary to have a partnership deed. The making of a partnership deed, is not compulsory., Is it Necessary to have the Partnership Agreement in Writing ?, No. The law does not require that the partnership agreement be in writing. However,, to avoid unnecessary harassment and unpleasantness among the partners in the event of, any dispute it is suggested that partnership agreement should be in writing., , 82
Page 97 :
Ac count ing for Part ner ship Firms : Fun da men tals, Is it Necessary to have the Partnership Deed Registered ?, No. It is not compulsory to get registered under the Indian Registration Act, 1908., But for the common benefit, the registration of Deed of Partnership is made under the, Indian Registration Act, 1908 because of apprehension of the Deed of Partnership being, destroyed or multilated in the possession of the partners. A deed of partnership is required, to be made out and registered under the Indian Registration Act, 1908 if the transfer of, immovable property together with other movable properties is involved., ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., , Details, , Practical Problem No., , 1(A), 1(B), , Provisions Applicable in the Absence of Partnership Deed, , 1, , 2 to 4, , Distribution of Profit/P/L Appropriation A/c, , 5 to 11, 12 to 18, , Fixed and Flctuating Capital, Interest on Partners Capital A/cs and Distribution of Profit, , 19 to 25, , Interest on Partners’ Drawings, , 26(A), 26(B), , Interest on Partners’ Loan, , 27, 28(A) to 30, , Rent paid to a Partner, Salary to Partners and Commission, , 31, , Commission to Manager, , 32, 33, 34, , Journal Entries relating to Appropriation, Interest on Capital, Commission and Transfer to Reserve, , 35, 36, , Distribution of Profit in Different Ways, , 37(A) to 42, 43 to 52, 53, , Guarantee of Profit to a New Partner, Past Adjustments, Final Accounts of Partnership, Boards’ Questions, , 53, , 2 to 4, 5, 6, 7, 8, 9, 10, 19, 11 to 18, 20, 21, 22 to 27, —, 28, 29, 30, 25, 26, 27, 31 to 34, 35 to 47, 48, 49 to 53, , Total, , 53, , Illustration 1(A) (In the Absence of Partnership Agreement), Mohan and Shyam are partners in a firm. State whether the claim is valid if the, partnership agreement is silent in the following matters :, (i) Mohan is an active partner. He wants a salary of ` 10,000 per year., (ii) Shyam had advanced a loan to the firm. He claims interest @ 10% per annum., (iii) Mohan has contributed ` 20,000 and Shyam ` 50,000 as capital. Mohan wants, that the profits to be shared equally., (iv) Shyam wants interest on capital to be credited @ 6% per annum., (U.S.E.B., 2016), Solution, (i) Not valid. Mohan is not entitled to any salary., (ii) Not valid. Shyam is entitled to interest @ 6% per annum., (iii) Valid. Partners have to share profits equally., (iv) Not valid. A partner is not entitled to any interest on capital., Illustration 1(B), X, Y and Z are partners. They do not have a partnership deed. At the end of the year, they have forwarded the following claims :, , 83
Page 98 :
SBPD Pub li ca tions Accountancy (XII), (i), , X and Z have contributed a larger amount of capital as compared to Y and, therefore, they want that the profits should be distributed in capital ratio to, which all partners agree., (ii) Z demands interest on loan of ` 2,00,000 advanced by him @ 10% p.a. to which, the partners agree., (iii) Y wants his son, M to join the firm and other partners agree to this., Keeping in view of provisions of the Partnership Act, 1932, settle each of the above, problems and give reasons., Solution, (i) Profits will be distributed in the ratio of their capital., Reason : In the absence of partnership deed and if there is a dispute among the, partners, profits, shall be shared equally. However in the present case, the other partners, do not have objections to this. So profits will be distributed in the ratio of capitals., (ii) Interest on loan will be paid @ 10% p.a., Reason : In the absence of partnership deed and if there being a dispute among the, partners, interest on loan is payable @ 6% p.a. However, in the present case, since all the, partners have agreed, interest will be paid @ 10% p.a., (iii) M will be admitted to the firm., Reason : Since all partners have agreed, M can be admitted into the firm., , 2.8 Partnership Accounts, The partnership business is based on the principles of mutual trust and faith., Therefore, for smooth and peaceful running of the firm, it is essential that the books of, accounts of the firm are maintained with transparency, honesty, integrity, accuracy and, equity., Usually, the double entry system of book-keepkng is followed to maintain partnership, accounts. Transactions of the partnership firm are recorded according to the principles of, double entry system and as in the case of sole proprietorship concern, a firm prepares, Trading Account, Profit and Loss Account and Balance Sheet at the end of every, accounting year. While preparing financial statements, a firm has to follow the provisions, of the Indian Partnership Act wherever necessary and when called for., The only difference between accounting of sole trading concern and that of the, partnership firm is that capital accounts of the partners have to be kept separately and the, profits of the firm are divided among the partners. For this purpose ‘Profits’ as per Profit &, Loss Account is transferred to Profit & Loss Appropriation Account., The main purpose of Profit & Loss Appropriation Account is to show how net profit,, after making appropriation for interest on capitals of partners, salary and/or commission, to partners, transfer to reserve, is to be distributed among the partners., In this Chapter, therefore, our focus of attention will be on the following issues :, 1. Division or Distribution of Profit among Partners., 2. Preparation of Profit & Loss Appropriation Account, 3. Partners’ Capital Accounts, 4. Interest on Partners’ Capital., 5. Interest on Partners’ Drawings., 6. Interest on Partners’ Loan., , 84
Page 99 :
Ac count ing for Part ner ship Firms : Fun da men tals, 7. Rent paid to a Partner., 8. Salary to Partners., 9. Commission to Partner., 10. Commission to Manager., 11. Transfer of Profit to Reserve A/c., 12. Past Adjustments : Adjustment after Closing of Accounts., 13. Guarantee of Profit., 2.8.1 Division or Distribution of Profit among Partners, ✪ Partnership is the result of an agreement between partners to carry on legal, business and to share profits or losses in an agreed ratio., ✪ In the absence of any agreement, profit or loss is shared equally among the, partners., ✪ Profit-sharing Ratio based on Capital : Profit or loss may be shared in capital, ratio if the partnership deed provides for it. Capital ratio depends on the nature of, capitals., ✪ Profit/loss is distributed among the partners through Profit and Loss Appropriation, Account. In other words, profits or loss should be distributed only when all the, appropriations have been made., ❏ Capital Ratio, Sometimes, partners decide to share profits and losses in the capital ratio. Hence,, there is a need to calculate capital ratio. Capital ratio depends on the nature of capitals., Following are the methods for calculating capital ratio :, (i) If partners maintain fixed capitals, capital ratio will be the ratio of their capitals, without making any adjustment. It is so because all adjustments are done through, current accounts of partners., (ii) If partners maintain fluctuating capitals, capital ratio will be calculated by, weighted average method or product method. The capital, after adjusting drawings or, introduction of fresh capital is multiplied by the months for which capital has been used, in the business. After adding the sum total of products of all partners, capital ratio is, calculated., 2.8.2 Profit and Loss Ap pro pri a tion Ac count, Profit and Loss Appropriation Account is an extension of Profit and Loss Account. It is, an account that shows appropriation or distribution of net profit (or loss) among the, partners., All the claims of partners in the form of interest on capital, salary, commission etc., are debited to this account and interest on drawings and net profit as per Profit and Loss, Account are credited to this account. The balance is distributed among the partners in, profit-sharing ratio., ❐ Fea tures of Profit and Loss Ap pro pri a tion Ac count, 1. It is an extension of Profit and Loss Account., 2. It is prepared by partnership firm., 3. The entries in this account are guided by the Partnership Deed or the, Partnership Act., 4. It discloses how the net profit for an accounting year has been appropriated., 5. It is a nominal account., , 85
Page 100 :
SBPD Pub li ca tions Accountancy (XII), 1. Before transferring net profit to Profit and Loss Appropriation Account, it should be seen, that ‘Interest on Partner’s Loan/Advance’ and ‘Rent Payable to Partner’ are adjusted, because they are ‘charge’ against profit. They should be shown in the Profit & Loss Account, itself., 2. Always remember that any amount payable to a partner (except interest on Loan and Rent, payable to a partner) such as Interest on Capital, Salary, Commission etc., is an, ‘appropriation’ of profit., , Following is the proforma or format of Profit and Loss Appropriation Account :, Dr., Format of Profit & Loss Appropriation Account, Cr., Particulars, To Profit & Loss A/c, (In case of Trading Loss before, Appropriation), To Interest on Capital :, `, A, ....., B, ....., C, ....., To Salary to Partner(s), To Commission to Partner(s), To Transfer to Reserve A/c, To Net Profit transferred to Partners’, Capital A/cs (or Current, A/cs) :, A, ....., B, ....., C, ....., , `, , ....., , ....., ....., ....., ....., , Particulars, By Profit and Loss A/c, (Net Profit before Appropriation), By Interest on Drawings :, `, A, ....., B, ....., C, ....., By Net Loss transferred to Partners’, Capital A/cs (or Current A/cs) :, A, ....., B, ....., C, ....., , ....., ....., , `, , ....., , ....., , ....., , ....., , Note : If the total of the debit side of the Profit & Loss Appropriation Account is more than that of the total of credit, side, then there will be net loss, which will be distributed among all partners in their profit-sharing ratio., , Difference between Profit & Loss A/c and Profit & Loss Appropriation A/c, , 1, , Basis of, Difference, Objective, , 2, , Preparation, , 3, , Items, , 4., , Matching, Principle, , 5., , Usage, , S.N., , 86, , Profit & Loss A/c, , Profit & Loss Appropriation A/c, , It is prepared to ascertain net, profit (or loss) made during a, period., It is prepared after Trading, Account and hence starts with, Gross Profit/Loss disclosed by, Trading Account., Items of incomes and expenses, which are charged against profit, are shown in P/L A/c., , It is prepared to distribute net, profit of the period among the, partners., It is prepared after Profit & Loss, A/c and hence starts with ‘Net, Profit/Loss' disclosed by Profit and, Loss Account., Items shown in this account are, appropriations such as interest on, capital and drawings, salary/, commission to partners etc., , While preparing this account,, matching principle (i.e., revenue is, matched against revenue) is, followed., It is prepared by all the business, concerns., , While preparing this account,, matching principle is not followed., It is prepared by partnership firms, only.
Page 101 :
Ac count ing for Part ner ship Firms : Fun da men tals, Journal Entries, Following are the Journal entries relating to Profit and Loss Appropriation Account :, (A) Under Fluctuating Capital System :, (1), , For transfer of balance of Profit & Loss A/c to (i) For Transfer of Credit Balance, P. & L. Appropriation A/c, (i.e. Profit), Profit and Loss A/c, Dr., To Profit & Loss Appropriation A/c, (Being transfer of profit to P. & L. App. A/c), , (ii) For transfer of debit balance (i.e., Loss), Profit & Loss Appropriation A/c, Dr., To Profit & Loss A/c, (Being Transfer of loss to P. & L. App. A/c), , (2), , For interest on capital, , (i) For allowing Interest, Interest on Capital A/c, To Partner's Capital A/c, , Dr., , (Being interest allowed on capital), , (ii) Transfer of Interest on Capital to, Profit & Loss Appropriation Account, Profit & Loss Appropriation A/c, Dr., To Interest on Capital A/c, (Being transfer of interest to P/L App. A/c), , Alternatively, Entries No. 1 & 2 may be, combined into one entry, that is :, Profit & Loss Appropriation A/c, Dr., To Partner's Capital A/c, (Being interest on capital allowed to partners), , (3), , For Interest on Drawings, , (i) For Charging Interest Partner's, Drawings A/c or, Partner’s Capital A/c, To Interest on Drawings A/c, , Dr., Dr., , (Being interest on drawings transferred to, Capital A/c), , (ii) For Transfer of interest on drawings into, Profit & Loss Appropriation Account, Interest on Drawings A/c, Dr., To Profit & Loss Appropriation A/c, (Being transfer of interest on drawings to P/L, App. A/c), , Alternatively, Entries No. 3 and 4 may be, combined into one entry, that is :, Partners' Capital A/c, Dr., To Profit & Loss Appropriation A/c, (Being interest on drawings charged), , (4), , For Partner’s Salary/Commission, , (i) For allowing Salary/Commission, Partner's Salary/Commission A/c, To Partner's Capital A/c, , Dr., , (Being Partner's Capital A/c credited with, salary), , 87
Page 102 :
SBPD Pub li ca tions Accountancy (XII), (ii) For transfer of Partner’s salary or, commission to Profit & Loss, Appropriation Account, Profit & Loss Appropriation A/c, To Partner’s Salary A/c, To Partner's Commission A/c, , Dr., , (Being transfer of partner's salary/commission, to P/L App. A/c), , (5), , For transfer to Reserve, , Profit and Loss Appropriation A/c, To Reserve, , Dr., , (6), , For transfer of Net Profit to Partners’ Capital Profit & Loss Appropriation A/c, Dr., A/c, To Partner's Capital A/c (Individually), , (Being transfer of profit to Reserve A/c), , (Being profit distributed amongst/between partners), , (7), , For transfer of Net Loss to Partners’ Capital, A/c, , Partner’s Capital A/c (Individually), To Profit & Loss Appropriation A/c, , Dr., , (Being Partner's Capital A/c with loss on, P/L Appropriation A/c), , (B) Journal Entries under Fixed Capital System : All entries will be the same, but Partner's Capital Account will be substituted by Partner's Current Account., Illustration 2 (In the Absence of Partnership Deed), Sajid and Wajid are two partners. Their Profit and Loss Appropriation Account was, as follows :, Dr., Cr., Particulars, To Salary :, `, Sajid, 18,000, Wajid, 24,000, To Interest on Capital @ 6% p.a. :, Sajid (on ` 1,00,000), 6,000, Wajid (on ` 1,50,000), 9,000, To Interest on Sajid’s Loan, @ 10% p.a. on ` 30,000, To Profit trans. to Capital A/cs :, Sajid (2/5), 40,000, Wajid (3/5), 60,000, , `, , Particulars, By Profit and Loss A/c (Profit), , `, , 1,60,000, , 42,000, , 15,000, 3,000, , 1,00,000, 1,60,000, , 1,60,000, , There is no Partnership Deed. Sajid feels that he has not been treated fairly. You are, required to prepare new Profit & Loss Appropriation Account according to the provisions, of Indian Partnership Act., Solution, Dr., Profit and Loss Appropriation Account, Cr., Particulars, To Profit trans. to Capital A/cs : `, Sajid (1/2 × 1,58,200), 79,100, Wajid (1/2 × 1,58,200), 79,100, , 88, , Particulars, By Profit & Loss A/c, `, (Profit), 1,60,000, 1,58,200, Less : Interest on Sajid’s, Loan @ 6%, 1,800, 1,58,200, `, , `, , 1,58,200, 1,58,200
Page 103 :
Ac count ing for Part ner ship Firms : Fun da men tals, Note : In the absence of Partnership Deed :, 1. No partner is entitled to any salary or commission., 2. Interest at the rate of 6% p.a. is to be allowed on a partner’s loan to the firm., 3. Profits and losses are to be shared equally., , Illustration 3 (Profit and Loss Appropriation Account), Reeta, Sudha and Jyoti are partners in a firm. On January 1, 2017 their capitals were, ` 40,000, ` 20,000 and ` 20,000 respectively. According to the partnership deed (i) Jyoti is, entitled to get salary of ` 2,000 per annum, (ii) Partners are entitled for 10% p.a. interest, on capital, (iii) Profit will be distributed in the capital ratio, Profit for the year 2017 was, ` 64,000. Prepare the Profit and Loss Appropriation Account., Solution, Profit and Loss Ap pro pri a tion Ac count, Dr., (for the year ending 31st De cem ber, 2017), Cr., Particulars, To Salary of Jyoti (` 2,000 × 12), To Interest on Capital :, `, Reeta, 4,000, Sudha, 2,000, Jyoti, 2,000, To Profit transferred to Reeta’s, Capital A/c, (` 32,000 × 2/4), 16,000, Sudha’s Capital A/c, (` 32,000 × 1/4), 8,000, Jyoti’s Capital A/c, (` 32,000 × 1/4), 8,000, , Particulars, , `, , 24,000 By Profit and Loss A/c (Net Profit), , `, , 64,000, , 8,000, , 32,000, 64,000, , 64,000, , Note : Profit Sharing Ratio = 40,000 : 20,000 : 20,000 = 2 : 1 : 1., , Illustration 4, A and B are partners in a firm sharing profits and losses equally. On 1st April, 2019, their capitals were ` 20,000 and ` 16,000 respectively. The net profit during the year, 2019-20 without charging interest on capital amounted to ` 10,000. Calculate the amount, to which each partner is entitled :, (a) When the interest on capital is not allowed., (b) When partnership deed allows interest at 5% p.a. from profits prior to division, thereof., Solution, (a) When Interest is not allowed on Capital :, Dr., Profit & Loss Appropriation Account, Cr., Particulars, , Amount, , Particulars, , `, , To Profit trans. to Capital A/cs : `, 1, A (10,000´ ), 5,000, 2, 1, B (10,000´ ), 5,000, 2, , Amount, `, , By Profit & Loss A/c (Net Profit), , 10,000, , 10,000, 10,000, , 10,000, , 89
Page 104 :
SBPD Pub li ca tions Accountancy (XII), Dr., , (b) When Interest is allowed on Capital @ 5% p.a. :, Profit & Loss Appropriation Account, Particulars, , Amount, , Cr., , Particulars, , Amount, , `, , To Interest on Capital A/cs :, `, A, 1,000, B, 800, To Profit trans. to Capital A/cs :, 1, A ( ´ 8,200), 4,100, 2, 1, B ( ´ 8,200), 4,100, 2, , `, , By Profit & Loss A/c (Net Profit), , 10,000, , 1,800, , 8,200, 10,000, , 10,000, , 2.8.3 Partners' Capital Accounts, There are two approaches to deal with partners' capital. Capital Account can be, maintained on the basis of fluctuating system or fixed system., Types of Capital Accounts, , Fluctuating, , Fixed, , Capital A/c, Capital Accounts, , Current Accounts, , (1) Fluctuating Capital, l Under Fluctuating Capital Method, only one account that is, Capital Account of each, , and every partner is maintained and all the adjustments relating to partners are, recorded in this account., l Under this system, capitals of partners do not remain fix but varies with each, , debit/credit entry. As a result, the balance in the Capital Account keeps on, changing. That is why it is called as fluctuating capital method., l The balance of this account may be either debit or credit., Thus under fluctuating capital method all entries pertaining to capital, addition of, capital or withdrawal of capital, drawings, interest on capital, interest on drawings, salary, or commission of partners, share of profit or loss are recorded in the Capital Account itself., Following is the proforma of Capital Account in case of fluctuating capital :, Dr., Cap i tal Ac count, Cr., Particulars, To Balance b/d, To Drawings, if any, To Cash/Bank A/c (Withdrawal of, Capital), To Interest on Drawings, , 90, , `, , Particulars, , `, , ....., ....., , By Balance b/d, By Cash/Bank A/c (Introduced), By Cash/Bank A/c (Additional Capital), By Interest on Capital, By Salary to Partners, , ....., ....., ....., ....., ....., , ....., .....
Page 105 :
Ac count ing for Part ner ship Firms : Fun da men tals, To P. & L. App. A/c (Share in Business, Loss), To Balance c/d (Bal. fig.), , ....., ....., ....., , By Commission, By P. & L. App. A/c (Share in Business, Profit), By Balance b/d, , ....., ....., ....., ....., , (2) Fixed Capital, Under this system, the amount of capital does not fluctuate during the entire life of, the firm. The capital remains fixed. To maintain the capital account on the basis of fixed, system, the firm opens Current Accounts of Partners. All the adjustments regarding share, in profits or losses, interest on capital, salary/commission to partners, drawings etc. are, made in the Current Account. The Capital Accounts show only the capital brought into the, firm by each partner. Therefore, in this system two accounts are maintained :, (a) Capital Account, (b) Current Account., Following is the proforma of Current Account and Capital Account in case of fixed capital :, Dr., Cur rent Ac count of Part ner, Cr., Particulars, To Drawings (Out of Capital), To Interest on Drawings, To Profit & Loss App. A/c (Share of, Losses), To Balance c/d (Bal. fig., if, credit side total is more), , `, , ....., ....., ....., ....., , Particulars, Balance b/d (if any), Interest on Capital, Salary, Commission, Profit & Loss App. A/c (Share of, Profit), By Balance c/d (Bal. fig., if debit, side total is more), By, By, By, By, By, , ....., , `, , ....., ....., ....., ....., ....., ....., ....., , Cap i tal Ac count, , Dr., Particulars, To Balance c/d (Bal. fig.), To Cash/Bank A/c, (Capital Withdrawn), , `, , ....., ......, , Cr., , Particulars, By Balance b/d (if any), or, By Cash/Bank/Property A/c, (Amount contributed initially on, starting of business), By Cash A/c (additions made to, capital), , ....., , `, , ....., , ....., ....., ....., , Credit balance of the Current Account is shown on the liability side of the Balance, Sheet and the debit balance of the Current Account is shown on the asset side of the, Balance Sheet. Both Capital and Current Accounts are shown in the Balance Sheet., 2.8.3.1 Distinction between Fixed Capital A/c and Fluctuating Capital A/c, S.No. Basis of Difference, 1., 2., , Fixed Capital Account, , Number of Accounts Two accounts are maintained for, each partner, i.e., Fixed Capital, Account and Current Account., Change in Capital The amount of capital contributed, Account, by each partner remains the same, except in certain cases., , Fluctuating Capital Account, Only one account, i.e., Capital, Account for each partner is, maintained., Under this system, Partner’s, Capital Accounts go on changing, from year to year., , 91
Page 106 :
SBPD Pub li ca tions Accountancy (XII), 3., , 4., , Treatment of Usual All adjustments relating to, Adjustments, drawings, interest on drawings,, interest, on, capital,, salary,, commission, profit and loss are, made in Current Account and not, in the fixed capital account., Closing Balance, Fixed Capital Account always, shows credit balance. Current, Account may show either credit or, debit balance., , All adjustments relating to, drawings, interest on drawings,, interest, on, capital,, salary,, commission, profit and loss are, made in capital account., Fluctuating Capital Account may, show credit or debit balance, , 2.8.3.2. Difference between Fixed Capital Ac count and Current Account, S.No. Basis of Difference, Fixed Capital Account, 1. Nature of Accounts Total capital of partners usually, remains fixed over a period of, years., 2. Capital, It shows the capital contributed by, Contribution, each partner., 3. Usual Adjustments It does not show usual adjustments viz., interest on capital and, drawings, salary, commission etc., 4. Balance, It always shows credit balance, when capital is fixed., , Current Account, The current account balance of, partners goes on changing from, time to time., It does not show capital, contribution., It, shows, all, the, usual, adjustments., It may have either credit or debit, balance., , Main Key Points to Re mem ber, l Following amounts are debited to the Current Account :, (i) Drawings, it may be in cash or kind,, (ii) Interest on drawings, if any,, (iii) Share of losses to the partners., l Following amounts are credited to the Current Account :, (i) Interest on capital, if any;, (ii) Salary or Commission received by the partner; and, (iii) Share of partner in profit., , 2.8.4 Calculation and Treatment of Interest on Capital, ❏ Cal cu la tion of In ter est on Part ners’ Cap i tal, Interest on capital is generally calculated on the opening balance of the capital for the, full year. Interest on capital is calculated at the given rate with reference to time period. If, any partner introduces additional capital during the year, the interest on additional, capital will be calculated for the period, it remained with the firm i.e., from the date of, introduction of additional capital to the last day of the accounting year., Amount of Capital ´ Rate of Interest ´ Time, Interest on Capital =, 100, Note : Time should be in year(s). Months and days should be converted into year., Capital´ Rate´ Months /Days, 100 ´ 12 /365, Note : No interest is allowed on the balances of Partners’ Current Accounts., , Interest on capital is calculated on the opening balance of partners’ capital. If opening, balance of capital is not given, opening balance of capital may be calculated as given, below :, Opening Balance of Capital, `, = Closing Balance of Capital, ´´´, Add : Drawings, ´´´, , 92
Page 107 :
Ac count ing for Part ner ship Firms : Fun da men tals, Add, Less, Less, Less, , :, :, :, :, , Interest on Drawings, Interest on Capital, Salary or Commission credited, Additional Capital introduced, Profit credited, Opening Balance of Capital, , ´´´, ´´´, ´´´, ´´´, ´´ ´, , ❏ Treatment of Interest, The total of interest on capital payable to all the partners has to be paid out of profit., Sometimes profit may not be sufficient to meet the obligation of interest on capital. In such, a situation, available profits shall be distributed between partners as interest on capital in, their capital ratio, if nothing is stated in the partnership deed, because interest on capital, is an appropriation of profit., If interest on capital is considered as a charge on profit, interest will be allowed and, the resultant loss shall be distributed among partners in profit and loss ratio., Thus, interest on capital may be treated as :, (i) An appropriation of profit, or, (ii) A charge against profit, if the partnership deed so provides., ❏ Accounting Treatment of Interest on Capital, Provision re lating to Interest on Capital, Case, Provision or Treatment, 1. If the partnership deed or agreement is silent 1. No interest on capital will be allowed., as to interest on capital., 2. If the partnership deed or agreement 2. Interest on capital will be allowed only if, provides for interest on capital but is silent as, there are profits [Sec. 13(c)]., to the treatment of interest as a charge or, (i) In case of profit before interest is equal, appropriation., to or more than the interest (i.e, profits, are sufficient) full interest on capital will, be allowed., (ii) In case profit before interest is less than, the interest (i.e, profits are insufficient), Interest will be allowed upto the amount, of profit and will be distributed in the, ratio of interest., (iii) In case of Loss : No interest on capital, will be allowed., 3. If the partnership agreement or deed 3. Interest on capital will be allowed whether, provides for interest on capital as a charge or, there is a profit or not., expense., , Journal Entries, 1. Adjusting Entry to Adjust Interest on Capital :, Interest on Capital A/c, Dr., To Partners’ Capital/Current A/c, 2. Closing Entry to Close Interest on Capital A/c :, Profit & Loss Appropriation A/c, Dr., To Interest on Capital A/c, Illustration 5 (When Opening Capital and Additions of Capital are given), A and B started business on 1.4.2019 with capitals of ` 60,000 and ` 40,000, respectively. During the year ended 31.3.2020 A introduced ` 10,000 to firm as additional, capital on 1.10.2019. They withdrew ` 500 p.m. for household expenses in lieu of profits., Interest on capital is to be allowed @ 10% p.a., Calculate the interest payable to A and B for the year ending 31.3.2020., , 93
Page 108 :
SBPD Pub li ca tions Accountancy (XII), Solution, , Interest Payable to A, , Interest on ` 60,000 for one year :, Interest on ` 10,000 for 6 months, (from 1.10.2019 to 31.3.2020) :, , 10,000 ´, , 6,000, , 10, 6, ´, 100 12, , Interest Pay able to B, Interest on ` 40,000 for one year :, , `, , 10, 60,000´, 100, , 40,000´, , 500, 6,500, , 10, 100, , ` 4,000, , Note : Drawings made by partners would not effect interest on capital., , Illustration 6, Rajendra Mohan and Radhey Mohan are partners and they had ` 40,000 and ` 60,000, in capital accounts as on 1st April, 2019 respectively. Rajendra Mohan paid in further, ` 5,000 on 1.11.2019 and another ` 6,000 on 15.2.2020., Compute the interest on capital to be allowed to partners assuming the rate of, interest to be 6% p.a., Solution, Interest Allowed to Rajendra Mohan, `, 6, Interest on ` 40,000 for one year :, 40,000 ´, 2,400, 100, Interest on ` 5,000 for 5 months (1.11.2019 to 31.3.2020) :, 6, 5, 5,000 ´, ´, 125, 100 12, Interest on ` 6,000 for 1, , 1, 2, , months, , 6, 3, ´, 45, 100 24, Total Interest, 2,570, Interest Allowed to Radhey Mohan, 6, Interest on ` 60,000 for one year :, 60,000 ´, ` 3,600, 100, Illustration 7 (When Opening Capitals are not given), Meenakshi and Ekta are partners in a firm. Their capital as on 31st March, 2020, were ` 3,60,000 and ` 2,50,000 respectively. During the year 2019-20, Meenakshi's, drawings and Ekta's drawings were ` 60,000 and ` 50,000 respectively. Profits (before, charging interest on capital) during the year were ` 2,40,000. Calculate interest on capital, @ 10% p.a. for the year ending 31st March, 2020., (15.2.2019 to 31.3.2020) :, , 6,000 ´, , Solution, To calculate interest on capital, it is necessary to ascertain capital as on 1st April,, 2019. It has been done as under :, Meenakshi, Ekta, `, , Capital as on 31st March, 2020, Add : Drawings during the year, Less : Profit for the year already distributed, Capital as on 1st April, 2019, , 94, , 3,60,000, 60,000, 4,20,000, 1,20,000, 3,00,000, , `, , 2,50,000, 50,000, 3,00,000, 1,20,000, 1,80,000
Page 109 :
Ac count ing for Part ner ship Firms : Fun da men tals, Interest on Capital payable to Meenakshi and Ekta :, 10, Meenakshi = 3,00,000´, = ` 30,000, 100, 10, Ekta = 1,80,000 ´, = ` 18,000, 100, Illustration 8(A) (Distribution of Profit and Preparation of Capital A/cs), A and B are partners in a firm, sharing profits and losses in the ratio of 3 : 2. They, have capital of ` 40,000 and ` 25,000 respectively. According to the partnership deed, they, are entitled to interest on capital @ 5% before dividing the profits. During the year the firm, earned profit of ` 3,900 before allowing interest. State how the profit will be divided, between partners and prepare Capital Accounts., (U.S.E.B., 2018), Solution, Dr., Profit and Loss Appropriation Account, Cr., Particulars, To Interest on Capital :, `, A, 2,000, B, 1,250, To Profit trans. to Capital A/cs :, A (650 ´ 3/5), 390, B (650 ´ 2/5), 260, , `, , Particulars, By Profit & Loss A/c (Profit), , `, , 3,900, , 3,250, , 650, 3,900, , 3,900, , Part ners' Cap i tal Ac counts, , Dr., Particulars, , A, `, , To Balance c/d, , B, , Particulars, , `, , Cr., A, , B, , `, , `, , 42,390, , 26,510 By Balance b/d, By Interest on Capital, By P/L Appropriation, A/c (Share of Profit), , 40,000, 2,000, , 25,000, 1,250, , 390, , 260, , 42,390, , 26,510, , 42,390, , 26,510, , Illustration 8(B), C and D are partners in a firm sharing profits and losses in the ratio of 3 : 2. They, have capital of ` 40,000 and ` 25,000 respectively. According to the partnership deed, they, are entitled to interest on capital 5% before dividing the profits. During the year the firm, earned profit of ` 3,900 before allowing interest. State how the profits will be divided, between partners and prepare Capital Accounts., (U.S.E.B., 2011), Solution, Partners are entitled to receive interest on capital. Therefore, interest on capital will, be shown as an appropriation and then the remaining net profit will be distributed in, profit-sharing ratio., Dr., Profit and Loss Appropriation Account, Cr., Particulars, To Interest on Capital A/cs :, C, D, , `, , `, 2,000, 1,250, , Particulars, By Profit and Loss A/c, (Profit before Appropriation), , `, , 3,900, , 3,250, , 95
Page 110 :
SBPD Pub li ca tions Accountancy (XII), To Profit transferred to Capital A/cs :, C, 390, , D, , 260, , 650, 3,900, , 3,900, , Part ners’ Cap i tal Ac counts, , Dr., Particulars, , C, , D, , `, , To Balance c/d, , Particulars, , `, , 42,390, , 42,390, , Cr., C, `, , 26,510 By Balance b/d, By Interest on Capital, By P/L Appropriation, A/c (3 : 2), 26,510, , D, `, , 40,000, 2,000, , 25,000, 1,250, , 390, 42,390, , 260, 26,510, , Illustration 9 (When interest is a charge and profits are not sufficient), Chhavi and Nidhi are partners in a firm, sharing profits in the ratio of 3 : 2. Their, capitals as on 1st April, 2019 were ` 2,10,000 and ` 1,50,000 respectively. The partnership, deed provides interest on capital @ 10% p.a. The profit of the firm before interest for the, year ended 31st March, 2020 is ` 30,000. Show the distribution of profits :, (a) If there is an agreement that the interest on capital will be allowed even if it, involves loss to the firm, and, (b) If the deed is silent as to the treatment of interest as a charge or appropriation., Solution, Dr., (a) Profit and Loss Appropriation Ac count, Cr., Particulars, To Interest on Capital A/c :, Chhavi, Nidhi, , Particulars, By Net Profit, By Loss transferred to Capitals : `, 36,000, Chhavi, 3,600, Nidhi, 2,400, 36,000, `, , `, , 21,000, 15,000, , `, , 30,000, , 6,000, 36,000, , Interest on Capital :, `, , 10, = 21,000, 100, 10, Nidhi = ` 1,50,000 ´, = 15,000, 100, Total Interest = 36,000, (b) Since profit available is less than total interest on capital, available profit would, be distributed in the ratio of capital, i.e., 2,10,000 : 1,50,000 i.e., 7 : 5., Dr., Profit and Loss Appropriation Account, Cr., Chhavi = ` 2,10,000 ´, , Particulars, To Interest on Capital :, Chhavi (7/12 ´ 30,000), Nidhi (5/12 ´ 30,000), , 96, , `, `, , 17,500, 12,500, , 30,000, 30,000, , Particulars, By Profit & Loss A/c (Profit), , `, , 30,000, , 30,000
Page 111 :
Ac count ing for Part ner ship Firms : Fun da men tals, Illustration 10 (Recording in Capital and Current Accounts), If a firm is maintaining both ‘Capital Account’ and ‘Current Account’ of partners A, and B, where will the following be recorded :, (a) Commission payable to A,, (b) Drawings made by B,, (c) Salary payable to A,, (d) Fresh capital introduced by B,, (e) Share of profit earned by A and B., Solution, (a) Credit side of A's Current Account., (b) Debit side of B's Current Account., (c) Credit side of A's Current Account., (d) Credit side of B's Capital Account., (e) Credit side of Current Accounts of A and B., Illustration 11 (Fluctuating Capital Method), Prepare the Capital Accounts of the partners from the following particulars,, assuming that fluctuating capital method is followed :, Akanksha, Priyanshu, `, , `, , Capital (as on 1.4.2018), 1,00,000, Drawings, 10,000, Salary, 12,000, Commission, —, Interest on Capital, 5,000, Interest on Partner’s Loan, 3,000, Interest on Drawings, 600, Share in profit during the year 2018-19, 12,000, Solution, Dr., Part ners’ Cap i tal Ac counts, Date, , Particulars, , 2019, Mar. 31 To Drawings, To Interest on, Drawings, To Balance c/d, , Akanksha Priyanshu, `, , 10,000, 600, 1,18,400, , 1,29,000, , Date, , Particulars, , 2018, Apr. 1 By Balance b/d, 2019, 300 Mar. 31 By Salary A/c, 1,00,700, By Commission, A/c, By Interest on, Capital A/c, By P.& L. App., A/c (Profit), 1,06,000 2019, Apr. 1 By Balance b/d, `, , 5,000, , 80,000, 5,000, 6,000, 8,000, 4,000, —, 300, 8,000, Cr., , Akanksha Priyanshu, `, , `, , 1,00,000, , 80,000, , 12,000, , 6,000, , —, , 8,000, , 5,000, , 4,000, , 12,000, 1,29,000, 1,18,400, , 8,000, 1,06,000, 1,00,700, , Illustration 12, Sameer and Yashmin are partners with capitals of ` 15,00,000 and ` 10,00,000 respectively. They agree to share profits in the ratio of 3 : 2. Show how the following transactions, will be recorded in the capital accounts of the partners in case : (i) the capitals are fixed, and, in case (ii) the capitals are fluctuating. The books are closed on December 31 every year :, , 97
Page 112 :
SBPD Pub li ca tions Accountancy (XII), Particulars, , Sameer, `, , Additional Capital Contributed on July 1, 2019, Interest on Capital, Drawings (during 2019), Interest on Drawings, Salary, Commission, Share in Loss for the year 2019, , Particulars, , J., F., , 2019, Dec. 31 To Balance c/d, , `, , 3,00,000, 5%, 30,000, 1,800, 20,000, 10,000, 60,000, , Sameer, , Yashmin, , Date, , `, , `, , 2019, , Particulars, , 18,00,000 12,00,000 Jan. 1 By Balance b/d, July 1 By Cash A/c, (Additional, Capital), 18,00,000 12,00,000, , 2,00,000, 5%, 20,000, 1,200, —, 7,000, 40,000, , (N.C.E.R.T.), , Solution, (i) When the Capitals are Fixed :, Dr., Part ners’ Cap i tal Ac counts, Date, , Yashmin, , Cr., J., F., , Sameer, , Yashmin, , `, , `, , 15,00,000 10,00,000, , 3,00,000, , 2,00,000, , 18,00,000 12,00,000, , Part ners’ Current Ac counts, , Dr., Particulars, 2019, , Sameer, `, , To Drawings, , 30,000, , Yashmin, , Particulars, 2019, , `, , 20,000 By Interest on Capital, , To Interest on Drawings, , 1,800, , 1,200 By Partner's Salary, , To Profit and Loss App., A/c (Loss), , 60,000, , 40,000, , 31.12.2019, To Balance c/d, , 20,700, , 800, , 1,12,500, , 62,000, , By Commission, , Working Note :, Calculation of Interest on Capitals :, Sameer :, , Yashmin :, , 5, 100, 5, 6, 5% on ` 3,00,000 for 6 months = 3,00, 000 ´, ´, 100 12, 5% on ` 15,00,000 for 1 year = 15, 00,000 ´, , 5, 5% on ` 10,00,000 for 1 year = 10, 00, 000 ´, 100, 5, 6, 5% on ` 2,00,000 for 6 months = 2, 00,000 ´, ´, 100 12, , Cr., Sameer, , Yashmin, , `, , `, , 82,500, , 55,000, , 20,000, , —, , 10,000, , 7,000, , 1,12,500, , 62,000, , `, 75,000, 7,500, 82,500, 50,000, 5,000, 55,000, , 98
Page 113 :
Ac count ing for Part ner ship Firms : Fun da men tals, (ii) When Capitals are Fluctuating :, , Part ners' Capital Ac counts, , Dr., Date, , J., F., , Particulars, , 2019, Dec. 31 To Drawings, Dec. 31 To Int. on, Drawings, Dec. 31 To Profit & Loss, App. A/c, Dec. 31 To Balance c/d, , Sameer, , Yashmin Date, , Particulars, , `, 2019, 20,000 Jan. 1 By Balance b/d, July 1 By Bank A/c, 1,800, 1,200 Dec. 31 By Interest on, Capital, 60,000, 40,000, By Salary, 18,20,700 12,00,800, By Commission, , Cr., J., F., , Sameer, , `, , 30,000, , 19,12,500 12,62,000, , Yashmin, , `, , `, , 15,00,000 10,00,000, 3,00,000 2,00,000, 82,500, 20,000, 10,000, , 55,000, —, 7,000, , 19,12,500 12,62,000, , Illustration 13, A and B are partners sharing profits in the ratio of 3 : 2 with capitals of ` 4,00,000 and, ` 3,00,000 respectively. Interest on capital is agreed @ 5% p.a. B is to be allowed an annual, salary of ` 60,000 which has not been withdrawn. During 2019 the profit for the year prior, to calculation of interest on capital but after charging B’s salary amounted to ` 2,40,000. A, provision of 5% of the profit is to be made in respect of commission to the manager., Prepare an account showing the appropriation of profits., Solution, , Profit and Loss Account, (for the year ended 31st De cem ber, 2019), , Dr., Particulars, , `, , To Manager’s Commission A/c, (@ 5% on ` 3,00,000), To Net Profit transferred to P. & L., App. A/c, , 15,000, , Particulars, By Profit, (` 2,40,000 + 60,000), , 2,85,000, 3,00,000, , Cr., `, , 3,00,000, , 3,00,000, , Profit and Loss Appropriation Account, (for the year ended 31st De cem ber, 2019), , Dr., Particulars, , To B’s Salary A/c, To Interest on Capital :, `, A, 20,000, B, 15,000, To Net Profit transferred to :, A’s Capital A/c, 1,14,000, B’s Capital A/c, 76,000, , `, , Particulars, , 60,000 By Net Profit transferred from, Profit & Loss A/c, , Cr., `, , 2,85,000, , 35,000, , 1,90,000, 2,85,000, , 2,85,000, , Notes : 1. Manager’s Commission is a charge against the profit. Hence, it is to be provided before, , an appropriation (i.e., partner’s salary and interest on capital., 2. As the Profit is given after adjustment of B’s Salary. Therefore Salary of B shall be added, back for actual profit., , 99
Page 114 :
SBPD Pub li ca tions Accountancy (XII), Illustration 14 (Profit and Loss Appropriation A/c and Journal Entry of, Profit Distribution), Chandra and Nandini are partners with capitals of ` 3,00,000 and ` 2,00,000, respectively. They share half profit of the firm in the capital ratio and the balance of profit, is distributed equally. At the end of the year, profit of the firm amounted to ` 1,00,000., Prepare profit and Loss Appropriation Account and also give the journal entry of profit, distribution., Solution, Profit and Loss Ap pro pri a tion Ac count, Dr., (for the year ended.......), Cr., Particulars, To Chandra’s Capital A/c :, (` 50,000 × 3/5), (` 50,000 × 1/2), To Nandini’s Capital A/c :, (` 50,000 × 2/5), (` 50,000 × 1/2), , Particulars, , `, , `, , By Profit & Loss A/c, (Profit for the year), , `, , 30,000, 25,000, , 1,00,000, , 55,000, , 20,000, 25,000, , 45,000, 1,00,000, , 1,00,000, , Jour nal En try, , Dr., Date, , Cr., , Particulars, , L.F., , Profit & Loss Appropriation A/c, , Dr., , Amount, , Amount, , `, , `, , 1,00,000, , To Chandra’s Capital A/c, , 55,000, , To Nandini’s Capital A/c, , 45,000, , (Being profit distributed between the partners), , Illustration 15 (Distribution of Profit in Capital Ratio), Golu and Polu entered into a partnership on 1st April, 2019 with ` 20,000 and, ` 10,000 as capitals respectively. Golu made an addition of ` 5,000 to the capital on, 1.8.2019 while Polu withdrew ` 2,000 on 1-12-2019. The business earned ` 28,000 during, the year ended on March 31, 2020. Distribute the profits in capital ratio and pass Journal, entry for the distribution of profit., Solution, Calculation of Cap i tal Ra tio, Total Cap ital Employed by Golu, Date, , Capital (` ), , Months for which Capital Used, , Product, , 1.4.2019, , 20,000, , April to July = 4, , 80,000, , 1.8.2019, , 25,000 (` 20,000 + 5,000), , Aug. to Mar. = 8, , 2,00,000, 2,80,000, , Total, , Total Cap ital Employed by Polu, Date, 1.4.2019, 1.12.2019, , Capital (` ), , Months for which Capital Used, , 10,000, , April to Nov. = 8, , 8,000 (` 10,000 – 2,000), , Dec. to Mar. = 4, Total, , 100, , Product, 80,000, 32,000, 1,12,000
Page 115 :
Ac count ing for Part ner ship Firms : Fun da men tals, Capital Ratio between Golu and Polu = 2,80,000 : 1,12,000 = 5 : 2, 5, Golu’s Share in Profit = 28,000 ´ = ` 20,000, 7, 2, Polu’s Share in Profit = 28,000 ´ = ` 8,000, 7, Journal Entry, Dr., Date, , Particulars, , L.F. Amount, `, , 31.3.2020 Profit and Loss Appropriation A/c, To Golu’s Capital A/c, , Dr., , Cr., Amount, `, , 28,000, 20,000, , To Polu’s Capital A/c, , 8,000, , (Being profit distributed in capital ratio), , Illustration 16 (Distribution of Profit in Capital Ratio), On 1.4.2019 Chintu and Pintu started a business with capital of ` 20,000 and ` 10,000, respectively. They agree to share profits in the capital ratio. Chintu further introduced, ` 10,000 on 1.9.2019 and withdrew ` 10,000 on 1.1.2020. Pintu further introduced ` 10,000, on 1.10.2019 and withdrew ` 5,000 on 1.2.2020., During the year ended 31.3.2020, the business earned a net profit of ` 45,000., Prepare Profit and Loss Appropriation Account., Solution, Calculation of Cap i tal Ra tio, Capital Employed by Chintu, Date, 1.4.2019, 1-9-2019, 1.1.2020, , Capital (` ), , Months for which Capital Used, , 20,000, 30,000 (` 20,000 + 10,000), 20,000 (` 30,000 – 10,000), , (April to Aug.) 5, (Sept. to Dec.) 4, (Jan. to Mar.) 3, Total, , Product, 1,00,000, 1,20,000, 60,000, 2,80,000, , Capital Employed by Pintu, Date, 1.4.2019, 1-10-2019, 1.2.2020, , Capital (` ), , Months for which Capital Used, , 10,000, 20,000 (` 10,000 + 10,000), 15,000 (` 20,000 – 5,000), , (April to Sept.), (Oct. to Jan.), (Feb. to Mar.), , 6, 4, 2, Total, , Product, 60,000, 80,000, 30,000, 1,70,000, , Capital Ratio : Chintu : Pintu = 2,80,000 : 1,70,000 = 28 : 17, Profit and Loss Appropriation Account, Dr., (for the year ended 31st March, 2020), Particulars, To Profit transferred to Chuntu’s, Capital A/c, æç, 28÷ö, ççè45,000 ´ ÷÷ø, 45, , Amount, `, , Particulars, By Profit & Loss A/c, (Profit for the year), , Cr., Amount, `, , 45,000, , 28,000, , 101
Page 116 :
SBPD Pub li ca tions Accountancy (XII), To Pintu’s Capital A/c, æç, 17÷ö, ççè45,000 ´ ÷÷ø, 45, , 17,000, 45,000, , 45,000, , Illustration 16(A), Anand, a sole trader, having a capital of ` 10,000 on 1.4.2019 admitted Niraj on, 30.6.2019 as a partner. Niraj paid ` 8,000 as capital. On 30.9.2019 Anand and Niraj, invested additional capital of ` 5,000 and ` 4,000 respectively. On 1.12.2019 they admitted, Mukul who paid in ` 12,000 as capital. On 31.1.2020 Anand and Niraj withdrew ` 3,000, and ` 2,000 respectively. The partners agreed to share profits and losses in capital ratio., Profit for the year 2019-20 amounted to ` 12,780. Calculate profit-sharing ratio and, prepare the P/L Appropriation Account and Capital Accounts., Solution, Investment of Capitals in terms of month :, `, Anand : ` 10,000 for 12 months (10,000 ´ 12) (for 1 month), 1,20,000, Add : ` 5,000 for 6 months (5,000 ´ 6) (for 1 month), 30,000, 1,50,000, Less : Drawings of ` 3,000 for 2 months (3,000 ´ 2), 6,000, Capital for one month, 1,44,000, Niraj : ` 8,000 for 9 months (8,000 ´ 9) (for 1 month), 72,000, Add : ` 4,000 for 6 months (4,000 ´ 6) (for 1 month), 24,000, 96,000, Less : Drawings of ` 2,000 for 2 months (2,000 ´ 2), 4,000, Capital for one month, 92,000, Mukul : ` 12,000 for 4 months (12,000 ´ 4) (for 1 month), 48,000, Profit-sharing Ratio on the basis of Capital Employed :, Anand, Niraj and Mukul = 1,44,000 : 92,000 : 48,000 = 36 : 23 : 12, Profit & Loss Appropriation Account, Dr., (for the year ending 31st March, 2020), Cr., Particulars, , Amount, , Particulars, , `, , To Net Profit transferred to, Capital A/c :, æ, 36 ö÷, Anand çç12,780 ´, ÷, çè, 71 ÷ø, , `, , By P. & L. A/c (Net Profit), , 12,780, , `, , 6,480, , æ, 23ö÷, Niraj çç12,780 ´, ÷, çè, 71 ÷ø, , 4,140, , æ, 12÷ö, Mukul çç12,780 ´, ÷, çè, 71÷ø, , 2,160, , 12,780, 12,780, , 102, , Amount, , 12,780
Page 117 :
Ac count ing for Part ner ship Firms : Fun da men tals, Illustration 17, What entries will be passed to record the following transactions in the books of the, firm of A and B before distributing the profits earned :, (a) Interest on Capital, A, ` 3,000, B, ` 2,000, (b) Interest on Drawings, A, `, 800, B, ` 1,000, Solution, Jour nal En tries, Dr., Cr., Date, , Particulars, , L.F., , Amount, , Amount, , `, , Profit and Loss Appropriation A/c, To A's Capital A/c, To B's Capital A/c, , Dr., , `, , 5,000, 3,000, 2,000, , (Being interest on capital to partners A and B), , A's Capital A/c, B's Capital A/c, To Profit and Loss Appropriation A/c, , Dr., Dr., , 800, 1,000, 1,800, , (Being interest on drawings charged from partners A and B), , Illustration 18, L, M and N are partners in a firm sharing profit in the ratio of 3 : 4 : 5. Their fixed, capitals were ` 4,00,000, ` 5,00,000 and ` 6,00,000 respectively., The partnership deed provides for the following :, (i) Interest on capital @ 6% p.a., (ii) Salary of ` 30,000 p.a. to N, (iii) Interest on, partner’s drawings @ 12% p.a., During the year ended 31.12.2018 the firm earned a profit of ` 2,70,000. L withdrew, ` 10,000 on 1.4.2018, M withdrew ` 12,000 on 30.9.2018 and N withdrew ` 15,000 on, 30.6.2018., Prepare Profit and Loss Appropriation Account for the year ended 31.12.2018., Solution, Profit and Loss Ap pro pri a tion Ac count, Dr., (for the year ended 31st De cem ber, 2018), Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Interest on Caital A/c :, L, M, N, To N’s Salary A/c, To Profit transferred to Current, A/cs :, `, L (3/12), 38,040, M (4/12), 50,720, N (5/12), 63,400, , By Profit (during the year), 24,000 By Interest on Drawings :, 30,000, L, 36,000, M, 30,000, N, , 1,52,160, 2,72,160, , `, , 2,70,000, `, , 900, 360, 900, , 2,160, , 2,72,160, , 103
Page 118 :
SBPD Pub li ca tions Accountancy (XII), Working Note :, Calculation of Interest on Drawings :, 12, 9, L : 10,000 ×, ´, = ` 900, 100 12, 12, 3, M : 12,000 ´, ´ = ` 360, 100 12, 12, 6, N : 15,000 ´, ´, = ` 900, 100 12, , Distribution of Profit :, 3, L = 1,52,160 ´ = ` 38,040, 12, 4, M = 1,52,160 ´ = ` 50,720, 12, 5, N = 1,52,160 ´ = ` 63,400, 12, , ❏ Partners’ Drawings, Meaning of Drawings : Drawings means the amount withdrawn in cash or kind for, personal expenses or domestic use. According to Oxford Dictionary of Accounting,, “Drawings means assets (cash or goods) withdrawn from an unincorporated business by, its owner.” Drawings are shown in a Drawings Account, which is used, for example, by, partners in a partnership firm., Types of Drawings : Drawings may be against profit or against capital. Thus, we have :, (i) Withdrawal of capital : Drawings against capital., (ii) Withdrawal in anticipation of profit : Drawings against expected profits., The amount of drawings is transferred to Partner’s Capital Account (where capital, is fluctuating) or Partner’s Current Account (where capital is fixed)., Journal Entries :, (i) Partner’s Drawings A/c, Dr., To Cash/Bank/Purchases A/c, (ii) Partner’s Capital/Current A/c, Dr., To Partner’s Drawings A/c, If a partner has withdrawn for meeting his personal needs (other than the domestic, needs), it is called partner’s drawings against capital., Journal Entry :, Partner’s Capital A/c, Dr., To Cash/Bank A/c, (For drawings against capital of a partner), , Difference between Drawings against Profits and, Drawings against Capital, S.N., 1., 2., 3., 4., , Basis of, Difference, Part, Debit, Effect on, Capital, Interest on, Capital, , Drawings against Capital, , Drawings against Profits, , It is part of partners’ capital., It is debited in Partner’s Capital, Account., It reduces partner’s capital., , It is part of expected profit of the firm, It is debited in Partner’s Drawings, Account., It does not reduce partner’s capital., , While calculating interest on capital, While calculating interest on capital,, it is necessarily considered., it is not taken into consideration., , Interest on partners drawings is charged only when the partnership deed provides for, the same., 2.8.5. Interest on Partners’ Drawings, ❐ Interest on Partner’s drawings can be charged only when it is clearly, mentioned in Partnership Deed, Interest on drawings is a gain to the firm and loss to the partner. Hence, Partner’s, Capital A/c (in case of Fluctuating Capital) or Current A/c (in case of Fixed Capitals) is, debited and Profit and Loss Appropriation A/c is credited., , 104
Page 119 :
Ac count ing for Part ner ship Firms : Fun da men tals, (i), , For Charging Interest on Drawings :, Partner’s Capital/Current A/c, Dr., To Interest on Drawings A/c, (ii) For Closure of Interest on Drawings A/c :, Interest on Drawings A/c, Dr., To Profit and Loss Appropriation A/c, ❐ Calculation of Interest on Drawings, l Interest on drawings is charged only when the partnership deed provides for the, same., l It is computed at the rate of interest mentioned in the ‘Partnership Deed’ with, reference to time period., l It is appropriation of Profits., Methods of Calculation of Interest on Drawings when Unequal Amount is, drawn on Different Dates : There are two methods for calculating interest on drawings :, 1. Simple Method, 2. Product Method, 1. Simple Method : When partners withdraw unequal amounts and at unequal time, intervals, then interest on drawings can be calculated either by simple method or product, method. Under simple method, calculation of interest on each single drawing is made for, the period the amount has been utilised. For this the following formula is used :, Interest on Drawings = Amount withdrawn ×, *In case of days, , No. of Days, 365, , Rate of Interest No. of Months *, ´, 100, 12, , 2. Product Method : Under this method, the following process is adopted :, Step (i) : First of all we calculate the period/months of each drawings (i.e., from the, date of drawings to the closing date of accounting year)., Step (ii) : Then each amount of drawing is multiplied by its period (i.e., days or, month as the case may be) as calculated in Step (i)., Step (iii) : Thereafter, the different products are added to find out ‘Total Product’., Step (iv) : Lastly, interest is calculated on the total products for one month at the, prescribed rate., Formula :, Rate of Interest 1, Interest on Drawings = Total Products ´, ´, *, 100, 12, 1, *In case of day, 365, Illustration 19 (Interest on Drawings of Unequal Monthly Amount), Hasan is a partner in a firm. He withdraws the following amounts during the, year 2017 :, `, February, 1, 4,000, May, 1, 10,000, June, 30, 4,000, October, 31, 12,000, December 31, 4,000, 1, Interest on drawings is to be charged @ 7 % p.a., 2, Calculate the amount of interest to be charged on Hasan's drawings for the year 2017., (N.C.E.R.T.), , 105
Page 120 :
SBPD Pub li ca tions Accountancy (XII), Solution, , (i) Simple Interest Method, , Date, , Amount (` ), , February, May, , Months upto December 31, , 1, Interest @ 7 % (` ), 2, , 1, , 4,000, , 11, , 275, , 1, , 10,000, , 8, , 500, , 30, 31, , 4,000, 12,000, , 6, 2, , 150, 150, , December 31, , 4,000, , —, , —, , June, October, , 34,000, , Al ter na tive Method :, Date, , 1,075, , (ii) Product Method, Amount (` ), , Period in Months, , Product, , February, , 1, , 4,000, , 11, , 44,000, , May, , 1, , 10,000, , 8, , 80,000, , June, , 30, , 4,000, , 6, , 24,000, , October, , 31, , 12,000, , 2, , 24,000, , December 31, , 4,000, , —, , —, , 34,000, , 1,72,000, , Rate, 1, ´, 100, 12, 15, 1, = 1,72,000 ´, ´, = ` 1,075, 2 ´ 100 12, When the Rate of In ter est is Si lent about per an num (p.a.), or, If In ter est on Draw ings is to be Cal cu lated for the Full year, with out Ref er ence, to Time Factor (i.e., period), In this case, interest is charged for the full year, irrespective of the date and month of, the withdrawal., Rate of Interest, Formula : Interest on Drawings = Amount of Drawings ´, 100, Illustration 20, M, N and O are partners in a firm. M withdrew ` 10,000 during the year ending 31st, March, 2018, N withdrew ` 10,000 in the month of May, 2017 and O withdrew ` 20,000 on, March 1, 2018. As per the partnership deed, interest on drawings is to be charged @ 10%., Find the interest on drawings., Solution, Since the interest on drawings is charged @ 10% without reference per annum, it will, be calculated without reference to time factor., Rate of Interest, Interest on Drawings = Amount of Drawings ´, 100, 10, 10, M = 10,000 ´, = ` 1,000, N = 10,000 ´, = ` 1,000,, 100, 100, 10, O = 20,000 ´, = ` 2,000, 100, Interest on Drawings = Total Product ´, , 106
Page 121 :
Ac count ing for Part ner ship Firms : Fun da men tals, ❏ Rules for Drawings Mode, If date of drawings is not mentioned :, In this case it should be presumed that the drawings are made evenly throughout the, year. Accordingly, the interest on drawings should be calculated on whole of the amount, for the average period, i.e., 6 months. In this case it is assumed that the amount is, withdrawn in the middle of every month., 12, So, the Average Period = Total Months ¸ 2, i.e.,, = 6., 2, Interest on Drawings = Amount Withdrawn ´, , Rate of Interest 6, ´, 100, 12, , Illustration 21, A and B are partners in a firm. They share profits and losses in the ratio of 3 : 2. As, per their partnership agreement, interest on drawings is to be charged @ 10% p.a. Their, drawings during 2017 were ` 24,000 and ` 16,000 respectively. Calculate interest on, drawings based on the assumption that the amounts withdrawn are even throughout the, year., (N.C.E.R.T.), Solution, , Calculation of Interest on Drawings, , Particulars, Drawings, Rate of Interest on Drawings, Interest on Drawings, , A, , B, , ` 24,000, , ` 16,000, , 10% p.a., 10, 6, ` 24,000´, ´, 100 12, = ` 1,200, , 10% p.a., 10, 6, ` 16,000´, ´, 100 12, = ` 800, , ❏ Rules for Drawings made on Monthly Basis, If the withdrawals are of equal amounts and are made at regular interval of time on, the monthly basis throughout the year, interest on drawings can be calculated on total, amount withdrawn (i.e., monthly drawing × No. of months) for the average of the periods, applicable to first and last instalments., Average Period = (No. of months left after first drawing + No. of months left after last, drawing) ¸ 2, Rate Average Periods, Interest = Total Drawings ´, ´, 100, 12, (i) If drawings are made by the partners on the first day of every month on regular, basis and the amount of drawing is the same, interest on total amount of drawings would, 1, be calculated for (6.5 months or 6 months)., 2, Thus, Interest on Drawings = Total Amount of Drawings´, Average Period =, , Rate of Interest 6.5, ´, 100, 12, , Time Left after First Drawing + Time Left after Last Drawing, 2, , 12 months + 1 month, 1, = 6 months, 2, 2, (ii) If drawings are made by the partners on the last day of every month on regular, basis and the amount of drawings is the same, interest on total amount of drawings would, be calculated for 5.5 months. Thus,, For example, In case of (i) above,, , 107
Page 122 :
SBPD Pub li ca tions Accountancy (XII), Interest on Drawings = Total Amount of Drawings´, Average Period =, In case of (ii),, , Rate of Interest 5.5, ´, 100, 12, , Time Left after First Drawing + Time Left after Last Drawing, 2, , 11 months + 0 month, 1, = 5 months, 2, 2, , (iii) If drawings are made by the partners in the middle of every month or evenly, throughout the year, interest on total amount of drawings would be calculated for 6, months. Thus,, Interest on Drawings = Total Amount of Drawings´, , Rate of Interest 6, ´, 100, 12, , Illustration 22, Menon and Thomas are partners in a firm. They share profits and losses equally., Their monthly drawings are ` 2,000 each. Interest on drawings is to be charged @ 10% p.a., Calculate interest on Menon's drawings for the year 2019 assuming drawings are made, (i) in the beginning of every month, (ii) in the middle of every month, and (iii) at the end of, every month., (N.C.E.R.T.), Solution, , Monthly Drawings = ` 2,000 each month, Total Amount of Drawings = ` 24,000 (12 ´ 2,000), Rate of Interest = 10%, (1) When Drawings are made at the beginning of each month :, 1, 6, Rate, Interest on Drawings = Total Drawings ´, ´ 2, 100 12, 1, 6, 10, = ` 24,000´, ´ 2, 100 12, = ` 1,300, (2) When the drawings are made in the middle of every month :, Rate 6, Interest on Drawings = Total Drawings´, ´, 100 12, 10, 6, = ` 24,000´, ´, 100 12, = ` 1,200, (3) When drawings are made at the end of each month :, 1, 5, Rate, Interest on Drawings = Total Drawings´, ´ 2, 100 12, 1, 5, 10, = ` 24,000´, ´ 2, 100 12, = ` 1,100, , 108
Page 123 :
Ac count ing for Part ner ship Firms : Fun da men tals, 3. Rules for Quarterly Drawings :, (i) Interest on Drawings, if withdrawn at the beginning of every quarter :, Interest on Drawings = Total Drawings ´, , Rate 7.5, ´, 100 12, , ], , Average Period =, , Time Left after First Drawing + Time Left after Last Drawing, 2, 12 months + 3 months, 1, = 7 months, 2, 2, , (ii) Interest on Drawings, if withdrawn at the end of each quarter :, Interest on Drawings = Total Drawings ´, Average Period =, , Rate 4.5, ´, 100 12, , Time Left after First Drawing + Time Left after Last Drawing, , 2, 9 months + 0 month, 1, = 4 months, 2, 2, (iii) Interest on Drawings made in the middle of each quarter :, Interest on Drawings = Total Drawings ´, , Rate 6, ´, 100 12, , Average Period = (10.5 + 1.5) months ¸ 2 = 6 months, Illustration 23, Calculate the interest on drawings of Mr. Sharma @ 10% p.a. for the year ended 31st, March, 2020 in each of the following cases :, Case (a) : If he withdrew ` 6,000 in the beginning of each quarter., Case (b) : If he withdrew ` 6,000 at the end of each quarter., Case (c) : If he withdrew ` 6,000 during the middle of each quarter., Solution, Total drawings for the year ` 6,000 × 4 times in a year = ` 24,000, 12 months + 3 months, Case (a) :, Average Period =, = 7.5 months, 2, 10 7.5, Interest on Drawings = ` 24,000 ×, ´, = ` 1,500, 100 12, 9 months + 0 month, Case (b) :, Average Period =, = 4.5 months, 2, 10 4.5, Interest on Drawings = ` 24,000 ×, ´, = ` 900, 100 12, 10.5 months + 1.5 months, Case (c) :, Average Period =, = 6 months, 2, 10, 6, Interest on Drawings = ` 24,000 ×, ´, = ` 1,200, 100 12, , 109
Page 124 :
SBPD Pub li ca tions Accountancy (XII), Illustration 23(A), Kanika and Gautam are partners in a firm. Kanika withdrew the following amounts, during the year to pay the hostel expenses of her son :, `, , 1st April, 10,000, 1st June, 9,000, 1st November, 14,000, 1st December, 5,000, Gautam withdraw ` 15,000 on the first day of April, July, October and January, to pay his of domestic expenses., Calculate interest on drawings @ 6% p.a. on 31.3.2016., Solution, (A) Computation of Interest on Drawings of Kanika, Date of Drawings, , Amount (A), `, , Months upto (M), March 31, , Product (A × M), `, , April, , 1, , 10,000, , 12, , 1,20,000, , June, , 1, , 9,000, , 10, , 90,000, , November, , 1, , 14,000, , 5, , 70,000, , December, , 1, , 5,000, , 4, , 20,000, , Total, , 3,00,000, , Interest on ` 3,00,000 for 1 month @ 6% p.a., 6, 1, Interest on Drawings = ` 3,00,000 ×, ´, = ` 1,500, 100 12, (B) Interest on Drawings of Gautam : Here ` 15,000 is withdrawn on 1st day of, April, July, October and January. It is withdrawn at the beginning of each quarter. Hence,, Interest will be charged for 7.5 months., Drawings = ` 15,000 × 4 = ` 60,000, 6, 7.5, Interest on Drawings = ` 60,000 ×, ´, = ` 2,250, 100 12, 4. Rule for Interest on Drawings made for 6 months :, Average Period = (Time Left after First Drawing + Time Left after Last Drawing) ¸ 2, (i) Drawings in the beginning of each month for 6 month :, 1, Average Period = (6 + 1) months ¸ 2 = 3.5 or 3 months, 2, Rate 3.5, Interest on Drawings = Total Drawings ´, ´, 100 12, (ii) Drawings at the end of each month for 6 months :, 1, Average Period = (5 + 0) months ¸ 2 = 2.5 or 2 months, 2, Rate 2.5, Interest on Drawings = Total Drawings ´, ´, 100, 12, (iii) Drawings in the middle of each month for 6 months :, Average Period = (5.5 + 0.5) ¸ 2 = 3 months, Rate 3, Interest on Drawings = Total Drawings ´, ´, 100 12, , 110
Page 125 :
Ac count ing for Part ner ship Firms : Fun da men tals, ❏ Calculation of Average Period, (i) Average Period = Time Left after First Drawing + Time Left after Last Drawing, N+1, 6+1, 3.5, or Averge Period =, =, = 3.5 months, Hence T =, 2, 2, 12, (ii) Average Period = Time Left after First Drawing + Time Left after Last Drawing, N + 0, 5+ 0, 2.5, or Average Period =, =, = 2.5 months, Hence T =, 2, 2, 12, (iii) Average Period = Time Left after First Drawing + Time left after Last Drawing, N, 5.5 + 0.5, 3, or Average Period =, =, = 3 months, Hence T =, 2, 2, 12, Where,, N = Number of months., Illustration 24, A, B and C are partners in a firm. You find that :, (i) A drew ` 4,000 in the beginning of every month for 6 months ending 30th, September, 2019., (ii) B drew ` 4,000 at the end of every month for 6 months ending 30th September, 2019., (iii) C drew 4,000 in the middle of every month for 6 months ending 30th September,, 2019., Calculate interest on drawings @ 8% p.a., Solution, Total Drawings in all cases = ` 4,000 × 6 months = ` 24,000, , Average Period, Interest on Drawings, , A, 6 +1, = 3.5 months, 2, 8, 3.5, ` 24,000 ´, ´, 100 12, , B, 5 +0, = 2.5 months, 2, 8, 2.5, ` 24,000 ´, ´, 100 12, , C, 5.5 + 0.5, = 3 months, 2, 8, 3, ` 24,000 ´, ´, 100 12, , = ` 560, , = ` 400, , = ` 480, , ❏ Rules for Interest on Drawings for 9 Months, When drawings of equal amount are made during 9 months, Average Period = (Time Left after First Drawing + Time Left after Last Drawing ¸ 2, Case (i) : Drawings made in the beginning of each month :, Average Period = (9 + 1) ¸ 2 = 5 months, Rate, 5, Interest on Drawings = Total Drawings ´, ´, 100 12, Case (ii) : Drawings made at end of each month :, Average Period = (8 + 0) ¸ 2 = 4 months, Rate 4, Interest on Drawings = Total Drawings ´, ´, 100 12, Case (iii) : Drawings made in the middle of each month :, 1, Average Period = (8.5 + 0.5) ¸ 2 = 4.5 or 4 months, 2, Rate 4.5, Interest on Drawings = Total Drawings ´, ´, 100, 12, , 111
Page 126 :
SBPD Pub li ca tions Accountancy (XII), Illustration 25, X, Y and Z started business on 1st July, 2019. Calculate interest on drawings @ 10%, p.a. in the following cases :, (i) X drew ` 6,000 from the firm in the beginning of every month for 9 months., (ii) Y drew ` 6,000 from the firm at the end of every month for 9 months., (iii) Z drew ` 6,000 from the firm in the middle of every month for 9 months., Solution, Total Drawings in all cases = ` 6,000 × 9 = ` 54,000, Average Period, Interest on Drawings, , X, 9 +1, = 5 months, 2, 10, 5, ` 54,000 ´, ´, 100 12, = ` 2,250, , Y, 8 +0, = 4 months, 2, 10, 4, ` 54,000 ´, ´, 100 12, = ` 1,800, , Z, 8.5 + 0.5, = 4.5 months, 2, 10, 4.5, ` 54,000 ´, ´, 100 12, = ` 2,025, , 2.8.6 Interest on Partner's Loan, If any partner, apart from his share of capital, advances a loan to the firm, he has the, right to receive interest on loan at an agreed rate of interest. In the absence of an agreement,, the Partnership Act will prevail and such partner shall get interest @ 6% p.a. on loan., Interest on loan is payable even if these is a loss., Nature of Interest on Loan : Interest on loan is a charge against profits. Hence,, interest on partner's loan is not an appropriation out of profit., Accounting Treatment :, (1) In Profit & Loss A/c : Interest on loan being a charge against the profits, like any, other operating expenses of the firm, should be charged to the Profit and Loss Account. It, is transferred to the debit side of Profit and Loss Account and to the debit of Profit & Loss, Appropriation Account., (2) In Balance Sheet : Partner’s loan is shown on the liabilities side of the Balance, Sheet along with any interest due on such loan., ❐ Journal Entries, (1) For Providing Interest on Loan :, Interest on Partner’s Loan A/c, Dr., To Partner's Loan, (2) For transferring the Interest on Loan to Profit and Loss A/c :, Profit and Loss A/c, Dr., To Interest on Partner’s Loan A/c, Distinction between Charge against Profit and, Appropriation out of Profit, S.N., , Basis of Distinction, , 1., , Nature, , 2., , Recording, , 3., , Necessary or Not, , 4., , Examples, , 112, , Charge against Profit, , Appropriation out of Profit, , It indicates expenses to be, deducted from profits while, calculating net profit (or loss)., It is debited to Profit and Loss, Account., It is necessary to make charges, against profit even if there is, loss., Interest on partner’s loan and, rent paid to a partner., , It indicates distribution of net, profit to various heads., It is debited to Profit and Loss, Appropriation Account., Appropriations are made only, when there is profit., Interest on partner’s capital,, partner’s salary etc.
Page 127 :
Ac count ing for Part ner ship Firms : Fun da men tals, Partner’s Loan Vs. Partner’s Capital, In the context of interest on partner's loan, it is pertinent to distinguish between Loan, Account and Capital Account of Partner. For this there are two valid reasons :, (1) As per provisions of the Partnership Act, partner's loan is repayable on dissolution, in priority to capital, and, (2) In the absence of any agreement, partners are entitled to get interest @ 6% p.a. on, loan given to the firm whereas they are not entitled for interest on capital., Illustration 26(A), Ram and Rahim are partners. From 1st January, 2019 without any partnership, agreement, they introduced capital of ` 20,000 and ` 10,000 respectively. On 1st July, 2019, Ram advanced ` 5,000 by way of loan to the firm without any agreement as to interest. The, Profit and Loss Account for the year 2019 disclosed a profit of ` 7,120 but the partners can, not agree upon the question of interest and upon the basis of division of profit. You are, required to divide the profit between them giving reasons., Solution, Dr., Date, , Profit & Loss Account, Particulars, , 2019, , Amount, , Date, , `, , 2019, , Dec. 31 To Interest on Loan (for 6, months @ 6% p.a.), To Net Profit trans. to P/L, App. A/c, , Cr., Particulars, , `, , Dec. 31 By Profit & Loss A/c, 150, , (Before Interest on Loan), , Date, , 7,120, , 6,970, 7,120, , Dr., , Amount, , 7,120, , Profit & Loss Appropriation Account, Particulars, , 2019, Dec. 31 To Profit transferred to :, Ram's Capital A/c, (1/2 of ` 6,970), Rahim's Capital A/c, (1/2 of ` 6,970), , Amount, `, , Date, , Particulars, , 2019, Dec. 31 By Profit & Loss A/c, (Net Profit), , Cr., Amount, `, , 6,970, , 3,485, 3,485, 6,970, , 6,970, , Notes : (i) Profits will be divided equally between partners in the absence of partnership deed., (ii) Interest @ 6% p.a. will be allowed on partners’ loan in the absence of deed., (iii) No interest will be given to the partners on their capitals in the absence of deed., , Illustration 26(B) (J/E, Partners’ Capital A/cs and Partners’ Loan A/c), X and Y entered into partnership on 1st April, 2018 without any partnership deed., They introduced capitals of ` 2,50,000 and ` 2,00,000 respectively. On 30th September,, 2018, X advanced ` 1,00,000 by way of loan to the firm without any agreement as to, interest., The Profit and Loss Account for the year ended 31.3.2019 showed a profit of, ` 2,23,000, but the partners could not agree upon the amount of interest on loan to be, charged and the basis of division of profits. Pass a Journal entry for the distribution of the, profit between the partners and prepare Partners' Capital Accounts., , 113
Page 128 :
SBPD Pub li ca tions Accountancy (XII), Solution, 1. In the absence of any agreement, interest on partner’s loan will be paid @ 6% p.a., 6, 6, Hence, Interest on X’s Loan = ` 1,00,000 ´, ´, = ` 3,000, 100 12, 2. Net Profit after Interest on X's Loan = ` 2,23,000 – 3,000 = ` 2,20,000, 3. In the absence of any agreement, profit will be distributed equally., Journal Entry, Dr., Cr., Date, , Particulars, , L.F., , Profit and Loss Appropriation A/c, To X's Capital A/c, , Dr., , `, , `, , 2,20,000, 1,10,000, , To Y’s Capital A/c, , 1,10,000, , (Being profit distributed between X and Y equally), , Part ners’ Cap i tal Ac counts, , Dr., Date, , Particulars, , 2019, Mar. 31 To Balance b/d, , X, , Y, , Date, , `, , `, , 2018, , Particulars, , 3,60,000 3,10,000 Apr. 1 By Bank A/c, 2019, Mar. 31 By P/L App. A/c, (Profit), 3,60,000 3,10,000, , Cr., X, , Y, , `, , `, , 2,50,000 2,00,000, , 1,10,000 1,10,000, 3,60,000 3,10,000, , Note : Interest on X’s loan will be shown in X’s Loan A/c and not in his Capital Account as it is a charge against, profit., , 2.8.7 Rent Paid to a Partner, Like interest on partner’s loan, rent paid to a partner for the use of his building/, premises by the firm is also a charge against profit and not an appropriation out of profit., Hence, it should be debited to Profit and Loss Account and not to Profit & Loss, Appropriation Account and credited to Partner's Capital Account in case of fluctuating, capital or Partner’s Current Account in case of fixed capital., Illustration 27 (Rent to a Partner), P and Q are partners in a firm sharing profit and loss in the ratio of 3 : 2 contributing, ` 1,50,000 and ` 1,00,000 respectively. Firm is working in the premises owned by P,, monthly rent payable by the firm being ` 5,000. Show the distribution of profits/losses for, the year 2017 :, If the profits before charging rent of premises are ` 1,00,000., Solution, Profit and Loss Account, Dr., (for the year ended 31st De cember, 2017), Cr., Particulars, To Rent of Premises (P), To Net Profit trans. to P/L App. A/c, , 1. ` 5,000 × 12 months = ` 60,000., , 114, , `, , 60,0001, 40,000, 1,00,000, , Particulars, By Net Profit (Before Charging Rent), , `, , 1,00,000, 1,00,000
Page 129 :
Ac count ing for Part ner ship Firms : Fun da men tals, Profit & Loss Appropriation Account, (for the year ended 31st De cember, 2017), , Dr., Particulars, , To Profit trans. to Partners’ Capital, A/cs :, `, P (40,000 ´ 3/5), 24,000, Q (40,000 ´ 2/5), 16,000, , Cr., , Particulars, , `, , `, , By Profit & Loss A/c (Net Profit), , 40,000, , 40,000, 40,000, , 40,000, , 2.8.8 Salaries to Partners, Salary to a partner or partners would be allowed if there is a specific provision to that, effect in Partnership Deed. Salary is a gain to a partner and hence, his Capital Account, would be credited. However, salary to a partner is an appropriation of profit and would be, shown on the debit side of Profit and Loss Appropriation Account., Illustration 28(A) (Interest on Capital and Salary to a Partner), A and B are partners. A's capital is ` 10,000 and B's capital is ` 6,000. Interest is, payable on capital @ 6% p.a. B is entitled to a salary of ` 300 per month. Profit for the, current year is ` 8,000 before interest and salary to B. Divide the profit between A and B., (J.A.C., 2011), Solution, Dr., Profit & Loss Appropriation Account, Cr., Particulars, To B's Salary @ ` 300 p.m., To Interest on Capital @ 6% p.a. : `, A, 600, B, 360, To Share of Profit :, A, 1,720, B, 1,720, , Amount, , Particulars, , Amount, , `, , `, , 3,600 By Net Profit as per P. & L. A/c, , 8,000, , 960, , 3,440, 8,000, , 8,000, , Illustration 28(B), Sita and Gita are partners in a firm. On 1st Jan., 2018 their capital stood at ` 60,000, and ` 50,000 respectively. They are entitled to 7.5% interest on their capital. On 1st July,, 2018, Sita has advanced a loan of ` 16,000 to the firm. Gita is entitled to receive a salary, of ` 8,000 p.a. Profit for the year ended 31st December, 2018 before any adjustment was, ` 18,000. Prepare Profit and Loss Appropriation Account., (M.P. Board, 2015), Solution, Dr., Profit & Loss Appropriation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Gita's Salary @ ` 8,000 p.a., ToInterest on Capital @ 7.5% p.a. `, Sita (60,000 × 7.5/100), 4,500, Gita (50,000 × 7.5/100), 3,750, , 8,000 By Profit & Loss A/c, (Net Profit), Less : Interest on Gita’s, 8,250, Loan, , `, `, , 18,000, 480, , 17,520, , 115
Page 130 :
SBPD Pub li ca tions Accountancy (XII), To Profit trans. to Partners’, Capital A/cs :, Sita, Gita, , 635, 635, , Note : Interest on Gita’s Loan = 16, 000 ´, , 1,270, 17,520, , 17,520, , 6, 6, ´, (from 1st July to 31st Dec., 2018) = ` 480, 100 12, , 2.8.9 Commission to Partners, Sometimes a partner is offered commission based on fixed percentage of the profits, earned by the firm. However, a partner would be entitled to commission only when, Partnership Deed provides for it. Such a commission is an appropriation of the profit and is, debited to Profit and Loss Appropriation Account and is credited to Partners' Capital, Account. Commission payable to a partner may be calculated in either of the two ways :, (i) Commission on net profit before charging such commission. Thus,, Rate of Commission, Commission = Net Profit before charging such Commission´, 100, (ii) Commission on net profit after charging such commission. Thus,, Rate of Commission, Commission = Net Profit before charging such Commission´, 100 + Rate of Commission, Remember :, 1. Commission to Manager is debited to P. & L. A/c, 2. Commission to Partners is debited to P. & L. A/c, Illustration 29, Meenakshi and Gauravi are partners in a firm. Meenakshi is to get a commission of, 10% of net profit before charging commission while Gauravi is to get a commission of 5% of, net profit after charging all commission. Net profit before charging any commission was, ` 1,10,000. Calculate commission of both the partners., Solution, , 10, = ` 11,000, 100, 5, Commission payable to Gauravi = (1,10,000 - 11,000) ´, 100 + 5, 5, = 99,000 ´, = ` 4,714, 105, , Commission payable to Meenakshi = 1,10,000 ´, , Illustration 30, The partnership agreement of Maneesh and Girish provides that :, (i) Profit will be shared equally., (ii) Maneesh will be allowed a salary of ` 400 p.m., (iii) Girish, who manages the sales department will be allowed a commission equal to, 10% of the net profit after allowing Maneesh's salary., (iv) 7% interest will be allowed on partners' fixed capital., (v) 5% interest will be charged on partners' annual drawings., (vi) The fixed capital of Maneesh and Girish are ` 1,00,000 and ` 80,000 respectively., Their annual drawings were ` 16,000 and ` 14,000 respectively. The net profit, for the year ending March 31, 2018 amounted to ` 40,000., Prepare firm's Profit & Loss Appropriation Account., (N.C.E.R.T.), , 116
Page 131 :
Ac count ing for Part ner ship Firms : Fun da men tals, Solution, Dr., , Profit & Loss Appropriation Account, (for the year ending 31st March, 2018), Particulars, , Amount, , Cr., , Particulars, , Amount, , `, , To Maneesh's Current A/c (Salary), To Girish's Current A/c (Commission), To Partners' Current A/c, (Interest on Capital) :, Maneesh, Girish, To Profit transferred to Partners', Current A/cs :, `, Maneesh, 10,290, Girish, 10,290, , `, , 4,800 By Profit & Loss A/c, 3,520 By Partners' Current A/c, (Interest on Drawings) :, Maneesh (16,000´ 5%), 7,000, Girish (14,000´ 5%), 5,600, , 40,000, , 800, 700, , 20,580, 41,500, , Working Note :, Girish's Commission = (40, 000 - 4, 800) ´, , 41,500, , 10, = ` 3, 520., 100, , 2.8.10 Commission to a Manager, Illustration 31 (Commission to Manager), A and B are partners sharing profits in the ratio of 3 : 2 with capitals of ` 50,000 and, ` 30,000 respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed an annua l, salary of ` 2,500. During 2017, profits of the year prior to calculation of interest on capital, but after charging B’s salary amounted to ` 12,500. Manager is to be allowed a commission, of 5% on the profits remaining after deducting salary and interest on capitals but before, charing such commission., Prepare an account showing allocation of profits and Partners’ Capital Accounts., Solution, Profit & Loss Appropriation Account, Dr., (for the year ending 31st Dec., 2017), Cr., Particulars, To B’s Salary, To Interest on Capitals :, A, B, , `, , 3,000, 1,800, , To Manager’s Commission (Note 1), To Profit trans. to Capital A/cs :, A (7,315 ´ 3/5), 4,389, B (7,315 ´ 2/5), 2,926, , `, Particulars, 2,500 By Profit & Loss A/c (Net Profit, before charging B’s Salary), (` 12,500 + 2,500), 4,800, , `, , 15,000, , 385, , 7,315, 15,000, , 15,000, , Partners’ Capital Accounts, , Dr., Particulars, , A, `, , To Balance c/d, , 57,389, , B, , Particulars, , `, , Cr., A, `, , 37,226 By Balance b/d, By Interest on Capital A/c, , B, `, , 50,000, , 30,000, , 3,000, , 1,800, , 117
Page 132 :
SBPD Pub li ca tions Accountancy (XII), By Salary A/c, By Profit & Loss App. A/c, 57,389, , 37,226, , —, 4,389, , 2,500, 2,926, , 57,389, , 37,226, , Working Notes :, , 5, 5, = 7,700 ´, = ` 385., 100, 100, 2. Normally, manager’s commission is a part of Profit & Loss Account as it is a charged against profit but in, this question, it is shown in the P/L App. A/c due to terms of manager’s commission., 1. Manager’s Commission = (12,500 – 4,800) ´, , 2.8.11 Transfer of Profit to Reserve, Sometimes partners agree to transfer a part (or certain percentage) of profit earned to, General Reserve or Specific Reserve before distribution of profit., Journal Entry for Transfer to Reserve/Reserve Fund :, Profit and Loss Appropriation A/c, Dr., To Reserve/Reserve Fund A/c, To Special Fund A/c, (Being profit earned transferred to Reserve), , Illustration 32 (J/E relating to Appropriations), Pass the necessary Journal Entries to record the following transactions in the books, of Amit and Sumit before distributing the profits earned :, (i) Salary payable to Amit ` 12,000 p.a., (ii) Interest on Capital : Amit ` 10,000; Sumit ` 15,000., (iii) Commission payable to Sumit ` 10,000., (iv) Transfer to the General Reserve ` 20,000., (v) Profit of ` 60,000 is to be distributed between Amit and Sumit in the ratio of 3 : 2., Sulution, Jour nal En tries, Dr., Cr., S. No., (i), , Particulars, Profit and Loss Appropriation A/c, To Amit’s Capital A/c, , L.F., Dr., , `, , `, , 12,000, 12,000, , (Being the salary payable to Amit), , (ii), , Profit & Loss Appropriation A/c, To Amit’s Capital A/c, To Sumit’s Capital A/c, , Dr., , 25,000, 10,000, 15,000, , (Being interest on capital payable to Amit and Sumit), , (iii), , Profit and Loss Appropriation A/c, To Sumit’s Capital A/c, , Dr., , 10,000, 10,000, , (Being commission payable to Sumit), , (iv), , Profit and Loss Appropriation A/c, To General Reserve A/c, , Dr., , 20,000, 20,000, , (Being transfer of profit into General Reserve), , (v), , Profit and Loss Appropriation A/c, To Amit’s Capital A/c, To Sumit’s Capital A/c, , Dr., , 60,000, 36,000, 24,000, , (Being profit distributed in the ratio of 3 : 2 and credited to their, Capital A/cs), , Illustration 33 (Interest on Capital and Drawings and Transfer to Reserve), A, B and C are partners with fixed capitals of ` 1,00,000, ` 80,000 and ` 50,000, respectively. The partnership deed provided for the following :, (i) Interest on Capital @ 5% p.a., (ii) Interest on drawings @ 6% p.a., , 118
Page 133 :
Ac count ing for Part ner ship Firms : Fun da men tals, (iii) Each partner withdrew ` 10,000 on 1st July, 2019., (iv) ` 20,000 is to be transferred to P.M.’s Relief Fund., (v) Profits and losses are to be shared in the ratio of 5 : 3 : 2., Net profit of the firm before above adjustments was ` 75,600., From the above information, prepare Profit & Loss Appropriation Account for the, year 2019., Solution, Profit & Loss Appropriation Account, Dr., (for the year ended 31st December, 2019), Cr., Particulars, To Interest on Capital A/cs :, A, B, C, To P.M.’s Relief Fund A/c, To Profit transferred to :, A’s Current A/c, B’s Current A/c, C’s Current A/c, Working Note :, 1. 10,000 ´, , Particulars, By Profit & Loss A/c (Net Profit), By Interest on Drawings, (for 6 months) :, `, 11,500, A, 300 1, `, , `, , 5,000, 4,000, 2,500, , 20,000, 22,500, 13,500, 9,000, , B, C, , 45,000, 76,500, , 300, 300, , `, 75,600, , 900, , 76,500, , 6, 6, ´, = ` 300., 100 12, , Illustration 34 (Distribution of certain amount of Profit in Profit-sharing Ratio, and Balance equally), P, Q and R are partners in a business. On 1st April, 2018 their capitals stood at, ` 20,000, ` 12,500 and ` 10,000 respectively. According to Partnership Deed each partner, is entitled to receive 5% interest on capital and ` 750 p.a. as salary. First ` 2,000 of the, divisible profit 40% is to be given to P, 30% to Q and 30% to R. After this amount, profit is, distributed equally. Before charging interest on capital and salary to partners, Profit &, Loss Account showed a profit of ` 8,175 for the year ended 31st March, 2019. Prepare, Profit & Loss Appropriation Account on 31st March, 2019., Solution, Interest on Capital :, Salaries Payable to Partners :, `, 20,000´ 5, P =, = ` 1,000, P, 750, 100, 12,500 ´ 5, Q, 750, Q =, = ` 625, 100, 10,000 ´ 5, R =, = ` 500, R, 750, 100, Total 2,125, Total, 2,250, Net Profit = ` 8,175 – (2,125 + 2,250), Distribution of first profit of ` 2,000 :, 2,000 ´ 40, Share of P =, 100, 2,000 ´ 30, Share of Q =, 100, 2,000 ´ 30, Share of R =, 100, , = ` 3,800, = ` 800, = ` 600, = ` 600, , 119
Page 134 :
SBPD Pub li ca tions Accountancy (XII), Profit to be shared equally = ` 3,800 – 2,000 = ` 1,800, 1, 1, 1, \ P = 1,800 ´ = ` 600; Q = 1,800 ´ = ` 600; R = 1,800 ´ = ` 600, 3, 3, 3, Profit & Loss Appropriation Account, Dr., (for the year ended 31st March, 2019), Particulars, , Amount, , Cr., , Particulars, , Amount, , `, , To Interest on Capital :, P, Q, R, To Salary :, P, Q, R, To Net Profit :, P (` 800 + 600), Q (` 600 + 600), R (` 600 + 600), , `, , By Net Profit b/d, , `, , 1,000, 625, 500, , 2,125, , 750, 750, 750, , 2,250, , 1,400, 1,200, 1,200, , 3,800, , 8,175, , 8,175, , 8,175, , Illustration 35 (Profit & Loss App. A/c and Partners’ Capital A/cs), Amit and Sumit are partners with capitals of ` 60,000 and ` 20,000 respectively on 1st, April, 2018. The trading profit (before taking into account the provisions of the Deed) for, the year 2018-19 was ` 24,000. Interest on capital is to be allowed 6% p.a. Sumit is entitled, to a salary of ` 6,000 p.a. The drawings of the partners were ` 6,000 and ` 4,000. The, interest on drawings for Amit being ` 200 and for Sumit ` 100., Show how the profit will be divided between Amit and Sumit and also show the, Capital Accounts., Solution, Dr., Profit & Loss Appropriation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Interest on Capital A/cs :, `, Amit, 3,600, Sumit, 1,200, To Salary to Sumit, To Amit's Capital A/c (Profit), To Sumit's Capital A/c (Profit), , Dr., , `, , 24,000, `, , 200, 100, , 300, , 24,300, , Amit's Capital Account, , Date, Particulars, 2019, Mar. 31 To Drawings A/c, Mar. 31 To Interest on Drawings, A/c, , 120, , By P. & L. A/c (Net Profit), By Interest on Drawings A/c :, 4,800, Amit, 6,000, Sumit, 6,750, 6,750, 24,300, , Amount, , Date, Particulars, `, 2018, 6,000 April 1 By Balance b/d, 2019, 200 Mar. 31 By Interest on Capital A/c, , Cr., Amount, `, , 60,000, 3,600
Page 135 :
Ac count ing for Part ner ship Firms : Fun da men tals, Mar. 31 To Balance c/d, , 64,150 Mar. 31 By P/L Appropriation A/c, 70,350, , 6,750, 70,350, , 2019, April 1 By Balance b/d, , 64,150, , Sumit's Capital Account, , Dr., , Date, Particulars, 2019, Mar. 31 To Drawings A/c, Mar. 31 To Interest on Drawings, A/c, Mar. 31 To Balance c/d, , Amount, , Date, `, 2018, 4,000 April 1, 2019, 100 Mar. 31, 29,850 Mar. 31, Mar. 31, 33,950, 2019, April 1, , Cr., Particulars, , Amount, `, , By Balance b/d, , 20,000, , By Interest on Capital A/c, By Salary A/c, By P/L Appropriation A/c, , 1,200, 6,000, 6,750, 33,950, , By Balance b/d, , 29,850, , Illustration 36 (Partners’ Capital A/cs and Current A/cs), A, B and C are partners who share profit or loss in the ratio of 1/2, 3/10 and 1/5, respectively after allowing 5% interest on fixed capital and ` 5,000 each to B and C as, annual salary. The fixed capitals A, B and C are ` 50,000; ` 30,000 and ` 20,000, respectively. During the year 2018-19 A had withdrawn ` 10,000 and B and C withdrew, ` 2,500 and ` 1,000 respectively besides their salary. The Profit & Loss Account showed a, profit of ` 45,000 for the year ending on 31st March, 2019 before providing for the following, expenses : (1) Interest on Capital, and (2) Salary of Partners., The balances of Current Accounts of partners as on 1st April, 2018 were A (credit), ` 4,500; B (credit) ` 1,500 and C (credit) ` 1,000. No interest is charged on Current, Accounts or Drawings., Show Partners' Capital Accounts and Current Accounts after dividing profit in, accordance with Partnership Deed on 31st March, 2019., Solution, Profit & Loss Appropriation Account, Dr., (for the year ended 31st March, 2019), Cr., Particulars, , Amount, , Particulars, , `, , To Interest on :, A's Capital A/c, B's Capital A/c, C's Capital A/c, To Salaries :, B's Capital A/c, , 2,500, 1,500, 1,000, , 45,000, , 5,000, , 5,000, 5,000, , 10,000, , To Profit transferred to :, A's Current A/c (30,000 ´ 1/2) 15,000, B's Current A/c (30,000 ´ 3/10) 9,000, C's Current A/c (30,000 ´ 1/5) 6,000, , 30,000, , C's Capital A/c, , `, , By Profit & Loss A/c, , `, , Amount, , 45,000, , 45,000, , 121
Page 136 :
SBPD Pub li ca tions Accountancy (XII), Partners' Current Accounts, , Dr., Date, Particulars, 2019, Mar. 31 To Cash A/c, (Salaries), Mar. 31 To Drawings, Mar. 31 To Balance c/d, , A, , B, , `, , `, , — 5,000, 10,000 2,500, 12,000 9,500, , 22,000 17,000, , Date, Particulars, A, B, `, 2018, `, `, April 1 By Balance b/d, 4,500 1,500, 5,000 2019, 1,000 Mar.31 By Salaries, — 5,000, 7,000 Mar. 31 By Interest on, Capital, 2,500 1,500, Mar. 31 By Profit & Loss, App. A/c, 15,000 9,000, 13,000, 22,000 17,000, , Partners' Capital Accounts, , Dr., Date, , Cr., , C, , Particulars, , 2019, Mar. 31 To Balance c/d, , A, , B, , C, , Date, , `, , 1,000, 5,000, 1,000, 6,000, 13,000, , Cr., , Particulars, , `, `, `, 2018, 50,000 30,000 20,000 April 1 By Balance b/d, 50,000 30,000 20,000, , C, , A, , B, , C, , `, , `, , `, , 50,000 30,000 20,000, 50,000 30,000 20,000, , 2.9 Guarantee of Profit to a New Partner, Sometimes, on admission of the new partner is promised a certain minimum amount, of profits is guaranteed to him as his share in the profits of the firm. In such a situation, when the share in profits of the new partner is less than the minimum guaranteed, amount, the shortage may be met by :, (i) all the existing partners, or, (ii) any one of the existing partners, as per the agreement among the partners., Due to this guaranteed amount of profits to the new partner, the profit-sharing ratio, of the old partners will change. Therefore, to solve such problems the following procedures, should be followed :, ❏ Procedures to be followed, (1) Firstly calculate the share of the new partner (on the basis of given ratio)., If this amount is more than the minimum guaranteed amount, then no adjustment is, required., (2) Profit is also distributed among other partners in their profit-sharing ratio., (3) If the amount of profit received by the new partner (on the basis of his share in, profits) is less than the minimum guaranteed amount, then calculate the ‘shortage’. This, shortage is contributed by the partner who has given the guarantee. This amount of, difference will be reduced from the share of profits of such partner., (4) If the shortage is to be contributed by all the partners, it should be seen in which, ratio they are going to share the shortage. If nothing is mentioned, then reduce the, amount of guaranteed profits of new partners from the total profits of the firm and balance, of profits will be distributed among old partners in their profit-sharing ratio., Illustration 37(A) (Guarantee for Minimum Profits to a New Partner by All, Existing Partners), A, B and C are partners sharing profit in ratio of 3 : 2 : 1. The annual profit is ` 24,000., Distribute the profit among partners if C’s share of minimum profit guaranteed by A and, B is ` 12,000., , 122
Page 137 :
Ac count ing for Part ner ship Firms : Fun da men tals, Solution, Since C’s share is guaranteed at a minimum of ` 12,000 he would be paid ` 12,000, even though his share of profit is ` 12,000. Remaining profit ` 12,000 (` 24,000 – 12,000), shall be divided between A and B in the ratio of 3 : 2., Dr., Profit & Loss Appropriation Account, Cr., Particulars, , Amount, , Particulars, , `, , To C's Capital A/c (Minimum Share), To Balance c/d, To A's Capital A/c (3/5th of ` 12,000), To B's Capital A/c (2/5th of ` 12,000), , `, , 12,000 By Profit & Loss A/c, 12,000, 24,000, 7,200 By Balance b/d, 4,800, 12,000, , Alternative Method, Dr., , Amount, 24,000, 24,000, 12,000, 12,000, , Profit & Loss Appropriation Account, , Particulars, , Amount, , Particulars, , `, , To Share of Profit :, `, A : 3/6th of ` 24,000, 12,000, Less : Adjustment for Guarantee, 3/5th of ` 8,000, 4,800, B : 2/6th of ` 24,000, 8,000, Less : Adjustment for Guarantee, 2/5th of ` 8,000, 3,200, C : 1/6th of ` 24,000, 4,000, Add : Adjst. for Guarantee, 8,000, , Cr., Amount, `, , By Profit & Loss A/c (Net Profit), , 24,000, , 7,200, , 4,800, 12,000, 24,000, , 24,000, , Illustration 37(B) (Guarantee for Minimum Profits to a New Partner by All, Existing Partners), P, Q, R are partners sharing profits and losses in 2 : 2 : 1. Partner R was given a, guarantee by other partners that his share of profit will not be less than ` 14,400. The, profit for the current year stood at ` 66,400., Prepare Profit and Loss Appropriation Account., (M.P. Board, 2017), Solution, Since R’s share is guaranteed at a minimum of ` 14,400. He would be paid ` 14,400, æ, 1ö, even though his share of profit is ` 13,280 çç66,400 ´ ÷÷÷. Remaining profit (` 66,400 – 14,400, çè, 5÷ø, = ` 52,000) shall be divided between P and Q in the ratio of 2 : 2., Dr., Profit & Loss Appropriation Account, Cr., Particulars, , Amount, , Particulars, , `, , To R's Capital A/c (Minimum Share), æ, 2ö, To P’s Capital A/c çç52,000 ´ ÷÷÷, çè, 4ø, , 14,400 By Profit & Loss A/c, , Amount, `, , 66,400, , 26,000, , 123
Page 138 :
SBPD Pub li ca tions Accountancy (XII), æ, To R's Capital A/c çç52,000 ´, çè, , 2ö÷, ÷, 4 ÷ø, , 26,000, 66,400, , 66,400, , Illustration 38 (Guarantee of Profit of One Partner), A, B and C entered into partnership on 1st April, 2018 to share profits and losses in, the ratio of 4 : 3 : 3. A, however, personally guaranteed that C’s share of profit after, charging interest on capital @ 5% p.a. would not be less than ` 40,000 in any year., The capital invested were :, A ` 3,00,000, B ` 2,00,000, C ` 1,50,000. The profit for the year ended 31st March, 2019, amounted to ` 1,60,000. Show Profit and Loss Appropriation Account., Solution, Dr., , Profit and Loss Appropriation Account, (for the year ended 31st March, 2019), Particulars, , Amount, , Particulars, , `, , To Interest on Capital :, A (5% of of ` 3,00,000), B (5% of ` 2,00,000), C (5% of ` 1,50,000), To Profit trans. to :, A’s Capital, Less : Guarantee to C, To B’s Capital, To C’s Capital, Add : Guarantee by A, , Cr., Amount, `, , By Profit & Loss A/c (Net Profit), , 1,60,000, , 15,000, 10,000, 7,500, `, , 51,000, 1,750, 38,250, 1,750, , 49,250, 38,250, 40,000, 1,60,000, , 1,60,000, , Working Note :, Divisible Profit = ` 1,60,000 – (15,000 + 10,000 + 7,500), = ` 1,27,500, 4, A’s Share = ` 1,27,500 ´ = ` 51,000, 10, 3, B’s Share = ` 1,27,500 ´ = ` 38,250, 10, 3, C’s Share = ` 1,27,500 ´ = ` 38,250, 10, Deficiency in C’s Share= ` 40,000 – 38,250 = ` 1,750 to be compensated by A., , Illustration 39 (One Partner Guaranteed by Firm and One Partner by Other, Partner), P, Q, R and S are partners sharing profits and losses in the ratio of 4 : 3 : 3 : 2. S was, guaranteed by the firm that his share of profits should not be less than ` 30,000 whereas R, was guaranteed by P that his share of profit should not be less than ` 55,000 (including, interest on capital and salaries). R was allowed a monthly salary of ` 1,500. The Capital, Accounts of P, Q, R and S showed credit balances of ` 80,000, ` 50,000, ` 50,000 and ` 20,000., Interest on Capital Accounts to be allowed @ 10% p.a. Prepare necessary account to give, effect of this arrangement, assuming that the profit during the year being` 1,58,000., , 124
Page 139 :
Ac count ing for Part ner ship Firms : Fun da men tals, Solution, Dr., , Profit & Loss Appropriation Account, Particulars, , Amount, , Cr., , Particulars, , Amount, , `, , To Interest on Capital :, P, Q, R, S, To Salary to R, To Balance c/d, , 8,000, 5,000, 5,000, 2,000, , `, , By P. & L. A/c (Profit for the year), , `, , 20,000, 18,000, 1,20,000, 1,58,000, , To Share of Profit :, P : 4/10 of ` 90,000, 36,000, Less : Due to R, 5,000, Q : 3/10 of ` 90,000, R : 3/10 of ` 90,000, 27,000, Add : Due from P, 5,000, S (Guaranteed minimum), , 1,58,000, , 1,58,000, By Balance b/d, , 1,20,000, , 31,000, 27,000, 32,000, 30,000, 1,20,000, , 1,20,000, , Working Notes :, 1. ` 1,20,000 – 30,000 = ` 90,000 (Guaranteed share of minimum profit)., 2. R's share of Profit (90,000 ´ 310, / ), Add : Interest on R's Capital, Salary to R (` 1,500 ´ 12), , Total, , `, 27,000, 5,000, 18,000, 50,000, , But he is guaranteed a minimum amount of ` 55,000 by P. As such ` 5,000 will be, deducted from P's share and will be added in R's share., Illustration 40 (Omission of Salary, Commission, Distribution of Profit in, Wrong Ratio and Guarantee of Profit), The partners of a firm distributed the profits for the year ended 31st March, 2018, ` 90,000 in the ratio of 3 : 2 : 1 without providing for the following adjustments :, (i) A and B were entitled to a salary of ` 1,500 each per annum., (ii) B was entitled to a commission of ` 4,500., (iii) B and C had guaranteed a minimum profit of ` 35,000 p.a. to A., (iv) Profits were to be shared in the ratio of 3 : 3 : 2., Pass necessary Journal entry for the above adjustments in the books of the firm., Solution, Statement show ing the Ad just ment, Particulars, (A) Profit already distributed without provisions, (B) Salary (Cr.), Commission (Cr.), Profit guaranteed to A, , (Cr.)1, , A, , B, , C, , Total, , `, , `, , `, , `, , 45,000, , 30,000, , 15,000, , 90,000, , 1,500, , 1,500, , —, , 3,000, , —, , 4,500, , —, , 4,500, , —, , 35,000, , 35,000, , —, , 125
Page 140 :
SBPD Pub li ca tions Accountancy (XII), Remaining Profit, i.e., ` 90,000 - 3,000 4,500 - 35,000 = ` 47,500 will be, divided between B and C in 3 : 2 (Cr.), Total (B), , —, , 28,500, , 19,000, , 47,500, , 36,500, , 34,500, , 19,000, , 90,000, , 45,000, , 30,000, , 15,000, , 90,000, , Less : Profit already distributed, (` 90,000 in 3 : 2 : 1) (Dr.), (C) Net Effect (A - B), , (Dr.) 8,500 (Cr.) 4,500 (Cr.) 4,000, Excess, Short, Short, , Adjustment Entry, Date, , Dr., , Particulars, , L.F., , Amount, `, , A's Capital A/c, To B's Capital A/c, To C's Capital A/c, , Dr., , —, , Cr., Amount, `, , 8,500, 4,500, 4,000, , (Being adjustment for omissions), Working Note :, 1. Profit remaining after allowing salary and commission will be :, ` 90,000 - 3,000 - 4,500 = ` 82,500, 3, A's Share = 82,500´ = ` 30, 938, 8, Since it is less than guaranteed amount of ` 35,000, A will be allowed ` 35,000., , Illustration 41 (Guarantee of Profit by One Partner), Three Chartered Accountants, Jha, Mishra and Thakur form a partnership, sharing, profits and losses in the ratio of 3 : 2 : 1 subject to the following conditions :, (1) Thakur's share of profit is guaranteed to be not less than ` 15,000 per annum., (2) Mishra gives guarantee to the effect that the gross fees earned by him for the firm, shall not be less than the average gross fees earned by him during the preceding five years, when he was carrying on profession alone (which average works out at ` 25,000)., The profit of the first year of the partnership is ` 75,000. The gross fees earned by, Mishra for the firm are ` 16,000., You are required to show the Profit & Loss Appropriation Account and Current, Accounts of the partners., Solution, Profit & Loss Appropriation Account, Dr., (for the year ended.....), Cr., Particulars, , Amount, , Particulars, , `, , To Share of Profit :, Thakur's Current A/c, , 3, Jha’s Current A/c (` 69,0001 ´ ), 5, 2, Mishra’s Current A/c (` 69,000´ ), 5, , By Profit & Loss A/c (Net Profit), 15,000 By Mishra's Current A/c, 41,400, , ` 84,000 – 15,000 = ` 69,000, So, Net Effect : Jha gets, , 126, , `, , 75,000, 9,000, , 27,600, 84,000, , 1, , Amount, , 84,000, `, 41,400
Page 141 :
Ac count ing for Part ner ship Firms : Fun da men tals, Mishra gets (` 27,600 – 9,000), , 18,600, , Thakur gets, , 15,000, , Partners' Current Accounts, , Dr., Particulars, , Jha, , Mishra Thakur, , `, , `, , Particulars, , Jha, , `, , To Profit & Loss, Appropriation A/c, To Balance c/d, , Cr., Mishra Thakur, , `, , `, , `, , By Profit & Loss, —, 9,000, —, 41,400 18,600 15,000, 41,400 27,600 15,000, , Appropriation A/c, , 41,400 27,600 15,000, 41,400 27,600 15,000, , ❏ Simultaneous Guarantee by the Firm to the Partner and by the Partner to the, Firm, (1) In case the firm guarantees any partner of minimum profit and a partner, guarantees to the firm for minimum profit earned by him for the firm, guarantee given to, the firm by the partner will be applied first., (2) If the profit earned by the partner falls short of the guaranteed minimum amount,, the deficiency will be debited to the partner and credited to P/L Appropriation A/c. It will, increase the amount of total profit., (3) The minimum guaranteed amount by the firm will be paid to the concerned, partner out of total profits and remaining profit will be distributed among the partners., Illustration 42 (Simultaneous Guarantee), Akshay, Bittu and Chintu formed a partnership. They agreed to share profit and loss, in the ratio of 5 : 3 : 2. They also agreed to the following :, (i) The firm guaranteed that Chintu’s share of profit will never be less than ` 80,000., (ii) Bittu guaranteed to the firm that the minimum amount earned by him for the firm, will be ` 1,00,000., The firm earned profit ` 2,75,000. The actual profit earned by Bittu for the firm, amounted to ` 75,000., Show the distribution of profit among partners through Profit and Loss Appropriation, Account., Solution, Dr., Profit and Loss Appropriation Account, Cr., Particulars, , Amount, , Particulars, , `, , To Profit trans. to :, Akshay’s Capital A/c, Bittu’s Capital A/c, Chintu’s Capital A/c, , 1,37,500, 82,500, 80,000, , `, , By Profit & Loss A/c (Profit), By Bittu‘s Capital A/c, (Guarantee ` 1,00,000 – 75,000), , `, , Amount, 2,75,000, 25,000, , 3,00,000, 3,00,000, , 3,00,000, , Note : Total Profit of the Firm = ` 2,75,000 + 25,000 (Guarantee by Bittu) = ` 3,00,000), 5, Akshay’s Share = ` 3,00,000 ´ = ` 1,50,000, 10, 3, Bittu’s Share = ` 3,00,000 ´ = ` 90,000, 10, 2, Chintu’s Share = ` 3,00,000 ´ = ` 60,000, 10, , 127
Page 142 :
SBPD Pub li ca tions Accountancy (XII), So, Chintu’s deficiency ` 20,000 (` 80,000 – 60,000) to be shared by Akshay ` 20,000 ×, Bittu ` 7,500 (3/8 ´ ` 20,000)., Thus,, Akshay’s actual Share in Profit = ` 1,50,000 – 12,500 = ` 1,37,500, Bittu’s acutal Share in Profit = ` 90,000 – 7,500 = ` 82,500, , 5, = ` 12,500 and, 8, , Chintu’s actual Share in Profit = ` 60,000 + 12,500 + 7,500 = ` 80,000 (Guaranteed), , 2.10 Past Adjustments/Adjustments in Closed Accounts, Meaning : Sometimes profits (or losses) of the firm are distributed among the partners, for a particular period without giving due consideration to the terms and conditions laid, down in the Partnership Deed. Those ignored or omitted terms and conditions may require, to be adjusted after the close of the accounting period. Since some accounting treatment is, required to correct the past errors or omissions, therefore, such treatment is called ‘Past, Adjustments’. This is also known as the adjustment of previous year’s profits. Usually, following types of errors or omissions may take place which require proper adjustments :, Cases for Past Adjustments :, 1. Omission of Interest on Capital., 2. Omission of Interest on Drawings., 3. Interest on Capital provided at a higher rate (or provided more)., 4. Interest on Capital provided at lower rate (or provided less)., 5. Interest on capital was credited though there was no such provision in the Partnership Deed., 6. Salary, fees/commission payable to partner omitted., 7. Distribution of profit in wrong ratio., 8. Change of profit-sharing ratio with retrospective effect (i.e., with effect from back, date or years), 9. Omission of outstanding expenses and accrued income., ❏ How to Correct Past Errors/Omissions ?, There are two approaches to correct past errors or omissions :, 1. Adjustment through Profit and Loss Adjustment Account, or, 2. Directly through the Capital Accounts by passing Single Entry., ❏ Method No. 1 : Adjustments through Profit and Loss Adjustment Account, According to this method, Profit and Loss Adjustment Account (or Appropriation A/c), is opened to correct the errors and omissions. It is debited with the omissions relating to, (i) interest on capital, and (ii) partner’s salary, commission and fees. It is credited with the, omissions relating to (i) interest on drawings, (ii) excess interest on capital, etc., This account is finally closed with the help of Partner’s Capital Account or Current, Account., Journal Entries :, 1. For omission (or less, allowing) of interest on capital, partner’s salary, commission,, fees etc. :, Profit and Loss Adjustment (or Appropriation) A/c, Dr., To Interest on Partner’s Capital A/c, To Partner's Salary A/c or Commission A/c, 2. For omission of interest on drawings, excess allowing of interest on capital, etc. :, Interest on Drawings A/c, Dr., Interest on Capital A/c, Dr., To Profit & Loss Adjustment A/c, 3. The net effect of the two entries will be either net profit or loss (for this prepare, Profit & Loss Adjustment A/c) :, , 128
Page 143 :
Ac count ing for Part ner ship Firms : Fun da men tals, (a) If profit (i.e., Credit balance of P/L Adjustment A/c) :, Profit and Loss Adjustment A/c, Dr., To Partner's Capital/Current A/c, (b) If loss (i.e., debit balance of P/L Adjustment A/c) :, Partner's Capital/Current A/c, Dr., To Profit and Loss Adjustment A/c, 4. Now find out the difference in share of profit already credited to each partner and, the actual share of profit as arrived at by preparing Profit & Loss Adjustment A/c and pass, the rectifying entry :, Partner's Capital/Current A/c, Dr. (credited in excess), To Partner's Capital/Current A/c, (who received less), Illustration 43 (Adjustment through Profit and Loss Adjustment A/c), A firm has three partners : X, Y and Z. After preparing Profit and Loss Account for the, year ended 31st March, 2020, the following omissions were discovered :, (i) Salary to Partner X ` 2,000;, (ii) Interest accrued to the firm on investment ` 4,000;, (iii) Commission to Partner Z ` 14,000., Pass necessary Journal entries., Solution, Jour nal En tries, Dr., Cr., S. No., (i), , Particulars, Profit and Loss Adjustment A/c, To (Salary to) X’s Capital A/c, To (Commission to) Z’s Capital A/c, , L.F. Amount, Dr., , `, , 16,000, , Amount, `, , 2,000, 14,000, , (Being adjustment for X's salary and Z's commission), , (ii), , Accrued Interest A/c, To Profit and Loss Adjustment A/c, , Dr., , 4,000, 4,000, , (Being adjustment for accrued interest), , (iii), , X's Capital A/c, Y's Capital A/c, Z's Capital A/c, To Profit and Loss Adjustment A/c, , Dr., Dr., Dr., , 4,000, 4,000, 4,000, 12,000, , (Being net loss transferred to Parnters’ Capital A/cs), , ❏ Method No. 2 : Past Adjustment by Passing Single Entry, Under this method instead of preparing Profit and Loss Adjustment A/c, a statement, showing the effect of omissions and commissions is prepared. The Capital Account(s) of the, partner(s), who has been credited in excess, would be debited and the Capital Account of, the partner, who has been credited less amount would be credited. The following steps, should be followed under this method :, Step 1 : Calculate the amount already credited (or recorded) by way of interest on, capital, salary, fees, commission, bonus, share of profit/loss etc., Step 2 : Calculate the amount which should have been credited by way of interest, on capital, salary, fees, commission, bonus, share of profit/loss etc., Step 3 : Find out the difference between the amount calculated as per the above, two steps (i.e., Step 1 – Step 2)., Step 4. : Find out the partner who has received more (or excess) and the partner, who received less (or short)., , 129
Page 144 :
SBPD Pub li ca tions Accountancy (XII), Step 5 :, , Pass necessary adjusting or rectifying Journal entry. The partner who has, received more (or credited in excess) is debited and the partner who has, received less is credited., Journal Entry :, Partner's Capital A/c, Dr. (Credited in excess or received more), To Partner’s Capital A/c, (Credited less or received less), Type 1, Illustration 44 (Omission of Interest on Capital), A, B and C are partners in a firm sharing profits equally. Their fixed capitals, were ` 40,000, ` 30,000 and ` 20,000 respectively. As per Partnership Deed they are to get, interest on capital @ 10% p.a. The interest on capital could not be provided and the profits for, the year ` 45,000 were distributed., Show the necessary adjustment entry., Solution, Step I :, Statement showing the Adjustment to be made, Particulars, , A, , B, , `, , I. Amount already credited to be debited (Dr.), II. Amount should have been credited (Cr.) :, (a) As interest on capital @ 10%, (b) Share of Profit (` 45,000 – 9,000) ` 36,000, , `, , 15,000, , Total, , `, , 15,000, , 4,000, 12,000, 16,000, Cr. 1,000, , III. Difference (I – II) or Net Effect, , C, , `, , 15,000, , 45,000, , 3,000, 2,000, 12,000, 12,000, 15,000, 14,000, — Dr. 1,000, , 9,000, 36,000, 45,000, —, , Step II :, Adjusting Journal En try, Date, , Dr., , Particulars, , L.F., , C's Current A/c, To A's Current A/c, , Cr., , Amount, , Amount, , `, , `, , Dr., , 1,000, 1,000, , (Being the interest on capital omitted to be provided, now corrected), , Type 2, Illustration 45 (Omission of Interest on Drawings), X, Y and Z are partners sharing profits and losses in the ratio of 3 : 2 : 1. After the, final accounts have been prepared, it was discovered that interest on drawings had not, been taken into consideration. The interest on drawings of partners amounted to X, ` 250, Y ` 180 and Z ` 100. Give the necessary adjusting Journal entry., Solution, Statement show ing Ad just ments, Particulars, Interest on drawings that should have been debited, Profit that should be credited as a result of interest on drawings, Difference, , 130, , X, , Y, , Z, , Total, , `, , `, , `, , `, , 250, (Dr.), 265, (Cr.), 15, (Cr.), , 180, (Dr.), 177, (Cr.), 3, (Dr.), , 100, (Dr.), 88, (Cr.), 12, (Dr.), , 530, (Dr.), 530, (Cr.), —
Page 145 :
Ac count ing for Part ner ship Firms : Fun da men tals, Journal Entry, Date, , Dr., , Particulars, , Cr., , L.F. Amount Amount, `, , Y's Capital A/c, , Dr., , 3, , Z's Capital A/c, To X's Capital A/c, , Dr., , 12, , `, , 15, , (Being adjustment entry for interest on drawings omitted earlier), , Type 3, Illustration 46 (Interest on Capital provided at Higher Rate), X, Y and Z are partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. Their, fixed capital were ` 3,00,000, ` 2,00,000 and ` 1,00,000 respectively. For the year 2015, interest on capital was credited to them @ 10% p.a. instead of 8% p.a. Showing your, working notes clearly, pass the necessary adjusting Journal entry., Solution, Table showing Adjustment to be made in Capital Accounts, Particulars, , X, , Y, `, , Interest that should have been credited @ 8% p.a., Interest already credited @ 10% p.a., , Z, `, , `, , `, , 24,000, (Cr.), 30,000, (Dr.), , 16,000, (Cr.), 20,000, (Dr.), , 8,000, (Cr.), 10,000, (Dr.), , 48,000, (Cr.), 60,000, (Dr.), , 6,000, (Dr.), 6,000, (Cr.), , 4,000, (Dr.), 3,600, (Cr.), , 2,000, (Dr.), 2,400, (Cr.), , 12,000, (Dr.), 12,000, (Cr.), , —, , 400 (Dr.), , 400 (Cr.), , Partners over-credited to be debited now, Adjustment of net profit of ` 12,000 in the ratio of, 5:3:2, Adjustment required for Difference, , Journal Entry, Date, , Total, , Dr., , Particulars, , L.F., , Cr., , Amount, `, , Y's Current A/c, , Dr., , —, , Amount, `, , 400, , To Z's Current A/c, , 400, , (Being interest on capital over-credited earlier now adjusted), Note : Since partners capital are fixed, adjustment would be made through Current Accounts., , Type 4, Illustration 47 (Interest on Capital provided at Lower Rate), D, E and F are equal partners. Their fixed capitals as on 1st April, 2018 were : D, ` 1,00,000, E ` 2,00,000 and F ` 3,00,000. Profits for the year 2018-19 amounting to, ` 1,20,000 were distributed. Give the necessary Journal entry if interest on capital was, credited @ 10% p.a. instead of 12% p.a. [B.S.E.B., 2014 (Figures reduced by one zero)], , 131
Page 146 :
SBPD Pub li ca tions Accountancy (XII), Solution, Step 1 :, , Statement showing the Adjustment to be made, Particulars, , D, , E, , F, , Total, , `, , `, , `, , `, , I., , Interest already credited @ 10%, , 10,000 20,000 30,000 60,000, , II., , Interest that should have been credited @ 12%, , 12,000 24,000 36,000 72,000, , III., , Partners less credited with (II - I) (Cr.), , 2,000, , 4,000, , 6,000 12,000, , IV., , By allowing interest @ 12%, the profit will be reduced by, ` 12,000. This loss will be divided among them (Dr.), , 4,000, , 4,000, , 4,000 12,000, , Dr., 2,000, , Nil, , V., , Difference (III - IV) : Adjustment required for, , Step 2 :, , Adjusting Jour nal En try, , Date, , Cr., 2,000, , Dr., , Particulars, , Cr., , L.F. Amount, `, , D's Current A/c, To F's Current A/c, , Dr., , —, Amount, `, , 2,000, 2,000, , (Being the interest wrongly provided, now corrected), , Type 5, Illustration 48 (Interest on Capital Credited though there was no such Provision), Anju, Manju and Mamta are partners whose fixed capitals were ` 10,000, ` 8,000 and, ` 6,000 respectively. As per the partnership agreement, there is a provision for allowing, interest on capital 5% p.a. but entries for the same have not been made for the last three, years. The profit-sharing ratio during three years remained as follows : 2016—4 : 3 : 5;, 2017—3 : 2 : 1; 2018—1 : 1 : 1. Make necessary adjustment entry of the beginning of the, fourth year, i.e., January, 2019., (N.C.E.R.T.), Solution, Step 1 :, Statement show ing the Ad just ment to be made, Particulars, , Anju, , Interest on Capital that should be credited :, 2016, 2017, 2018, , Manju Mamta, , Total, , `, , `, , `, , 500, 500, 500, , 400, 400, 400, , 300, 300, 300, , 1,200, 1,200, 1,200, , Total (A), , 1,500, , 1,200, , 900, , 3,600, , Amount distributed without adjustment for interest on capital :, 2016, 2017, 2018, Total (B), , 400, 600, 400, , 300, 400, 400, , 500, 200, 400, , 1,200, 1,200, 1,200, , 1,400, , 1,100, , 1,100, , 3,600, , 100, (Cr.), , 100, (Cr.), , 200, (Dr.), , Adjustment to be required (A – B), , 132, , `
Page 147 :
Ac count ing for Part ner ship Firms : Fun da men tals, Step 2 :, , Adjusting Jour nal En try, , Date, 1.1.2019, , Dr., , Particulars, , L.F. Amount, `, , Mamta’s Current A/c, To Anju’s Current A/c, To Manju’s Current A/c, , Dr., , Cr., Amount, `, , 200, 100, 100, , (For interest on capital omitted), , Type 6, Illustration 49(A) (Omission of Remuneration and Interest on Capital and, Distribution of Profit in Wrong Ratio), A, B and C are partners in a firm. Their Capital Accounts stood at ` 30,000, ` 15,000, and ` 15,000 respectively on 1st Jan., 2018., As per the provisions of the deed :, (i) C was to be allowed a remuneration of ` 3,000 p.a., (ii) Interest at 5% p.a. was to be provided on capital., (iii) Profits were to be divided in the ratio of 2 : 2 : 1., Ignoring the above terms, net profit of ` 18,000 for the year ended 2018 was divided, among the three partners equally. Pass an adjustment entry to rectify the error. Show the, working clearly., Solution, Statement of Adjustment, Particulars, Remuneration to C (Cr.), Interest on Capital (Cr.), Profit remaining after allowing remuneration and, interest ` 12,000 which will be divided in their, profit-sharing ratio, i.e., 2 : 2 : 1 (Cr.), Net amount which should have been received, Less : Profit already distributed, Difference (to be adjusted), , A, , B, , C, , Total, , `, , `, , `, , `, , —, 1,500, , —, 750, , 3,000, 750, , 3,000, 3,000, , 4,800, , 4,800, , 2,400, , 12,000, , 6,300, 6,000, (+) 300, , 5,550, 6,000, (–) 450, , 6,150, 6,000, (+) 150, , 18,000, 18,000, —, , Adjustment Entry, Date, , Dr., , Particulars, , L.F., , Cr., , Amount, `, , B's Capital A/c, To A's Capital A/c, To C's Capital A/c, , Dr., , Amount, `, , 450, 300, 150, , (Being adjustment for interest on capital and wrong distribution, of profit), , Illustration 49(B) (Interest on Capital and Drawings and Commission Ignored), Mudit and Uday are partners in a firm sharing profits in the ratio 2 : 3. Their capital, accounts as on April 1, 2018 showed balances of ` 70,000 and ` 60,000 respectively. The, drawings of Mudit and Uday during the year 2018-19 were ` 16,000 and ` 12,000, respectively. Both the amounts were withdrawn on 1st January 2019. It was subsequently, found that the following items had been omitted while preparing the final accounts for the, year ended 31st March 2019., , 133
Page 148 :
SBPD Pub li ca tions Accountancy (XII), (a) Interest on capitals @ 6% p.a.;, (b) Interest on drawings @ 6% p.a.;, (c) Mudit was entitled to a commission of ` 4,000 for the whole year., Showing you workings clearly pass rectifying entry in the books of the firm., (C.B.S.E., A.I., 2017), Solution, Statement of Adjustment, Particulars, (A) Interest on Capital, , Mudit, , Uday, , Total, , `, , `, , `, , (Cr.), , 4,200, , 3,600, , 7,800, , (Cr.), , 4,000, , —, , 4,000, , (B) Less : Interest on Drawings (Note 1), , (Dr.), , 8,200, 240, , 3,600, 180, , 11,800, 420, , (C), , (Cr.), , 7,960, , 3,420, , 11,380, , (D) Division of ` 11,380 in Profit Sharing Ratio (i.e., 2 : 3) (Dr.), , 4,552, , 6,828, , 11,380, , Commission, , Net Effect/Difference, , Cr. 3,408 Dr. 3,408, , —, , Working Note :, , 12, 000´ 6 ´ 3, = ` 180., 100 ´ 12, 2. ` 11,380 was not Posted in 2018-19, So Profit will be reduced by this amount. Partners will bear it, in the ratio of 2 : 3. Mudit ` 11,380 × 2/5 = ` 4,552 and Uday ` 11,380 × 3/5 = ` 6,828., 3. Adjusted Entry will be Passed for the amount of Difference after adjusting Debit amount from Credit, amount of Partners., 1. Mudit 16,000 × 6/100 × 3/12 = ` 240, Uday =, , Journal Entry, , Dr., , Date, Particulars, 2019, April 1 Uday’s Capital A/c, To Mudit’s Capital A/c, , L.F., , Cr., , Amount, , Amount, , `, , Dr., , `, , 3,408, 3,408, , (Being adjustment in respect of interest on capital, salary and, interest on drawings omitted in accounts), , Type 7, Illustration 50 (Distribution of Profit made in Wrong Ratio), X, Y and Z are partners in a firm who share profits in the ratio of 2 : 3 : 5. The firm, earned a profit of ` 1,50,000 for the year ended December, 31, 2018. The profits by mistake, were distributed among X, Y and Z in the ratio of 3 : 2 : 1 respectively. This error was, noticed only in the beginning of the next year. Pass necessary entry to rectify the error., Solution, Statement show ing Ad just ment, Particulars, A. Wrong Distribution of Profit in the Ratio of 3 : 2 : 1 (Dr.), B. Correct Distribution of Profit in the Ratio of 2 : 3 : 5 (Cr.), C. Net Effect (A – B) (Adjustment required), , 134, , X, , Y, , Z, , Firm, , `, , `, , `, , `, , 75,000 50,000 25,000 1,50,000, 30,000 45,000 75,000 1,50,000, (Dr.), (Dr.), (Cr.), 45,000, 5,000 (50,000), —, Excess Excess Short
Page 149 :
Ac count ing for Part ner ship Firms : Fun da men tals, Adjustment Entry, Date, , Dr., , Particulars, X’s Capital A/c, Y’s Capital A/c, To Z’s Capital A/c, , L.F., Dr., Dr., , `, , Cr., `, , 45,000, 5,000, 50,000, , (Being profit wrongly distributed, now rectified), , Type 8, Illustration 51 (Change in Profit-sharing Ratio with Retrospective Effect), The firm of P, Q and R who have been sharing profits in the ratio of 2 : 2 : 1, respectively, has existed for some years. R wants that he should share equally in the, profits with P and Q and he further wants that the change in the profit-sharing ratio, should come into effect retrospectively for the last 3 years. P and Q have no objection to, this. The profits for the last three years were ` 30,000; ` 24,000 and ` 33,000., Show the adjustment of profits for the last three years by means of Journal entry., Solution, Profits of 3 years = ` 30,000 + 24,000 + 33,000 = ` 87,000, Old Profit-sharing Ratio 2 : 2 : 1, 2, Therefore, P's Share in Profits = 87,000 ´ = ` 34,800, 5, 2, Q's Share in Profits = 87,000 ´ = ` 34,800, 5, 1, R's Share in Profits = 87,000´ = ` 17,400, 5, New profit-sharing ratio is equal, i.e., 1 : 1 : 1, 1, Therefore, each partner will get ` 87,000´ = ` 29,000, 3, Statement showing the Adjustment Required, Particulars, Profit credited among Partners, ` 30,000 + 24,000 + 33,000 = ` 87,000, In the ratio of 2 : 2 : 1 during the last three years, Profit of ` 87,000 required to be credited equally among, partners as per new arrangement, Difference representing adjustment required, , P, , Q, , R, , `, , `, , `, , 34,800, 29,000, (–) 5,800, , Adjustment Entry, Date, , 34,800, , 29,000, 29,000, (–) 5,800 (+) 11,600, , Dr., , Particulars, , L.F., , Cr., , Amount, `, , P's Capital A/c, , Dr., , 5,800, , Q's Capital A/c, , Dr., , 5,800, , To R's Capital A/c, , 17,400, , Amount, `, , 11,600, , (Being adjustment entry recorded due to change in profit-sharing, ratio with retrospective effect for three years), , 135
Page 150 :
SBPD Pub li ca tions Accountancy (XII), Type 9, Illustration 52 (Omission of Outstanding Expenses and Accrued Income), Akshay and Vinit are partners in a firm. Their respective capitals are ` 60,000 and, ` 40,000. They share profits and losses in the ratio of 3 : 2. Immediately after distribution, of ` 30,000 as profit for the year ended 31st March, 2019, it was detected that in arriving at, the profit for 2018-19 the following two items have been ignored :, (i) Outstanding expenses of ` 3,000, and, (ii) Accrued interest on Bank deposit ` 2,000., Pass an adjustment Journal entry., Solution, Statement show ing the Ad just ments to be made, Particulars, , Akshay, , Vinit, , `, , `, , Total, `, , A. Share of Partners in Outstanding Expenses, , 1,800 (Dr.) 1,200 (Dr.) 3,000, , B. Share of Partners in Accrued Interest, , 1,200 (Cr.), , C. Net effect being difference (A - B), , 600 (Dr.), , 800 (Cr.) 2,000, 400 (Dr.) 1,000 (Dr.), , Adjustment Journal Entry to be passed, Date, , Particulars, Accrued Interest A/c, Akshay's Capital A/c, Vinit's Capital A/c, To Outstanding Expenses A/c, , L.F., Dr., Dr., Dr., , Dr., , Cr., , Amount, , Amount, , `, , `, , 2,000, 600, 400, 3,000, , (Being the outstanding expenses and accrued interest expenses, and accrued interest omitted to be recorded, now adjusted), , 2.11 Final Accounts of Partnership Firm*, Final Accounts of partnership firm are prepared in the same way as it is done in the, case of a sole trading concern, that is, a partnership firm also prepare Trading Account,, Profit and Loss Account and Balance Sheet. However, in addition to, Profit and Loss, Account, Profit and Loss Appropriation Account is also prepared by the firm wherein, necessary appropriations are made to arrive at distributable net profit or loss., The only difference between accounting of a sole proprietor and a partnership lies in, the division of profits., The net profit as shown by the Profit and Loss Account of a partnership firm requires, adjustments with regard to interest on capitals, interest on drawings, partner's salary etc., as per the terms of agreement. This is done through Profit and Loss Appropriation, Account., The profit of the partnership firm as disclosed by the Profit and Loss Appropriation, Account is divided among the partners in agreed ratio or equally in the absence of, partnership deed., Illustration 53, Ramesh and Suresh carry on cloth business at Agra under the name of Agra Cloth, Stores and share profits in the ratio of 3/5 and 2/5 respectively. The under-mentioned Trial, Balance was extracted from their books on 31st March, 2018 :, *, , As per C.B.S.E. and J.A.C. Syllabus students have not to study final accounts of partnership., , 136
Page 151 :
Ac count ing for Part ner ship Firms : Fun da men tals, Dr., , Cr., , `, , Ramesh's Capital, Ramesh's Drawings, Suresh's Capital, Suresh's Drawings, Office Salaries, Purchases, Purchases Returns, Sales, Sales Returns, Loan on Mortgage, Freight and Carriage, Building, Interest Account, Stock on 1-4-2019, Brokerage and Commission, General Charges, Advertising, Reserve for Doubtful Debts, Taxes and Insurance, Furniture, Bad Debts, Sundry Debtors, Sundry Creditors, Bills Receivable, Cash in hand, Cash at Bank, Donation to Agra Club, , `, , 80,000, 12,000, , 60,000, , 10,000, 19,900, 2,15,000, 2,500, 3,10,000, 1,600, 40,000, , 20,000, 30,000, 3,200, 36,800, 15,000, 5,000, 2,000, , 1,500, 2,500, 5,000, 1,000, 61,000, 12,750, 50,000, 1,700, 10,050, 5,000, 5,06,750, , 5,06,750, , Prepare Trading and Profit & Loss Account for the year ended 31st March, 2020 and, Balance Sheet as at that date, after making the following adjustments :, (a) Stock in hand on 31st March, 2020 ` 52,000. (b) Partners are entitled to 6% interest, on capital but no interest is to be charged on drawings. (c) Write off 5% depreciation on Buildings and 10% on Furniture. (d) The reserve for doubtful debts is to be increased to ` 5,000., (e) Suresh is to be credited with ` 7,200 as a partnership salary. (f) ` 2,000 are outstanding, as salaries. (g) Four month's interest on loan at 12% per annum is unpaid., Solution, Trad ing and Profit & Loss Ac count of Agra Cloth Stores, Dr., (for the year ended 31st March, 2020), Cr., Particulars, To Opening Stock, `, To Purchases, 2,15,000, Less : Returns, 2,500, To Freight & Carriage, To Gross Profit transferred, to P. & L. A/c, , `, , Particulars, , 36,800, By Sales, 2,12,500, Less : Returns, 20,000 By Closing Stock, 91,100, 3,60,400, , `, `, , 3,10,000, 1,600, , 3,08,400, 52,000, , 3,60,400, , 137
Page 152 :
SBPD Pub li ca tions Accountancy (XII), To Office Salaries, Add : Outstanding, To Brokerage & Commission, To General Charges, To Advertising, To Taxes & Insurance, To Interest, Add : Outstanding, Interest, To Bad Debt, Add : New Reserve, , 19,900, 2,000, , 21,900, 15,000, 5,000, 2,000, 2,500, , By Gross Profit brought from, Trading A/c, , 91,100, , 3,200, 1,6001, 1,000, 5,000, 6,000, , 4,800, , Less : Reserve for, D/D (old), 1,500, To Donation to Agra Club, To Depreciation on :, (i) Building 5%, 1,500, (ii) Furniture 10%, 500, To Profit transferred to Profit &, Loss Appropriation A/c, , 4,500, 5,000, , 2,000, 28,400, 91,100, , 91,100, , Profit & Loss Appropriation Account, , Dr., Particulars, , To Interest on Capital A/c :, Ramesh, Suresh, , 1, , Interest =, , `, , By Profit & Loss A/c (Profit), , `, , 4,800, 3,600, , 28,400, , 8,400, , To Suresh's Salary A/c, To Net Profit transferred to Capital, A/cs :, Ramesh (3/5), 7,680 2, Suresh (2/5), 5,120 3, Working Notes :, , Cr., , Particulars, , `, , 7,200, , 12,800, 28,400, , 40,000´ 12´ 4, = ` 1,600., 100´ 12, , 2 ` 12,800´, , 28,400, 3, = ` 7,680., 5, , 3 ` 12,800´, , 2, = ` 5,120., 5, , Balance Sheet of Agra Cloth Stores, (as on 31st March, 2020), , Liabilities, , Amount, , Assets, , Amount, , `, , Sundry Creditors, Loan on Mortgage, Add : Interest, Outstanding Salaries, Ramesh's Capital, , 138, , `, , 40,000, 1,600, 80,000, , 12,750 Cash in hand, Cash at Bank, 41,600 Bills Receivable, 2,000 Sundry Debtors, Less : Reserve, , `, , `, , 61,000, 5,000, , 1,700, 10,050, 50,000, 56,000
Page 153 :
Ac count ing for Part ner ship Firms : Fun da men tals, Add : Interest, Add : Net Profit, Less : Drawings, Suresh's Capital, Add : Interest, Add : Salary, Add : Net Profit, Less : Drawings, , 4,800, 7,680, 92,480, 12,000, 60,000, 3,600, 7,200, 5,120, 75,920, 10,000, , Buildings, Less : Depreciation, Furniture, 80,480, Less : Depreciation, Closing Stock, , 30,000, 1,500, 5,000, 500, , 28,500, 4,500, 52,000, , 65,920, 2,02,750, , 2,02,750, , 2.12 FAST REVISION, l Meaning of Partnership : Partnership is an association of two or more persons who agree, to contribute financial resources and share the profits of the business in an agreed ratio., l Definition of Partnership : According to Section 4 of the Indian Partnership Act, 1932,, partnership may be defined as ‘ The relationship between two or more persons who have, agreed to share the profits of the business carried on by all or any of them acting for all.'', l Partner and Firm : The persons who enter into agreement to form partnership are individually, known as ‘partners' of the firm and collectively they are known as a ‘partnership firm'., l Partnership Deed : Partnership deed may be defined as a document in writing containing, the important terms of partnership as agreed by the partners between themselves., l Provisions applicable in the Absence of Partnership Deed [Sec. 13] :, Interest on Capital : No interest on capital will be allowed to partners. If there is a, provision for the interest on capital in the partnership deed, it will be allowed only, when there is a sufficient profit., (ii) Interest on Drawings : No interest is to be a charged on drawings., (iii) Profit-sharing Ratio : Profits and losses will be shared in equal ratio irrespective of, their capital contribution., (iv) Salary to a Partner : No partner is entitled to any salary or commission for taking, active part in business activities., (v) Interest on Partner's Loan : Interest at the rate of 6% per annum will be allowed on a, partner's loan to the firm. Such interest will be paid even if there are losses to the firm., (vi) A new partner can only be admitted if all existing partners agree on his admission., (vii) Each partner has the equal right on the properties of the firm., l Preparation of Capital Accounts : There may be two methods of maintaining Capital, Accounts. These are : (i) Fluctuating Capital Method, (ii) Fixed Capital Method., Fluctuating Capital Method : Under this method, all the transactions relating to a partner, are directly recorded in the Capital Account., Fixed Capital Method : Under this method, amount of capital remains fixed, the, transactions like interest on capital, drawings, interest on drawings, salary, commission,, share of profit or loss are recorded in a separate account called ‘Partner's Current Account’., l Distribution of Profit & Loss : Distribution of profits among the partners are made, through a Profit & Loss Appropriation Account as per terms of agreement., l Profit & Loss Appropriation Account : Profit and Loss Appropriation Account is an, extension of Profit & Loss Account. It is prepared to show how net profit that has been, distributed among the partners. It is prepared to carry out adjustments of partner's rights, (such as interest on capital, salary, commission etc.) and obligations., (i), , 139
Page 154 :
SBPD Pub li ca tions Accountancy (XII), l Treatment of Past Adjustments : If after the final accounts have been prepared, some, omissions or commissions are noticed in respect of interest on capital, salary etc. Necessary, adjustments can be made in Partner's Capital Accounts by passing an adjustment entry., Entry : Debit the capital account of the partner who had been credited in excess and credit, the capital account of the partner who had been debited in excess., Journal Entry :, Partner's Capital A/c, Dr., To Partner's Capital A/c, , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (6/8 Marks Questions), , 1. Define Partnership and discuss its essential features., 2. What is Partnership Deed ? State at least five important points from Accountancy point of view, which must be incorporated in a partnership deed., 3. What do you mean by fixed and fluctuating capitals ? Distinguish between fixed and, fluctuating capitals., Or, Explain differences between Fixed Capital Account and Fluctuating Capital Account., (M.P. Board, 2015, 17), 4. What is Partnership Deed ? What are its contents ?, 5. Define ‘Partnership' and enumerate the essential elements of Partnership., 6. State the main provisions of the Partnership Act relating to partnership accounts if there is no, partnership agreement., , (B) Short Answer Type Questions, 1., 2., 3., 4A., 4B., 5., , 6., 7., 8., 9., 10., 11., 12., 13., 14., 15., 16., 17., , (3/4 Marks Questions), , What is meant by partnership ?, (B.S.E.B., 2010), Distinguish between Partners' Capital Account and Current Account., State any four characteristics of partnership., State the elements of Partnership Deed., (M.P. Board, 2016), What do you mean by ‘Fixed Capitals' and ‘Fluctuating Capitals' ?, In the absence of Partnership Deed, what are the rules relating to the following :, (a) Interest on Partners' Capitals, (b) Profit-sharing Ratio,, (U.S.E.B., 2011), (c) Interest on Partner's Loan., Why is Profit and Loss Appropriation Account prepared ?, Explain in 50 words as to why it is considered desirable to make the partnership agreement in, written., List the items which may be debited or credited in capital accounts of the partners when :, (i) Capitals are fixed, (ii) Capitals are fluctuating., Distinguish between Fixed Capital and Fluctuating Capitals of partners., In the absence of Partnership Deed, what are the rules relating to :, (a) Salaries of Partners, (b) Interest on Partner's Capital., In the absence of Partnership Deed, what are the rules relating to :, (a) Interest on Partner's Loan, (b) Profit-sharing Ratio., In the absence of Partnership Deed, what are the rules relating to :, (a) Interest on Partner's Drawings, (b) Interest on Partners' Capital., What rules of Partnership apply in the absence of Partnership Deed ?, (U.S.E.B., 2018), List any four points from Accountancy point of view which must be incorporated in a, Partnership Deed., List any four items which can be credited to the Capital Account of a partner when the Capital, Account is fluctuating., State any four rules of Partnership Act which apply in the absence of Partnership Deed., (U.S.E.B., 2015), Distinguish between charge against profit and appropnation of profit., , 140
Page 155 :
Ac count ing for Part ner ship Firms : Fun da men tals, (C) Very Short Answer Type Questions, , (1 Mark Questions with Answers), , 1. What is meant by partnership ?, [Ans. Partnership is an agreement between two or more persons who agree to share profits of a, business carried on by them under common ownership and management.], 2. Define partnership., [Ans. According to Section 4 of the Indian Partnership Act, 1932, ‘‘Partnership may be defined, as the relationship between two or more persons who have agreed to share the profit of a, business carried on by all or any of them acting for all.’’], 3. State the nature of partnership firm., [Ans. When two or more persons establish legal business and share its profits and losses. They, are said to be in Partnership. The persons who have entered into partnership with one, another are individually called ‘Partners’ and collectively ‘Firm’. The name in which the, business is carried on is called the ‘firm's name.’], 4. What is meant by partner ?, [Ans. The persons who have entered into a partnership with one another are called ‘Partners'.], 5. What is meant by ‘Firm’ ?, [Ans. The persons who have entered into a partnership are collectively called ‘firm’.], 6. What is the minimum and maximum limit on number of partners in a firm ?, [Ans. There must be at least two persons to form a partnership firm. The maximum number of, partners is restricted upto 50 by Rule (10) of Companies (Miscellaneous) Rule, 2014], 7. List any two/three essential elements (or features) of partnership., (J.A.C., 2011), [Ans. (1) Agreement between the partners, (2) Two or more persons, (3) Sharing of profits (and losses).], 8. What is Partnership Deed ? or What is meant by Partnership Deed ?, [Ans. A Partnership Deed is a document in writing containing the important terms of, partnership as agreed between the partners. Generally, it is registered.], 9. Is it compulsory to have Partnership Deed for conducting a business under partnership?, [Ans. No, it is not compulsory to have Partnership Deed in writing.], 10. State any two contents of Partnership Deed., [Ans. (1) Amount of capital to be contributed by each partner., (2) Ratio in which profits and losses are to be shared by partners.], 11. In the absence of any provision in the Partnership Deed, in which ratio the partners, share the profits and losses., [Ans. Equally.], 12. Why is it necessary to have a Partnership Deed ?, [Ans. Partnership Deed is required for the following purposes :, (1) It helps in resolving mutual conflicts among the partners., (2) It helps in smooth functioning of the business.], 13. State the provision of Indian Partnership Act, 1932 relating to sharing of profit in, the absence of any provision in the Partnership Deed., [Ans. According to Section 13(B) of Indian Partnership Act, 1932, the profits and losses of the, firm are to be shared equally by partners. If the Partnership Deed is silent about the, profit-sharing ratio irrespective of their capital contribution in the firm.], 14. In the absence of any provision in the Partnership Deed, what will be the rate of, interest on the loan given by a partner to the firm ?, [Ans. 6% p.a.], 15. In the absence of any provision in the Partnership Deed, what will be the rate of, interest on capital and drawings of the partners ?, [Ans. Nil.], 16. What are two methods of maintaining Capital Accounts of partners ?, [Ans. (1) Fixed Capital Method, (2) Fluctuating Capital Method.], 17. What is Fixed Capital Method ?, [Ans. Under fixed capital method, the partners are not allowed to change their capital except, in extra ordinary circumstances. Share of profit or loss, interest on capital, drawings,, interest on drawings etc. are recorded it in Partners’ Current Accounts.], , 141
Page 156 :
SBPD Publications Accountancy (XII), 18. Under which method of maintaining Capital Accounts, Current Accounts are, maintained along with Partners' Capital Accounts ?, [Ans. Fixed Capital Method.], Accounting for Partnership, SBPD Publications, Firms : Fundamentals, Accountancy, 19. Explain Fluctuating Capital System of maintaining partner’s capital ?, [Ans. Fluctuating capital system is a system under which only one account, namely Capital, Account is maintained for each partner. All the adjustments are made in Capital, Account itself. This makes the balance in the Capital Account to fluctuate from time to, time. This is the reason why this method is called Fluctuating Capital Method.], 20. List two items that may appear on the credit side of a Partner's Fixed Capital Account., [Ans. 1. Opening balance of capital. 2. Fresh capital introduced under an agreement.], 21. List any two items which usually appear on the debit side of a Partner's Capital, Account when the capital is fixed., [Ans. 1. Drawings under an agreement. 2. Closing Balance.], 22. Define Profit-sharing Ratio., [Ans. Profit-sharing Ratio is the ratio on the basis of which the partners share profit of the, business among themselves.], 23. What is Profit and Loss Appropriation Account ?, [Ans. Profit and Loss Appropriation Account is an account which is prepared to carry out, adjustment of partners' rights and obligations such as salary and commission payable to, partner, interest on capital etc. and distribution of profit among partners. It is nominal, account in nature and prepared just like Profit and Loss Account.], 24. What is the purpose of preparing Profit and Loss Appropriation Account ? or Why is, Profit & Loss Appropriation Account prepared ?, [Ans. The main purpose of preparing Profit and Loss Appropriation Account of a partnership, firm is to calculate and distribute divisible profit (and loss.)], 25. List any two items appearing on the debit side of the Profit and Loss Appropriation, Account of a partnership firm., [Ans. (1) Interest on Capital. (2) Partner's Salary/Commission.], 26. List any two items appearing on credit side of the Profit and Loss Appropriation, Account of a partnership firm., [Ans. (1) Interest on drawings, (2) Net Profit.], 27. How will you calculate interest on drawings of equal amount on the first day of every, month of a year ?, Rate 6.5, [Ans. Interest on Drawings = Total Drawings ´, ´, ×], 100 12, 28. How will you calculate interest on drawings of equal amounts on the last day of, every month of a year ?, Rate 5.5, [Ans. Interest on Drawings = Total Drawings ´, ´, ], 100 12, 29. How will you calculate interest on drawings of equal amounts on the 15th day or, middle of every month of a calendar year ?, Rate 6, [Ans. Interest on Drawings = Total Drawings ´, ´ ×], 100 12, 30. How will you calculate interest on drawings when fixed amount is withdrawn at the, beginning of each quarter ?, Rate 7.5, [Ans. Interest on Drawings = Total Drawings ´, ´, ×], 100 12, 31. How will you calculate interest on drawings when a fixed amount is withdrawn at, the end of each quarter ?, Rate 4.5, [Ans. Interest on Drawings = Total Drawings ´, ´, ×], 100 12, 32. Why is interest on drawings calculated ?, [Ans. When partners make drawings disproportionately, it results in difference in the, advantages enjoyed by the partner's interest. To remove disproportionate advantage,, interest on drawings is calculated.], , 142
Page 157 :
Accounting for Partnership Firms : Fundamentals, 33. Give the formula of calculating interest by Product Method., Rate, 1, 1, [Ans. Interest = Total Product´, ´, or ×], 100 365 12, 34. Pass a single entry or adjustment entry for making past adjustments., [Ans. Partner's Capital A/c (Credited in excess), Dr., To Partner's Capital A/c (Debited in excess)], 35. Give any two points of distinction between fixed capital method and fluctuating, capital method., (U.S.E.B., 2014), [Ans. See 2.8.3.1 Page 91 of this chapter.], , (D) Objective Type Questions, I. Choose the correct option :, 1. In the absence of any agreement, the profits and losses of the firm are shared :, (a) Equally, (b) In Capital Ratio, (c) In Different Proportions, (d) None of these, 2. In the absence of partnership agreement, interest on partner's loan is paid :, (J.A.C., 2018), (a) 5% p.a., (b) 6% p.a., (c) 8% p.a., (d) 4% p.a., 3. The interest on Partners' Capital Account is to be credited to :, (a) Profit and Loss A/c, (b) Interest A/c, (c) Partner's Capital A/c, (d) None of these, 4. The interest on Capital Accounts of partners under Fixed Capital method is to be credited to :, (a) Partner’s Capital A/c, (b) Profit and Loss A/c, (c) Interest A/c, (d) Partner’s Current A/c, 5. In an ordinary partnership maximum number of partners can be :, (J.A.C., 2018), (a) 10, (b) 20, (c) 50, (d) 30, 6. Current Account is :, (a) Personal Account, (b) Real Account, (c) Nominal Account, (d) None of these, 7. Interest on partner's capital is calculated on :, (a) Capital at the beginning, (b) Capital at the end, (c) Average Capital, (d) None of these, 8. Partnership agreement can be :, (J.A.C., 2018), (a) Oral, (b) Written, (c) Oral or Written, (d) None of these, [Ans. 1. (a), 2. (b), 3. (c), 4. (d), 5. (c), 6. (a), 7. (a), 8. (c).], II. State whether the following statements are True or False :, 1. Partnership is created by an agreement., (J.A.C., 2014, 15), 2. The sharing of profit is the conclusive evidence of partnership., 3. A partnership can be formed only for a legal business., 4. The partnership agreement is always in writing., 5. The liability of a partner is limited., (J.A.C., 2014), 6. A partner is entitled to 6% p.a. interest on capital., 7. A partner is entitled to receive 6% p.a. interest on his loan given to the firm., 8. A partner cannot transfer his interest in partnership without the consent of other partners., 9. Atleast two persons are necessary for forming a partnership., (J.A.C., 2014), 10. A minor can also be admitted as a partner., (J.A.C., 2015, 18), 11. Registeration of partnership firm is compulsory., (J.A.C., 2015), 12. The liability of a partner is unlimited., (J.A.C., 2018), [Ans. : 1. True, 2. False, 3. True, 4. False, 5. False, 6. False, 7. True, 8. True, 9. True, 10. False,, 11. False, 12. True.], , 143
Page 158 :
SBPD Publications Accountancy (XII), PRACTICAL PROBLEMS, ❐ In the Absence of Partnership Agreement/Deed, 1. A, B and C entered into partnership with no agreement as to sharing profits and contributed, ` 1,00,000, ` 80,000 and ` 70,000 respectively as capital. C advances a loan of ` 50,000 to the, firm. State that :, (i) How do they share profits ?, (ii) What rate of interest is given on C’s loan ?, (iii) For taking part in management, B claims a salary of ` 6,000 per annum. Is he entitled to it., (U.S.E.B., 2013), [Ans. (i) Partners shall share the profits equally. (ii) 6% interest p.a. will be given on C’s loan., (iii) No.], ❐ Distribution of Net Profit : Profit and Loss Appropriation Account, 2. A, B and C have capitals of ` 60,000, ` 30,000 and ` 12,000 respectively, on which they are, entitled to get interest at 5% p.a. The profits for the year before charging interest on capital, amounted to ` 34,000. Prepare Profit & Loss Appropriation A/c, if they share profits and losses, in the ratio of 6 : 3 : 1., [Ans. Net Profit : A—` 17,340; B— ` 8,670; C—` 2,890], 3A. X and Y are entered into partnership sharing the profit and losses in the ratio of 3 : 2. X being a, non-working partner contributed ` 5,00,000 as his Capital on 1st January 2019. Y being a, working partner agreed to work for the firm. The partnership deed provides for interest on, capital @ 8% and salary to every working partner @ ` 2,000 p.m. Net Profit before providing for, interest on capital and partners’ salary for the year 2019 was ` 1,20,000. Show the distribution, of profit., [Ans. Net Profit : X ` 33,600, Y ` 22,400.], 3B. Ankit and Munna started a partnership business on Jan., 1, 2017. They contributed ` 1,60,000, and ` 1,20,000 respectively as their capitals. The terms of the partnership agreements are as, under :, (i) Interest on capital @ 10% p.a., (ii) Ankit and Munna to get a monthly salary of ` 2,000 and, ` 3,000 respectively, (iii) Profits are to be shared in the ratio of 3 : 2., The profit for the year ended 31st December, 2017, before making above appropriations was, ` 1,43,000 Interest on drawings amounted to ` 2,000 for Ankit and ` 3,000 for Munna. Prepare, Profit and Loss Appropriation Account., [Ans. Net Profit ` 60,000, Ankit’s Share ` 36,000, Munna’s Share ` 24,000.], 4. Raj and Amritanshu are partners sharing profits and losses in the ratio of 3 : 2. Their capitals, are ` 2,00,000 and ` 1,60,000 respectively. Interest on capital is allowed at 5% p.a. Amritanshu, is to be allowed an annual salary of ` 30,000. The profit for the year ended 31st March, 2018, prior to calculation of interest on capital but after charging Amritanshu’s salary is ` 90,000., Prepare Profit and Loss Appropriation Account., [Ans. Net Profit ` 72,000, Raj ` 43,200, Amritanshu ` 28,800.], ❐ Fixed and Fluctuating Capital, 5. From the following information, prepare Capital Accounts of Manav and Raghav who are, partners in a firm, assuming that their capitals are fluctuating :, Manav, Raghav, Capital (1.4.2018), Drawings, Interest on Capital, Interest on Drawings, Salary, Commission, Share of Profits for 2018-19, [Ans. Capital Balance (Cr.) : Manav ` 1,09,700, Raghav ` 89,820], , 144, , `, , 1,00,000, 10,000, 5,000, 300, 5,000, —, 10,000, , `, , 80,000, 6,000, 4,000, 180, —, 2,000, 10,000
Page 159 :
Accounting for Partnership Firms : Fundamentals, 6. Amrit Pal and Rajkumar started a partnership business on 1.1.2017 with capital contribution, of ` 50,000 and ` 40,000 respectively sharing profits in the ratio of 2 : 3. During the year they, earned a profit of ` 30,000 after all appropriations. According to the partnership deed both the, partners are entitled to ` 1,000 per month as salaries and 5% interest on capital. Their, drawings during the year amounted to ` 10,000 and ` 6,000 respectively., Prepare Partners’ Capital Accounts when :, (i) Capital is Fixed, and (ii) Capital is Fluctuating., [Ans. (i) When Capital is Fixed : Capital A/c Balance (Cr.) : Amrit Pal ` 50,000, Rajkumar, ` 40,000. Current Account Balance (Cr.) Amrit Pal ` 16,500, Rajkumar ` 26,000., (ii) When Capital is Fluctuating : Capital A/c Balance (Cr.) Amrit Pal ` 66,500,, Rajkumar ` 66,000], ❐ Calculation of Interest on Capital, 7. Surajmukhi and Gulab started partnership business on April 1, 2019 with capital of ` 2,50,000, and ` 1,50,000 respectively. On October 1, 2019 they decided that their capitals should be, ` 2,00,000 each. The necessary adjustments in the capitals are made by introducing or, withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate interest on capital, as on March 31, 2020., (N.C.E.R.T.), [Ans. Total Interest on Surajmukhi's Capital ` 22,500 and on Gulab's Capital ` 17,500.], 8. Saloni and Shrishti are partners in a firm. Their capital accounts as on April 1, 2019 showed a, balance of ` 2,00,000 and ` 3,00,000 respectively. On July 1, 2019, Saloni introduced additional, capital of ` 50,000 and Shrishti ` 60,000. On October 1, 2019 Saloni withdrew ` 30,000 and on, January 1, 2020 Shrishti withdrew ` 15,000 from their capitals. Interest is allowed @ 8% p.a., Calculate interest payable on capital to both the partners during the financial year 2019-20., [Ans. Net Interest on Capital : Saloni ` 17,800, Shrishti ` 27,300.], (N.C.E.R.T.), ❐ Division or Distribution of Profit among Partners, 9. Black and White started a business on 1st April, 2019 contributing ` 40,000 and ` 60,000, respe ctively. At the end of the year the business made a profit of ` 30,000. Distribute the profits :, (i) If their profit-sharing ratio is 3 : 2, (ii) If they decide to follow the provisions of Indian, Partnership Act, and (iii) If they share profits in capital ratio., [Ans. (i) Black ` 18,000, White ` 12,000; (ii) Black ` 15,000, White ` 15,000; (iii) Black ` 12,000,, White ` 18,000], 10. On Jan. 1, 2019 Puja and Neha started a business in partnership with ` 20,000 and ` 12,000, respectively as capital. They agree to share profits in the capital ratio. They have the following, transactions during the year :, Capital Introduced, Amount Withdrawn, Puja, Neha, Puja, Neha, `, , `, , `, , `, , 1st April, 5,000, —, —, —, 1st Aug., —, 8,000, 2,000, —, 1st Oct., —, —, —, 4,000, 1st Dec., 5,000, —, —, —, The business earned a profit of ` 45,200 during the year ended 31st December, 2019. Distribute, the profits in capital ratio and pass a Journal entry for the distribution of profit., [Ans. Capital Ratio between Puja and Neha = 70 : 43. Share of Profit : Puja ` 28,000, Neha, ` 17,200], (N.C.E.R.T.), ❐ Interest on Drawings, 11. Pawan is a partner in a firm. He withdrew the following amounts during the year ended on 31st, March, 2020 :, 1st July, 2019, ` 20,000, 31st Jan,. 2020, ` 5,000, 31st August, 2019, ` 40,000, 1st March, 2020, ` 5,000, 1st Oct., 2019, ` 10,000, 31st March, 2020, ` 10,000, Interest on drawings is to be charged @ 12% p.a. Calculate interest on drawings, [Ans. Interest ` 5,350], , 145
Page 160 :
SBPD Publications Accountancy (XII), 12. Divyanshu is a partner in a firm. He withdrew the following amounts during the half year, ended on 30th June, 2019 :, 31st January, ` 400, 28th February, ` 350, 31st March, ` 500, 30th April, ` 250, 31st May, ` 150, 30th June, ` 200, Calculate interest on drawings @ 8% p.a. for the half year ended on 30th June, 2019., [Ans. Interest on Drawings ` 37], 13. M and N are equal partners. As per their partnership agreement interest on drawings is to be, charged @ 10% p.a. Their drawings during 2019 were ` 40,000 and ` 20,000 respectively., Calculate interest on drawings based on the assumption that the amount was withdrawn, evenly throughout the year., (J.A.C., 2013), [Ans. Interest on Drawings : M ` 2,000, N ` 1,000.], 14A. Hemant withdraws ` 2,500 at the end of each month. The Partnership Deed provides for, charging the interest on drawings @ 12% p.a. Calculate interest on drawings for the year, ending 31st December, 2019., (N.C.E.R.T.), [Ans. Interest on Drawings ` 1,650.], 14B.Bhashkar is a partner in a firm. He withdraws ` 6,000 in the beginning of each month for 12, months. The books of the firm closes on 31st March every year. Calculate interest on drawings, if the rate of interest is 10% p.a., [Ans. Interest on Drawings ` 3,900.], 14C. Hari and Ravi are partners in a firm. They withdrew ` 6,000 and ` 8,000 respectively from the, firm at the end of each month. The interest is charged @ 14% p.a. on their drawings, the books, of the firm are closed on 31st December. Calculate the interest on drawings of Hari and Ravi., [Ans. Interest on Drawings : Hari ` 4,620; Ravi ` 6,160.], 15. (a) Kailash is a partner in a firm. He withdraws ` 10,000 from the business for personal use, during the year ended 31st March, 2019. Calculate interest on drawings @ 12% p.a., (b) Javed is a partner in a firm. He withdraws ` 6,000 p.m. throughout the year in the middle of, every month. Compute interest on drawings @ 8% p.a., [Ans. (a) ` 600 (b) ` 2,880], 16. M, N and O are three partners. They withdrew ` 10,000 each on quarterly basis. Compute, interest on drawings for the year 2019 @ 10% p.a. in the following cases :, (i) M withdrew at the beginning of each quarter., (ii) N withdrew at the end of each quarter., (ii) O withdrew in the middle of each quarter., [Ans. (i) ` 2,500, (ii) ` 1,500, (iii) ` 2,000], 17. In a firm R, S and T are partners. They made the drawings as follows :, (i) R ` 5,000 p.m. on the first day of each month for 6 months., (ii) S ` 4,000 p.m. on the last day of each month for 6 months., (iii) T ` 3,000 p.m. in the middle of each month for 6 months., Calculate interest on drawings @ 12% p.a., [Ans. (i) ` 1,050, (ii) ` 600 (iii) ` 540.], 18. Aryan, Bhargav and Chaturvedi are partners in a firm. You find that :, (i) Aryan drew ` 4,000 in the beginning of each month for 9 months., (ii) Bhargav drew ` 4,000 at the end of each month for 9 months., (iii) Chaturvedi drew ` 4,000 in the middle of each month for 9 months., Calculate interest on drawings @ 10% p.a., [Ans. (i) ` 1,500, (ii) ` 1,200, (iii) ` 1,350], ❐ Interest on Capital as a Charge on Profit, 19. Arun and Arora are partner in a firm sharing profits in the ratio of 5 : 3. Their fixed capitals on, 1.4.2019 were Arun ` 60,000 and Arora ` 80,000. They agreed to allow interest on capital @ 12%, p.a. and to charge interest on drawings @ 15% p.a. The profit of the firm for the year ended, 31.3.2020 before all above adjustments were ` 12,600. The drawings made by Arun were ` 2,000, and by Arora ` 4,000 during the year., , 146
Page 161 :
Accounting for Partnership Firms : Fundamentals, Prepare Profit and Loss Appropriation Account of Arun and Arora. Show the calculations clearly., The interest on capital will be allowed even if the firm incurs loss., (C.B.S.E., 2012), [Ans. Interest on Drawings : Arun ` 150, Arora ` 300, Net Loss ` 3,750 (Arun ` 2,344, Arora, ` 1,406).], ❐ Treatment of Interest on Loan of Partners, 20. A and B are partners sharing the profits and losses in the ratio of 2 : 3 with capitals of ` 40,000, and ` 20,000 respectively. On 1st July, 2019, A and B granted loans of ` 80,000 and ` 40,000, respectively to the firm. Show the distribution of profits/losses if the profits before charging any, interest for the year 2019 amounted to ` 8,400., [Ans. Share of Profit : A ` 1,920, B ` 2,880.], ❐ Partner’s Loan and Rent paid to a Partner, 21. X, Y and Z are partners in a firm. Their capitals on 1st April, 2019 were as follows :, X ` 60,000, Y ` 50,000 and Z ` 40,000. On 1st Oct., 2019 X gave a loan of ` 10,000 to the firm., The partnership deed contained the following clauses :, (i) Interest on capital @ 5% p.a., (ii) Interest on loan @ 6% p.a., (iii) Salary for Z @ 1,000 per month., (iv) Y to get rent of ` 500 p.m. for the use of premises., Net profit of the firm for the year ended 31st March, 2020 (before the above adjustments) was ` 30,300., Prepare Profit and Loss Appropriation Account assuming capital to be fixed., [Ans. Distributable Profit ` 4,500; X’s Share ` 1,500, Y’s Share ` 1,500, Z’s Share ` 1,500], ❐ Salary and Commission to a Partner, 22. Sharma and Verma are partners sharing profits in the ratio of 4 : 1 in a firm. Their capitals on 1st, April, 2018 were : Sharma ` 5,00,000 and Verma ` 1,00,000. The Partnership Deed provided, that Sharma will get a commission of 10% of the net profits after allowing a salary of ` 5,000 per, month to Verma. The profit of the firm for the year ended 31st March, 2019 was ` 2,80,000., Prepare Profit and Loss Appropriation Account of Sharma and Verma for the year ended 31st, March, 2019., [Ans. Share of Profit : Sharma ` 1,58,400, Verma ` 39,600, Sharma’s Commission ` 22,000.], 23. Gopal and Kalu share profits equally. Gopal is entitled to a salary of ` 2,000 per month and, together a commission of 10% of net profit before charging commission. Kalu is entited to a, salary of ` 20,000 p.a. and also a commission of 5% on the profits after charging the commission, and salary. The profits during the year ending March, 31, 2018 were ` 1,84,000. Distribute the, profits between Gopal and Kalu., [Ans. Commission to Gopal ` 14,000, Kalu ` 6,000, Net Profit ` 1,20,000. Share of Profit : Gopal, ` 60,000, Kalu ` 60,000], ❐ Profit & Loss Appropriation A/c and Partners' Capital A/cs, 24. A, B and C have capitals of ` 20,000, ` 10,000 and ` 4,000 respectively, on which they are, entitled to interest at 5% per annum. The profit in the year, before charging interest on capital,, amounted to ` 1,100. Prepare Profit & Loss A/c and Partners’ Capital Accounts when interest, on capital is paid and profits and losses are shared equally., [Ans. (i) P/L Appropriation A/c Loss ` 600, (ii) Capital Balance : A ` 20,800; B ` 10, 300; C ` 4,000.], ❐ Commission to a Manager, 25. A and B are partners sharing profits in the ratio of 3 : 2 with their capitals as ` 4,00,000 and, ` 3,00,000 respectively. Interest on capital is allowed at 5% p.a. B is allowed an annual salary of, ` 30,000 which has not been withdrawn. During 2019, the profits prior to calculation of interest, on capital but after charging B’s salary amounted to ` 1,20,000. A provision of 5% of profit is to, be made in respect of commission to manager., Show the distribution of profit of the firm., [Ans. Net Profit transferred to P/L App. A/c ` 1,42,500, Net Profit : A ` 46,500, B ` 31,000.], 26. Manpreet and Harmeet are partners sharing profits in the ratio of 3 : 1 with capitals of, ` 1,00,000 and ` 40,000 respectively. Interest on capital is agreed @ 10% p.a. Harmeet is to be, allowed a salary of ` 500 per month. During the year they withdrew ` 10,000 each. Profit for the, year amounted to ` 36,000 prior to appropriations and before charging depreciation on, , 147
Page 162 :
SBPD Publications Accountancy (XII), furniture ` 2,000 and writing off bad debts ` 1,000. Manager is to be allowed a commission of, 10% of profit after charging such commission., Show the distribution of profit between partners and prepare Partners’ Capital Accounts, [Ans. Net Profit ` 30,000, Distributable Profit ` 10,000, Manpreet ` 7,500, Harmeet ` 2,500., Capital Balance : Manpreet ` 1,07,500, Harmeet ` 42,500], 27. A and B are partners sharing profits in the ratio of 3 : 2 with capitals of ` 50,000 and ` 30,000, respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed annual salary of, ` 2,500 and rent of building ` 3,000. During 2019, the profits of the firm prior to calculation of, interest on capital but after charging B's salary amounted to ` 12,500. A provision of 5% of the, profits is to be maintained in respect of manager's commission., Prepare an account sharing allocation of profits and Partners' Capital Accounts., [Ans. Net Profit : A ` 2,460, B ` 1,640, Manager's Commission ` 600 (on ` 12,000), Capital, Balance : A ` 55,460, B ` 35,940.], ❐ Interest on Capital and Drawings, Interest on Loan and Transfer to Reserve, 28. A and B are partners with capital of ` 30,000 and ` 10,000 respectively on 1st April, 2019. The, trading profit (before taking into account the provisions of deed) for the year ended 31st March,, 2020 was ` 12,000. Interest on capital is to be allowed at 6% per annum. B is entitled to a salary, of ` 3,000 p.a. The drawings of the partners were ` 3,000 and ` 2,000. The interest on drawings, for A is ` 100 and for B ` 50. Assuming that A and B are equal partners, prepare the Profit &, Loss Appropriation Account as on 31st March, 2020. (The Capitals are fluctuating)., [Ans. Net Profit ` 6,750; A ` 3,375; B ` 3,375], (J.A.C., 2019), 29. Sanatan and Narayan are partners in a firm sharing profits and losses as Sanatan 4/5th and, Narayan 1/5th. On 1st April, 2019, the capital of the partners was Sanatan ` 50,000 and, Narayan ` 40,000. The Profit & Loss Account of the firm for the year ended 31st March, 2020, showed a net profit of ` 1,75,000., You are required to give the Profit & Loss Appropriation Account of the firm after taking into, consideration the following adjustments :, (i) Interest on capital at 5% p.a.; (ii) Interest on Narayan's Loan Account of ` 50,000 for the, whole year; (iii) Interest on Drawings of partners at 6% per annum. The Drawings were :, Sanatan ` 15,000 and Narayan ` 10,000; (iv) Transfer 10% of the distributable profit, before, distribution to the Reserve Fund of the firm., [Ans. Distributable Profit ` 1,69,000, Transfer to R/F ` 16,900, Sanatan's Share in Profit, ` 1,21,680, Narayan's Share ` 30,420.], Note : Interest on loan will be provided @ 6%., , ❐ Different Ways of Distribution of Profits, 30. A, B and C were partners in a firm having capitals of ` 60,000; ` 60,000 and ` 80,000, respectively. Their Current Account balances were A : ` 10,000; B : ` 5,000 and C : ` 2,000 (Dr)., According to the Partnership Deed the partners were entitled to interest on capital @ 5% p.a. C,, being the working partner was also entitled to a salary of ` 6,000 p.a. The profits were to be, divided as follows :, (a) The first ` 20,000 in proportion to their capitals., (b) Next ` 30,000 in the ratio of 5 : 3 : 2., (c) Remaining profits to be shared equally., The firm made a profit of ` 1,56,000 before charging any of the above items. Prepare Profit &, Loss Appropriation Account and pass the necessary Journal entry for apportionment of profit., [Ans. Profit on P/L App. A/c ` 90,000 transferred equally to Partners’ Current A/cs.], ❐ Guarantee of Profit to a New Partner, 31. A, B and C are partners sharing profits in the ratio 5 : 4 : 1. C is given a guarantee that his, share of profit in any given year would not be less than ` 5,000. Deficiency, if any, would be, borne by A and B equally. The profits for the year 2019-20 amounted to ` 40,000., Pass necessary entries in the books of the firm., [Ans. Deficiency met by A & B, ` 500 and ` 500 respectively. Share in Profit A ` 19,500,, B ` 15,500, C ` 5,000], 32. X, Y and Z are partners in a firm. Their profit-sharing ratio is 5 : 3 : 2. However, Z is guaranteed, a minimum amount of ` 10,000 as share of profit every year. Any deficiency arising on that, , 148
Page 163 :
Accounting for Partnership Firms : Fundamentals, account shall be met by Y. The profits for the two years ending December 31, 2016 and 2017, were ` 40,000 and ` 60,000 respectively. Prepare Profit & Loss Appropriation Account for the, two years., [Ans. Share of Profit 2016—X : ` 20,000, Y : ` 10,000, Z : ` 10,000; 2017—X : ` 30,000,, Y : ` 18,000, Z : ` 12,000.], 33. A, B and C entered into a partnership on October 1, 2019 to share profits and losses in the ratio, of 3 : 2 : 1. A, however, personally guaranteed that C’s share of profit after charging interest on, capitals at 5% p.a. would not be less than ` 30,000 in any year.The capital contributions were A, ` 3,00,000, B ` 2,00,000 and C ` 1,00,000., The profit for the period ended 31st March, 2020 were ` 1,20,000., Show distribution of profits., [Ans. Distributable Net Profit ` 1,05,000], 34. The partners of a firm distributed the profits for the year ended 31st March, 2020, ` 1,40,000 in, the ratio of 2 : 2 : 1 without providing for the following adjustments :, (i) A and B were entitled to a salary of ` 1,500 per quarter., (ii) C was entitled to a commission of ` 8,000., (iii) A and C had guaranteed a minimum profit of ` 50,000 p.a. to B., (iv) Profits were to be shared in the ratio of 3 : 3 : 2., Pass necessary Journal entries for the above adjustments in the books of the firm., [Ans. Profit—A : ` 42,000, B : ` 50,000, C : ` 28,000.], ❐ Past Adjustments : Omission of Interest on Capital, 35. A, B and C are partners sharing profits and losses in the ratio of 4 : 3 : 3. On 1st April, 2019, their capitals were ` 30,000, ` 45,000 and ` 60,000 respectively. After the final accounts have, been prepared, it was found that interest on capital @ 6% p. a. was omitted. Give the necessary, adjusting Journal entry., [Ans. A to be debited by ` 1,440, B to be credited by ` 270 and C to be credited by ` 1,170], 36. Ramesh, Suresh and Tomar are partners in a firm. They have omitted interest on capital @ 10%, p.a. for three years ended 31st March, 2020. Their fixed capitals on which interest was to be, calculated throughout were :, Ramesh ` 1,00,000, Suresh ` 80,000, Tomar ` 70,000., Give the necessary adjusting Journal entry with working notes., [Ans. Ramesh ` 5,000 (Cr.), Suresh ` 1,000 (Dr.), Tomar ` 4,000 (Dr.).], ❐ Omission of Interest on Drawings, 37. A, B, and C are partners sharing profits and losses in the ratio of 2 : 2 : 1. After the final, accounts have been prepared, it was discovered that interest on drawings had not been taken, into consideration. The interest on drawings of partners amounted to A ` 250, B ` 180 and C, ` 100. Give the necessary adjusting Journal entry., [Ans. A ` 38 (Dr.), B ` 32 (Cr.), C ` 6 (Cr.).], ❐ Adjustment after Calculating Opening Capital, 38. A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. The following was, the Balance Sheet of the firm as on 31.3.2020 :, Balance Sheet, Liabilities, `, Assets, `, Capitals :, Sundry Assets, 80,000, A, 60,000, B, 20,000, 80,000, 80,000, The profits ` 30,000 for the year ended 31.3.2020 were divided between the partners without, allowing interest on capital @ 12% p.a. and annual salary to A @ ` 1,000 per month. During the, year, A withdrew ` 10,000 and B ` 20,000., Pass the necessary adjustment Journal entry, show your working clearly. (C.B.S.E., 2011), [Ans. B’s Capital to be debited by ` 5,280 and A’s Capital to be credited by ` 5,280], [Hint : Opening Capital : A ` 52,000, B ` 28,000.], , 149
Page 164 :
SBPD Publications Accountancy (XII), 39. Manu and Shrishti are partners in a firm sharing profits in the ratio of 3 : 2. Following is the, Balance Sheet of the firm on 31st March, 2020 :, Balance Sheet (as on 31st March, 2020), Liabilities, Capitals :, Manu’s Capital, Shrishti’s Capital, , Assets, , `, `, , 30,000, 10,000, , Drawings :, Manu, 40,000, Shrishti, , `, `, , 4,000, 2,000, , Other Assets, , 6,000, 34,000, 40,000, , 40,000, , Profits for the year ended 31st March, 2020 was ` 5,000 which was divided in the agreed ratio, but interest on capital @ 5% p.a. and interest on drawings @ 6% p.a. was inadvertently ignored., Give adjustment entry., (N.C.E.R.T.), [Ans. Shrishti to be debited by ` 288 and Manu to be credited by ` 288], ❐ Interest Credited at Higher Rate, 40. A, B and C are partners in a firm sharing profits and losses in the ratio of 4 : 3 : 3. Their fixed, capitals were ` 1,00,000, ` 2,00,000 and ` 3,00,000 respectively. For the year 2019-20 interest, on capital was credited to them @ 10% instead of 9% p.a. Pass the necessary adjusting, Journal entry., [Ans. B's Current A/c, C's Current A/c, To A's Current A/c, , Dr., Dr., , `, , `, , 200, 1,200, , 1,400], , Note : Since the capitals are fixed, Current Accounts will be debited or credited., , 41. X, Y and Z are partners in a firm, sharing profits and losses in the ratio of 5 : 3 : 2. Their fixed, capitals were ` 3,00,000, ` 2,00,000 and ` 1,00,000 respectively. For the year 2019 interest on, capital was credited to them @ 10% p.a. instead of 8% p.a. Showing your working notes clearly,, pass the necessary adjustment Journal entry., [Ans. Current A/c of Y to be debited by ` 400 and Z to be credited by ` 400.], ❐ Interest Credited at a Lower Rate, 42. Ram, Shyam and Mohan are partners in a firm sharing profits and losses in the ratio of, 2 : 1 : 2 respectively. Their capitals were fixed at ` 3,00,000, ` 1,00,000, ` 2,00,000. For the, year 2019-20, interest on capital was credited to them @ 9% instead of 10% p.a. The profits, for the year after charging interest was ` 2,50,000. Show your working notes clearly and, pass the necessary adjustment entry., `, `, [Ans. Shyam's Current A/c, Dr., 200, Mohan's Current A/c, Dr., 400, To Ram's Current A/c, 600], ❐ Interest provided though the Deed did not provide, 43. A, B and C are partners in a firm sharing profits and losses in 2 : 1 : 2 ratio. Their fixed capital, were ` 40,000, ` 30,000 and ` 50,000 respectively. Interest on capital @ 6% p.a. has been, provided for the year 2019, though it was not provided in the Partnership Deed. Correct the, error by passing one adjustment entry., [Ans. B's Current A/c to debited ` 360, C's Current A/c to be debited ` 120, A's Current A/c to be, credited ` 480], ❐ Distribution of Profit in Wrong Profit-sharing Ratio, 44. Firm of Girish, Jitesh and Manoj earned profits of ` 50,000 during the year 2019, which was, distributed among the partners in the ratio of 5 : 3 : 2, whereas it should be in the ratio 2 : 3 : 5., Give a Journal entry for the rectification., `, , [Ans. Girish’s Capital A/c, Dr., To Manoj’s Capital A/c, , 150, , 15,000, , `, , 15,000]
Page 165 :
Accounting for Partnership Firms : Fundamentals, 45. A, B and C shared the profits of ` 75,000 in the ratio of 2 : 2 : 1 without providing for interest on, B's loan of ` 50,000 given in the beginning of the year. Partnership Deed is silent on interest on, loan and the profit-sharing ratio. Give necessary adjusting entry., [Ans. A and B to be debited with ` 6,000 each and C's Capital A/c with ` 9,000 and B's Loan A/c to be, credited by ` 3,000], ❐ Change of Profit-sharing Ratio with Retrospective Effect, 46. Ashish, Abhishek and Akhilesh have been sharing profits in the ratio of 2 : 1 : 1 respectively in, a firm. The firm has existed for some years. Now they decide to share profits equally and that, too, with retrospective effect from 2019. The profits for the last three years were :, 2017—` 20,000; 2018— ` 18,000; 2019— ` 16,000., Show that adjustment of profits for the last three years by means of Journal entries., [Ans. Ashish to be debited with ` 9,000; Abhishek & Akhilesh each to be credited with ` 4,500], ❐ Omission of Expenses and Income, 47. M and N are partners in a firm. Their capital contributions are ` 1,50,000 and ` 1,00,000 and their, profit-sharing ratio is 3 : 2. Immediately after the allocation of ` 80,000 as profit for the year, ended 31st March, 2020, it was discovered that in arriving profit for 2019-20 the following two, items have been ignored :, (i) Accrued interest on investment ` 1,000., (ii) Outstanding wages ` 800., Pass an adjustment Journal entry., [Ans. Accrued Interest A/c to be debited with ` 1,000 and Outstanding Wages A/c to be credited, with ` 800 and M's and N's Capital A/c to be credited with ` 120 and ` 80 respectively.], ❐ Fi nal Ac counts of Part ner ship Firm, 48. Amar, Akbar and Anthoni are partners sharing profits and losses in the proportion of 3 : 1 : 1., Akbar and Anthoni are to get salaries of ` 100 per month respectively and interest @ 5% p.a. is to, be allowed on capital. Trial Balance as on 31st December, 2019 was as follows :, Dr. Balances, `, Cr. Balances, `, Amar's Drawings, 2,500 Amar's Capital, 20,000, Akbar's Drawings, 3,000 Akbar's Capital, 15,000, Anthoni's Drawings, 1,000 Anthoni's Capital, 10,000, Purchases, 1,51,000 Sales, 2,30,000, Returns Inwards, 9,000 Bad Debts Reserve, 650, Rent, 2,200 Sundry Creditors, 71,000, Wages, 33,000, Employee's Salary, 2,750, Trading Expenses, 5,500, Office Expenses, 2,200, Insurance (Paid upto 30th, April, 2020), 500, Stock (1-1-2019), 35,000, Plant and Machinery, 10,000, Furniture and Fittings, 1,000, Sundry Debtors, 85,000, Cash, 3,000, 3,46,650, 3,46,650, Write off ` 5,000 for Bad Debts and maintain a 5% reserve on Sundry Debtors. Depreciate Plant, and Machinery by 10% and Furniture and Fittings by 5%. Stock on 31st December, 2019 was, worth ` 37,000. Expenses for Rent, Wages and Office are uniform throughout the year and, those for December, 2019 have not been paid, ` 200 of the insurance premium and ` 350 of, salary relates to the year 2020. Prepare final accounts for the year 2019., [Ans. G.P. ` 36,000; Net Profit ` 13,600, Divisible Net Profit ` 8,950; B/S Total ` 1,26,500], , 151
Page 166 :
SBPD Publications Accountancy (XII), ❐ Miscellaneous and Boards’ Questions, 49. Kumar and Raja were partners in a firm sharing profits in the ratio of 7 : 3. Their fixed capitals, were : Kumar ` 9,00,000 and Raja ` 4,00,000. The Partnership Deed provided for the following, but the profit for the year was distributed without providing for :, (i) Interest on Capital @ 9% per annum., (ii) Kumar's salary ` 50,000 per year and Raja's salary ` 3,000 per month., The profit for the year ended 31.3.2020 was ` 2,78,000. Pass the adjustment entry., `, , 50., , 51., , 52., , 53., , `, , [Ans. Kumar's Current A/c, Dr. 11,100, To Raja's Current A/c, 11,100], Mr. X is a partner in a firm. He withdraws ` 200 at the end of each month. His capital in the, firm is ` 8,000. He gave a loan of ` 4,000 to the firm on 1st July, 2019. Rate of interest on, capitals, drawings and loan is 5% per annum. Books are closed on 31st December each year., Calculate the amount of interest., (U.S.E.B., 2010), [Ans. Interest on Drawings ` 55, Interest on Capital ` 400, Interest on Loan ` 100], X, Y and Z have capitals of ` 20,000, ` 10,000 and ` 4,000 respectively, on which they are, entitled to interest at 5 percent per annum. The profit in the year, before charging interest on, capital amounted to ` 1,100., Prepare Profit & Loss Account and Partners’ Capital Accounts when :, (i) Interest on capital is paid and profits and losses are shared equally., (ii) No interest on capital is paid and profits and losses are shared in capital ratio., (Calculations are to be made to the nearest Rupee), (U.S.E.B., 2012), [Ans. (i) Net Loss : X ` 200, Y ` 200; Z ` 200; Capital Balance : X ` 20,800, Y ` 10,300, Z ` 4,000., (ii) Net Profit : X ` 647, Y ` 324, Z ` 129; Capital Balance : X ` 20,647; Y ` 10,324; Z ` 4,129.], The capitals of X and Y, who are sharing profits and losses equally are ` 20,000 and ` 4,000, respectively. Interest on capital is allowed at 5% per annum. Drawings during the year were as follows :, X, Y, 1st April, 2019, ` 200, 1st June, 2019, ` 100, 1st June 2019,, ` 200, 1st September, 2019, ` 200, 1st August, 2019, ` 100, 1st November, 2019, ` 100, The rate of interest an drawings is 5% per annum. Profits for the year ending 31st December,, 2019 were ` 12,000 before deducting interest on capital and drawings., Prepare Profit and Loss Account., (U.S.E.B., 2015), [Ans. Distributable Profit ` 10,822.50, X’s Share ` 5,411.25, Y’s Share ` 5,411.25.], [Hint : Interest on Drawings X = ` 15.42, Y = ` 7.08.], Sonu and Rajat started a partnership firm on April 1, 2019. They contributed ` 8,00,000 and, ` 6,00,000 respectively as their capitals and decided to share profits and losses in the ratio of, 3 : 2., The partnership deed provided that Sonu was to be paid a salary of ` 20,000 per month and, Rajat a commission of 5% on turnover. It also provided that interest or capital be allowed @ 8%, p.a. Sonu withdrew ` 20,000 on 1st December, 2019 and Rajat withdrew ` 5,000 at the end of, each month. Interest on drawings was charged @ 6% p.a. The net profit as per Profit and Loss, Account for the year ded ended 31st March, 2020 was ` 4,89,950. The turnover of the firm for, the year ended 31st March, 2020 amounted to ` 2,00,000. Prepare Profit and Loss, Appropriation Account for the above transactions in the books of Sonu and Rajat., [Ans. Net Profit after appropriation ` 40,000, Sonu ` 24,000, Rajat ` 16,000], [Hint. Interest on Drawings : Sonu ` 400, Rajat ` 1,650.], , l, , 152
Page 167 :
3, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 3.1 Meaning and Definitions of Goodwill, , 154, , 3.2 Characteristics (Features) of Goodwill, , 155, , 3.3 Classification of Goodwill, , 155, , 3.4 Nature of Goodwill, , 155, , 3.5 Need for Valuation of Goodwill, , 156, , 3.6 Factors Affecting the Value of Goodwill, , 156, , 3.7 Methods of Valuation of Goodwill, , 157, , (1) Average Profit Method, (a) Simple Average Profit Method (b) Weighted Average Profit Method, (2) Super Profit Method (3) Capitalisation Method, 3.8 Fast Revision, , 169, , ❑ Useful Questions, , 170, , ❑ Practical Problems, , 173, , 153
Page 168 :
SBPD Pub li ca tions Accountancy (XII), , 3.1 Meaning and Definitions of Goodwill, ❏ Meaning of Goodwill, Goodwill is an intangible asset which is the result of good name or reputation enjoyed, by a firm that enables it to earn higher profits than the normal profits. According to Oxford, Dictionary of Accounting, Goodwill is “an intangible an asset reflecting a business’s, customer connections, reputation and similar factors.” Any firm that earns normal profits or, is incurring losses has no goodwill., Thus, Goodwill is, ● the reputation of the business., ● the representation of the business., ● the benefit and advantage of good name and reputation., ● attractive force which brings in customers., ● one thing which distinguishes an old established business from a new business., ❏ Definitions of Goodwill, Goodwill has been defined in many ways :, 1. According to Lord Lindley, ‘‘Goodwill is that amount of profit which occurs due to, relations and fame and its amount remains only until the businessman can, maintain his business relations.’’, 2. According to Spicer and Pegler, “Goodwill may be said to be that element arising, from the reputation, connection or other advantages possessed by a business which, enables it to earn greater profits than the return normally to be expected on the, capital represented by net tangible assets employed in the business.”, 3. According to Lord Eldon, ‘‘Goodwill is nothing more than probability that the old, customers will resort to the old place.’’, 4. In the words of Morrisey, ‘‘Goodwill is the present value of the anticipated excess, earnings of the firm.’’, 5. According to Eric L. Kohler, ‘‘Goodwill is the excess of the price paid for a business, as a whole over the book values or over the computed value of all tangible assets, purchased.’’ Normally goodwill thus acquired is only one type of an asset appearing, on books of account and in financial statements., In short, goodwill may be defined as the reputation possessed by a business which, enables it to earn higher profits than the normal return on the investment. Thus, it is the, result of past good deeds, efficiency of the present and base for future good earnings., ❏ Origin of Goodwill, Goodwill owes its origin from the trust of customers with regard to any business enterprise., It grows with the passage of time and reputation of the business. The trust and confidence with, respect to a firm give rise to increase in sales and profit of the business. It is due to goodwill of the, firm that the sales and profit of a firm are much higher in comparison to others. This extra profit, earned by a firm called ‘Super profit’ helps in the creation of goodwill., Im por tance of Good will, ❂ Goodwill is the mirror which reflects the true view of the business., ❂ Goodwill reflects sound health, financial soundness and credit worthiness of the, , firm., ❂ Importance of goodwill may be understood from the perusal of the following lines :, If Capital is lost, nothing is lost., If Customers are lost, something is lost., If Goodwill is lost, everything is lost., , 154
Page 169 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, , 3.2 Characteristics (Features) of Good will, (i), (ii), (iii), (iv), (v), (vi), (vii), , Goodwill is an asset because it brings in customers and helps in earning excess, profits., Goodwill is an intangible and invisible asset., Valuation of goodwill is subjective and depends on various factors., Normally, it does not depreciate. However, its value may decline if the special, advantages contributing to the goodwill are lost., Goodwill is subject to fluctuation. It cannot remain the same throughout., Its value is certain. It can be bought and sold like any other asset., Goodwill is connected with business. Unlike plant, machinery, building, furniture, etc., it cannot be sold separately from business., , 3.3 Classification of Goodwill, Goodwill can be classified into two categories, viz.,, (i) Purchased Goodwill, and (ii) Self Generated Goodwill., Purchased Goodwill arises in case of purchase of business of another party., Purchased Goodwill = Purchase Price of Business – Net Value of Assets Purchased, Net Assets = Assets – Liabilities, At the time of sale of business, the purchaser pays for goodwill as an element in the, total cost price., Purchased goodwill is shown on the assets side of the Balance Sheet. It must be written, off over a reasonable period of time., Self Generated Goodwill : It is self generated and based on various attributes of, business, viz., location, quality products, after sales service, good management, etc. It is a, vital contributor in earning of profits. The need for its valuation arises in reconstitution of, partnership firm, i.e., at the time of admission, retirement/death of a partner, etc. Premium, for goodwill is payable to such a partner who sacrifices his or her share., , 3.4 Nature of Goodwill, 1. Goodwill is an intangible and invisible asset. It cannot be seen, touched, melted or, broken etc., 2. It is a fixed asset or non-current of the business., 3. Though it is a fixed asset, it cannot be sold independently during the life of the, business., 4. Goodwill is undetachable from the business., 5. Goodwill can be sold or realised only when the business is sold., 6. Goodwill is related with the profits of the business. Higher the profit, higher the, value of goodwill, lower the profit, lower the value of goodwill., 7. Goodwill is an intangible asset because it has no physical exsistence but it is not a, fictitious asset because fictitious asset do not have any value., 8. In the case of Whiteman Smith Motor Company Vs. Chaplin the nature of goodwill, has also been divided on the basis of nature of customers which is based upon, following four natures of animals :, (i) Dog Goodwill : Dogs are attached to the master. A dog is a faithful animal. It, follows its master. Similarly, the customers will go to the old proprietor where, he goes. Such customers and to personal goodwill which is not transferable., Hence, the value of goodwill of such business will not be very high., , 155
Page 170 :
SBPD Pub li ca tions Accountancy (XII), (ii) Cat Goodwill : Cats are deeply attached to the house rather than to the, master. Cat does not leave the house even if the master leaves the house., Similarly there are customers who continue to visit the old business place even, if the ownership changes. Such customers give rise to locality goodwill. The, value of goodwill of cush business will be very high because customers continue, to patronise the business., (iii) Rat Goodwill : The nature of rat is quite different from a cat or dog. Rat is not, attached either to the master or to the house. Rat is very flexible and moves, frequently. Similarly, some customers have attachment neither to the person, nor to the place. They are flexible. This give rise to fugitive goodwill. The value, of goodwill of such business will be either nil or very little and will go on, changing., (iv) Rabbit Goodwill : Rabbit is affected by the closeness. The word closeness, refers to the time and place. Rabbit wants to live at a place which is always safe, or from where, at the time of any danger, it can reach its living place easily and, safely. The goodwill of this type of business is less because it has less capacity to, handle the ups and downs of the business., , 3.5 Need for Valuation of Goodwill, The need for valuation of goodwill in case of partnership firm arises in the following, circumstances :, (i) When there is a change in profit-sharing ratio of partners;, (ii) When any new partner is admitted (taken);, (iii) When any partner retires from the firm;, (iv) When any partner dies;, (v) When two or more partnership firms are amalgamated;, (vi) When the firm is sold;, (vii) When a firm is converted into a company., , 3.6 Factors Affecting the Value of Goodwill, The goodwill of a firm is affected by a number of factors. All the factors which increase, the earning capacity of the firm affect the value of goodwill of the firm., These factors are responsible for the increase in the earning capacity of the firm.:, 1. Favourable Location : A favourable location of the business helps to a great extent, in attracting customers. It increases profitability and thus also the value of goodwill., 2. Nature of Business : The nature of business also affects the value of goodwill. The, nature of business includes :, (a) The nature of goods : The more stable the business, the more is goodwill and vice, versa,, (b) Risk involved : The more risk involved in the business, less the goodwill,, (c) Monopolistic nature of business : It enhances the value of goodwill,, (d) Benefits of patents and trademarks, and, (e) Easy excess of raw materials etc., 3. Time : A business older in age will have more goodwill since it is better known to the, customers., 4. Capital Required : If the two business enterprises can earn same rate of profit, the, business requiring less capital shall have more goodwill., 5. Trend of Profits : Value of goodwill may also be affected due to fluctuation in the, amount of profit. Rising trend of profits leads to higher amount of goodwill. Declining profits, will reduce the value of goodwill., , 156
Page 171 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, 6. Efficiency of Management : A firm endowed with good management is capable of, earning good profit. This enhances the value of goodwill., 7. Personal Qualities : Goodwill may depend upon businessman’s own value,, personality and relations, which may depend upon his truthfulness, hardwork, good nature,, experience etc., 8. Other Factors :, (i) Protected valuable patents, copyright, trade marks;, (ii) Condition of money market;, (iii) Government patronage and its policy;, (iv) Good industrial relations;, (v) Research and development efforts;, (vi) Production of good quality product., , 3.7 Methods of Valuation of Goodwill, There are three important methods of valuing goodwill :, Valuation of Goodwill, , 1. Average Profit, Method, , Simple Average, Method, , 2. Super Profit, Method, , 3. Capitalisation, Method, , Weighted Average, Method, , Capitalisation, Capitalisation of, of Average, Super Profit, Profit Method, Method, Under Average Profit Method, goodwill can be computed on Simple Average Method or, Weighted Average Method., 3.7.1 Average Profit Method, ❏ (i) Simple Average Profit Method (Number of Years’ Purchase of Average Profits, Method), Under this method, goodwill is the product of average profit and specified number of, years’ purchase. Symbolically,, Goodwill = Average Profit ´ No. of Years’ Purchase, Total Profits, Average Profit =, Number of Years, ❏ Steps In volved under Av er age Profit Method, Step 1 : Calculate total profits by adding each relevant years’ past profit (given) and, subtracting loss, if any., Step 2 : Calculate average profit (of the given period)., Total Profits, Average Profit =, Number of Years, Step 3 : Calculate goodwill by multiplying the average profits by number of years, purchase., Formula :, Goodwill = Average Profit ´ Number of Years’ Purchase, ...(1), , 157
Page 172 :
SBPD Pub li ca tions Accountancy (XII), ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., , Details, , Practical Problem No., , 1 to 7, , (1) Average Profit Method, , 8 to 12, , (2) Super Profit Method, , 10 to 14, , 13 to 18, , (3) Capitalisation Method, , 15 to 19, , Miscellaneous and Boards’ Questions, , 20 to 28, , 19, 20, , 1 to 9, , Total, , 20, , 28, , Illustration 1 (Average Profit Method), The profit for the last five years of a firm were as follows : year 2014 ` 4,00,000; year, 2015 ` 3,98,000; year 2016 ` 4,50,000; year 2017 ` 4,45,000 and year 2018 ` 5,00,000., Calculate goodwill of the firm on the basis of 4 years’ purchase of 5 year average profits., (N.C.E.R.T.), Solution, Year, , Profit, `, , 2014, , 4,00,000, , 2015, , 3,98,000, , 2016, , 4,50,000, , 2017, , 4,45,000, , 2018, , 5,00,000, , Total, , 21,93,000, , Total Profit of Last 5 Years, No. of Years, 21,93,000, =, = ` 4,38,600, 5, Goodwill = Average Profit ´ No. of Years’ Purchase, = ` 4,38,600 ´ 4 = ` 17,54,400, , Average Profit =, , Therefore,, Goodwill = ` 17,54,400, Illustration 2, The profits earned by a business over the last 5 years are as follows : ` 12,000, ` 13,000,, ` 14,000, ` 18,000 and ` 2,000 (loss). Find out the value of goodwill if it is based on 2 years’, purchase of the average profit of last 5 years., Solution, Calculation of Total Profits :, `, 1st year, 12,000, 2nd year, 13,000, 3rd year, 14,000, 4th year, 18,000, 5th year (Loss), (2,000), Total Profit, 55,000, , 158
Page 173 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, 55,000, = ` 11,000, 5, Value of Goodwill = Average Profit´ No. of Years’ Purchase, = ` 11,000´ 2 = ` 22,000, \, Value of Goodwill = ` 22,000., ❏ Main tain able Profit or Nor mal Profit or Ad just ed Profit/Actual Profit, It should be noted that while calculating past profits, some adjustments are to be made, to arrive at Normal Profits or Maintainable Profits. Maintainable Profits or Normal Profits, are calculated by adding abnormal losses/abnormal expenses to the past profits and, deducting abnormal gains/extra-ordinary gains from the past profits. This means that only, normal business profits are considered while calculating the value of goodwill., Cal cu la tion of Nor mal Profit/Main tain able Profit, Average Profit =, , `, , Less : 3. Extra-ordinary Gains or Abnormal Gains (or Profit) credited to P/L A/c, Less : 4. Income from non-trading asset (e.g. Interest on Investment), Less : 5. Normal Expenses (if not considered earlier, such as Depreciation,, Provision for D.D.), Less : 6. Proprietor’s or Partner’s Remuneration, Less : 7. Income/Gain not to arise in future though already considered, Total Normal Profit or Maintainable Profit or Adjusted Profit, , Step 1 :, , Step 2 :, Step 3 :, , Step 4 :, , `, , √, , Net Profit during the year, Add : 1. Abnormal Losses/Extra-ordinary Expenses (if the same already debited, to P. L. A/c), Add : 2. Expected Income (if not yet considered), , √, √, √, √, √, √, √, √, , √, √, , Steps In volved un der Av er age Profit Method, Calculate Adjusted (Past) Profits or Maintainable Profit for each of the, relevant years (given) after making adjustments relating to abnormal gains,, profits, abnormal expenses and losses, incomes from non-trade investments,, proprietor's remuneration etc., Calculate total profit by adding each relevant year's adjusted profits., Calculate average (maintainable) profits :, Total (Maintainable) Profits, Formula : Average Profits =, ...(2), Number of Years, Calculate Goodwill as under :, Goodwill = Average (Maintainable) Profit × Number of Years' Purchase, , Im por tant Notes, 1. The number of years’ purchase means the period, which the business estimates, that it will earn atleast the average maintainable profits during that period., 2. Average profits are considered because on the basis of average profits buyer can, estimate the future profits of the business., 3. While calculating average profits, only normal profits should be considered., Hence, while calculating past profits anyabnormal gain or extra-ordinary income, is excluded by deducting from the profits and any abnormal loss or abnormal, expenses is excluded by adding to the past profits., , 159
Page 174 :
SBPD Pub li ca tions Accountancy (XII), Illustration 3, The total capital of the firm of Saurabh, Mohit and Nikhil was ` 1,00,000. The net, profits for the last 3 years were : 2016-17 ` 40,000; 2017-18 ` 46,000 and 2018-19 ` 52,000., There was an abnormal loss of ` 3,000 in 2017-18. Goodwill of the firm was to be valued at 2, years purchase of the average profits of last three years. Calculate the goodwill of the firm., (C.B.S.E. A.I., 2017), , Solution, , Calculation of Goodwill of the Firm, Particulars, , `, , Net Profit : 2016-17, Net Profit 2017-18, Add : Abnormal Loss, Net Profit : 2018-19, , `, , 40,000, 46,000, 3,000, Total Profit, , 49,000, 52,000, 1,41,000, , ` 1,41,000, , = ` 47,000, 3, Goodwill at 2 year’s Purchase = ` 47,000 × 2 = ` 94,000, Average Profit =, , Illustration 4 (Adjusted Profit Basis), Lalit purchased Tushar’s business from 1st Jan., 2018. The profits as disclosed by, Tushar’s business for the last three years were as follows :, 2015 : ` 1,40,000 (Including an abnormal gain of ` 5,000), 2016 : ` 1,50,000 (After charging an abnormal loss of ` 10,000), 2017 : ` 1,45,000 (Excluding ` 5,000 as insurance premium of firm's property now, to be insured), Calculate the value of firm’s goodwill on the basis of 2 years’ purchase of the average, profit for the last three years., Solution, Val u a tion of Good will, Step 1 : Calculation of Total Net Profits :, Year, Profit Adjustment for Adjusted, Abnormality, Profits, `, , `, , 2015 :, 2016 :, 2017 :, Step 2 :, Step 3 :, \, , 1,40,000 – 5,000, 1,35,000, 1,50,000 + 10,000, 1,60,000, 1,45,000 – 5,000, 1,40,000, Adjusted Total Net Profits, 4,35,000, 4,35,000, Adjusted Average Profit =, = ` 1,45,000, 3, Goodwill = Average Profit × Number of Years' Purchase, Goodwill = ` 1,45,000´ 2 = ` 2,90,000, , Illustration 5, The profits and losses of last five years were :, 1st Year : ` 12,000 Profit (Including an abnormal gain of ` 4,000), 2nd Year : ` 28,000 Profit (Excluding ` 8,000 as insurance premium), 3rd Year : ` 8,000 Profit (After charging an abnormal loss of ` 4,000), 4th Year : ` 12,000 Profit, 5th Year : ` 4,000 Loss, , 160
Page 175 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, Calculate the amount of goodwill on the basis of 3 years’ purchase of last 5 years, average profit and losses., Solution, Step (i) : Calculation of Average Maintainable Profits :, Actual Profit, `, , 1st Year, 2nd year, 3rd Year, 4th Year, , (` 12,000 – 4,000), (` 28,000 – 8,000), (` 8,000 + 4,000), , 8,000, 20,000, 12,000, 12,000, 52,000, 4,000, 48,000, , Less : Loss for 5th year, , Total Profit for the last 5 years, Total Actual Profit, 48,000, Average Maintainable Profits =, =`, = ` 9,600, Number of Years, 5, Step (ii) :, Goodwill = Average (Actual) Profit ´ Number of Years’ Purchase, = ` 9,600 ´ 3 = ` 28,800, Illustration 6, A, B and C are partners sharing profits and losses equally. They agree to admit D for, 1/4th share. For this purpose, the value of goodwill is to be calculated on the basis of four, years’ purchase of average profit of last five years. These profits were :, Year, , 2013, , 2014, , 2015, , 2016, , 2017, , Profit/Loss, , ` 30,000, (Profit), , ` 70,000, (Profit), , ` 1,00,000, (Profit), , ` 1,40,000, (Profit), , ` 1,20,000, (Loss), , On 1st January, 2017 a machinery costing ` 20,000 was purchased and debited to office, expenses account, on which depreciation is to be charged @ 25% p.a. Calculate the value of, goodwill after adjusting the above., Solution, Cal cu la tion of Av er age Prof its, Year, `, 2013, 30,000 (Profit), 2014, 70,000 (Profit), 2015, 1,00,000 (Profit), 2016, 1,40,000 (Profit), 2017, 1,05,000 1 (Loss), Total Profit 2,35,000, ` 2,35,000, Average Profit =, = ` 47,000, 5, Goodwill = Average Profit ´ Number of Years’ Purchase, = ` 47,000 ´ 4 = ` 1,88,000, Working Note :, 1. Loss for 2017, Less : Cost of Machinery treated as office expenses, æ 20,000´ 25 ÷ö, Add : Depreciation çç, ÷÷, çè, ÷ø, 100, , `, 1,20,000, 20,000, 1,00,000, 5,000, , Actual Loss of 2017, , 1,05,000, , 161
Page 176 :
SBPD Pub li ca tions Accountancy (XII), ❏ (ii) Weighted Av er age Profit Method, Under this method, weights are given to the profits and weighted average profit is, ascertained to find out the value of goodwill., Fol low ing steps are taken for cal cu la tion of good will un der Weighted Av er age Method :, (i) Allot weights like 1, 2, 3, 4, 5 and so on to the profit of the given years., (ii) Compute product by multiplying profits with their respective weight., (iii) Add all the products., (iv) Compute weighted average profit :, Total of Products of Profits, Weighted Average Profit =, Sum of all Weights, (v) Calculate goodwill by multiplying Weighted Average Profit with number of years’, purchase. i.e., Goodwill = Weighted Average Profit ´ Number of Years’ Purchase ...(3), Illustration 7 (Weighted Average Profit Method), Profits of Susmita and Priyanka Enterprises for the last 4 years were as follows :, `, , 2014-15, 24,000, 2015-16, 30,000, 2016-17, 32,000, 2017-18, 40,000, Compute the value of Goodwill of the firm on the basis of 5 years’ purchase of weighted, average assuming weights 1, 2, 3 and 4 respectively to the profits., Solution, Year, 2014-15, 2015-16, 2016-17, 2017-18, Total, , Annual Profit, `, 24,000, 30,000, 32,000, 40,000, , Weight, 1, 2, 3, 4, 10, , Product, (Profit ´ Weight ), `, 24,000, 60,000, 96,000, 1,60,000, 3,40,000, , 3,40,000, = ` 34,000, 10, Value of Goodwill = Average Profit ´ No. of Years’ Purchase, Value of Goodwill = ` 34,000 ´ 5 = ` 1,70,000, , Weighted Average Profit =, , ❏ What is Number of Years' Purchase ?, The period of time for which the profits are assured to new partner is called ‘‘Number of, years' purchase’’. It is to be noted that the ‘number of years’ purchase’ is based purely on, approximation rather on scientific basis., ❏ Why Average Profits are taken for Calculating Goodwill ?, As said earlier, goodwill is linked with profits. In case the firm earns more profits, there, will be more amount of goodwill. If the profits are less, the amount of goodwill will also be, less. In fact, profits are not earned uniformly. During the adverse situations like strike, lockouts, fire, short supply of material etc., profit goes down. And, during the favourable, situations, the profits sharply increase. If the goodwill is calculated on the basis of each year, profit, there will be too much fluctuations in the amount of goodwill. Hence, to set right all, fluctuations and to ensure better result the concept of ‘average profit’ is preferred to, calculate the amount of goodwill., , 162
Page 177 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, 3.7.2 Super Profit Method, Under this method, super profits constitute the basis of calculation of the value of, goodwill. And hence, goodwill is calculated by multiplying the super profits by a reasonable, number of years, such as, 2 years’ purchase, 3 years’ purchase etc., Thus,, Goodwill = Super Profit ´( Agreed) Number of Years’ Purchase, ...(4), ❏ Steps Involved in Calculation of Goodwill under Super Profit Method, Step 1 : Find out (actual) average profit or future maintainable profit of the business., Step 2 : Find out normal profit. If normal profit is not given in the question, use the, following formula to get normal profit :, (Average) Capital Employed ´ Norma l Rate of Return, Normal Profit =, 100, Step 3 : Calculate Super Profit, Super Profit = Ac tual Av er age Profit – Nor mal Profit, Step 4 : Calculate the value of goodwill as follows :, Thus,, , Goodwill = Super Profits´ Number of Years’ Purcha se, , Or, Value of Goodwill = Average Actual Profits – Normal Profits´No. of Years’ Purchase, ❏ Meaning of Normal Profit, Normal profit means a reasonable return on capital employed, i.e., profit earned by, similar type of firms in the same industry, having the same degree of business risk., Normal rate of return means the rate of earning which partners or investors expect on, their investments in a particular type of business. So it may differ from business to business, and industry to industry and place to place., ❏ Average Capital Employed, (1) According to Assets Side Approach :, Capital Employed = All Assets (other than Goodwill, Fictitious Assets and, Non-trade Investments) – Current Liabilities, (2) According to Liabilities Side Approach :, Capital Employed = E quity Share Capital + Pref. Share Capital + Reserves and Surplus, (including P/L Balance) + Long-term Loans – Fictitious Assets and, Non-trade Investments, (i) Average Capital Employed, Opening Capital Employed + Closing Capital Employed, =, 2, 1, (ii) Average Capital Employed = Closing Capital Employed – of Current Years’ Profit, 2, 1, (iii) Average Capital Employed = Opening Capital + of Current Years’ Profit, 2, Illustration 8 (Simple Super Profit Method), A firm has a capital of ` 50,000 and 10% normal profits are expected. The firm earns, ` 9,000 as actual profits. If goodwill is to be valued at 3 years’ purchase of the super profit,, find the value of goodwill., , 163
Page 178 :
SBPD Pub li ca tions Accountancy (XII), Solution, (A) Actual Average Profit = ` 9,000, 50,000´ 10, (B), Normal Profit =, = ` 5,000, 100, (C) Super Profit (A) – (B) = ` 9,000 – 5,000 = ` 4,000, (D) Value of Goodwill at 3 years’ purchase = Super Profit × No. of Years’ Purchase, = ` 4,000´ 3 = ` 12,000, Illustration 9 (Average Super Profit Method), Sanjay and Pramod are equal partners. According to the Partnership Deed goodwill is, valued at 4 years' purchase of the average super profits of the last five years. Their profits for the, last five years are ` 12,000, ` 16,000, ` 11,000, ` 18,000 and ` 28,000 respectively. 10% return, on capital employed in the similar business is considered to be the normal profit. The capital of, their firm is ` 1,00,000. Compute goodwill on the basis of super profits., Solution, Total Profits = ` (12,000 + 16,000 + 11,000 + 18,000 + 28,000), = ` 85,000, `, 85,000, Average Profit =, 17,000, 5, Less : Normal Profit (1,00,000 ´ 10 / 100), 10,000, Super Profit, 7,000, Therefore, Value of Goodwill = Super Profit × No. of Years’ Purchase, = ` 7,000 ´ 4 = ` 28,000, Alternative Method :, Normal Profit = 10% of Capital Employed, 10, =, ´ 1,00,000 = ` 10,000, 100, In this way, super profit of last five years and its average can be calculated as under :, Year, , Profit, , 1, , 2, `, 12,000, 16,000, 11,000, 18,000, 28,000, , I, II, III, IV, V, , Normal Profit, 3, `, 10,000, 10,000, 10,000, 10,000, 10,000, Total Super Profit of 5 years, , Super Profit, (2 – 3), `, 2,000, 6,000, 1,000, 8,000, 18,000, 35,000, , 35,000, = ` 7,000, 5, Value of Goodwill = ` 7,000 ´ 4 = ` 28,000, , Average Super Profit =, \, , Illustration 10, The capital of the firm Anu and Banu is ` 1,00,000 and the market rate of interest is, 15%. Annual salary to partners is ` 6,000 each. The profits for the last 3 years were ` 30,000;, ` 36,000 and ` 42,000. Goodwill is to be valued at 2 years’ purchase of the last 3 years, average super profits. Calculate the goodwill of the firm., (U.S.E.B. & C.B.S.E., 2019), , 164
Page 179 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, Solution, , 15, 100, Add : Partner’s Salary = ` 6,000 ´ 2, Normal Profit (i + ii), Interest on Capital = 1,00,000 ´, , ` 15,000, , ...(i), ...(ii), , ` 12,000, , 27,000, , 30,000 + 36,000 + 42,000 1,08,000, =, = ` 36,000, 3, 3, Super Profit = Average Profit - Normal Profit, = ` 36,000 - 27,000 = ` 9,000, Goodwill= Super Profit´ No. of Years’ Purchase, = ` 9,000 ´ 2 = ` 18,000, , Average Profit =, , Illustration 11, From the following information, calculate the value of goodwill :, (i) Average capital employed in the business ` 6,00,000., (ii) Net trading profits of the firm for the past three years were ` 1,07,600, ` 90,700, and ` 1,12,500., (iii) The rate of interest expected from capital having regard to the risk involved is 12%., (iv) Fair remuneration to the partners for their services ` 12,000 p.a. not charged to, Profit & Loss Account so far., (v) Sundry Assets of the Firm ` 7,54,762; Current Liability ` 31,329., (vi) Goodwill is valued on the basis of 3 years’ purchase of the super profit., Solution, Step (A) :, , Step (B) :, Step (C) :, , Step (D) :, Step (E) :, , (J.A.C., 2019), , 1,07,600 + 90,700 + 1,12,500, Average Profit =, 3, 3,10,800, =, = ` 1,03,600, 3, Expected Future Profit = Average Profit – Remuneration, = ` 1,03,600 – 12,000 = ` 91,600, Capital Employed´ Rate of Return, Normal Profit =, 100, 12, = 6,00,000 ´, = ` 72,000, 100, Super Profit (B – C) = Expected Future Profit – Normal Profit, = ` 91,600 – 72,000 = ` 19,600, Value of Goodwill = Super Profit ´ No. of Years’ Purchase, = ` 19,600´ 3 = ` 58,800, , Illustration 12, On April 1, 2019 an existing firm had assets of ` 75,000 including cash of ` 5,000. The, Partners’ Capital Accounts showed a balance of ` 60,000 and reserve constituted the rest. If, the normal rate of return is 10% and the goodwill of the firm is valued at ` 24,000 at 4 years’, purchase of super profits, find out the average profit of the firm., Solution, , \, , Goodwill = Super Profits´ 4 (No. of years’ Purchase), ` 24,000 = Super Profits´ 4 (Given), Super Profits = ` 24,000 ¸ 4 = ` 6,000, , 165
Page 180 :
SBPD Pub li ca tions Accountancy (XII), Capital Employed´ Normal Rate of Return, 100, 75,000 ´ 10, =, = ` 7,500, 100, Super Profit = Average Profit – Normal Profit, ` 6,000 = Average Profit – ` 7,500, \, Average Profit = ( ` 6,000 + 7,500) = ` 13,500, Dis tinc tion be tween Av er age Profit Method and Super Profit Method, Normal Profit =, , Basis of Difference, 1. Meaning, , 2. Formula, 3. Capital Employed, 4. Normal Rate of Profit, 5. Profit for No. of Years, 6. Normal Profit, , Average Profit Method, , Super Profit Method, , Average Profit refers to the, amount obtained by dividing the, total profits of the relevant years, by number of years., Total Profits, No. of Years, Calculation of capital employed is, not required under this method., No function of normal rate in this, method., Profits for more than one year is, required to get average profit., It is not calculated in this method., , Super Profit refers to the excess of, actual profit over normal profit., Actual Profit – Normal Profit, Capital employed is required in, this method., Without normal rate, normal, profit cannot be calculated., Only one year actual profit is, required., It is always calculated in this, method., , 3.7.3 Capitalisation Method, According to capitalisation method, goodwill can be calculated in the following ways :, (i) By capitalising the average profit., (ii) By capitalising the super profit., ❏ (i) Capitalisation of Average Profit Method, Under this method, goodwill is the difference between the normal capital employed,, i.e., capitalised value of the business and the actual capital employed., Steps involved under Capitalisation of Average Profit Method, Step 1. : Calculate Average Profit/Average Future Maintainable Profit of the, given years., Step 2. : Find out the Capitalised Value of Business, Average Future Maintainable Profit, Capitalised Value =, ´100, Normal Rate of Return, Step 3. : Calculate the Value of Net Assets, Net Assets = All Assets Less Outsiders' Liabilities., All Assets = Assets other than Goodwill, Fictitious Assets and Non-trade, Investments, Step 4. : Calculate Goodwill by using the following formula :, Goodwill = Capitalised Value of Business – Actual Capital Employed ...(5), Or, Goodwill = Capitalised Value of Business – Net Assets, ...(6), æç Average Profit ´ 100 ö÷, In short, Goodwill = ç, – Net Assets, ...(7), çè Normal Rate of Return÷÷ø, , 166
Page 181 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, Illustration 13 (Capitalisation Method), The average profit of the firm is ` 12,000. The capital of the firm is ` 80,000 and 10% is, the reasonable return in this type of business. Find out the amount of goodwill by, Capitalisation Method., Solution, , Average Profit´ 100, (–) Capital Employed, Normal Rate of Return, 12,000 ´ 100, =, ( –) ` 80,000, 10, Goodwill = ` 1,20,000 – 80,000 = ` 40,000, , Goodwill =, , \, , Illustration 14, A business has earned average profits of ` 1,00,000 during the last few years and the, normal rate of return in a similar business is 10%. Ascertain the value of goodwill by, capitalisation of average profits method, given that the value of net assets of the business is, ` 8,20,000., Solution, , 100, = ` 10,00,000, 10, Goodwill = Capitalised Value - Net Assets, = ` 10,00,000 - 8,20,000 = ` 1,80,000, , Capitalised Value of Average Profits = ` 1,00,000 ´, , Illustration 15, From the following information, calculate goodwill according to the Capitalisation, Method :, (a) Actual Net Profit, `, 8,000, (b) Normal Rate of Profit, 10%, (c) Total Assets of the Firm, ` 1,20,000, (d) Liabilities, ` 60,000, Solution, Capitalised Value of Business =, , \, , Actual Profit ´ 100, , Normal Rate of Profit, 8,000 ´ 100, =, = ` 80,000, 10, Net Assets of the Firm = Total Assets – Liabilities, = ` 1,20,000 – 60,000 = ` 60,000, Goodwill = Total Capitalised Value of Business – Net Assets, = ` 80,000 – 60,000 = ` 20,000, , Illustration 16, Find out goodwill by Capitalisation Method from the following information :, Normal rate of return 10%, Average profit of the last three years ` 39,000, Average, capital employed ` 3,00,000., Solution, Average Profit´ 100, 39,000 ´ 100, Normal Capital Employed =, =, = ` 3,90,000, Normal Rate of Return, 10, \, Goodwill = Normal Capital Employed – Actual Capital Employed, = ` 3,90,000 – 3,00,000 = ` 90,000, , 167
Page 182 :
SBPD Pub li ca tions Accountancy (XII), Important Note : If the capitalised value of business less net tangible assets is ‘zero’ or, ‘negative’, there will be no goodwill., ❏ (ii) Capitalisation of Super Profit Method, Under this method, the value of goodwill is calculated by capitalising the super profit at, the normal rate of return. Thus,, Super Profit´ 100, Goodwill =, Normal Rate of Return, Illustration 17 (Capitalisation Method on the basis of Super Profit), From the following information, calculate Goodwill according to the Capitalisation Method :, (i) Actual Average Profit, ` 8,000, (ii) Normal Rate of Return, 10%, (iii) Capital Employed, ` 50,000, Solution, Average Profit = ` 8,000, 10, = ` 5,000, 100, Super Profit = Average Profit – Normal Profit, = ` 8,000 – 5,000 = ` 3,000, Super Profit ´ 100, 3,000 ´ 100, \, Goodwill =, =, = ` 30,000, Normal Rate of Return, 10, Illustration 18, A business has earned average profits of ` 1,00,000 during the last few years. Find out, the value of goodwill by Capitalisation Method, given that the assets of the business are, ` 10,00,000 and its external liabilities are ` 1,80,000, the normal rate of return is 10%., Normal Profit = 50,000´, , Solution, , Capital Employed = Total Tangible Assets – Outside Liabilities, = ` 10,00,000 – 1,80,000 = ` 8,20,000, Capital Employed´ Rate of Return, Normal Profit =, 100, 8,20,000 ´10, =, = ` 82,000, 100, Super Profit = Average Profit – Normal Profit, = ` 1,00,000 – 82,000 = ` 18,000, Super Profit´ 100, 18,000 ´ 100, Goodwill =, =, = ` 1,80,000, Normal Rate of Return, 10, , ❏ Miscellaneous Illustrations, Illustration 19, From the following information, calculate goodwill by (i) Capitalisation method, and, (ii) at 3 years’ purchase of super profits :, (i) Total Assets, ` 10,00,000, (ii) External Liabilities, ` 1,80,000, (iii) Normal Rate of Return, 10%, (iv) Average Net Profit of the last five years, ` 1,00,000, , 168
Page 183 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, Solution, Average Profit = ` 1,00,000, Total Assets = ` 10,00,000, External Liabilities = ` 1,80,000, Therefore,, Capital Employed = Total Assets - External Liabilities, Capital Employed = ` 10,00,000 - 1,80,000 = ` 8,20,000, Normal Profit = ` 8,20,000 ´ 10/100 = ` 82,000, Super Profit = Average Profit - Normal Profit, = ` 1,00,000 - 82,000 = ` 18,000, Super Profit´ 100, (i) Goodwill by Capitalisation Method =, Normal Rate of Return, 18,000 ´ 100, =, = ` 1,80,000, 10, (ii) Goodwill by Super Profit Method = Super Profit ´ No. of Purchase Year, = ` 18,000 × 3 = ` 54,000, Illustration 20, (i) The goodwill of a firm is to be worked out at three years’ purchase of the average, profits of the last five years which are as follows :, Years, :, 2015, 2016, 2017, 2018, 2019, Profit-Loss : ` 10,000, 15,000, 4,000, (5,000), 6,000, (ii) The capital employed of the firm is ` 1,00,000 and normal rate of return is 8%. The, average profit for last five years is ` 12,000 and goodwill is to be worked out at 3 years’, purchase of super profits., (iii) Ram Brothers earn an average profit of ` 30,000 with a capital of ` 2,00,000. The, normal rate of return in the business is 10%. Using capitalisation of super profits method, work out the value of goodwill of the firm., (N.C.E.R.T.), Solution, (i), Total Profits = ` 10,000 + 15,000 + 4,000 + 6,000 – 5,000 = ` 30,000, 30,000, Average Profit =, = ` 6,000, 5, \, Goodwill = Average Profits × 3 = ` 6,000 × 3 = ` 18,000, (ii) Average Profit = ` 12,000, 8, Normal Profit = ` 1,00,000 ×, = ` 8,000, 100, Super Profit = ` 12,000 – 8,000 = ` 4,000, \, Goodwill = Super Profit × 3 = ` 4,000 × 3 = ` 12,000, 10, (iii) Normal Profit = ` 2,00,000 ×, = ` 20,000, 100, Super Profit = ` 30,000 – 20,000 = ` 10,000, Super Profit ´ 100, 10,000 ´ 100, \ Goodwill =, =, = ` 1,00,000, Normal Rate of Return, 10, , 3.8 FAST REVISION, l Meaning of Goodwill : Goodwill is the value of reputation possessed by a business enterprise, , which enables to earn higher profits than the normal return on the investment., , l Methods of Valuation of Goodwill : (1) Average Profit Method, (2) Super Profit Method,, , (3) Capitalisation Method., , 169
Page 184 :
SBPD Pub li ca tions Accountancy (XII), l Meaning of Normal Profit : Normal profit means a reasonable return on capital employed,, , l, l, , l, , l, , i.e., profit earned by a similar firm in the same industry., Capital Employed´ Normal Rate of Return, Formula :, Normal Profits =, 100, Meaning of Super Profit : Super profit means excess of actual profit over normal profit., Formula :, Super Profit = Actual Profit – Normal Profit, Calculation of Goodwill :, (i) On the basis of Average Profit :, Goodwill = Average Profit ´ Number of Years’ Purchase, (ii) On the basis of Super Profit :, Goodwill = Super Profit ´ Number of Years’ Purchase., (iii) On the basis of Capitalisation of Average Profit :, Goodwill = Capitalised Value of Business – Actual Capital Employed., Actual Profit, Where, Capitalised Value of Business =, ´ 100, Normal Rate of Return, Actual Capital Employed = Total Assets – Liabilities, (iv) On the basis of Capitalisation of Super Profits :, Super Profit, Goodwill =, ´ 100, Normal Rate of Return, Classification of Goodwill :, (a) Purchased goodwill,, (b) Non-purchased goodwill or self generated goodwill or earned goodwill., Factors Affecting the Value of Goodwill :, (i) Nature of Business, (ii) Location of Business, (iii) Efficiency of Management, (iv) Market, Situations., , USE FUL QUES TIONS, (A) Long Answer Type Questions, , (5/6 Marks Questions), , 1. What is Goodwill ? Explain the different methods of calculating goodwill., 2. Describe the different methods of valuation of goodwill., (M.P. Board, 2016), 3. What is meant by Goodwill ? What are the different methods of calculating goodwill ? Explain, each method with example., 4. Define goodwill and describe the factors affecting the value of goodwill., Or, Describe any five factors that leads to generations of Goodwill a Business. (M.P. Board, 2014, 17), 5. Describe the methods of valuation of goodwill., 6. What is Goodwill ? How is its value determined ?, 7. What is meant by Goodwill ? How is it calculated ?, (B) Short Answer Type Questions, (3/4 Marks Questions), 1., 2., 3., 4., 5., 6., 7., 8., , Explain goodwill in about 50 words., On what occasions the need for valuation of goodwill arise ?, What is Goodwill ? On what occasions the need for valuation of goodwill arise ?, Distinguish between Normal Profit and Super Profit., Or, Describe any five factors that leads to generation of Goodwill of a business. (M.P. Board, 2014, 17), What is meant by the term goodwill ? Explain any one method of calculating goodwill by giving, suitable example., What is the need for valuation of goodwill ?, (J.A.C., 2011), How is goodwill calculated under Capitalisation of Super Profit Method ?, Distinguish between Average Profit Method and Super Profit Method of valuation of goodwill., (J.A.C., 2014), , 170
Page 185 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, 9. How will you deal with goodwill when there is change in the profit-sharing ratio among the, existing partners ?, 10. Briefly explain the ‘Average Profit Method’ of Valuation of Goodwill., 11. Explain the nature of goodwill., 12. State the treatment of goodwill as per AS-26., 13. Describe the Capitalisation Method of Valuation of Goodwill., 14. Explain Average Profit, Normal Profit and Super Profit., (J.A.C., 2017), 15. Why the valuation of Goodwill is required. Give atleast three reasons., 16. State the factors which influence the valuation of goodwill of a partnership firm., 17. What is goodwill ? Name any four methods of calculating goodwill., 18. Explain the conditions for valuation of goodwill., 19. State any three circumstances other than (i) death of a partner, (ii) admission of a partner, and, (iii) retirement of a partner when need for valuation of goodwill of a firm may arise., (C.B.S.E., A.I., 2016), (C) Very Short Answer Type Questions, (1/2 Marks Questions with Answers), 1. What is Goodwill ?, [Ans. Goodwill is the value of the reputation of a firm which enables it to earn higher profits than, the normal return on the investment.], 2. Give two features (characteristics) of Goodwill., Or, What kind of asset is Goodwill ?, (M.P. Board, 2017), [Ans. (i) Goodwill is an intangible and invisible asset. (ii) It helps in earning higher profits.], 3. Name any four factors affecting goodwill of a partnership firm., (U.S.E.B., 2015), [Ans. (i) Efficiency of Management. (ii) Favourable location of the business, (iii) Nature of, Business, (iv) Market Situations.], 4. Name any two/three methods of valuation of Goodwill., (J.A.C., 2016), [Ans. (i) Average Profit Method. (ii) Super Profit Method, (iii) Capitalisation Method of Profit.], 5. How is goodwill valued under the Average Profit Method ?, [Ans. Under Average Profit Method, goodwill is valued on the basis of agreed number of years’, purchase of the average profits of the last few years.], 6. Give the formula of calculating goodwill by Average Profit Method., [Ans. Goodwill = Average Profit´ No. of years’ purchase, , or, , Goodwill =, , Total Profits, Number of years, , ´ Number of years’ purchase], , 7. What is meant by Super Profit ?, [Ans. Super Profit is the excess of average profit of the business over the normal profit. Formula :, Super Profit = Average Actual Profit – Normal Profit], 8. Give the formula of Super Profit., [Ans. Super Profit = Average Actual Profit – Normal Profit.], 9. How goodwill is valued under Super Profit Method ?, [Ans. Under Super Profit Method, goodwill is valued by using the following formula :, Goodwill = Super Profit´ Number of years’ Purchas e, Where, Super Profit = Actual Average Profit – Normal Profit], 10. How the goodwill is valued under the Capitalisation of Average Profit Method ?, [Ans. Under this method, the average of actual profits is capitalised at the prevailing normal rate, of return. The capitalised value of average profits is then compared with the actual capital, employed on a particular date. The difference between the capitalised value and the actual, capital employed is the goodwill., , 171
Page 186 :
SBPD Pub li ca tions Accountancy (XII), or, , Actual Profit´ 100, Goodwill =, – Actual Capital Employed], Normal Rate of Retur n, Note : Actual Capital Employed = Total Assets – Outside Liabilities., , 11. How the goodwill is valued under the Capitalisation of Super Profit Method ?, 100, [Ans. Goodwill = Super Profit´, ], Normal Rate of Return, 12. Distinguish between ‘Average Profit’ and ‘Super Profit’., [Ans. Average profit is the average of the profits of past few years whereas super profit is the, excess of average profits over normal profits.], 13. What do you mean by Normal Profit and Super Profit ?, [Ans. Normal profit means a reasonable return on capital employed, i.e., profit earned by a, similar firm in the same industry, whereas super profit means excess of actual profit over, normal profit.], 14. When there is a change in the profit-sharing ratio amongst exisiting partners, does it, require adjustment for goodwill., [Ans. Yes. Change in profit-sharing ratio basically implies that some partners will gain in future, profits while other(s) will lose. Therefore, the ‘gaining partner’ must compensate the, ‘sacrificing partner’ by paying the proportionate amount of goodwill.], 15. When there is a change in profit-sharing ratio, what adjustment entry is made for, goodwill ?, [Ans. Gaining Partner's Capital A/c, Dr., To Sacrificing Partner's Capital A/c, (Being Gaining Partner’s Capital A/c debited and Sacrificing, Partner’s Capital A/c credited for adjustment)], , 16. Explain three factors affecting goodwill., [Ans. 1. Favourable Location : A favourable location of the business helps to a great extent in, attracting customers. It increases profitability and thus also the value of goodwill., 2. Capital Required : If the two business enterprises can earn same rate of profit, the, business requiring less capital shall have more goodwill., 3. Efficiency of Management : A firm endowed with good management is capable of, earning good profit. This enhances the value of goodwill.], , (D) Objective Type Questions, I. Select the correct alternative :, 1. Goodwill is :, (a) A Tangible Asset, (b) An Intangible Asset, (c) A Current Asset, (d) None of these, 2. An asset which is not fictitious but intangible and have realisable value is :, (a) Machinery, (b) Building, (c) Furniture, (d) Goodwill, 3. Profits of last three years were ` 6,000, ` 13,000 and ` 8,000. The value of goodwill at 2 years’, purchase of average profit will be :, (J.A.C., 2018), (a) ` 81,000, (b) ` 27,000, (c) ` 9,000, (d) ` 18,000, 4. Super Profit means :, (a) Less than Normal Profit, (b) Above the Normal Profit, (c) Average Profit, (d) None of these, 5. A firm has an average profit of ` 60,000. Rate of return on capital employed is 12.5% p.a. Total, capital employed in the firm was ` 4,00,000. Goodwill on the basis of two years’ purchase of super, profit is :, (a) ` 20,000, (b) ` 15,000, (c) ` 10,000, (d) None of these, , 172
Page 187 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, 6. Capital employed in a business is ` 1,50,000. Profits are ` 50,000 and the normal rate of profit is, 20%. The amount of goodwill as per capitalisation method will be :, (a) ` 2,00,000, (b) ` 1,50,000, (c) ` 3,00,000, (d) ` 1,00,000, [Ans. 1. (b), 2. (d), 3. (d), 4. (b), 5. (a) 6. (d).], II. State whether the following statements are ‘True’ or ‘False’ :, 1. The amount of Goodwill brought in cash by the new partner is shared by the old partners in their, sacrificing ratio., 2. Goodwill is an intangible asset., 3. As per AS-26 only purchased goodwill will be recorded in the books of accounts., 4. Goodwill can be calculated on the basis of super profit., 5. Goodwill cannot be calculated on the basis of capitalisation of super profit., [Ans. 1.True, 2.True, 3.True, 4.True, 5. False.], , PRACTICAL PROBLEMS, ❏ Valuation of Goodwill : Average Profit Method, 1. Compute the value of goodwill on the basis of 4 years' purchase of the average profit of the last, five years. The profits for the last five years were as follows : ` 40,000, ` 50,000, ` 60,000, ` 50,000, and ` 60,000., [Ans. Value of Goodwill ` 2,08,000], 2. Calculate the amount of goodwill on the basis of 2 years' purchase of average profits of last 5, years. The profit for last 5 years were ` 10,000, ` 12,000, ` 15,000, ` 18,000 and ` 20,000., [Ans. Value of Goodwill ` 30,000], 3. The profits of the firm for the last five years were as follows :, Year, Profit, `, 2014-15, 20,000, 2015-16, 24,000, 2016-17, 30,000, 2017-18, 25,000, 2018-19, 18,000, Calculate the value of goodwill on the basis of three years’ purchase of average profits., [Ans. Goodwill ` 70,200], 4. Calculate the amount of goodwill in the following case at three years' purchase of the last five, years average profits. The profits and losses of the last five years were :, (M.P. Board, 2016), I Year ` 2,000 (Profit); II Year ` 1,500 (Profit), III Year ` 300 (Loss);, IV Year ` 3,000 (Profit);, V Year ` 3,800 (Profit), [Ans. Goodwill ` 6,000], 5. A and B are partners in a firm. They admit C into the firm. The goodwill for the purpose is to be, calculated at two years' purchase of the average profits of the last three years. Profits of the last, three years were ` 10,000, ` 15,000 and ` 30,000 respectively. Second year's profit included profit, on sale of machinery ` 10,000., Find the value of goodwill of the firm on C's admission., [Ans. Value of Goodwill ` 30,000], [Hint : Average Profit ` 15,000.], 6. The profits of a firm for the last three years were as follows :, 2017 : ` 40,000 (including an abnormal gain of ` 5,000), , 173
Page 188 :
SBPD Pub li ca tions Accountancy (XII), 2018 : ` 50,000 (after charging an abnormal loss of ` 10,000), 2019 : ` 45,000 (excluding ` 5,000 as insurance premium on firm's property now to be insured)., Calculate the value of firm's goodwill on the basis of 2 years' purchase of the average profits for, the three years., [Ans. ` 90,000], [Hint : Maintainable Average Profit ` 45,000.], 7. The Profits and Losses for last five years were :, 1st Year : ` 6,000 (including an abnormal gain of ` 2,000), 2nd Year : ` 14,000 (excluding ` 4,000 as insurance premium), 3rd Year : ` 4,000 (after charging an abnormal loss of ` 2,000), 4th Year : ` 2,000 (loss), 5th Year : ` 16,000, Calculate the amount of goodwill on the basis of 4 years’ purchase of last 5 years profits and losses., [Ans. Goodwill ` 27,200], [Hint : Average Profit ` 6,800.], 8. X and Y are partners sharing profits and losses in the ratio of 3 : 2. They agree to take into, partnership for Z 1/3rd share. For this purpose, goodwill is to be valued at two years’ purchase of, the average profit of last 4 years which were as follows :, `, Year ended on 31st March, 2016, 1,50,000 (Profit), Year ending on 31st March, 2017, 1,20,000 (Profit), Year ending on 31st March, 2018, 1,80,000 (Profit), Year ending on 31st March, 2019, 1,70,000 (Loss), On 1st April, 2018 a Motor bike costing ` 50,000 was purchased and debited to travelling, expenses account, on which depreciation is to be charged @ 20% p.a. Calculate the value of, goodwill., [Ans. Goodwill ` 1,60,000; Average Profit ` 80,000.], ❐ Weighted Average Method, 9. The profits of the firm for the last five years were as follows :, Year, , 2014-15, , 2015-16, , 2016-17, , 2017-18, , 2018-19, , Profit ( `), , 20,000, , 24,000, , 30,000, , 25,000, , 18,000, , Calculate the value of goodwill on the basis of three years’ purchase of weighted average profits, based on weights 1, 2, 3, 4 and 5 respectively to the profits for 2014-15, 2015-16, 2016-17, 2017-18, and 2018-19., [Ans. Goodwill ` 69,600], [Hint : Average Profit ` 23,200.], , ❏ Calculation of Goodwill : Super Profit Method, 10. A firm has a capital of ` 90,000. The normal profit is estimated at 10%. If the actual profit of the firm, is ` 13,000. Calculate the value of goodwill on the basis of three years' purchase of super profit., [Ans. Value of Goodwill ` 12,000], [Hint : Super Profit ` 4,000.], 11. A firm has earned profits of ` 20,000, ` 6,000, ` 12,000 and ` 8,000 respectively in the last four years., The Capital invested in the firm is ` 50,000. The rate of return expected from capital invested is, 15% p.a., Calculate the value of goodwill on the basis of 3 years’ purchase of Super Profit. (M.P. Board, 2014), [Ans. Goodwill ` 12,000.], 12. A partnership firm earned net profits during the last five years as follows :, 1st Year—` 40,000; 2nd Year—` 50,000; 3rd Year—` 55,000; 4th Year—` 70,000; 5th Year—85,000., , 174
Page 189 :
Good will : Mean ing, Na ture, Fac tors ........ Val u a tion, The capital investment of the firm is ` 5,00,000. A fair return on the capital having regard to the, risk involved is 10%. Calculate the value of goodwill on the basis of 3 years' purchase of average, super profits earned during the above mentioned period., (N.C.E.R.T.), [Ans. Goodwill ` 30,000.], 13. The average profits expected of a firm in future are ` 1,36,000 per year and capital invested in the, business by the firm is ` 7,00,000. The rate of interest expected from capital invested in this class of, business is 12%. The remuneration of the partners is estimated to be ` 16,000 for the year., Calculate the value of goodwill on the basis of two years' purchase of super profit., [Ans. Value of Goodwill ` 72,000], [Hint : Super Profit ` 36,000], 14. A partnership firm earned net profits during the last four year’s as follows :, 1st Year, 2nd Year, , ` 20,000, ` 22,000, , 3rd year, 4th year, , ` 28,000, ` 34,000, , The capital investment of the firm is 1,20,000. A fair return on the capital having regard to the, risk involved is 10%. Calculate the value of goodwill on the basis of 3 years. Purchase of average, super profits earned during the above mentioned period., [Ans. Goodwill ` 42,000], , ❏ Calculation of Goodwill : Capitalisation Method, 15. The capital of a firm is ` 40,000 and its profits for the last three years averaged to ` 9,000., Assuming that 10% is the reasonable rate of return in the business, find out the value of goodwill, of capitalisation method., [Ans. ` 50,000], [Hint : Capitalised Value of Business ` 90,000.], 16. Find out Goodwill by Capitalisation Method from the following information :, Normal rate of return 10%, profit for the last three years are ` 30,000, ` 40,000 and ` 50,000, respectively. Non-recurring income of ` 3,000 included in the above mentioned profit of ` 30,000., Average capital employed is ` 3,00,000., [Ans. Average Profit ` 39,000, Capital Employed ` 3,90,000, Goodwill ` 90,000.], 17. The net tangible assets of a business are worth ` 3,00,000 and the average profits expected to be, earned in future years after making necessary adjustments are ` 60,000. Assuming that 15% is, the reasonable return on capital employed in the business, find out the value of goodwill., [Ans. Value of Goodwill ` 1,00,000], [Hint : Capitalised Value of Business ` 4,00,000.], 18. A firm earns ` 72,000 as its average profits. The rate of normal profit being 12%. The Assets of the, firm amounted to ` 8,00,000 and Liabilities are ` 3,20,000., Calculate the value of goodwill., (U.S.E.B., 2013), [Ans. Goodwill ` 1,20,000], [Hint : Capitalised Value of Business ` 6,00,000.], 19. A and B are partners in a firm. The capital employed of the firm is ` 5,00,000 and normal rate of, return is 10% per annum. Annual salary of each partner is ` 8,000. The average profit was, ` 80,000 for last 10 years., Calculate the value of goodwill by super profit capitalisation method., [Ans. Goodwill ` 1,40,000], [Hint : Capitalised Value of the Firm ` 6,40,000.], ❐ Miscellaneous and Boards’ Questions, 20. A partnership firm earned net profits during the last four years as follows :, 1st year ` 20,000; 2nd year ` 22,000; 3rd year ` 28,000; 4th year ` 34,000., , 175
Page 190 :
SBPD Pub li ca tions Accountancy (XII), The capital investment of the firm is ` 1,20,000. A fair return on the capital having regard to the, risk involved is 10%. Calculate the value of the goodwill on the basis of 3 years’ purchase of, average super profits earned during the above mentioned period., (U.S.E.B., 2010, 16), [Ans. Goodwill ` 42,000.], [Hint : Super Profit ` 14,000.], 21. The average profit of a firm is ` 50,000. Its assets and outside liabilities are ` 5,00,000 and, ` 2,00,000 respectively. The normal rate of return is 10%. Find the value of goodwill if it is based, on 2 years' purchase of super profit., [Ans. Value of Goodwill ` 40,000], [Hint : Super Profit ` 20,000.], 22. The capital invested in a business is ` 40,000. The normal profit expected in a similar business is, 10% p.a. The actual average profit of last 5 years is ` 8,000. Calculate the value of goodwill, if it, calculated at 3 years’ purchase of Super Profit., (M.P. Board, 2017), [Ans. Goodwill ` 12,000.], 23. The net profit of a business, after providing for taxation, for the past five years are : ` 80,000,, ` 85,000, ` 92,000, ` 1,05,000 and ` 1,18,000. The capital employed in the business is ` 8,00,000., The normal rate of return expected in this type of business is 10%. Calculate the value of goodwill, on the basis of :, (a) 5 years’ purchase of Super Profit Method,, (b) Capitalisation of Super Profit Method., [Ans. (a) Super Profit Method ` 80,000, (b) Capitalisation Method ` 1,60,000.], 24. Calculate the value of goodwill from the following :, (a) A firm earns ` 72,000 as its average profits. The rate of normal profit being 12%. The assets of, the firm amounts to ` 8,00,000 and liabilities are ` 3,20,000., (b) X and Y are partners with capital of ` 16,000 and ` 12,000 respectively. They admit Z as a, partner with one-fourth share in profits of the firm. Z brings ` 16,000 as his capital., [Ans. (a) Goodwill ` 1,20,000, (b) Goodwill ` 20,000.], (U.S.E.B., 2012), 25. The net profit for 2015 of M/s. Niranjan & Sons was ` 80,000 and its employed capital was, ` 4,00,000. The normal rate of return for such type of business is 15%. Compute the amount of, goodwill if goodwill is five times of the super profit., [Ans. Goodwill ` 1,00,000.], [Hint : Super Profit ` 20,000.], 26. The average profit earned by a firm is ` 80,000 which includes under-valuation of stock of ` 8,000, an average basis. The capital invested in the business is ` 8,00,000 and the normal rate of return, is 8%. Calculate goodwill of the firm on the basis of 7 times the super profit., [Ans. Goodwill ` 1,68,000], [Hint : Super Profit ` 24,000.], 27. Average profit of a firm is ` 9,000. Firm’s capital is ` 60,000 and normal return on business is, expected at 10%. Find out goodwill by capitalisation method., [Ans. Goodwill ` 30,000], 28. A firm earned average profit of ` 3,00,000 during the last few years. The normal rate of return of, the industry is 15%. The assets of the business were ` 17,00,000 and its liabilities were ` 2,00,000., Calculate the goodwill of the firm by capitalisation of average profits., (C.B.S.E., 2019 AI), [Ans. Goodwill ` 5,00,000], , l, 176
Page 191 :
4, RECONSTITUTION OF, PARTNERSHIP—CHANGE IN, PROFIT-SHARING RATIO, AMONG THE EXISTING PARTNERS, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 4.1 Meaning of Reconstitution of Partnership Firm, , 178, , 4.2 Occasions/Circumstances of Reconstitution, , 178, , 4.3 Change in Profit-sharing Ratio among Existing Partners, , 178, , l Sacrificing Ratio l Gaining Ratio l Accounting for Revaluation of Assets, and Re-assessment of Liabilities l Distribution of Reserve and Accumulated, Profits, , 4.4 Fast Revision, , 206, , ❑ Useful Questions, , 206, , ❑ Practical Problems, , 209, , 177
Page 192 :
SBPD Pub li ca tions Accountancy (XII), , 4.1 Meaning of Reconstitution of Partnership Firm, ‘‘Partnership is the relation between persons who have agreed to share the profits of a, business carried on by all or any of them acting for all.’’ In short, partnership is the result of, an agreement between persons for sharing the profits of a business., A change in the partnership agreement brings to an end of the existing agreement and, a new agreement comes into force. This new agreement changes relationship among the, members of the partnership firm. When there is change in the relations without affecting the, existence of partnership firm, it is called ‘Reconstitution of Partnership Firm’. As a, result of reconstitution, the firm continues as a new or reconstituted firm., , 4.2 Occasions/Circumstances of Reconstitution, Reconstitution of the firm takes place whenever there is a :, (i) Change in the profit-sharing ratio among the existing partners., (ii) Admission of a new partner., (iii) Retirement of an existing partner., (iv) Death of a partner., (v) Amalgamation of two (or more) partnership firms., Reconstitution of a firm always leads to change in profit-sharing ratio among the, partners., (i) Change in the Profit-sharing Ratio among the Existing Partners : Change in, the profit-sharing ratio of the existing partners results in the reconstitution of the, partnership firm. For example, X and Y are partners in a firm sharing profits in the ratio of, 3 : 2. Now they decide to share profits in the ratio of 2 : 1. It amounts to reconstitution of the, firm., Reconstitution of Partnership—Change in ....... Partners, (ii) Admission of a New Partner : For example, Karan and Arjun are partners, sharing profits in the ratio of 3 : 1. On April 1, 2015, they decided to admit Vikram as a new, partner with 1/8th share in the profits of the firm. In this case, with the admission of Vikram, the firm is reconstituted and it amounts to reconstitution of the firm., (iii) Retirement of an Existing Partner : Sometimes an existing partner retires, from business and so the profit-sharing ratio of the remaining partners changes. It results, in the reconstitution of the firm., (iv) Death of a Partner : Death of a partner also results in the reconstitution of a firm., For example, A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. C dies on 1st May,, 2015. A and B decide to share profits in the ratio of 5 : 3. It also amounts to reconstitution of, the firm., (v) Amalgamation of Two (or more) Partnership Firms : A and B are partners in a, firm sharing profits equally. C and D are partners in an another firm sharing profits in the, ratio of 2 : 1. To eliminate competition they decided to amalgamate their firms and agreed to, share profits and losses equally in the future. It amounts to reconstitution of the firm., , 4.3 Change in Profit-sharing Ratio among the Existing Partners, Meaning : A change in profit-sharing ratio basically refers to the purchase of profit by one, partner from another partner. As a result of change in profit-sharing ratio, some partners may, gain in future profits whereas other(s) may lose. The ‘gaining partner’ (i.e., the partner, whose share has increased) must compensate the ‘losing or sacrificing partner’ (i.e., the, partner whose share has decreased) by paying the amount or through capital., Example : Ali and Akbar are partners in a firm sharing profits in the ratio of 3 : 2. They, now decide to share future profits equally., Old Sharing Ratio of Ali and Akbar = 3 : 2, i.e., 3/5 : 2/5, , 178
Page 193 :
Reconstitution of Partnership—Change in ....... Partners, New Sharing Ratio of Ali and Akbar = 1 : 1, i.e., 1/2 : 1/2, Sacrifice = Old Share – New Share, Gain = New Share – Old Share, 3 1 6-5, 1, Ali's Sacrifice = - =, =, 5 2, 10, 10, 1, 2 5- 4, 1, Akbar's Gain = - =, =, 2 5, 10, 10, Following Journal entry is passed to record the change in profit-sharing ratio :, Gaining Partner's Capital A/c, Dr., To Sacrificing Partner's Capital A/c, Thus, Ali’s sacrifice will be 1/10th and Akbar’s gain will be 1/10th. So Akbar should, compensate Ali for his loss in the share of future profit., Let us explain this fact with an example. Assume that profit of the firm is ` 1,00,000., Then according to old ratio, i.e., 3 : 2, Ali should get ` 1,00,000 ´ 3/5 = ` 60,000, Akbar should get ` 1,00,000 ´ 2/5 = ` 40,000, But according to new ratio, i.e., 1 : 1, 1, Ali’s Share in Profit = ` 1,00,000 ´ = ` 50,000, 2, 1, Akbar’s Share in Profit = ` 1,00,000´ = ` 50,000, 2, Thus, Ali who earlier got ` 60,000 will now get ` 50,000 (i.e., ` 10,000 less) and Akbar, who earlier got ` 40,000 will now get ` 50,000 (i.e., ` 10,000 more). Thus, Akbar gains by, ` 10,000 and Ali loses by the same amount. Hence, Akbar must compensate Ali for this loss, to him in future., b Gaining Partner : A gaining partner is one whose profit-sharing ratio has, increased., b Losing Partner : Losing partner is one whose profit-sharing ratio has decreased., b Compensation : The compensation is given by the gaining partner to the losing, partner in the form of goodwill., Issues to be Considered or, Adjustments required for Change in Profit-sharing Ratio, When a change in the profit-sharing ratio of existing partners takes place, the following, adjustments or issues must be considered :, (1) Determination of Sacrificing Ratio,, (2) Determination of Gaining Ratio,, (3) Accounting for Reserves, Accumulated Profits and Losses,, (4) Accounting for Revaluation of Assets and Re-assessment of Liabilities,, (5) Accounting Treatment of Goodwill., 4.3.1 Determination of Sacrificing Ratio (S/R), As a result of change in the profit-sharing ratio, one or more of the existing partners, have to surrender a part of their share in favour of one or more of other partners. A part of, share being so surrendered is called ‘Sacrificing Ratio’., Calculation of Sacrificing Ratio : Sacrificing Ratio is calculated as under :, Sacrificing Ratio = Old Ratio – New Ratio, , 179
Page 194 :
SBPD Pub li ca tions Accountancy (XII), Sacrificing Partner : The partners whose shares have decreased due to change in, profit-sharing ratio are known as sacrificing partners., Purpose of Calculating Sacrificing Ratio : The purpose of calculating sacrificing, ratio is to determine the amount of compensation to be paid to the ‘sacrificing partner’ i.e.,, ‘losing partner’. In fact, the importance of this ratio lies in the fact that goodwill is, distributed among the partners in their sacrificing ratio., 4.3.2 Determination of Gaining Ratio (G/R), Whenever as a result of change in the profit-sharing ratio, one or more partners gain, some portion of other partners' share of profit, it is called ‘gaining ratio’., Gaining Partners : The partners whose shares have increased as a result of change in, profit-sharing ratio are called gaining partners., Calculation of Gaining Ratio : Gaining Ratio is calculated as follows :, Gaining Ratio = New Ratio – Old Ratio, Dif fer ence Be tween Sac ri fic ing Ra tio And Gain ing Ra tio, Basis of, Difference, , Sacrificing Ratio, , Gaining Ratio, , 1. Meaning, , It is the ratio in which the old partners It is the ratio in which the remaining, surrender their share of profit in favour partners share the retiring partner's, of the new partner., share of profit., , 2. When, Calculated, , It is calculated at the time of admission It is calculated at the time of retireof a new partner., ment or death of a partner., , 3. Object, , The purpose of calculating sacrificing, ratio is to calculate the share of, goodwill payable to old partners at the, time of admission of a partner., , The purpose of calculating gaining, ratio is to calculate the share of, goodwill payable to the retiring partner, by each of the remaining partners., , 4. Effect on, Capital, , Old Partners' Capital Accounts increase with the amount received as, goodwill. New partner losses., , Retiring partner is paid for goodwill, and the remaining partners' capital, reduces., , 5. Method of, Calculation, , It is calculated by deducting new ratio, from the old ratio., , It is calculated by deducting old ratio, from the new ratio., , 6. Accounting, Treatment, , New Partner's Capital A/c, To Old Partners' Capital A/c, (In sacrificing ratio), , Dr. Remaining Partners' Capital A/cs Dr., To Retiring Partner's Capital A/c, (In gaining ratio), , ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., 1 to 8, 9 to 13, 14, 15 to 19, 20 to 25, 26, 27, 27, , 180, , Details, Sacrificing Ratio and Gaining Ratio, Accounting for Distribution of Accumulated Profits &, Reserves, Workmen Compensation Reserve, Accounting for Revaluation of Assets and Liabilities, Adjustment for Goodwill, Adjustments of Partners' Capital, Long Answer Illustration/Problems, Miscellaneous and Board's Questions, Total, , Practical Problem No., 1 to 5, 6 to 13, —, 14 to 18, 19 to 23, 24, 25, 26 to 29, 29
Page 195 :
Reconstitution of Partnership—Change in ....... Partners, ❏ Sacrificing and Gaining Ratio, Illustration 1, X and Y are partners in a firm sharing profits in the ratio of 2 : 1. With effect from 1st, April, 2019 they agreed to share profits equally. Determine each partner's sacrifice or gain, due to change in ratio., Solution, Change in Profit-sharing Ratio = New Ratio – Old Ratio, Sacrificing Ratio = Old Ratio – New Ratio, Gaining Ratio = New Ratio – Old Ratio, Old Profit-sharing Ratio of X and Y = 2 : 1, New Profit-sharing Ratio of X and Y = 1 : 1, 2 1 4–3 1, X= – =, = (Sacrifice), 3 2, 6, 6, 1 1 3–2 1, Y= – =, = (Gain), 2 3, 6, 6, X has sacrificed 1/6 and Y has gained 1/6., Illustration 2, A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. They agree to share profits, in equal proportion w.e.f. April 1, 2019. You are required to calculate sacrificing ratio and, the gaining ratio., (J.A.C., 2018), Solution, Graining Ratio = New Ratio – Old Ratio, Sacrificing Ratio = Old Ratio – New Ratio, A, B, C, 3, 2, 1, (a) Old Ratio, 6, 6, 6, 1, 1, 1, (b) New Ratio, 3, 3, 3, 3 1, 2 1, 1 1, Difference (a – b), 6 3, 6 3, 6 3, 3- 2 1, 2- 2, 1- 2, 1, =, =0, = (-), 6, 6, 6, 6, 6, Sacrifice, Nil, Being negative result,, it is gain., Alternatively :, Sacrifice or Gain :, 3 1 3–2 1, A= – =, = (Sacrifice), 6 3, 6, 6, 2 1 2–2, B= – =, = 0 (Nil), 6 3, 6, 1 1 2–1 1, C= – =, = (Gain), 3 6, 6, 6, Illustration 3, X, Y and Z are partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. The, partners now decide to share future profits and losses in the ratio of 2 : 2 : 1. Indicate each, partner’s gain or sacrifice due to change in ratio., , 181
Page 196 :
SBPD Pub li ca tions Accountancy (XII), Solution, (a) Old Share, (b) New Share, , X, 3, 6, 2, 5, , Y, 2, 6, 2, 5, , 3 2, 2 2, 6, 5, 6, 5, 15 - 12, 10 - 12, =, =, 30, 30, 3, 2, =, Sacrifice, = (-), Gain, 30, 30, 3, 2, Thus, X has sacrificed, , Y has gained, and Z has gained, 30, 30, Difference (a – b), , Note : The sum of gaining ratio always equals to the sum of sacrificing ratio., , Z, 1, 6, 1, 5, , 1 1, 6, 5, 5-6, =, 30, 1, = (-), Gain, 30, 1, ., 30, , Illustration 4, A, B and C are partners sharing profits in the ratio of 5 : 4 : 1. It is now agreed that they, will share future profits in the ratio of 3 : 3 : 4. For this purpose, goodwill of the firm is valued, at ` 50,000. Calculate the amount of gain or sacrifice of each partner., Solution, Old Profit-sharing Ratio of A, B and C = 5 : 4 : 1, New Profit-sharing Ratio of A, B and C = 3 : 3 : 4, Change in Profit-sharing Ratio = New Ratio – Old Ratio, æ 2ö, 3, 5, 3- 5, A=, =, = (-) çç ÷÷÷ (Sacrifice), çè10 ø, 10 10, 10, æ1ö, 3, 4, 3- 4, B=, =, = (-) çç ÷÷ (Sacrifice), çè10 ÷ø, 10 10, 10, 4, 1, 4–1 3, C=, –, =, =, (Gain), 10 10, 10, 10, Distribution of goodwill on the basis of sacrifice and gain :, 2, A = ` 50,000 ´, = ` 10,000 (Sacrifice), 10, 1, B = ` 50,000 ´, = ` 5,000 (Sacrifice), 10, 3, C = ` 50,000 ´, = ` 15,000 (Gain), 10, Illustration 5, Amar, Akbar and Anthony are partners sharing profits and losses in the ratio of 7 : 2 : 1., 1, Calculate new profit-sharing ratio and sacrificing ratio if Anthony acquires, shares from, 10, Amar., Solution, (A) Their Excisting Share, , 182, , Amar, 7, 10, , Akbar, 2, 10, , Anthony, 1, 10
Page 197 :
Reconstitution of Partnership—Change in ....... Partners, (B) Share acquired by Anthony, (-), , from Amar, , 1, 10, , 7 –1, 7, 1, =, 10, 10, 10, = 6/10, , New Share, , New Profit-sharing Ratio :, , Amar :, , (+), , —, , 1, 10, , 1, 1, +, 10, 10, = 2/10, , 2/10, , Akbar : Anthoni, , =, , 6, 2, 2, :, :, 10 10 10, , = 6 : 2 : 2 or 3 : 1 : 1, 1, Share Sacrificed by Amar =, 10, Illustration 6, A, B and C are partners in a firm sharing profits in the ratio of 5 : 3 : 2. Calculate new, profit-sharing ratio and sacrificing ratio of C acquires 1/5th share equally from A and B., Solution, Share acquired by C from A and B each =, Particulars, (A) Old Share, (B) Share acquired by C from A and B, New Share, , 1 1, 1, ´ =, 5 2 10, A, 5/10, , B, 3/10, , – 1/10, , – 1/10, , 4, 10, , 2, 10, , C, 2/10, æ1, 1ö, + 2/10 çç, + ÷÷÷, çè10, 10÷ø, 4, 10, , 4, 2, 4, , B = , C , i.e., 4 : 2 : 4 or 2 : 1 : 2, 10, 10, 10, 1, 1, Sacrificing Ratio between A and B =, :, or 1 : 1., 10 10, New Profit-sharing Ratio = A =, , Illustration 7, D, E and F are partners in the ratio of 5 : 3 : 2. F acquires 1/5th share from D. D acquires, 1/20th share from E. Find out new profit-sharing ratio, gaining ratio and sacrificing ratio., Solution, (A) Old Ratio, (B) Acquired by F from D, Acquired by D from E, , (C) New Ratio ( A m B), , D, 5, 10, 1, (-), 5, 1, (+), 20, 5, 1, 1, - +, 10, 5, 20, 7, =, 20, , E, 3, 10, , F, 2, 10, (+), , (-), , 1, 20, , 3, 1, 10, 20, 5, =, 20, , 1, 5, , 2, +, 10, 4, =, or, 10, , 1, 5, 8, 20, , 183
Page 198 :
SBPD Pub li ca tions Accountancy (XII), 5, 7, 3, 3, 5, 1, 2, 8, 4, =, =, =10, 20, 20, 10, 20, 20, 10, 20, 20, Sacrifice, Sacrifice, Gain, 7, 5, 8, Thus, New Ratio =, :, :, or 7 : 5 : 8, 20 20 20, 3, 1, 4, Sacrificing Ratio : D Sacrifices, , E Sacrifices, and F Gains, ., 20, 20, 20, Illustration 8, Krishna, Kavya and Kavita are partners sharing profits in the ratio of 2 : 1 : 1. Now they, want to change their profit-sharing ratio. Krishna agreed to sacrifice 1/2 of his share in, favour of Kavya and Kavita in the ratio of 3 : 1. Compute their new profit-sharing ratio., Solution, 2 1 1, Krishna : Kavya : Kavita : 2 : 1 : 1 or : :, 4 4 4, 1, 2 1, Profit share sacrified by Krishna of =, 2, 4 4, æç 1 ö÷, He sacrifices it ç ÷÷ in the ratio of 3 : 1 in favour of Kavya and Kavita., çè 4 ø, 1 3, 3, \ Krishna's sacrifice in favour of Kavya = ´ =, 4 4 16, 1 1, 1, \ Krishna's sacrifice in favour of Kavita = ´ =, 4 4 16, Krishna, Kavya, Kavita, 2, 1, 1, (A) Old Share, 4, 4, 4, 1, (B) Sacrificed, (–), —, —, 4, 3, 1, (C) Sacrificed in favour, —, (+), (+), 16, 16, 1, 7, 5, (D) New Share, (A – B), (A + C), (A + C), 4, 16, 16, New Profit-sharing Ratio of Krishna, Kavya and Kavita, 1, 4 7, 5, = or, :, :, or 4 : 7 : 5, 4, 16 16 16, 4.3.3 Accounting Treatment of Distribution of Accumulated, Profits and Reserves, Case I : When Accumulated Profits and Reserve Accounts are Closed, At the time of change in profit-sharing ratio (or reconstitution of a partnership firm),, the firm may have undistributed or accumulated profits and reserves. These accumulated, profits and reserves belong to the partners existing before the reconstitution of the firm. As, such these profits and reserves should be distributed amongst the partners in their old, profit-sharing ratio. This should be recorded in the books by passing the following, Journal entry :, (D) Difference (A – C), , (i), , For Undistributed or Accumulated Profits, , Profit & Loss A/c, To Partners’ Capital (or Current) A/cs, (For profit transferred to the Capital A/cs of, partners in old ratio), , 184, , Dr.
Page 199 :
Reconstitution of Partnership—Change in ....... Partners, (ii), , For Distribution of Reserves, , (General) Reserve A/c, Dr., To Partners' Capital (or Current) A/cs, (For general reserve transferred to the Partners’, Capital A/cs in the old ratio), , (iii) For Distribution of Workmen's Compensation Workmen's Compensation Reserve A/c1, Reserve/Investment Fluctuation Reserve, Investment Fluctuation Reserve A/c 2, , Dr., Dr., , To Partner's Capital (or Current) A/cs, (In Old Ratio), Notes : 1. Excess of reserve over actual liability in respect of compensation., 2. Excess of reserve over the difference between book value and market value of investments., , Illustration 9 (Distribution of Profits and Reserves), Satyam and Shivam are partners in a firm sharing profits in the ratio of 3 : 1. They, decided to share future profits equally. On the date of change in the profit-sharing ratio, the, Profit & Loss Account showed a credit balance of` 40,000 and a General Reserve of ` 10,000., Record the necessary Journal entries for distribution of General Reserve and Profit before, the change in the profit-sharing ratio., Solution, Journal Entries, Date, , Dr., , Particulars, , L.F., , Cr., , Amount, `, , Profit and Loss A/c, To Satyam's Capital A/c, To Shivam's Capital A/c, , Dr., , Amount, `, , 40,000, 30,000, 10,000, , (Being undistributed profits transferred to Capital A/cs of the, partners in the old ratio), , General Reserve A/c, To Satyam's Capital A/c, To Shivam's Capital A/c, , Dr., , 10,000, 7,500, 2,500, , (Being general reserve transferred to the Partners’ Capital A/cs, in the old ratio), , Undistributed Losses and Unwritten off Deferred Revenue Expenditure :, Sometimes, at the time of change in the profit-sharing ratio or reconstitution of partnership,, there may be undistributed losses and deferred revenue expenditure in the books. These, may be adjusted in the books in the following manner :, (a) When partners decide to close these accounts :, Existing Partners’ Capital (or Current) A/cs, Dr. (in old ratio), To Profit and Loss A/c (Debit Balance), To Deferred Revenue Expenditure A/c, (Being the account(s) closed), , Illustration 10 (Distribution of Loss), A, B and C are partners sharing profits in the ratio of 3 : 3 : 2. On April 1, 2019 they, agreed to share profits and losses equally. On the date of change in the profit-sharing ratio,, the Profit & Loss Account showed a debit balance of ` 20,000., Give the necessary Journal entry., , 185
Page 200 :
SBPD Pub li ca tions Accountancy (XII), Solution, Journal Entry, Date, , Dr., , Particulars, , L.F., , 2019, , Amount, `, , Apr. 1 A's Capital A/c, B's Capital A/c, C's Capital A/c, To Profit & Loss A/c, , Dr., Dr., Dr., , Cr., Amount, `, , 7,500, 7,500, 5,000, 20,000, , (Being undistributed loss transferred to the Capital A/cs of the, partners in the old ratio), , Case II : Not to Close Profit & Loss Account/General Reserve Account, Or Adjustment of Profits & Losses/Reserves Through Capital Accounts, In case of Reserves and Accumulated Profits : Sometimes the partners may, decide that existing balances of Profit & Loss Account or the Reserve Account should be left, undistributed. In the case Profit and Loss A/c or Reserve A/c will appear at the same amount, in the Balance Sheet of the reconstituted firm. In such a case, it will be necessary to pass an, adjustment entry through capital accounts of the existing partners. In this case, the following, steps should be followed :, Step 1 : Calculate the Net Effect of Profits, Reserves and Losses, Step 2 : Calculate Gain or Sacrifice (i.e., Loss) of share., Step 3 : Calculate share of gaining partner and sacrificing partner in the profits,, reserves and losses. The gaining partner shall compensate the sacrificing, partner., Step 4 : Pass the following Adjustment Journal Entry :, (a) In case of Positive Effect (Net Profit), Gaining Partner’s Capital A/c, Dr., To Sacrificing Partner’s Capital A/c, (Being proportionate share of reserves/accumulated profits adjusted), , (b) In case of Negative Effect (Net Loss), When only adjustment entry is required and partners do not want to close, Profit & Loss Account and Deferred Revenue Expenditure A/c :, Sacrificing Partner’s Capital A/c, Dr., To Gaining Partner’s Capital A/c, (Being adjustment made for loss), , Illustration 11 (Not to Close the General Reserve A/c), X, Y and Z are partners in a firm sharing profits in the ratio of 1 : 2 : 3. Their Balance, Sheet as on 31.3.2019 showed a balance of ` 1,20,000 in General Reserve. From 1.4.2019, they will share profits equally. Record the necessary Journal entry to give effect to the above, arrangement when X, Y and Z decided not to close the General Reserve Account., (N.C.E.R.T.), Solution, Calculation of the Sacrifice or Gain :, Sacrificing Share = Old Share – New Share, æ1 ö, 1 1 1- 2, X= - =, = (-) çç ÷÷÷ (Gain being negative result), çè6 ø, 6 3, 6, , 186
Page 201 :
Reconstitution of Partnership—Change in ....... Partners, 2 1 2–2 0, – =, = (No Sacrifice), 6 3, 6, 6, 3 1 3–2 1, Z= – =, = (Sacrifice), 6 3, 6, 6, , Y=, , Thus, Gaining Partner's Share of General Reserve = ` 1,20,000 ´, , 1, = ` 20,000 to be, 6, , adjusted through Capital Accounts., Jour nal En try, Date, , Dr., , Particulars, , Cr., , L.F. Amount Amount, , 2019, , `, , April 1 X's Capital A/c, , Dr., , `, , 20,000, , To Z's Capital A/c, , 20,000, , (Being proportionate share of general reserve adjusted between, existing partners), , Illustration 12 (Not to Close the Undistributed Profit & Loss Account and General, Reserve Account), Sunil and Anil are partners sharing profits in the ratio of 3 : 2. Their Balance Sheet, showed a balance of ` 50,000 in General Reserve Account and ` 40,000 in Profit and Loss, Account. They now decide to share the future profits equally. Instead of closing the General, Reserve Account and Profit & Loss Account, it is decided to pass an adjustment entry for the, same. You are required to record the necessary adjustment entry to give effect to the above, arrangement., (N.C.E.R.T.), Solution, Calculation of the Gain or Sacrifice Share of Partners :, Sacrifice = Old Share – New Share, 3 1 6-5, 1, Sunil = - =, =, (Sacrifice), 5 2, 10, 10, æ1ö, 2 1 4-5, Anil = - =, = (-) çç ÷÷÷ (Gain, being negative result), çè10 ø, 5 2, 10, Thus, Gaining Partner's Share of General Reserve and Profit & Loss Account to be, adjusted :, 1, General Reserve A/c = 50,000´, = ` 5,000, 10, 1, Profit & Loss A/c = 40,000 ´, = ` 4,000, 10, Total ` 9,000, Jour nal En try, Date, , Dr., , Particulars, , `, , Anil's Capital A/c, To Sunil's Capital A/c, , Cr., , L.F. Amount Amount, Dr., , `, , 9,000, 9,000, , (Being proportionate share of General Reserve and Profit & Loss A/c, adjusted between partners), , 187
Page 202 :
SBPD Pub li ca tions Accountancy (XII), Alternatively :, , Jour nal En tries, , Date, , Dr., , Particulars, , Cr., , L.F. Amount Amount, `, , Anil's Capital A/c, To Sunil's Capital A/c, , Dr., , `, , 5,000, 5,000, , (Being adjustment made for General Reserve A/c on change in, profit-sharing ratio), , Anil's Capital A/c, To Sunil's Capital A/c, , Dr., , 4,000, 4,000, , (Being adjustment made for Profit & Loss A/c on change in profitsharing ratio), , Illustration 13 (Adjustment of Net Effects of Profit, Loss and Reserves), X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2. They decided to, share future profits and losses in the ratio of 2 : 3 : 5 with effect from 1st April, 2016. They, also decided to record the effect of the following without affecting their book values :, Book Value, `, , General Reserve, Profit and Loss A/c (Credit), Advertisement Suspense A/c, , 75,000, 50,000, 50,000, , Solution, Step 1 : Calculation of Net Effect of Profits and Losses :, General Reserve, Add : Profit & Loss A/c (Credit), , `, , Less : Advertisement Suspense A/c, Net Effect, Step 2 :, , 75,000, 50,000, 1,25,000, 50,000, 75,000, , Calculation of Sacrifice or Gain :, , Partner, , Old Ratio (A), , New Ratio (B), , Sacrifice (Gain) (A – B), , X, , 5, 10, , 2, 10, , 5, 2, 3, –, =, (Sacrifice), 10 10 10, , Y, , 3, 10, , 3, 10, , 3, 3, –, = Nil, 10 10, , Z, , 2, 10, , 5, 10, , 2, 5, 3, –, = (–), (Gain), 10 10, 10, , Step 3 :, Here X sacrifices. Therefore X, will be compensated by Z because he gains., Calculation of Share of Sacrifice and Gain in net Effect of Profits, Losses and, Reserves :, 3, For, X = ` 75,000 ´, = ` 22,500 (S), 10, 3, For, Z = ` 75,000 ´, = ` 22,500 (G), 10, , 188
Page 203 :
Reconstitution of Partnership—Change in ....... Partners, Step 4 :, , Adjustment Entry, , Date, , Dr., , Particulars, , L.F. Amount Amount, `, , Z's Capital A/c, To X's Capital A/c, , Cr., , Dr., , `, , 22,500, 22,500, , (Being the adjustment made for net effect of profit, loss and reserves), , Employee Compensation Reserve (W.C.R.), Meaning : Workmen Compensation Reserve is a reserve created out of profit to meet, the Workmen Compensation Liability, if any arise in future. It means, claim may or may not, arise. It also means that the claim may be higher or lower than the amount of reserve., Treatment : At the time of change in profit-sharing ratio, it is treated as follows :, Situation 1 : If no claim against Workmen Compensation Exists. (Distribute it, in old profit-sharing ratio), Journal Entry :, Workmen Compensation Reserve A/c, Dr., To Partners’ Capital (or Current) A/cs, (Being the amount of workmen compensation reserve credited to partners, in their old profit-sharing ratio), , Situation 2 : If Claim for Workmen Compensation Exist, (i) If the Claim is Lower than the amount of Workmen Compensation Reserve., b The amount of claim is transferred to provision for Workmen Compensation Claim, Account., b The balance (W.C.R. – Claim) is transferred to Partners’ Capital Accounts (or, Current) Accounts in their Old Profit-sharing Ratio., Journal Entry :, Workmen Compensation Reserve A/c, Dr., To Provision for Workmen Compensation Claim A/c, To Partners’ Capital (or Current) A/cs, (Being the amount of claim transferred to W.C. Claim A/c and balance transferred, to partners’ capital/current accounts in thier old profit-sharing ratio), , (ii) If the Claim is Higher than the amount of W.C.R., b The amount of W.C.R. alongwith the amount of claim, over and above the amount of, reserve, is credited to Workmen Compensation Claim A/c., b The amount is excess of reserve (i.e., loss) is debited to Revaluation Account, because, the loss must be borne by all the partners in their old profit sharing ratio., Journal Entries :, Workmen Compensation Reserve A/c, Dr., Revaluation A/c, Dr., To Workmen Compensation Claim A/c, (Being the amount of claim debited to W.C.R. and Revaluation A/c), , (iii) If the Claim is Equal to Workmen Compensation Reserve, Workmen Comensation Reserve A/c, Dr., To Provision for Workmen Compensation Claim A/c, (Being the claim against workmen compensation reserve recorded), , 189
Page 204 :
SBPD Pub li ca tions Accountancy (XII), Illustration 14 (Treatment of Workmen Compensation Claim A/c), A, B and C share profits and losses in the ratio of 5 : 3 : 2. They decide to share future, profit and losses in the ratio of 5 : 3 : 2 with effect from 1.4.2020. Workmen Compensation, Reserve appears at ` 6,000 in the Balance Sheet as at 31st March, 2020., Show the accounting treatment under the following alternative cases :, Case (i) : If there is no other information., Case (ii) : If a claim on account of workmen compensation of ` 2,000 was admitted., Case (iii) : If a claim on account of workmen compensation is estimated at ` 8,000., Solution, Journal Entries, Dr., Cr., Date, Particulars, 2020, April 1, Case (i) Workmen Compensation Reserve A/c, To A’s Capital A/c, To B’s Capital A/c, To C’s Capital A/c, , L.F., , Amount, `, , Dr., , Amount, `, , 6,000, 3,000, 1,800, 1,200, , (Being the transfer W.C.R. to Partners’ Capital accounts in, their old profit sharing ratio), , Case (ii), , Workmen Compensation Reserve A/c, Dr., To Provision for Workmen Compensation Claim A/c, To A's Capital A/c, To B's Capital A/c, To C's Capital A/c, , 6,000, 2,000, 2,000, 1,200, 800, , (Being to transfer surplus W.C.R. to partners’ capital accounts, in their old profit-sharing ratio), , Case (iii) Workmen Compensation Reserve A/c, Dr., Revaluation A/c, Dr., To Provision for Workmen Compensation Claim A/c, , 6,000, 2,000, 8,000, , (Being the provision created and shortfall charged to, Revaluation A/c), , A’s Capital A/c, B’s Capital A/c, C’s Capital A/c, To Revaluation A/c, , Dr., Dr., Dr., , 1,000, 600, 400, 2,000, , (Being the transfer of loss on revaluation to partners’ capital, accounts in their old profit sharing ratio), , 4.3.4 Accounting for Revaluation of Assets and Liabilities, In the event of reconstitution of the partnership firm, the assets are revalued and, liabilities are reassessed. Revaluation Account is an account showing profit and loss on, revaluation of assets and reassessment of liabilities. The reason is that the present value of, the assets may be different from their book value (i.e., the value shown in the Balance, Sheet). It is possible that the value of some of the assets might have increased while that of, others might have decreased. Similarly, with the passage of time, value of liabilities might, have increased or decreased. Hence, the assets are revalued and the liabilities are, reassessed at the time of change in profit-sharing ratio so that the profit or loss arising on, account of such revaluation or reassessment is adjusted in the capital accounts in their old, profit-sharing ratio. For this purpose, an account called ‘Revaluation Account’ is prepared., Revaluation Account is also known as Profit and Loss Adjustment Account., , 190
Page 205 :
Reconstitution of Partnership—Change in ....... Partners, b When the assets of the firm are revalued on reconstitution of the firm, this is called, revaluation of assets., b When liabilities of the firm are reassessed on reconstitution of the firm, this is, called reassessment of liabilities., b Revaluation Account is Nominal Account in nature. So, increase in the value of, assets and decrease in the amount of liabilities are credited to Revaluation Account and, decrease or loss in the value of assets or increase in the amount of liabilities is debited to, this account., b Increase in the value of assets = Gain, b Decrease in the amount of liabilities = Gain, b Decrease in the value of assets = Loss, b Increase in the amount of liabilities = Loss, b Unrecorded assets and liabilities are also recorded through Revaluation Account., Unrecorded assets are recorded as increase in assets and unrecorded liabilities are, recorded as increase in the liabilities., Need for Revaluation of Assets and Liabilities on Reconstitution of Partnership Firm, 1. Present value of assets might have increased or decreased at the time of reconstitution., 2. There may be some expenses outstanding or prepaid at the time of reconstitution., 3. There may be some unrecorded assets or unrecorded liabilities on reconstitution,, which are to be taken into account., 4. There may be requirement for creating provision for bad and doubtful debts., The balance of Revaluation Account shows profit or loss on revaluation which is, transferred to the Capital Accounts of the existing partners in theirold profit-sharing ratio., Important Note : When Revaluation Account is prepared, assets and liabilities are, shown in the Balance Sheet of the reconstituted firm at their revised values., Ac count ing En tries for the pur pose of Re val u a tion, (1), , For decrease in the value of assets, (It is loss), , (2), , For increase in the value of assets, (It is gain), , (3), , For increase in the amount of liabilities, (It is loss), , (4), , For decrease in the amount of liabilities, (It is gain), , (5), , For recording an Unrecorded Assets/Accrued, Income/Prepaid Expense, (It is gain), , (6), , For recording Unrecorded Liability/Outstanding Expenses/Provisions, (It is loss), , Journal Entries, Revaluation A/c, To Assets (By Name) A/c, , Dr., , (For decrease in the value of assets), , Assets (By Name) A/c, To Revaluation A/c, , Dr., , (For increase in the value of assets), , Revaluation A/c, To Liabilities A/c (By Name), , Dr., , (For increase in the amount of liabilities), , Liabilities A/c (By Name), To Revaluation A/c, , Dr., , (For decrease in the amount of liabilities), , Assets A/c, Accrued Income/Prepaid Exp. A/c, To Revaluation A/c, , Dr., Dr., , (For recording unrecorded assets), , Revaluation A/c, To Liability A/c, To Outstanding Expenses A/c, To Provisions A/c, , Dr., , (For recording unrecorded liability and provisions), , 191
Page 206 :
SBPD Pub li ca tions Accountancy (XII), (7), , For transfer of Balance in Revaluation Account, (a) When Revaluation Account shows Profit, Revaluation A/c, Dr., (Credit side exceeding debit side), To Partners' Capital A/cs, (Distribution of Revaluation Profit), (Individually in old profit-sharing ratio), (For profit on revaluation credited to Partners’, Capital A/cs), , (b) When Revaluation Account shows Loss, (Debit side exceeding credit side), (Distribution of Revaluation Loss), , Partners’ Capital A/cs, (Individually in old profit-sharing ratio), To Revaluation A/c, , Dr., , (For loss on revaluation debited to Partners’ Capital, A/cs), , For mat of Re val u a tion Ac count, , Dr., Particulars, , To Assets A/c (Decrease in Asset), To Unrecorded Liability A/c, To Liabilities A/c, (Increase in Liabilities), To Provisions A/c, (Creation of Provision), To Profit transferred to Partners’, Capital A/cs :, `, A, ............, B, ............, C, ............, , Amount, , Particulars, , `, ............ By Assets A/c (Increase in Assets), ............ By Unrecorded Asset(s) A/c, By Liabilities A/c (Decrease in, ............, Liabilities), By Provisions A/c, ............, (Decrease in Provision), By Loss trans. to Partners’, Capital A/cs :, `, A, ............, B, ............, ............, C, ............, ............, , Cr., Amount, `, ............, ............, ............, ............, , ............, ............, , Illustration 15 (Revaluation Account), P, Q and R share profits in the ratio of 5 : 3 : 2. They decide to share their future profits as, 4 : 3 : 3 with effect from April 1, 2019. On that date the following revaluations have taken place :, Book Value, Revised Value, `, , `, , Plant & Machinery, 50,000, 40,000, Land & Buildings, 80,000, 1,00,000, Investments, 44,000, 50,000, Sundry Debtors, 1,20,000, 1,00,000, Trade Creditors, 1,40,000, 1,20,000, Outstanding Expenses, 11,200, 12,000, Partners agreed that revised values of assets and liabilities are to be recorded in the, books. Give necessary Journal entries in the books of the firm on account of change in profitsharing ratio., Solution, Journal Entries, Dr., Cr., Date, Particulars, 2019, April 1 Revaluation A/c, To Plant & Machinery A/c, To Sundry Debtors A/c, To Outstanding Expenses A/c, , L.F. Amount Amount, `, `, Dr., 30,800, 10,000, 20,000, 800, , (Being decrease in value of assets and increase in outstanding expenses), , 192
Page 207 :
Reconstitution of Partnership—Change in ....... Partners, April 1 Land and Building A/c, Investments A/c, Trade Creditors A/c, To Revaluation A/c, , Dr., Dr., Dr., , 20,000, 6,000, 20,000, 46,000, , (Being increase in the value of assets and decrease in creditors), , April 1 Revaluation A/c, To P's Capital A/c, To Q's Capital A/c, To R's Capital A/c, , Dr., , 15,200, 7,600, 4,560, 3,040, , (Being transfer of profit on Revaluation A/c to the Capital A/cs of, Partners in old ratio), Working Note :, Dr., , Re val u a tion Ac count, Particulars, , Amount, , To Plant & Machinery A/c, To Sundry Debtors A/c, To Outstanding Expenses A/c, To Profit on Revaluation transferred to :, P's Capital A/c (15,200 ´ 5/10), Q's Capital A/c (15,200 ´ 3/10), R's Capital A/c (15,200 ´ 2/10), , Cr., Particulars, , Amount, , `, 10,000 By Land and Building A/c, 20,000 By Investments A/c, 800 By Trade Creditors A/c, , `, 20,000, 6,000, 20,000, , 7,600, 4,560, 3,040, 46,000, , 46,000, , Illustration 16, A, B and C are partners in a firm sharing profits and losses in the ratio of 3 : 3 : 2. Their, Balance Sheet as on 31st March, 2019 was as follows :, Liabilities, Creditors, Capital A/cs :, A, B, C, , Amount, , `, 50,000, 50,000, 36,000, , Assets, , `, 73,600 Cash at Bank, Debtors, Less : Provision, Stock, 1,36,000 Building, 2,09,600, , Amount, `, 90,000, 16,000, , `, 25,600, 74,000, 50,000, 60,000, 2,09,600, , On this date they decided that in future C will get 1/5th share in profits. They further, decided that the building be valued at ` 80,000, stock to be reduced by ` 6,000 and provision, for doubtful debts to be reduced by ` 4,000., Pass Journal entries in the books of the firm regarding the revaluation of assets and, prepare Revaluation Account., Solution, Journal Entries, Dr., Cr., Date, Particulars, 2019, April 1 Buildings A/c, Provision for Doubtful Debts A/c, To Revaluation A/c, , L.F. Amount Amount, `, `, Dr., 20,000, Dr., 4,000, 24,000, , (Being value of building appreciated and provision for D.D. reduced), , 193
Page 208 :
SBPD Pub li ca tions Accountancy (XII), Revaluation A/c, To Stock A/c, , Dr., , 6,000, 6,000, , (Being value of stock reduced), , Revaluation A/c, To A's Capital A/c, To B's Capital A/c, To C's Capital A/c, , Dr., , 18,000, 6,750, 6,750, 4,500, , (Being profit on revaluation transferred to Partners' Capital A/cs, in their old profit-sharing ratio), , Re val u a tion Ac count, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, To Stock A/c, , `, , 6,000 By Buildings A/c, , To Capital A/cs :, A, , By Provision for Doubtful Debts A/c, , `, 6,750, , B, , 6,750, , C, , 4,500, , 20,000, 4,000, , 18,000, 24,000, , 24,000, , Illustration 17 (Revaluation A/c, Capital A/cs and Revised Balance Sheet), The following is the Balance Sheet of X and Y as on 31st March, 2019 :, Liabilities, Capitals :, X, Y, Creditors, , Amount, `, `, 90,000, 60,000 1,50,000, 50,000, , Assets, Buildings, Furniture, Debtors, Stock, Cash, , 2,00,000, , Amount, `, 80,000, 30,000, 50,000, 20,000, 20,000, 2,00,000, , The partners share profits and losses in the ratio of 3 : 2. From 1.4.2019, they agreed to, share profits and losses equally. For this purpose the following were agreed upon :, (i) Buildings are to be valued at ` 1,20,000,, (ii) Current value of furniture is to be taken at ` 45,000, and, (iii) A provision for doubtful debts @ 10% is to be made on debtors., Prepare necessary ledger accounts and Revised Balance Sheet., Solution, Dr., Re val u a tion Ac count, Cr., Particulars, To Provision for Bad Debts, To Partner’s Capital A/cs :, X (50,000 ´ 3/5), Y (50,000 ´ 2/5), , 194, , `, 30,000, 20,000, , Amount, Particulars, `, 5,000 By Buildings A/c, By Furniture A/c, 50,000, 55,000, , Amount, `, 40,000, 15,000, , 55,000
Page 209 :
Reconstitution of Partnership—Change in ....... Partners, Part ners’ Capital Ac counts, , Dr., Particulars, To Balance c/d, , X, , Y, , `, 1,20,000, 1,20,000, , Cr., , Particulars, , `, 80,000 By Balance b/d, By Revaluation A/c (Profit), 80,000, , X, , Y, , `, 90,000, 30,000, 1,20,000, , `, 60,000, 20,000, 80,000, , Re vised Bal ance Sheet, (as on 1st April, 2019), Liabilities, Capital A/cs :, X, Y, Creditors, , Amount, `, `, 1,20,000, 80,000, , Assets, , Buildings, Furniture, 2,00,000 Debtors, 50,000, Less : Provision, Stock, Cash, 2,50,000, , `, , 50,000, 5,000, , Amount, `, 1,20,000, 45,000, 45,000, 20,000, 20,000, 2,50,000, , ❏ Adjustments of Profit & Loss on Revaluation of Assets and Liabilities through, Capital Accounts, Sometimes partners decide to record the net effect of revaluation of assets and, liabilities without affecting the old amount of assets and liabilities through one single, adjusting entry. This is done through Capital Accounts of gaining partner and sacrificing, partner (See Step 4 under) :, In this regard, the following steps are taken :, Step 1 : Calculation of Net Effect of Revaluation :, `, (i) Increase in Value of Assets, ....., Add : (ii) Unrecorded Assets, ....., (iii) Decrease in the Amount of Liabilities, ....., (iv) Decrease in Provisions, ....., ....., Less : (i) Decrease in Value of Assets, ....., (ii) Increase in the Amount of Liabilities, ....., (iii) Unrecorded Liabilities, ....., (iv) Increase in Provisions, ....., Net Effect of Revaluation, ....., Note : When net effect is ‘Positive’, it is gain, when it is ‘Negative’, it is loss., , Step 2 : Calculation of Gaining Ratio and Sacrificing Ratio :, Partner’s New Share – Partner’s Old Share = Gain, Old Share – New Share = Sacrifice, Step 3 : Calculation of Proportional Amount of Net Effect of Revaluation :, (a) For Gaining Partner = Net Effect of Revaluation´ Share gained, (b) For Sacrificing Partner = Net Effect of Revaluation ´ Share sacrificed, Step 4 : Pass the following Journal entry :, For Profit on Revaluation, Gaining Partner's Capital A/c, To Sacrificing Partner's Capital A/c, , For Loss on Revaluation, Dr. Sacrificing Partner's Capital A/c, To Gaining Partner's Capital A/c, , Dr., , 195
Page 210 :
SBPD Pub li ca tions Accountancy (XII), Illustration 18, A, B and C are partners in a firm in the ratio of 3 : 2 : 1. On 1st April, 2015 they decided, to share the profits in future in the ratio of 7 : 5 : 4. On this date General Reserve is ` 76,000, and profit on revaluation of assets and liabilities being ` 68,000. It was decided that, adjustment should be made without altering the figures in the Balance Sheet. Make, adjustment by one single Journal entry., Solution, Step 1 : Calculation of Sacrifice/Gain Share of Partners :, Sacrificing Share = Old Share – New Share, Gaining Share = New Share – Old Share, 3 7, 24 – 21 3, A = –, =, =, (Sacrifice), 6 16, 48, 48, 2 5 16 – 15 1, B = –, =, =, (Sacrifice), 6 16, 48, 48, 4 1 12 – 8 4, C =, – =, =, (Gain), 16 6, 48, 48, Step 2 :, General Reserve = ` 76,000, Profit on Revaluation A/c = ` 68,000, Total Amount (Cr.) ` 1,44,000, 4, Gaining Partner’s Share = C : 1,44,000´, = ` 12,000, 48, Sacrificing Partners' Share :, 3, 1, A : 1,44,000´, = ` 9,000, B : 1,44,000´, = ` 3,000, 48, 48, Step 3 :, Journal Entry, Dr., Cr., Date, 2015, April 1 C’s Capital A/c, To A’s Capital A/c, To B’s Capital A/c, , Particulars, , L.F., Dr., , Amount, `, 12,000, , Amount, `, 9,000, 3,000, , (Being net share of general reserve and profit adjusted), , Illustration 19, A, B and C are partners sharing profits in the ratio of 5 : 3 : 2. They decide to share their, future profits as 4 : 3 : 3 with effect from 1st April, 2019. On that date the following, revaluation have taken place :, Book, Revised, Value, Value, `, `, Plant & Machinery, 50,000, 40,000, Land & Buildings, 80,000, 1,00,000, Investments, 44,000, 50,000, Sundry Debtors, 1,20,000, 1,00,000, Trade Creditors, 1,40,000, 1,20,000, Outstanding Expenses, 11,200, 12,000, Partners do not want to change the book values of the assets and liabilities but record, the change by passing one adjusting entry., Reconstitution of Partnership—Change in ....... Partners, Pass the Journal entry with necessary working note., Solution, Step 1 : Calculation of Net Effect of Revaluation, `, (i) Increase in Value of Land and Building, 20,000, , 196
Page 211 :
Reconstitution of Partnership—Change in ....... Partners, (ii) Add : Incrcase in Value of Investments, 6,000, (iii) Add : Decrease in the amount of Trade Value of Creditors, 20,000, (iv) Less : Decrease in Value of Plant & Machinery, (10,000), (v) Less : Decrease in Value of Debtors, (20,000), (vi) Less : Increase in the amount of Outstanding Expenses, (800), Net Profit on Revaluation, 15,200, Step 2 : Calculation of Gain/Sacrifice (Loss) on Share :, A, B, C, (i) Old Share, 5/10, 3/10, 2/10, (ii) New Share, 4/10, 3/10, 3/10, 5, 4, 1, 3, 3, 2, 3, 1, (iii) Sacrifice or Gain [(i) – (ii)], =, =0, = (-), 10 10, 10, 10 10, 10 10, 10, Sacrifice, Nil, Gain, Step 3 : Calculation of Proportion of Amount of Net Profit on Revaluation, 1, 1, For A = 15,200´, = ` 1,520 Sacrifice, For C = 15,200 ´, = ` 1,520 Gain, 10, 10, Step 4 :, Journal Entry, Dr., Cr., Date, , Particulars, , L.F., , 2019, April 1 C's Capital A/c, To A's Capital A/c, , Dr., , Amount, , Amount, , `, , `, , 1,520, 1,520, , (Being adjustment for revaluation of assets and liabilities without, altering the book values), , 4.3.5 Accounting Treatment of Goodwill, ❏ When there is Change in the Profit-sharing Ratio of Existing Partners, A change in profit-sharing ratio basically implies that some partners will gain in future, profits while other(s) will lose. Therefore, the ‘gaining partner’ must compensate the, ‘sacrificing partner’ by paying the proportionate amount of goodwill in their sacrificing ratio., This means that the amount of goodwill so paid should be equal to the share gained by him., Accounting Technique, Reconstitution of Partnership—Change in ....... Partners, 1. First calculate sacrifice/gain share of partner., 2. Calculate gaining partners share of goodwill i.e. Share Gained ´ Goodwill., 3. Then pass following Journal entry to make adjustment for goodwill :, Gaining Partner’s Capital A/c, Dr., To Sacrificing Partner’s Capital A/c, (Being adjustment for goodwill due to change in ratio), , Please Re mem ber, b When there is change in profit-sharing ratio, goodwill must be valued., b The sacrificing partner should be compensated by gaining partner equal to the share, gained., Illustration 20, Amitabh and Abhishek are partners in a firm sharing profits in the ratio of 3 : 2. They, now decide to share future profits equally. For this purpose the goodwill has been valued at, ` 60,000. Pass the necessary Journal entry for the treatment of goodwill., , 197
Page 212 :
SBPD Pub li ca tions Accountancy (XII), Solution, Old Profit-sharing Ratio of Amitabh and Abhishek = 3 : 2, New Profit-sharing Ratio of Amitabh and Abhishek = 1 : 1, Sacrifice = Old Ratio – New Ratio, Gain = New Ratio – Old Ratio, 3 1 6−5, 1, Amitabh = − =, =, (Sacrifice), 5 2, 10, 10, 1 2 5−4, 1, Abhishek = − =, =, (Gain), 2 5, 10, 10, It means that Abhishek should compensate 1/10th of goodwill to Amitabh., 1, Thus, gaining partner's share of goodwill to be adjusted = ` 60,000 ×, = ` 6,000, 10, Jour nal En try, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , Abhishek's Capital A/c, To Amitabh's Capital A/c, , Dr., , Amount, `, , 6,000, 6,000, , (Being adjustment of goodwill in favour of Amitabh), , Illustration 21, Naiyar, Sharma and Ram are partners in a firm sharing profits equally. They now, decided to share future profits in 2 : 3 : 5. For this purpose the goodwill of the firm has been, valued at ` 3,00,000. Pass necessary Journal entries., (M.P. Board, 2013), Solution, Old Ratio = 1 : 1 : 1, New Ratio = 2 : 3 : 5, 1, 2, 10 − 6, 4, Sacrifice by Naiyar = −, =, =, 3 10, 30, 30, 10 − 9, 1, 3, 1, Sacrifice by Sharma = −, =, =, 3 10, 30, 30, 1, 5, 10 − 15, 5, Gain by Ram = −, =, =, 3 10, 30, 30, It means that Ram should compensate 5/30 share in Goodwill to Naiyar and Sharma in, 4/30 and 1/30 (4 : 1) respectively., 5, Thus, gaining partners share of goodwill to be adjusted = 3,00,000 ×, = ` 50 ,000, 30, 4, Naiyar’s Sacrifice Share = 50 ,000 × = ` 40,000, 5, 1, Sharma’s Sacrifice = 50,000 × = ` 10,000, 5, Jour nal En try, Dr., Cr., Date, , Particulars, Ram's Capital A/c, To Naiyar’s Capital A/c, To Sharma’s Capital A/c, , L.F., Dr., , (Being adjustment of goodwill in favour of sacrificing partners), , 198, , Amount, `, , 50,000, , Amount, `, , 40,000, 10,000
Page 213 :
Reconstitution of Partnership—Change in ....... Partners, Illustration 22, P, Q and R are partners sharing profits equally. They decided that in future R will get, 1/5th share in profits. On the day of change, firm’s goodwill is valued at ` 30,000. Give, Journal entry arising on account of change in profit-sharing ratio., Solution, Reconstitution of Partnership—Change in ....... Partners, 1 1 1, Old Profit-sharing Ratio of P : Q : R = 1 : 1 : 1 i.e., , ,, 3 3 3, 1, 1 4, R’s New Share = ; Remaining Share = 1 − =, 5, 5 5, 1 4 2, New Share of P = of =, 2 5 5, 1 4 2, New Share of Q = of =, 2 5 5, 2 2 1, ∴ New Profit-sharing Ratio of P : Q : R = 2 : 2 : 1 i.e., , ,, 5 5 5, Sacrifice or Gain made :, 2 1 6–5 1, P= – =, =, Gain (New Ratio – Old Ratio), 5 3, 15, 15, 2 1 6–5 1, Q= – =, =, Gain (New Ratio – Old Ratio), 5 3, 15, 15, 1 1 5–3 2, R= – =, =, Sacrifice (Old Ratio – New Ratio), 3 5, 15, 15, 2, R’s Sacrifice = ` 30,000 ×, = ` 4,000 to be compensated by P and Q., 15, Jour nal En try, Dr., Cr., Date, , Particulars, P’s Capital A/c, Q’s Capital A/c, To R’s Capital A/c, , L.F., Dr., Dr., , Amount, , Amount, , `, , `, , 2,000, 2,000, 4,000, , (Being R compensated by P and Q for the sacrifice made by him), , Illustration 23, Amar, Akbar and Anthony are partners sharing profits and losses in the ratio of, 5 : 3 : 2. From 1st January, 2020 they decided to share profits and losses equally. The, Partnership Deed provides that in the event of any change in profit-sharing ratio, the, goodwill should be valued at two years' purchase of the average profits of the preceding, three years. The profits of the preceding three years were ` 1,40,000, ` 1,70,000 and, ` 1,40,000., Pass the necessary Journal entry to give effect to the above arrangement., Solution, Valuation of Goodwill :, 1,40,000 + 1,70,000 + 1,40,000 4,50,000, Average Profit =, =, = ` 1,50,000, 3, 3, Goodwill at two years’ purchase = ` 1,50,000 × 2 = ` 3,00,000, Effect of Change in Profit-sharing Ratio :, 5 3 2, Old Ratio of Amar, Akbar and Anthony = 5 : 3 : 2, i.e.,, , ,, 10 10 10, , 199
Page 214 :
SBPD Pub li ca tions Accountancy (XII), New Ratio of Amar, Akbar and Anthony = 1 : 1 : 1, i.e.,, , 1 1 1, , ,, 3 3 3, , 5 1 15 – 10, 5, – =, =, Sacrifice (Old Ratio – New Ratio), 10 3, 30, 30, 1 3 10 – 9, 1, Akbar = –, =, =, Gain (New Ratio – Old Ratio), 3 10, 30, 30, 1 2 10 – 6, 4, Anthony = –, =, =, Gain (New Ratio – Old Ratio), 3 10, 30, 30, 1 4, Sacrificing Ratio =, :, =1: 4, 30 30, 5, Compensation payable to Amar =, of ` 3,00,000 = ` 50,000, 30, Jour nal En try, Dr., Cr., Amar =, , Date, , Particulars, Akbar's Capital A/c, Anthony's Capital A/c, To Amar's Capital A/c, , L.F., Dr., Dr., , Amount, , Amount, , `, , `, , 10,000, 40,000, 50,000, , (For crediting Amar's Capital A/c for the sacrifice made by him), , Illustration 24, Aman, Bobby and Chandani were partners in a firm sharing profits and losses in the, ratio of 5 : 4 : 1. From 1st April, 2019 they decided to share profits equally. The revaluation of, assets and re-assessment of liabilities resulted in a loss of ` 5,000. The goodwill of the firm on, its reconstitution was valued at ` 1,20,000. The firm had a balance of ` 20,000 in General, Reserve., Showing your workings clearly pass necessary journal entries on the reconstitution of, the firm., Solution, Working Note, (1) Calculation of Sacrifice or Gain of the Partner(s) :, 5 1 15 − 10, 5, Aman =, − =, =, (Sacrifice), 10 3, 30, 30, 4 1 12 − 10, 2, Bobby =, − =, =, (Sacrifice), 10 3, 30, 30, 1 1 3 − 10, 7, Chandani =, − =, =−, (Gain), 10 3, 30, 30, (2) Compensation payable by Chandani in respect of Goodwill, 7, = ` 1,20,000 ×, = ` 28,000, 30, 5, To Aman = ` 28,000 × = ` 20,000, 7, 2, To Bobby = ` 28,000 × = ` 8,000, 7, , 200
Page 215 :
Reconstitution of Partnership—Change in ....... Partners, Jour nal En tries, Date, , Particulars, , L.F., , Aman’s Capital A/c, Bobby’s Capital A/c, Chandani’s Capital A/c, To Revaluation A/c, , Dr., Dr., Dr., , Dr., , Cr., , `, , `, , 2,500, 2,000, 500, 5,000, , (Being the transfer of loss on revaluation to the capital accounts of, partners in old profit-sharing ratio.), , Chandani’s Capital A/c, To Aman’s Capital A/c, To Bobby’s Capital A/c, , Dr., , 28,000, , ., , 20,000, 8,000, , (Being the goodwill adjusted on change in the profit-sharing ratio), , General Reserve A/c, To Aman’s Capital A/c, To Bobby’s Capital A/c, To Chandani’s Capital A/c, , Dr., , 28,000, 10,000, 8,000, 2,000, , (Being the general reserve transferred to capital accounts of the, partners in thier old profit-sharing ratio), , Treat ment of Ex ist ing Good will, ❏ When Good will Al ready Ap pears in the Books, If goodwill already appears the books, it should be written off among the old partners in, their old profit sharing ratio by debiting all partners' capital accounts and crediting the, goodwill account., Journal Entry, All Partners' Capital/Current A/cs, Dr., To Goodwill A/c, (Being goodwill already appearing in the books, written off in old Ratio), , Illustration 25, A, B and C are partners sharing profit and losses in the ratio of 5 : 3 : 2. They decide to, share future profits and losses equally. The goodwill of the firm has been valued at, ` 1,80,000. Goodwill already appearing in the books is at ` 30,000. Show necessary, accounting treatment., Solution, (1) Calculation of Gain/Sacrifice of Partners, A, B, C, 1, 1, 1, New Share, 3, 3, 3, 5, 3, 2, Old Share, 10, 10, 10, 1, 5 10 − 5, 5, −, −, =, 3 10, 30, 30, , 1 3, 10 − 9, 1, 1, 2 10 − 6, 4, −, −, =, −, −, =, 3 10, 30, 30, 3 10, 30, 30, 1, (2) Compensation payable by B to A = ` 1,80,000 ×, = ` 6,000, 30, 4, Compensation payable by C to A = ` 1,80,000 ×, = ` 24,000, 30, , 201
Page 216 :
SBPD Pub li ca tions Accountancy (XII), Jour nal Entries, Date, , Particulars, A’s Capital A/c (` 30,000 × 5/10), B’s Capital A/c (` 30,000 × 3/10), C’s Capital A/c (` 30,000 × 2/10), To Goodwill A/c, , L.F., Dr., Dr., Dr., , Amount, `, 15,000, 9,000, 6,000, , Amount, `, , 30,000, , (Being the existing goodwill written off in old ratio), , B’s Capital A/c, C’s Capital A/c, To A’s Capital A/c, , Dr., Dr., , 6,000, 24,000, 30,000, , (Being the adjustment made through capital A/cs for goodwill on, charge in the profit-sharing ratio), , 4.3.6 Adjustments of Partners’ Capitals, Sometimes adjustments are to be made due to change in profit-sharing ratio. The, various steps involved in adjusting the capitals of partners according to new profit-sharing, ratio are as follows :, Step 1 : Calculate the Adjusted old Capital of Partners., Adjusted Old Capitals of Partners =, `, Capital Balance, ........, Add : Adjustments relating to goodwill, undistributed, ........, Profit/General Reserve/, ........, Profit on Revaluation A/c, ........, `, ........, Less : Accumulated Loss, ........, Loss on Revaluation, ........, Goodwill Written off, ........, ......., Adjusted Old Capitals, ......., Step 2 : Calculate Total Capital of the New Firm (if not given in questions) :, Total Capital = Aggregate of Adjusted Old Capitals of Partners, Step 3 : Calculate the New Capitals of Partners (in new profit-sharing ratio), = Total Capital of New Firm × New Share of Partner, Step 4 : Calculate the shortage or Surplus in each Partner’s Capital Account., = New Capital – Adjusted Old Capital = Deficiency., Adjusted Old Capital – New Capital = Surplus, Step 5 : The partners having surplus will withdraw cash from business :, (i) In Case of Deficiency, Journal Entry for bringing in cash :, Cash/Bank A/c, Dr., To Partner’s Capital A/c, Journal Entry for debiting Current A/c, Partner 's Current A/c, Dr., To Partner’s Capital A/c, (ii) In Case of Surplus, Journal Entry for withdrawal :, Partner’s Capital A/c, Dr., To Cash/Bank A/c, , 202
Page 217 :
Reconstitution of Partnership—Change in ....... Partners, or, Journal Entry for transfer to the credit of his Current A/c, Partern’s Capital A/c, Dr., To Partner’s Current A/c, Illustration 26 (Adjustments of Existing Partner’s Capital), A, B and C are partners in a firm sharing profits and losses as 3 : 2 : 1. Their Balance, Sheet as at 31st March, 2020 was as follows :, Liabilities, Creditors, General Reserve, Partners’ Capital A/cs :, A, B, C, , `, Assets, 4,50,000 Cash, 2,40,000 Other Current Assets, Fixed Assets, , `, , 3,00,000, 2,40,000, 2,10,000, , `, , 1,20,000, 6,90,000, 6,30,000, , 7,50,000, 14,40,000, , 14,40,000, , From April 1, 2020, the partners decided to share profits in the ratio of 5 : 3 : 2. As per, decision :, (i) Revaluation of assets and liabilities resulted into a profit of ` 24,000., (ii) The goodwill of the firm was valued at ` 3,00,000., (iii) The capital of the firm will be ` 12,00,000 and the capital accounts of the partners, will be adjusted according to new profit-sharing ratio., Draft necessary journal entries and prepare partners’ capital account., Jour nal Entry, Dr., Cr., Solution, S.No., 1, , Particulars, , L.F., , General Reserve A/c, To A’s Capital A/c, To B’s Capital A/c, To C’s Capital A/c, , Dr., , `, , `, , 2,40,000, 1,20,000, 80,000, 40,000, , (Being general reserve transferred to partners’ capital accounts, , 2, , Revaluation A/c, To A’s Capital A/c, To B’s Capital A/c, To C’s Capital A/c, , Dr., , 24,000, 12,000, 8,000, 4,000, , (Being profit on revaluation transferred to capital account), , 3, , C’s Capital A/c, To B’s Capital A/c, , Dr., , 10,000, 10,000, , (Being goodwill adjusted in the partners’ capital accounts), , 4, , Cash A/c, To A’s Capital A/c, To B’s Capital A/c, , Dr., , 1,90,000, , ., , 1,68,000, 22,000, , (Being cash brought in by A and B to make their capitals, proportionate to new profit-sharing ratio.), , C’s Capital A/c, To Cash A/c, , Dr., ., , 4,000, 4,000, , (Being amount withdrawn by C), , 203
Page 218 :
SBPD Pub li ca tions Accountancy (XII), Working Notes :, (1) Calculation of Sacrifice or Gain :, Old Ratio 3 : 2 : 1,, 3, A= –, 6, 1, C= –, 6, , New Ratio 5 : 3 : 2, 30 – 30, 5, 0, =, =, = Nil,, 10, 60, 60, 2 10 – 12, 2, =, =, = (gain), 10, 60, 60, , Share of Goodwill Contributed to B by C = 3,00,000 ×, , B=, , 20 – 18, 2, 3, 2, –, =, =, = (Sacrifice), 6 10, 60, 60, , 2, = ` 10,000, 60, , (2) Calculation of New Capital of Partners :, Total Capital = 12,00,000, 5, Capital of A = 12,00,000 ×, = ` 6,00,000, 10, 3, Capital of B = 12,00,000 ×, = ` 3,60,000, 10, 2, Capital of C = 12,00,000 ×, = ` 2,40,000, 10, , Dr., , Cr., , Part ners’ Cap i tal Ac counts, Particulars, , To B’s Capital A/c, (Goodwill), To Cash A/c, To Balance c/d, , A, , B, , C, , `, , `, , `, , —, —, —, —, 6,00,000 3,60,000, , 6,00,000 3,60,000, , Particulars, , By Balance b/d, 10,000 By General Reserve, 4,000, A/c, 2,40,000 By Revaluation A/c, (Profit), By C’s Capital A/c, (Goodwill), By Cash A/c, 2,54,000, , A, , B, , C, , `, `, `, 3,00,000 2,40,000 2,10,000, 1,20,000, , 80,000, , 40,000, , 12,000, , 8,000, , 4,000, , —, 10,000, —, 1,68,000, 22,000, —, 6,00,000 3,60,000 2,54,000, , ❏ Long Answer Illustrations, Illustration 27 (Revised Value not to be Recorded and Preparation of Revised, Balance Sheet), Akshay, John and Salman are partners in a firm sharing profits and losses in the ratio, of 2 : 2 : 1 and their Balance Sheet as on 31st March, 2019 was as under :, Liabilities, , Amount, `, , Creditors, Bills Payable, General Reserve, Capitals :, Akshay, John, Salman, , `, 1,00,000, 1,20,000, 1,40,000, , 85,000 Land, 65,000 Building, 1,00,000 Plant, Stock, Debtors, Cash in hand, 3,60,000, 6,10,000, , Assets, , Amount, `, , 1,70,000, 1,00,000, 2,00,000, 80,000, 50,000, 10,000, 6,10,000, , From 1st April, 2019 the partners decided to share profits in the ratio of 1 : 2 : 3. For this, purpose it was agreed that :, (i) Land should be valued at ` 2,00,000 and building should be depreciated by 6%., (ii) Creditors amounting to ` 6,000 were not to be paid., (iii) The goodwill of the firm should be valued at ` 1,20,000., , 204
Page 219 :
Reconstitution of Partnership—Change in ....... Partners, (a) Pass the necessary Journal entries to give effect to the above agreement without, opening Revaluation Account., (b) Prepare the Capital Accounts of the partners., (c) Prepare the Balance Sheet of the reconstituted firm., Solution, (1) Calculation of Sacrifice/Gain of Partners :, Sacrificing Share = Old Share – New Share, 2 1 12 – 5 7, Akshay = – =, =, (Sacrifice), 5 6, 30, 30, 2 2 12 – 10, 2, John = – =, =, (Sacrifice), 5 6, 30, 30, 1 3 6 – 15, 9, Salman = – =, = ( –), (Gain, being negative result), 5 6, 30, 30, 7, 2, Sacrificing Ratio =, :, =7:2, 30 30, (2) Calculation of Proportionate Share of Profit of Gaining Partner :, `, Adjustment of Goodwill (Profit), 1,20,000, Profit due to increase in value of Land, 30,000, Profit due to decrease in Creditors, 6,000, 1,56,000, Less : Loss due to decrease in value of Building, 6,000, Total Profit 1,50,000, Hence, Proportionate share of profit of gaining partner, = ` 1,50,000 × 9 / 30 = ` 45,000, (3) In the absence of specific instruction, ‘General Reserve' will be distributed in old, ratio., Jour nal En tries, Dr., Cr., Date, Particulars, 2019, April 1 General Reserve A/c, To Akshay's Capital A/c, To John's Capital A/c, To Salman's Capital A/c, , L.F., Dr., , Amount, `, 1,00,000, , Amount, `, 40,000, 40,000, 20,000, , (Being transfer of general reserve to Partners' Capital A/cs, in their old ratio), , April 1 Salman's Capital A/c, To Akshay's Capital A/c, To John's Capital A/c, , Dr., , 45,000, 35,000, 10,000, , (Being Salman's share of gain credited to sacrificing Partners', Capital A/cs in their sacrificing ratio, i.e., 7 : 2), , Dr., Particulars, To Akshay's, Capital A/c, , Part ners’ Cap i tal Ac counts, Akshay, `, —, , John, `, —, , Salman, `, , Particulars, , By Balance b/d, 35,000 By General, , Cr., Akshay, John, Salman, `, `, `, 1,00,000 1,20,000 1,40,000, , 205
Page 220 :
SBPD Pub li ca tions Accountancy (XII), To John's, Capital A/c, To Balance c/d, , Reserve A/c, —, —, 10,000 By Salman's, 1,75,000 1,70,000 1,15,000, Capital A/c, 1,75,000 1,70,000 1,60,000, , 40,000, , 40,000, , 20,000, , 35,000, 10,000, —, 1,75,000 1,70,000 1,60,000, , Bal ance Sheet of the Re con sti tuted Firm, (as on 1.4.2019), Liabilities, Creditors, Bills Payable, Capital A/cs :, Akshay, John, Salman, , `, 1,75,000, 1,70,000, 1,15,000, , Amount, `, 85,000 Land, 65,000 Building, Plant, Stock, Debtors, 4,60,000 Cash in hand, 6,10,000, , Assets, , Amount, `, 1,70,000, 1,00,000, 2,00,000, 80,000, 50,000, 10,000, 6,10,000, , 4.4 FAST REVISION, l Meaning of Reconstitution of Partnership Firm : Reconstitution of partnership firm means, , any change in the relations of partners without affecting the existence of partnership firm., , l Occasions of Reconstitution of a Firm :, , (i) Change in profit-sharing ratio,, (ii) Admission of a partner,, (iii) Retirement/Death of a partner,, (iv) Amalgamation of partnership firms, etc., l Sacrificing Ratio : Sacrificing Ratio is the ratio in which the old partners agree to sacrifice, their shares of profits in favour of the new partner., Formula : Sacrificing Ratio = Old Ratio – New Ratio., l Gaining Ratio : The ratio in which the continuing (remaining) partners have acquired the, share from the outgoing or existing partner is called as gaining ratio (or benefit ratio)., Formula : Gaining Ratio = New Ratio – Old Ratio., l Revaluation Account : Revaluation Account is a nominal account which shows profit/loss, arising from revaluation of assets and re-assessment of liabilities., , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (6/8 Marks Questions), , 1. What adjustments are required when a change in the profit-sharing ratio of existing partners, takes place in a partnership firm ?, 2. What is meant by revaluation of assets and re-assessment of liabilities on the reconstitution of, the firm ? What purpose does it serve at the time of reconstitution of partnership ?, , (B) Short Answer Type Questions, , (3/4 Marks Questions), , 1. What is meant by reconstitution of a partnership firm ?, (C.B.S.E., 2014), 2. State the occasions on which reconstitution of partnership firm can take place ?, 3. What is meant by reconstitution of a partnership firm ? Explain briefly any two occasions on, which a partnership firm can be reconstituted ?, 4. Briefly explain any four points of the need for the revaluation of assets and liabilities on the, reconstitution of a partnership firm., , 206
Page 221 :
Reconstitution of Partnership—Change in ....... Partners, 5. Why is it necessary to revaluate the assets and liabilities of a firm on its reconstitution ? Explain, briefly., 6. What is the difference between Sacrificing Ratio and Gaining Ratio ?, , (C) Very Short Answer Type Questions, , (1/2 Marks Questions with Answers), , 1. What is meant by reconstitution of a partnership firm ? Or What is reconstitution of, partnership ?, (J.A.C., 2010), [Ans. When there is a change in the partnership agreement (or relationship between partners), without affecting the existence of partnership firm, it is called reconstitution of the, partnership firm.], 2. State any two occasions on which a partnership firm can be reconstituted., [Ans. (i) Change in profit-sharing ratio among the existing partners., (ii) Admission of a new partner.], 3. What is meant by change in profit-sharing ratio ?, [Ans. Change in profit-sharing ratio refers to purchase of share of profit by one or more partners, from other partner or partners.], 4. What is Sacrificing Ratio ?, [Ans. The ratio in which the old partners have agreed to sacrifice (or surrender) their share of, profit in favour of a new partner, is called the ‘Sacrificing Ratio’., Sacrificing Ratio = Old Ratio – New Ratio.], 5. Give two circumstances in which sacrificing ratio may be applied., [Ans. (i) At the time of admission of a new partner for distributing goodwill brought in by him., (ii) In case of change in profit-sharing ratio of the existing partners.], 6. Give the formula for calculating ‘Sacrificing Ratio’., [Ans. Sacrificing Ratio = Old Ratio – New Ratio.], 7. What is meant by Gaining Partners ?, [Ans. A ‘Gaining Partner’ is one whose profit-sharing ratio has increased due to change in profitsharing ratio.], 8. What is meant by ‘sacrificing partner’ or ‘losing partner’ ?, [Ans. The partner whose share has decreased as a result of change in profit-sharing ratio is, called ‘sacrificing partner’ or ‘losing partner’.], 9. What is Gaining Ratio ?, [Ans. Gaining Ratio is the ratio in which the remaining partners acquire (or gain) the share of, outgoing partner’s share.], 10. Give the formula of calculating Gaining Ratio., [Ans. Gaining Ratio = New Ratio – Old Ratio.], 11. Give any two circumstances in which gaining ratio may be applied., [Ans. (i) At the time of change in profit-sharing ratio of existing partners., (ii) At the time of retirement (or death) of a partner.], 12. When there is a change in profit-sharing ratio amongst existing partners, should the, assets and liabilities be revalued ?, [Ans. Yes. The reason is that the present value of assets and revised value of liabilities may be, different from their book values. The profit or loss on revaluation is adjusted in the, Partners’ Capital Accounts in their old profit-sharing ratio.], 13. What is Revaluation Account ?, Or, What is Profit and Loss Adjustment Account ?, [Ans. Revaluation Account is a nominal account which shows profit/loss arising from revaluation, of assets and reassessment of liabilities.], , 207
Page 222 :
SBPD Pub li ca tions Accountancy (XII), 14. Why is it necessary to revalue the assets and liabilities of a firm on its reconstitution ?, [Ans. At the time of reconstitution of the firm, assets and liabilities of the firm are revalued and, net gain (or loss) of revaluation is shared by existing partners in their old profit-sharing, ratio. The reason is that the net benefit of increase (or decrease) in the valuation of assets, and liabilities is due to the efforts of existing partners only.], 15. How are the Accumulated Profits/Reserves are distributed when there is a change in, the profit-sharing ratio amongst the existing partners ?, [Ans. Accumulated Profits/Reserves are credited to the Partners’ Capital Accounts in their old, profit-sharing ratio.], 16. How are the accumulated losses distributed when there is change in the profitsharing ratio amongst the existing partners ?, [Ans. Accumulated losses are debited to the Partners’ Capital Accounts in their old profitsharing ratio.], 17. Distinguish between Gaining Ratio and Secrificing Ratio., [Ans., Basis of, Difference, , Sacrificing Ratio, , Gaining Ratio, , 1. Meaning, , It is the ratio in which the old, partners surrender their share of, profit in favour of the new partner., , It is the ratio in which the remaining, partners share the retiring partner's, share of profit., , 2. When, Calculated, , It is calculated at the time of, admission of a new partner., , It is calculated at the time of retirement or death of a partner., , (D) Objective Type Questions, I. Select the correct alternative :, 1. Increase in the value of assets on reconstitution of the partnership firm results into :, (a) Gain to the existing partners, (b) Loss to the existing partners, (c) Neither gain nor loss to the existing partners, (d) None of these, 2. Recording of an unrecorded asset on the reconstitution of a partnership firm will be :, (a) A gain to the existing partners, (b) A loss to the existing partners, (c) Neither gain nor loss to the existing partners, (d) None of these, 3. Recording of an unrecorded liability on the reconstitution of a partnership firm will be :, (a) A gain to the existing partners, (b) A loss to the existing partners, (c) Neither gain nor loss to the existing partners, (d) None of these, 4. Revaluation Account or Profit and Loss Adjustment Account is a :, (a) Personal Account, (b) Real Account, (c) Nominal Account, (d) None of these, 5. The balance of Revaluation Account is transferred to old Partners’ Capital Accounts in their :, (a) Old Profit-sharing Ratio, (b) New Profit-sharing Ratio, (c) Equal Ratio, (d) None of these, 6. X and Y share profits in the ratio of 2 : 3. In future they have decided to share profits in equal, ratio. Which partner will sacrifice in which ratio ?, 1, 1, (a) X sacrifices, (b) Y sacrifice, 10, 5, 1, (c) Y sacrifice, (d) None of these, 10, [Ans. 1. (a), 2. (a), 3. (b), 4. (c), 5. (a), 6. (c).], , 208
Page 223 :
Reconstitution of Partnership—Change in ....... Partners, II. State whether the following statements are True or False :, 1. Change in profit-sharing ratio needs adjustment on account of revaluation of goodwill and, other assets., 2. Change in profit-sharing ratio does not change the relationship among existing partners., 3. Change in profit-sharing ratio of the existing partners does not amount to reconstitution of, the partnership firm., 4. Change in profit-sharing ratio of the existing partners results in the reconstitution of the, partnership firm., 5. When there is a change in the relations without affecting the existence of partnership firm, it, is called reconstitution of the partnership firm., [Ans. : 1. True, 2. False, 3. False, 4. True, 5. True.], , PRACTICAL PROBLEMS, Very Short Answer/Short Answer Type Questions, ❐ Sacrificing and Gaining Ratio, 1. C and D share profits and losses in the ratio of 2 : 1. With effect from 1st April, 2019, they agreed, to share profits equally. Calculate the sacrificing ratio and gaining ratio., [Ans. Sacrifice of C = 1/6, Gain of D = 1/6], 2. R, S and T are partners sharing profits in the ratio of 5 : 3 : 2. They agree to share profits in equal, proportion w.e.f. April 1, 2019. You are required to determine sacrificing ratio and the gaining, ratio for R, S and T., [Ans. R's Sacrifice 5/30, S's Gain 1/30, T's Gain 4/30], 3. A, B, C and D are partners sharing profits in equal proportions. They decide to share the profits i n, the ratio of 5 : 4 : 3 : 2 in future. You are required to calculate sacrificing ratios and the gaining, ratios for the partners., [Ans. A Gains 3/28; B Gains 1/28; C Sacrifices 1/28, D Sacrifices 3/28], 4. A, B and C are partners sharing profits in the ratio of 5 : 3 : 2. Calculate the new profit-sharing, ratio and the sacrificing ratio in each of the following cases :, Case I : If C acquires 1/5th share from A., Case II : If C acquires 1/5th share equally from A and B., [Ans. Case I : New Ratio 3/10 : 3/10 : 4/10 or 3 : 3 : 4. A Sacrifice = 1/5, C Gained = 1/5, Case II : New Ratio 4/10 : 2/10 : 4/10 or 4 : 2 : 4 or 2 : 1 : 2., Sacrificing Ratio between A and B = 1/10 : 1/10 or 1 : 1.], 5. X, Y and Z are partners in a firm in the ratio of 2 : 3 : 5. On 31st March, 2019 the following, proposals are under consideration. You are required to find out change in the ratio of each, partner :, (i) New ratio will be 2 : 5 : 3., (ii) Z will give 10% of his share to X., [Ans. (i) X : No change, Y Gains 2/10, Z Sacrifices 2/10., (ii) X's Gains 1/20, Y No change, Z's Sacrifices 1/20.], ❐ Accounting for Distribution of Accumulated Profits and Reserves, 6. A and B are partners in a firm sharing profits in the ratio of 3 : 2. They decided to share profits and, losses equally. On the date of change in the profit-sharing ratio, Profit & Loss Account showed a, debit balance of ` 40,000 and a General Reserve of ` 10,000. Record the necessary Journal entry, for the distribution of the balance in the Profit & Loss Account and General Reserve before the, change in the profit-sharing ratio., [Ans. Total of Journal ` 50,000], 7. Dhoni and Pathan are partners in a firm sharing profits in the ratio of 5 : 3. They decided to, change their profit-sharing ratio to 3 : 5. On the date of change in the profit-sharing ratio, Profit, & Loss Account showed a credit balance of ` 50,000 and General Reserve of ` 24,000. Record, necessary Journal entry for the distribution of the balance in the Profit & Loss Account and, General Reserve before the change in the profit-sharing ratio., [Ans. Total of Journal ` 74,000], , 209
Page 224 :
SBPD Pub li ca tions Accountancy (XII), ❐ Not to Close the General Reserve Account, 8. X, Y and Z are partners in a firm sharing profits in 5 : 2 : 3 ratio. Their Balance Sheet on 31.3.2019, showed a balance of ` 60,000 in General Reserve. From 1.4.2019 they will share profits equally., Record the necessary Journal entry to give effect to the above arrangement when X, Y and Z, decided not to close the General Reserve Account., [Ans. Y's Capital A/c Debit ` 8,000, Z's Capital A/c Debit ` 2,000, X’s Capital A/c Credit ` 10,000], ❐ Not to Close Profit & Loss Account, 9. Abhay and Vaibhav are partners sharing profits in the ratio of 2 : 1. They decided to share future, profits equally. On the date of change in the profit-sharing ratio, the Profit and Loss Account, showed a credit balance of ` 24,000. Record the necessary Journal entry for the distribution of the, balance in the Profit & Loss Account before the change in the profit-sharing ratio if they decided, not to close the Profit & Loss Account., [Ans. Vaibhav to be debited by ` 4,000 and Abhay to be credited by the same amount.], 10. Mrinal and Mayank are partners in a firm sharing profits in the ratio of 3 : 2. They decided to, share future profits equally. On the date of change in the profit-sharing ratio, the Profit & Loss, Account showed a debit balance of ` 60,000. Record the necessary Journal entry for the, distribution of the balance in the Profit & Loss Account before the change in the profit-sharing, ratio if the Profit and Loss Account is not to be closed., [Ans. Mayank’s Capital A/c to be debited by ` 6,000 and Mrinal's Capital A/c to be credited by, the same amount.], ❐ Not to Close Profit & Loss Account and General Reserve Account, 11. A and B are partners sharing profits in the ratio of 3 : 1. Their Balance Sheet showed a balance of, ` 20,000 in General Reserve Account and ` 30,000 in Profit & Loss Account. They now agree to, share the future profits equally. Instead of closing the General Reserve Account and Profit, & Loss Account it is decided to pass an adjustment entry for the same. You are required to record, the necessary adjustment entry to give effect to the above arrangement., [Ans. B Debit ` 12,500, A Credit ` 12,500, A’s Sacrifice 1/4, B's Gain 1/4.], 12. A, B and C shared profits and losses equally. They mutually decided to change their profitsharing ratio to 5 : 3 : 2 respectively. On the date of the change in the ratio, they had the following, undistributed profits which need to be adjusted because of the change in their ratio :, `, (i) General Reserve, 48,000, (ii) Contingency Reserve, 96,000, (iii) Profit & Loss Account (Credit Balance), 1,32,000, (iv) Joint Life Policy Reserve, 1,50,000, Give one entry for all profits and reserves to make the necessary adjustments., [Ans. A Debit ` 71,000, B Credit ` 14,200, C Credit ` 56,800], 13. X, Y and Z are partners sharing profit and loss in the ratio of 5 : 3 : 2. They decide to share future, profit and loss in the ratio of 2 : 3 : 5. They also decide to record the effect of the following profit,, reserves and losses without affecting their book values by passing a single entry :, Book Value, `, , Profit and Loss A/c—Credit, 70,000, General Reserve, 20,000, Advertisement Suspense A/c, 36,000, [Ans. X's Sacrifice 3/10, Z's Gain 3/10, Net Effect (Profit) ` 54,000, Z's to be debited by ` 16,200, and X to be credited by ` 16,200], ❐ Adjustment for Revaluation of Assets and Liabilities, 14. Shankar, Babita and Vishal are partners in a firm in the ratio of 5 : 4 : 2. On 1st April, 2019 they, decided to share profits in the ratio of 4 : 3 : 2. On this date general reserve was ` 34,900 and loss, on revaluation of assets and liabilities was ` 5,200. It was decided that adjustment should be, made without altering the figures of assets and liabilities in the Balance Sheet. Make adjustment, by a single Journal entry., [Ans. Debit Vishal ` 1,200; Credit Shankar ` 300 and Babita ` 900.], [Hint : Sacrifice : Shankar 1/99, Babita 3/99, Gain : Vishal 4/99.], , 210
Page 225 :
Reconstitution of Partnership—Change in ....... Partners, 15. C and D who share profits equally decided to share future profits in the ratio of 3 : 2. For this, purpose assets and liabilities were revalued as under :, (i) Building will increase by ` 40,000., (ii) Furniture and creditors will decrease by ` 4,000 and ` 2,000 respectively., (iii) Unrecorded liability is to be recorded now at ` 6,000., (iv) The balance of general reserve was ` 40,000 and Profit and Loss Account showed a debit, balance of ` 20,000., Pass the necessary Journal entries to record the above., [Ans. Revaluation Profit ` 32,000], 16. The following is the Balance Sheet of S and T on 31st March, 2019. They share profits and losses, in the ratio of 3 : 1. They decided that in future they will share profits equally :, Liabilities, Creditors, Bills Payable, Profit & Loss A/c, General Reserve, Capital A/cs :, S, T, , Amount, `, 1,00,000, 10,000, 40,000, 16,000, `, 1,00,000, 84,000, , Assets, , Business Premises, Furniture, Stock, Book Debts, Bills Receivable, Cash at Bank, 1,84,000 Cash in hand, , Amount, `, 1,00,000, 4,000, 80,000, 64,000, 12,000, 80,000, 10,000, , 3,50,000, , 3,50,000, , On the date of change in profit-sharing ratio, they decided that :, (i) The value of business premises be appreciated by 20%., (ii) Stock and furniture be reduced by 10% each., (iii) A reserve of 5% be created for doubtful debts on book debts., Prepare the Revaluation Account., [Ans. Profit on Revaluation : S ` 6,300, T ` 2,100], ❐ When Revised Values are Not to be Recorded, 17. Shukla and Saxena are partners in a firm sharing profits in the ratio of 2 : 3. Their Balance Sheet, as on 31st March, 2019 is as follows :, Liabilities, , Amount, , Assets, , `, Capital A/cs :, Shukla, , `, 1,80,000, , Saxena, , 1,20,000, , Creditors, , Amount, `, , Land, Building, , 1,20,000, 1,00,000, , 3,00,000 Plant, , 1,00,000, , 1,20,000 Investments, 4,20,000, , 1,00,000, 4,20,000, , Revaluation of Assets : Land ` 3,00,000 and Building ` 90,000., On March 31, 2019, the partners decided to share profits equally with effect from April 1, 2019., You are required to record the necessary Journal entries and prepare Revaluation Account., [Ans. Revaluation Profit ` 1,70,000 to be shared in old ratio.], 18. Munda, Manjhi and Murmu are partners sharing profits and losses in the ratio of 5 : 3 : 2. They, decide to share future profits and losses in the ratio of 2 : 3 : 5 with effect from 1st April, 2019., They decide to record the effect of the following revaluations without effecting the book value of, the assets and liabilities by passing a single Journal entry :, , 211
Page 226 :
SBPD Pub li ca tions Accountancy (XII), Particulars, , Book Value, `, 3,00,000, 2,00,000, 50,000, 60,000, , Revised Value, `, 2,90,000, 2,50,000, 40,000, 50,000, , Plant & Machinery, Land & Building, Investments, Sundry Creditors, Required : Pass the necessary single adjusting entry., [Ans. Debit Murmu ` 12,000; Credit Munda ` 12,000], [Hint : Munda Sacrifice 3/10 and Murmu Gains 3/10.], ❐ Accounting Treatment of Goodwill, 19. A and B are partners in a firm sharing profits in the ratio of 3 : 2. With effect from 1st January,, 2019 they agreed to share profits equally. For this purpose the goodwill of the firm was valued at, ` 30,000. Pass the Journal entry for the treatment of goodwill., [Ans. Debit B ` 3,000, Credit A ` 3,000], 20. Ram and Shyam are partners sharing profits in the ratio of 3 : 4. Goodwill does not appear in the, books but it is worth ` 42,000. The partners decide to share profits in future in the ratio of 4 : 3., Give Journal entry to record the above change., [Ans. Debit Ram ` 6,000, Credit Shyam ` 6,000], 21. X, Y and Z are partners sharing profits in the ratio of 2 : 2 : 1. They decided to share future profits, in the ratio of 3 : 2 : 2. Goodwill of the firm was valued at ` 40,000. Goodwill already appeared in, the books ` 20,000., Pass necessary journal entries, [Ans. X's Sacrifice 1/40, Y's Sacrifice 1/40, Z's Gain 2/40.], 22. Deep, Ishwar and Mukesh were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2., From 1st April, 2020 they decided to share profits equally. The revaluation of assets and, re-assessment of liabilities resulted in a profit of ` 10,000. The goodwill of the firm on its, reconstitution was valued at ` 1,20,000. The firm had a balance of ` 30,000 in General Reserve., Showing your workings clearly, pass journal entries on the reconstitution of the firm., [Ans. Deep’s Sacrifice 5/30, Ishwar’s Gain 1/30 and Mukesh’s Gain 4/30. Proportionate share of, goodwill = ` 20,000 to be adjusted in the ratio of 1 : 4, Revaluation Profit and General, Reserves will be shared in old ratio.], ❐ Accounting Treatment of Profit, Goodwill and Workmen Compensation Reserve, 23. P, Q and R were partners in a firm sharing profits in the ratio of 1 : 1 : 2. On 31st March, 2018,, their balance sheet showed a credit balance of ` 9,000 in the profit and loss account and a, Workmen Compensation Fund of ` 64,000. From 1st April, 2018 they decided to share profits in, the ratio of 2 : 2 : 1. For this purpose it was agreed that :, (a) Goodwill of the firm was valued at ` 4,00,000., (b) A claim on account of workmen compensation of ` 30,000 was admitted., Pass necessary journal entries on reconstitution of the firm., (C.B.S.E., 2019), [Ans. J/E], ❐ Adjustment of Capital, 24. X and Y are partners in a firm sharing profits and losses in the ratio of 2 : 1. Their Balance Sheet, as at 31st December, 2019 was as follows :, Liabilities, X's Capital, Y's Capital, Reserves, Creditors, , 212, , Assets, Land and Building, 3,00,000 Furniture, 2,00,000 Current Assets, 2,10,000 Cash, 1,90,000, 9,00,000, `, , `, , 2,90,000, 1,00,000, 3,10,000, 2,00,000, 9,00,000
Page 227 :
Reconstitution of Partnership—Change in ....... Partners, From 1 January, 2020, the partners decided to share profits in the ratio of 3 : 2. They also agreed, upon that :, (i) Reserves be maintained at ` 3,00,000, (ii) Land & Building be valued at ` 5,00,000, (iii) The entire capital of the firm will be ` 6,00,000., Prepare partners’ Capital Accounts and revised Balance Sheet., [Ans. Revaluation Profit ` 2,10,000, New Capital : X ` 3,60,000, Y ` 2,40,000, Cash brought by Y, ` 20,000, Cash withdrawn by A ` 40,000, Balance Sheet (Total) ` 10,90,000.], ❐ Long Answer Type Questions, 25. Jain and Gupta are partners in a firm sharing profits in the ratio of 2 : 3. Their Balance Sheet as, on 31.3.2019 was as follows :, Liabilities, , Amount, `, , Jain's Capital, Gupta's Capital, Creditors, General Reserve, , 90,000, 60,000, , Assets, , `, , Amount, `, , Land, 1,50,000 Building, 40,000 Plant, 20,000 Profit & Loss A/c, 2,10,000, , 60,000, 50,000, 95,000, 5,000, 2,10,000, , The Goodwill of the firm has been valued at ` 75,000; Land ` 1,50,000 and Building ` 45,000. On 31st, March, 2019 the partners decided to share profit equally with effect from April 1, 2019., Required :, (i) Pass the necessary Journal entries without opening Revaluation Account., (ii) Prepare the Capital Accounts of the partners., (iii) Prepare the Balance Sheet of the reconstituted firm., [Ans. (i) Balance of Capital A/cs : Jain ` 80,000, Gupta ` 85,000,, (ii) Balance Sheet Total ` 2,05,000], [Hints. (i) Debit Jain's Capital ` 16,000, Credit Gupta's Capital by ` 16,000. (ii) Sacrifice made, by Gupta 1/10 and Gain received by Jain 1/10.], ❐ Miscellaneous and Boards’ Questions, 26. X, Y and Z are partners sharing profits and losses in the ratio of 4 : 3 : 2. Goodwill does not appear, in the books, but its worth is ` 36,000. The partners decide to share future profits in equal, proportion. Give a Journal entry to record the above change. Also indicate the individual, partner’s gain or loss due to change in ratio. Show your working notes clearly., (B.S.E.B., 2013), [Ans. X’s Sacrifice ` 1/9; Z’s Gain ` 1/9. Debit Z by ` 4,000 and Credit X by ` 4,000.], 27. P, Q and R are partners sharing profits and losses in the ratio of 3 : 3 : 2. Their Balance Sheet as on, 31st March, 2019 was as follows :, Liabilities, Creditors, Capital :, P, Q, R, , `, `, , 20,000, 15,000, 15,000, , 6,000 Cash, Debtors, Stock, Machinery, 50,000 Building, 56,000, , Assets, , `, , 3,700, 4,400, 12,000, 15,900, 20,000, 56,000, , Partners decided that with effect from 1st April, 2019 they would share profits and losses in the, ratio of 4 : 3 : 2. It was agreed that :, (i) Stock to be valued at ` 11,000., (ii) Machinery to be depreciated by 10%., (iii) Building to be appreciated by 20%., Pass necessary Journal entries., (J.A.C., 2014), [Ans. Revaluation Profit ` 1,410; P ` 528.75; Q ` 528.75; R ` 352.50.], , 213
Page 228 :
SBPD Pub li ca tions Accountancy (XII), 28. The Balance Sheet of P, Q and R sharing profits and losses in the ratio of 2 : 2 : 1 as on 31st March,, 2019 is as follows :, Liabilities, Creditors, Capital :, P, Q, R, , `, `, , 60,000, 60,000, 30,000, , Assets, , 30,000 Cash, Bank, Debtors, Stock, 1,50,000 Fixed Assets, 1,80,000, , `, , 3,300, 12,500, 25,200, 30,000, 1,09,000, 1,80,000, , From 1st April, 2019, they decide that profit-sharing ratio among them and their capital should, be equal. The total capital of the firm is to remain at ` 1,50,000. Any deficiency in the capital of a, partner is to be brought in cash and any surplus in capital to be paid in cash. Pass Journal entries, to record the above., (J.A.C., 2015), [Ans. Amount to be paid in by R ` 20,000; Excess Capital to be Withdrawn by P ` 10,000 and Q, ` 10,000.], 29. The Balance Sheet of V, N and K sharing profits and losses in the ratio of 3 : 2 : 1 as on 31st March,, 2019 is as follows :, Liabilities, Creditors, Capital :, V, N, K, , `, `, , 1,50,000, 1,00,000, 50,000, , 2,10,000 Cash, Stock, Machinery, Building, 3,00,000, 5,10,000, , Assets, , `, , 50,000, 1,50,000, 2,00,000, 1,10,000, 5,10,000, , Partners decided that with effect from 1st April, 2019 they would share profits and losses in the, ratio of 3 : 2 : 2. It was agree that :, (a) Stock to be valued at ` 1,30,000., (b) Machinery to be depreciated by 10%., (c) Building to be appreciated by 25%., Pass necessary Journal Entries., (JA.C., 2016), [Ans. Total of Journal ` 80,000.], , l, , 214
Page 229 :
5, ADMISSION OF A PARTNER, Learning Objectives, After Studying this chapter, you would be able to understand :, 5.1 Position of Incoming (New) Partner, , P.No., 216, , l Effects of Admission of a New Partner, 5.2 Need for Admission of a New Partner, , 216, , 5.3 Main Adjustments on Admission of a New Partner, , 216, , l Computation of New Profit-sharing Ratio l Sacrificing Ratio, l Accounting Treatment of Goodwill : As per AS-26 l Treatment for, Revaluation of Assets and Liabilities l Treatment of Reserve &, Accumulated Profit and Loss l Adjustment of Capitals, 5.4 Fast Revision, , 282, , ❑ Useful Questions, , 282, , ❑ Practical Problems, , 287, , 215
Page 230 :
SBPD Pub li ca tions Accountancy (XII), , 5.1 Position of Incoming (New) Partner, Admission of a partner refers to entry of a person in the firm as an owner, resulting in, the increase in number of members of the firm., As per Section 31(1) of the Indian Partnership Act no new partner can enter into a, partnership until the old partners give their assent. A new partner after admission will be, responsible for all the acts of the firm but he will not be responsible for the acts committed by, the firm prior to his admission., Admission of a Partner, Under Section 31 of Indian Partnership Act, the position of a new partner will be as, under :, (i) He is not liable to pay any debts of the firm incurred before his admission., (ii) He cannot be held responsible for the acts of the old partners., When a new partner is admitted, technically or legally speaking there is a change in the, constitution of the firm. In fact, on the admission of a new partner, the existing partnership, agreement comes to an end and a new agreement comes into effect. Therefore, the firm is, reconstituted under a fresh agreement., ❏ Effects of Admission of a New Partner, 1. The admission of a partner constitutes the termination of old partnership and the, commencement of a new firm., 2. The new partner is entitled to a share in future profits of the firm. In effect, the, combined share of the old partners is reduced., 3. The effect of admission of a new partner in the firm is that there is a change in the, relations of the partners and as a result reconstitution of the partnership firm takes place., 4. The number of partners increases in the firm., 5. The new partner acquires right of sharing in the future profits of the firm. To acquire, this right, he is generally required to bring his share of goodwill (also called premium). The, amount of goodwill is to be shared by the old partners in their sacrificing ratio., 6. The new partner acquires right of sharing in the assets of the firm. To acquire this, right he usually brings in an agreed amount of capital in cash or kind or both., 7. The effect of admission of a partner is that the capital base of the firm increases and, the firm is in the position to have an experienced person for the management or working of the, firm., 8. The firm's reputation is enhanced by admitting influential and reputed person into, the firm., , 5.2 Need for Admission of a New Partner, A new partner is admitted for the following reasons :, 1. When more capital is needed for the expansion of business and existing partners, consider themselves incapable to meet the requirements., 2. When there is need for a competent and experienced person for the management and, working of the firm., 3. When the reputation of the firm is to be enhanced by admitting influential and, reputed person into the firm., 4. When it is considered desirable to admit any competent and dedicated employee as a, partner of the firm., , 5.3 Main Adjustments on Admission of a New Partner, When a partner is admitted into partnership firm a new partnership deed is prepared,, of course, if required. From accounting point of view, a number of adjustments are to be, made in the books of the firm. These adjustments relate with the following problems :, 1. Computation of New Profit-sharing Ratio,, 2. Calculation of Sacrificing Ratio,, , 216
Page 231 :
Admission of a Partner, 3. Accounting Treatment of Goodwill (As per AS-26),, 4. Revaluation of Assets and Liabilities,, 5. Distribution of Reserve/General Reserve/Accumulated Profits and Losses., 6. Adjustments of Capitals., One of the effects of admission of a partner is that there is a change in profit-sharing, ratio of the existing partners with the result some may gain and some may lose. In the, context of admission of a new partner, we have to compute the following ratios :, 1. New Profit-sharing Ratio,, 2. Sacrificing Ratio., ❏ 5.3.1 Com pu ta tion of New Profit-shar ing Ra tio, Meaning : The ratio in which all partners (including new partner) share the profits and, losses is called the new profit-sharing ratio., On the admission of a new partner the profit and loss sharing ratio of the old partners, changes. Hence, it is necessary to calculate the new profit-sharing ratio., Finding out New Ratio, (a) Remaining Shares (or Profit) = 1 – New Partner's Share in Profit, (b) New Share of Old Partners = (1) Remaining Shares (i.e. Profit) ´ Old Ratio, (2) Old Share – Share Sacrificed, New partner may bring in capital in form of cash, goods or property. Generally the, capital is brought in cash., Entries for bringing in of Capital, (i) When capital is brought in cash :, Cash/Bank A/c, Dr., To New Partner's Capital A/c, (Being cash brought in by new partner as capital), , (ii) When capital is brought in the form of goods/assets and Liabilities :, Assets A/c, Dr., Stock/Property A/c, Dr., To Liabilities A/c, To New Partner's Capital A/c, (Being assets/goods brought in by new partner as capital), , Case 1. When only new partner’s share is given, or when new partner acquires, his share from old partners in their old profit-sharing ratio, In this case, the method for computation of new profit-sharing ratio is as follows :, (i) Assume the profit of the firm as 1., (ii) Reduce the share of new partner from profit of the firm, the remaining profit will be, distributed among old partners in the old profit-sharing ratio., ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., , Details, , Practical Problem No., , 1 to 8, 9 to 13, 14 to 15, , Calculation of New Profit-sharing Ratio, Sacrificing Ratio, Calculation of New Profit-sharing Ratio and Sacrificing, Ratio, Accounting Treatment of Goodwill, Revaluation of Assets and Liabilities, Distribution of Reserves/General Reserve/Undistributed, Profit & Loss, , 1(A) to 6, 7 to 10, 11, 12(A), (B), , 16 to 32, 33 to 37, 38 to 41, , 13 to 28(B), 29(A) to 30(B), 31(A) to 34(C), , 217
Page 232 :
SBPD Pub li ca tions Accountancy (XII), 42 to 49, 50(A) to 55, 56, 57, 57, , Revaluation A/c, Partners’ Capital A/cs, Distribution of, Reserve and Balance Sheet, Adjustments of Capital, Miscellaneous and Board Question, Total, , 35 to 42, 43(A) to 51, 52 to 55, 55, , Illustration 1 (Calculation of New Profit-sharing Ratio), Sanjay and Sunil are partners sharing profits and losses in the ratio of 2 : 1. Sudhir is to be, admitted as a new partner for 1/4th share in profits. Calculate the new profit-sharing ratio., Solution, 1, Let, Profit = 1; Sudhir's Share =, 4, 1 3, Therefore,, Remaining Share = 1 – =, (Sanjay + Sunil), 4 4, 3 2 1, Sanjay's Share = ´ =, 4 3 2, 3 1 1, Sunil's Share = ´ =, 4 3 4, 1 1 1, New Profit-sharing Ratio of Sanjay, Sunil and Sudhir is : : or 2 : 1 : 1,, 2 4 4, (Multiplying by 4, L.C.M. of 2, 4, 4), 1., 2., 3., 4., , Ac count ing Tech nique, Note the share of the new partner., Deduct it out of assumed profit, i.e., 1., Divide the remaining profit among old partners in their old ratio., Calculate the New Ratio., , Case 2. When the new partner ‘purchases’ his share from other partners in, particular ratio., Sometimes, the new partner purchases a certain share of profits from one partner and, another share of profits from another partner. In such a case, the new profit-sharing ratio, will be calculated by deducting the sacrifice of a partner from his existing share of profit, (that is, old share)., New Share of Old Partner : Old Share – Sacrificed Share, Illustration 2 (When Sacrificing Ratio is given), Kapil and Sunil share profits in the ratio of 3 : 2. They admit Shrikant giving him 1/4th, share which he acquires 2/12 from Kapil and 1/12 from Sunil. Calculate the new profitsharing ratio., (J.A.C., 2009), Solution, , Calculation of New Profit-sharing Ratio, , Kapil's and Sunil's Old Ratio 3 : 2 or 3/5 : 2/5, Shrikant's Share 1/4 (2/12 from Kapil +, 1/12 from Sunil), 3 2, 36 –10 26, Kapil's New Share = –, (Sacrifice) =, =, 5 12, 60, 60, 2 1, 24 – 5 19, Sunil's New Share = –, (Sacrifice) =, =, 5 12, 60, 60, , 218
Page 233 :
Admission of a Partner, The New Profit-sharing Ratio of Kapil, Sunil and Shrikant, therefore, is :, Kapil : Sunil : Shrikant, 26, 19, 1, :, :, or 26 : 19 : 15, 60, 60, 4, Illustration 3, A and B are partners sharing profits in the ratio of 5 : 4. They admit C for a 1/10th share of, profits which he acquires in equal proportions from both. Find the new profit-sharing ratio., Solution, æ1ö, C’s Share in the Firm = 1/10, C acquires his share çç ÷÷÷ from A and B is equal, çè10 ø, 1, 1, 1, proportions. It means, A has Surrendered of, =, 2, 10, 20, 1, 1, 1, B has Surrendered of, =, 2, 10, 20, 100 - 9, 5, 1, 91, A’s Share in the New Firm Old Share – Sacrifice = =, =, 9, 20, 180, 180, 4, 1, 80 - 9, 71, B’s Share in the New Firm = =, =, 9, 20, 180, 180, 1, 18, C’s Share in the New Firm =, or, 10, 180, 91 71 18, New Profit-sharing Ratio of A, B and C =, :, :, = 91 : 71 : 18, 180 180 180, Illustration 4 (When one of the old partners gifts his share others surrender a, particular fraction of their shares), Shivani and Sayana are partners sharing profits in the ratio of 3 : 2. Sonali is admitted, 3, for, share of half of which was gifted by Shivani and the remaining share was taken by, 10, Sonali equally from Shivani and Sayana. Calculate new profit-sharing ratio., Solution, 3 2, Old Share of Shivani and Sayana 3 : 2 or :, 5 5, Shivani, Sayana, 3, 2, (A) Old Share, 5, 5, 3, 1, 3, (B) Share Gifted by Shivani, ´ =, —, 10 2, 20, 3, 1, 3, (C) Share acquired by Sonali, ´ =, 20 2 40, Now, New Share of Shivani = Old Share – Share Gifted – Share acquired by Sonali, 24 - 6 - 3 15, 3, 3, 3, = –, =, =, ...(1), 5 20, 40, 40, 40, 2, 3, 16 - 3 13, New Share of Sayana = =, =, ...(2), 5 40, 40, 40, 3, 12, New Share of Sonali =, or, ...(3), 10, 40, New Profit-sharing Ratio of Shivani, Sayana and Sonali, 15 13 12, =, :, :, or 15 : 13 : 12, 40 40 40, , 219
Page 234 :
SBPD Pub li ca tions Accountancy (XII), Case 3. When new partner acquires (Purchases) his share from one partner, only., In this case calculate new ratio as follows :, (i) Deducting new Partner share from sacrificing Partner Share, Balance ratio will, sacrificing Partner ratio., (ii) No change in other Partner shares., (iii) New Profit ratio = New ratio of Sacrificing Partner : Old ratio of not Sacrificing, Partner : Ratio of New Partner, Illustration 5, (i) X and Y are partners sharing profits in the ratio of 7 : 3. Z was admitted. The new, partner acquires his 1/10th share entirely from X., (J.A.C., 2013, 15), (ii) X and Y are partners sharing profits in the ratio of 3 : 2. They admit Z for 1/5th share, which he acquires from Y., Calculate the new profit-sharing ratio., Solution, Calculation of New Profit-sharing Ratio, 7, 3, (i) Old Ratio 7 : 3 or, : , Y's Sacrifice = Nil, 10 10, 7, 1 7–1 6, X's Share after giving 1/10th Share to Z =, –, =, =, 10 10, 10, 10, New Ratio : X : Y : Z, 6, 3, 1, :, :, or 6 : 3 : 1, 10, 10, 10, Y's share will remain unchanged in the firm., 3 2, (ii) Old Ratio 3 : 2 or :, 5 5, 1, X's Sacrifice Nil; Y's Sacrifice =, 5, 3, X's Share = (Share remaining unchanged, No Sacrifice), 5, 2 1, 2–1 1, Y's Share = – (Sacrifice) =, =, 5 5, 5, 5, 1, Z's Share =, 5, 3 1 1, New Ratio of Z, Y and Z = : :, or 3 : 1 : 1, 5 5 5, Case 4. When the old partners surrender a particular fraction of their shares, in favour of the new partner., In this case, first of all, surrendered share or sacrifice should be calculated. The, surrendered share or sacrifices must then be deducted from the share of the old partners to, find their new share. The share of the new partner will be equivalent to the total of all that, has been sacrificed (surrendered) in his favour., Illustration 6, Atul and Putul are partners sharing profits and losses in the ratio of 3 : 2. They admit, Mukul into partnership giving him 1/5th share in profits which he acquires from Atul and, Putul in the ratio of 1 : 2. Calculate the new profit-sharing ratio., , 220
Page 235 :
Admission of a Partner, Solution, , æ 1ö, Existing share of Atul and Putul 3 : 2 or 3/5 : 2/5. Mukul acquires his share of profit çç ÷÷÷, çè 5ø, 1 2, from Atul and Putul in the ratio of 1 : 2, that is :, 3 3, 1, 1 1, Hence, Share surrendered by Atul = ´ =, 3, 5 15, 2, 1, 2, Share surrendered by Putul = ´ =, 3, 5 15, 3 1 9 –1 8, Now,, New Share of Atul = –, =, =, 5 15, 15, 15, 2 2 6–2 4, New Share of Putul = –, =, =, 5 15, 15, 15, Thus, the New Profit-sharing Ratio of Atul, Putul and Mukul will be, 8 4 1, 3, :, :, or, or 8 : 4 : 3, 15 15 5, 15, Illustration 7, A and B were partners sharing profits in the ratio of 3 : 2. They admitted X and Y as new, partners. A surrendered 1/3rd of his share in favour of X and B surrendered 1/4th of his, share in favour of Y., Calculate the new profit-sharing ratio of A, B, X and Y., Solution, 3 2, Old Share of A and B = 3 : 2 or :, 5 5, 3, 1 3 1, A surrendered 1/3rd of to X;, \ ´ = (Sacrifice), 5, 3 5 5, 3 1 3–1 2, 4, Therefore,, A's New Share is – =, = or, ....(i), 5 5, 5, 5, 10, 2, 1 2 1, B surrendered 1/4th of, to Y,, \ ´ =, (Sacrifice), 5, 4 5 10, 2 1, 4 –1 3, B's New Share is –, =, =, ....(ii), 5 10, 10, 10, 1, 2, X's Share is or, ....(iii), 5, 10, 1, Y's Share is, ....(iv), 10, 2 3, 2 1, Therefore, New Profit-sharing Ratio of A, B, X and Y is :, :, :, or 4 : 3 : 2 : 1, 5 10 10 10, Note : Unless agreed otherwise, it is presumed that the new partner acquires his share in, profits from the old partners in their old profit-sharing ratio and the old partners, continue to share the remaining profit in the old ratio., Case 5. When share of new partner is given and new ratio of old partner is given., In this situation, share of new partner deducted from 1 and Balance is distributed in, new ratio of old Partners., Illustration 8, Abhay and Anuj are partners. They admit Akshaya for 1/4th share. In future, profitsharing ratio between Abhay and Anuj would be 3 : 2. Calculate new profit-sharing ratio., , 221
Page 236 :
SBPD Pub li ca tions Accountancy (XII), Solution, Let the total share be 1, , 1, 1, 3, Share of incoming partner Akshaya = , Remaining Share =1 - = (Abhay + Anuj), 4, 4, 4, Future Profit-sharing Ratio of Abhay and Anuj = 3 : 2, 3, 3, 3 3, 9, ∴, Abhay’s Share = th of, = ´ =, 5, 4, 5 4, 20, 2, 3, 2 3, 6, Anuj’s Share = th of = ´ =, 5, 4, 5 4, 20, 9, 6 1, 5, New Profit-sharing of Abhay : Anuj and Akshaya =, :, : or, or 9 : 6 : 5, 20 20 4, 20, , ❏ 5.3.2 Sac ri fic ing Ra tio, On admission the new partner becomes entitled to a share in future profits of the firm., Therefore, old partners have to make a sacrifice to the extent of share of new partner., Meaning : The ratio in which the old partners have agreed to sacrifice their shares in, profit in favour of a new partner is known as the sacrificing ratio., Sac ri fic ing Ra tio = Old Ra tio – New Ra tio, Objective of Calculation of Sacrificing Ratio : The main objective of calculation of, sacrificing ratio is to determine the amount of goodwill for compensation to old partners., Importance of Calculation of Sacrificing Ratio : The importance of sacrificing, ratio is that, old partners get the amount of goodwill in their sacrificing ratio., Calculation of Sacrificing Ratio : Question arises as to how should the sacrificing, ratio be calculated ? For this two things should be kept in mind :, Case 1. When the share of the incoming (new) partner is given without, mentioning the details of the sacrifice made by the old partners., It is assumed that the old partners sacrifice in their old profit-sharing ratio., Illustration 9 (Sacrifice in Old Ratio), Anil and Sunil are partners sharing profits in the ratio of 2 : 1. Zamil is admitted as a, new partner for 1/4th share in profits. Calculate the sacrificing ratio., Solution, æ1ö, Zamil's share çç ÷÷÷ is given without mentioning as to what Zamil acquires from Anil and, çè 4 ø, Sunil. Hence, it is presumed that Zamil takes it from the partners in their old ratio., Therefore, sacrifice made by Anil and Sunil in the ratio of 2 : 1 is as follows :, 1, Zamil's Share =, 4, 1 2 2, Anil's Sacrifice = ´ =, 4 3 12, 1 1 1, Sunil's Sacrifice = ´ =, 4 3 12, 2 1, Sacrificing Ratio is, :, or 2 : 1, 12 12, Remarks : When sacrificing ratio is not given, old ratio is assumed to be sacrificing ratio., Case 2. When sacrificing ratio is different from old profit-sharing ratio., When the new partner gets his share of profit a ratio other than the old profit-sharing, ratio, then the sacrificing ratio has to be calculated as under :, (i) Calculate the sacrifice made by each partner., (ii) Find out the sacrificing ratio on the basis of share surrendered or sacrificed., , 222
Page 237 :
Admission of a Partner, Illustration 10, Calculate sacrificing ratio from the following :, R and S are partners sharing profits in the ratio 5 : 3. T joins the firm as a new partner., R gives 1/4th of his share and S gives 2/5th of his share to the new partner., (U.S.E.B., 2011), Solution, Calculation of Sacrificing Ratio of R and S, 5 3, Old Profit-sharing Ratio of R and S = 5 : 3 or :, 8 8, R gives 1/4th of his share to T, 5 1, 5, Therefore,, R's Sacrifice = ´ =, 8 4 32, S gives 2/5th of his share to T, 3 2 6, Therefore,, S's Sacrifice = ´ =, 8 5 40, 5, 6, 5 ´ 160 6, Sacrificing Ratio of S and R =, :, =, :, ´ 160 = 25 : 24, 32 40, 32, 40, Illustration 11, P, Q and R share the profits and losses in the ratio of 3 : 2 : 1. S is admitted. He gets, 1/6th share entirely from P. Calculate the sacrificing ratio., Solution, 1, P's Sacrifice in favour of S = , Q's Sacrifice = Nil, R's Sacrifice = Nil, 6, There cannot be sacrificing ratio, because there should be at least two partners making, sacrifice for a ratio., Case 3. When old ratio of the old partners and the new ratio of all partners are, given., In such a case, the sacrificing ratio is calculated by deducting the new share from the, old share of the old partners. Thus,, Sac ri fice Ratio = Old Profit-sharing Ra tio – New Ra tio, On the basis of sacrifice made or share surrendered by the old partners, sacrificing, ratio is calculated., Illustration 12, A, B and C are in partnership sharing profits and losses in the ratio 5 : 4 : 1 respectively., Two new partners D and E are introduced. The profits are now to be shared in the ratio, 3 : 4 : 1 : 2 : 2 respectively. Calculate the sacrificing ratio., Solution, Partners, A, B, C, , Old Share, 5, 10, 4, 10, 1, 10, , New Share, 3, 12, 4, 12, 1, 12, , Old Share – New Share, 5, 3, 30 - 15 15, =, =, 10 12, 60, 60, 4, 4, 24 - 20, 4, =, =, 10 12, 60, 60, 1, 1, 6-5 1, =, =, 10 12, 60, 60, , Sacrificing Ratio, A : B :C, 15 4 1, :, :, 60 60 60, 15 : 4 : 1, , Illustration 13, Calculate the sacrificing ratio from the following :, A and B are two partners in a firm sharing profits and losses in the ratio of 3 : 2. C is, admitted in the firm as a new partner with 1/4th share which he acquires equally from A, and B., (U.S.E.B., 2011), , 223
Page 238 :
SBPD Pub li ca tions Accountancy (XII), Solution, Calculation of Sacrificing Ratio, Old Share of A and B 3 : 2, C gets 1/4th share which he acquires equally from A and B., 1 1 1, A's Sacrifice = ´ =, 4 2 8, 1 1 1, B's Sacrifice = ´ =, 4 2 8, ö, 1 1 æ1, 1, Therefore, Ratio of Sacrifice of A and B = : = çç ´ 8 : ´ 8÷÷÷ = 1 : 1, ç, ø, 8 8 è8, 8, Case 4. Calculation of New Profit-sharing Ratio and Sacrificing Ratio., Illustration 14, A and B are partners sharing profits and losses in the ratio of 3 : 2. C is admitted for, 1/4th share. A and B decide to share equally in future. Find the sacrificing ratio and new, profit-sharing ratio., Solution, Calculation of New Profit-sharing Ratio, Let the total share be 1, 1, 2, Share of New Partner C = or, 4, 8, 1 3, Remaining Share = 1 – =, (A + B), 4 4, Therefore, Old partner's share in future profit :, 3 1 3, A's Share = ´ =, 4 2 8, 3 1 3, B's Share = ´ =, 4 2 8, 3 3 1, 2, \ New Profit-sharing Ratio of A, B and C = : :, or, or 3 : 3 : 2, 8 8 4, 8, Cal cu la tion of Sac ri fic ing Ra tio, 3 2, Old Profit-sharing Ratio 3 : 2 or :, 5 5, 3 3 24 – 15 9, \, A's Sacrifice = – =, =, 5 8, 40, 40, 2 3 16 – 15 1, B's Sacrifice = – =, =, 5 8, 40, 40, 9, 1, Therefore, Sacrificing Ratio of A and B =, :, or 9 : 1, 40 40, Illustration 15, P, Q and R are partners sharing profits in the ratio 3 : 2 : 1. S is admitted as a new, partner. It is agreed among the partners that new ratio between R and S will be the same as, between P and Q. Further, relative share of P, Q and R will remain unchanged. Calculate, the new profit-sharing ratio and the sacrificing ratio., Solution, Calculation of New Profit-shar ing Ra tio, Profit-sharing Ratio between P and Q = 3 : 2, \ New Profit-sharing Ratio between R and S = 3 : 2, As per new agreement relative ratio of P, Q and R will remain unchanged., At present P's share is three times of the share of R., \, P's Share will be 3 ´ 3 = 9, Similarly, Q’s share is two times of the share of R., \, Q's Share will be 3´ 2 = 6, \ New Profit-sharing Ratio of P, Q, R and S is 9 : 6 : 3 : 2., Thus, both the conditions of new ratio are fulfilled. Ratio between P and Q is same ratio, as between R and S., , 224
Page 239 :
Admission of a Partner, (Proved), , Relative Ratio of P, Q and R = 9 : 6 : 3 = 3 : 2 : 1, , Cal cu la tion of Sac ri fic ing Ra tio, Sacrificing Ratio = Old Ratio – New Ratio, 3, 9, 30 – 27, 3, \, P's Sacrifice = –, =, =, 6 20, 60, 60, 2, 6, 20 – 18 2, Q's Sacrifice = –, =, =, 6 20, 60, 60, 1, 3, 10 – 9, 1, R's Sacrifice = –, =, =, 6 20, 60, 60, 3 2 1, \, Sacrificing Ratio =, :, :, =3 : 2 : 1, 60 60 60, Case 5 : When new partner gets equally from old partners., In this case the sacrificing ratio of old partners will be equal., ❏ Dif fer ence be tween Sac ri fic ing Ra tio and New Profit-shar ing Ratio, Main differences between new profit-sharing ratio and sacrificing ratio are as under :, Basis of, Difference, 1. Meaning, , 2. Relation, 3. Purpose, , 4. Calculation, , Sacrificing Ratio, , New Profit-sharing Ratio, , Sacrificing ratio is the ratio in which the, existing (old) partners sacrifice or, surrender a share of profit in favour of, the new partner., Sacrificing ratio is related to the old, partners., Sacrificing ratio is required for the, purpose of distributing the goodwill, brought in by the new partner among the, old partners., Sacrificing Ratio, = Old Ratio – New Ratio, , New profit-sharing ratio is the ratio in, which all the partners (old + new) share, the future profits of the firm., New profit-sharing ratio is related to all, the partners., New profit-sharing ratio is required for, the purpose of distributing the future, profits of the firm among all partners., New Profit-sharing Ratio, = Old Ratio – Sacrifice Ratio, , ❏ 5.3.3 Ac count ing Treat ment of Good will : As per AS-26, Goodwill is an intangible asset. Goodwill of a firm is the result of efforts made by the, existing partners of the firm in the past. Therefore, at the time of admission, the new, partner, who acquires the right to share the future profits of the firm, must compensate the, existing partners who have sacrificed their existing share of profit in favour of the new, partner by making payment in the form of ‘Goodwill’ or ‘Premium’., ❏ Meth ods of Re cord ing Good will, The following two methods are followed for recording or adjustment of goodwill :, Meth ods of Re cord ing Good will, , I. Premium Method, , II. Revaluation Method, , 5. Hidden or, Inferred Goodwill, , 1., , When a new partner, brings his share of, goodwill in cash, , 3. When a new partner, is unable to bring his, share of goodwill in cash, , 2., , When premium is, brought in kind by, the new partner, , 4., , When a new partner brings, only a part of his share of, goodwill in cash, , 225
Page 240 :
SBPD Pub li ca tions Accountancy (XII), ❏ I. Premium Method, This method is particularly followed when the new partner brings in cash for goodwill, and the same is shared by the old partners in their sacrificing ratio (i.e., the ratio at which, they have surrendered a part of their profits to the new partner) or in their old profit-sharing, ratio itself where the profit-sharing ratio between the partners remains the same., ❏ II. Revaluation Method, This method is applicable particularly :, (a) When the partner is unable to pay any amount for goodwill, but a Goodwill, Account is raised in the books at its full value. The entry being :, (i) For raising Goodwill A /c :, Goodwill A/c, Dr. (In Old Ratio), To Old Partners’ Capital A/cs, (ii) When goodwill is closed or when the goodwill should not appear in the books. The, entry being :, All Partners’ (Old + New) Capital A/c, Dr. (In New Ratio), To Goodwill A/c, (b) When the new partner brings a portion of goodwill in cash and is unable to, pay the rest amount., But AS-26 (New Indian AS-38) does not allow this method. (Explained lateron)., Accounting treatment of goodwill depends on different situations., ❏ Accounting Treatment in Different Situations, In case of admission of a partner there may be the following situations related to, treatment of goodwill :, 1. When the new partner brings his share of goodwill (premium) in cash., 2. When the new partner brings his share of goodwill in kind (i.e., Assets)., 3. When the new partner does not bring his share of goodwill (premium) in cash., 4. When the new partner brings his share of goodwill partly in cash., 5. Hidden/Inferred Goodwill., Accounting Treatment of Goodwill when Cash is brought for Goodwill, Case (1) : When Goodwill (Premium) is brought in cash paid privately : Under, this method, the new partner brings in goodwill in cash and the old partners distribute it, among themselves. Old partners use this money for their own benefits. Therefore, under, this method, no entry in the books is made for bringing of goodwill and its distribution, among old partners., Case (2) : When Goodwill (Premium) is brought in cash : Under this method, new, partner brings in goodwill in cash which is distributed among the old partners. By, distribution we mean that Partners' Capital Accounts are credited with the amount of, goodwill in their sacrificing ratio (i.e., the ratio in which they have surrendered part of their, profits to the new partner) or in their old profit-sharing ratio itself where the profit-sharing, ratio between the partners remains the same. This method is known as ‘Premium’ method of, adjustment of goodwill., According to this method there are three alternatives :, (i) When the amount of goodwill/premium brought in by the new partner is retained, in the business., (ii) When the amount of goodwill/premium brought in by the new partner is, withdrawn by the old partners., (iii) When the amount of goodwill/premium is partially withdrawn by the old partners., , 226
Page 241 :
Admission of a Partner, (i) When Goodwill/Premium brought in Cash by the New Partner is retained, in the business., 1. For Premium or Goodwill brought in cash, , Cash/Bank A/c, To Premium for Goodwill A/c, , Dr., , (Being Goodwill brought in cash), , 2. For capital brought in cash by the new, partner, , Cash/Bank A/c, To New Partner’s Capital A/c, , Dr., , (Being Capital brought in Cash), , Note : Instead of above two entries, generally a, combined entry is made., , Cash/Bank A/c, Dr., To Goodwill/Premium for Goodwill A/c, To New Partner’s Capital A/c, (Being Capital and Goodwill brought in Cash), , 3. For distribution of Goodwill among Old, Partners, , Premium for Goodwill A/c, To Old Partners' Capital A/cs, (In Sacrificing Ratio), , Dr., , (Being the amount of goodwill credited to Old, Partners' Capital A/cs), Notes : (1) The amount of goodwill will be distributed in the sacrificing ratio. If the new profit-sharing ratio is not, given then goodwill will be distributed between partners in old profit-sharing ratio., (2) The amount of goodwill when credited to Old Partners’ Capital Accounts, enhances the amount of capital., (3) When the amount of goodwill is credited to the Capital Accounts of Old Partners, the Goodwill Account, is closed., , (ii) When the Amount of Goodwill is withdrawn fully by old partners :, For withdrawal of goodwill money by old partners :, Old Partners’ Capital A/cs, Dr., To Cash/Bank A/c, (Being goodwill money withdrawn), , Illustration 16 (Bringing in Cash for Capital and Goodwill), A and B are partners in a firm. They share profits and losses in the ratio of 3 : 2. Their, capitals are ` 20,000 and ` 16,000 respectively. They admit C into partnership for 1/4th, share in profit. C is to bring in cash ` 12,000 as capital and ` 10,000 for goodwill., Pass Journal entries assuming that :, (i) The goodwill is retained in the business., (ii) The old partners have withdrawn goodwill., Also ascertain the new profit-sharing ratio., Solution, Journal Entries, (i) When Goodwill is retained in the Business :, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Bank A/c, To C's Capital A/c, To Premium for Goodwill A/c, , Dr., , Amount, `, , 22,000, 12,000, 10,000, , (Being cash brought in by C as capital and goodwill for 1/4th share), , Premium for Goodwill A/c, To A's Capital A/c, To B's Capital A/c, , Dr., , 10,000, 1, , 6,000, 2, 4,000, , (Being goodwill credited to Old Partners' Capital A/cs in the ratio of, 3 : 2), , 227
Page 242 :
SBPD Pub li ca tions Accountancy (XII), (ii) When Goodwill is withdrawn by the Old Partners :, Date, , Particulars, Bank A/c, To C's Capital A/c, To Premium for Goodwill A/c, , Dr., L.F. Amount, , Dr., , `, , 22,000, , Cr., Amount, `, , 12,000, 10,000, , (Being cash brought in as capital and goodwill for 1/4th share), , Premium for Goodwill A/c, To A's Capital A/c, To B's Capital A/c, , Dr., , 10,000, 6,000 1, 4,000 2, , (Being Old Partners' Capital A/cs credited with the share of goodwill), , A's Capital A/c, B's Capital A/c, To Bank A/c, , Dr., Dr., , 6,000, 4,000, 10,000, , (Being the amount of goodwill withdrawn by A and B), Note : Since the new profit-sharing ratio is not given, it is assumed that the old profit-sharing ratio is the, sacrificing ratio., Working Notes :, 3, 1 10, 000 ´ = ` 6, 000;, 5, 2, 2 10, 000 ´ = ` 4, 000., 5, , New Profit-sharing Ra tio, Let Total Profit be 1, C's Share =, , 1, 4, , 1, 3, = (A + B) to be Shared in the Ratio of 3 : 2, 4, 4, 3 3, 9, Now, A's Share in Profits and Losses = ´ =, 4 5 20, 3 2 6, 3, B's Share in Profits and Losses = ´ =, or, 4 5 20, 10, 9, 6 1, Thus,, A:B:C =, :, : i.e., 9 : 6 : 5, 20 20 4, 1–, , Illustration 17 (Treatment of Goodwill when Ratio is given), Mohan and Sohan are partners in a firm sharing profits in the ratio of 3 : 2. They, admitted Rohan as a new partner. The new profit-sharing ratio between Mohan, Sohan and, Rohan will be 5 : 3 : 2. Rohan brings ` 75,000 as capital and ` 25,000 for his share of premium., Pass necessary Journal entries., (U.S.E.B., 2014), Solution, Sacrificing Ratio = Old Ratio – New Ratio, 3, 5, 6-5, 1, Mohan’s Sacrifice = =, =, 5 10, 10, 10, 2, 3, 4 -3, 1, Sohan’s Sacrifice = =, =, 5 10, 10, 10, 1 1, Sacrificing Ratio =, :, =1:1, 10 10, , 228
Page 243 :
Admission of a Partner, Jour nal En tries, Date, , Dr., , Particulars, , L.F. Amount, , Cr., Amount, , `, , Bank A/c, To Rohan’s Capital A/c, To Premium for Goodwill A/c, , Dr., , `, , 1,00,000, 75,000, 25,000, , (Being the amount brought in as capital and goodwill), , Premium for Goodwill A/c, To Mohan’s Capital A/c, To Sohan’s Capital A/c, , Dr., , 25,000, 12,500, 12,500, , (Being goodwill credited to old partners in sacrificing ratio 1 : 1), , Illustration 18 (Distribution of Goodwill in Ratio of Sacrifice), Suresh and Ramesh are partners in a firm sharing profits and losses in the ratio of 3 : 1., On 1st July, 2019 their fixed capitals stood at ` 20,000 and ` 10,000. On this date, Mahesh was admitted into partnership paying ` 10,000 as capital and ` 3,000 as goodwill, for1/4th share of profits which he acquired 1/6th from Suresh and 1/12th from Ramesh., Pass the necessary Journal entries and prepare Goodwill Account., Solution, Jour nal En tries, Dr., Cr., Date, 2019, July 1, , Particulars, , L.F. Amount, `, , Cash A/c, To Mahesh's Capital A/c, To Premium for Goodwill A/c, , Dr., , Amount, `, , 13,000, 10,000, 3,000, , (Being capital and goodwill received in cash from Mahesh), , Premium for Goodwill A/c, To Suresh's Current A/c, To Ramesh's Current A/c, , Dr., , 3,000, 2,000, 1,000, , (Being distribution of goodwill between the old partners in the ratio, of 2 : 1), Working Note :, 1 1, 2 1, Sacrificing Ratio of Suresh and Ramesh = : = : = 2 : 1, 6 12 12 12, 2, Share of Suresh in Goodwill = 3,000´ = ` 2,000, 3, 1, Share of Ramesh in Goodwill = 3,000´ = ` 1,000, 3, , Dr., Date, , Premium for Goodwill Account, Particulars, , 2019, July 1 To Suresh's Current A/c, July 1 To Ramesh's Current A/c, , Amount, `, , 2,000, 1,000, 3,000, , Date, , Particulars, , 2019, July 1 By Cash A/c, , Cr., Amount, `, , 3,000, 3,000, , (iii) Bringing of Goodwill in Cash and Withdrawal of Goodwill Partiall y : This, method is similar to the previous method [i.e., method number (ii)], the only difference is, that the goodwill is not fully withdrawn, but only a part of goodwill is withdrawn. Therefore,, the entries in this method will be similar to those in case number (ii)., , 229
Page 244 :
SBPD Pub li ca tions Accountancy (XII), Illustration 19 (Withdrawal of a Part of Goodwill), Prashant and Nishant are partners in a firm. They share profits and losses in the ratio, of 2 : 1. Their capitals are ` 12,000 and ` 8,000 respectively. They admit Sushant into, partnership on the condition that he will bring ` 2,400 as goodwill and ` 5,000 as capital and, will get 1/3rd share in the profit of the firm. Parshant and Nishant withdrew half of the, amount of goodwill., Pass necessary Journal entries and find out the new profit-sharing ratio., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Cash A/c, To Premium for Goodwill A/c, To Sushant's Capital A/c, , Dr., , Amount, `, , 7,400, 2,400, 5,000, , (Being the amount brought in by Sushant for goodwill and, capital), , Premium for Goodwill A/c, To Prashant's Capital A/c, To Nishant's Capital A/c, , Dr., , 2,400, 1,600, 800, , (Being the amount of goodwill credited to Old Partners' Capital A/cs), , Prashant's Capital A/c, Nishant's Capital A/c, To Cash A/c, , Dr., Dr., , 800, 400, 1,200, , (Being half of the amount of goodwill withdrawn by Prashant and, Nishant), , New Profit & Loss Ratio :, Let Total Profit = 1, 1, 1 2, Sushant's Share = , Remaining Profit = 1 – = (Prashant and Nishant), 3, 3 3, 2 2 4, Prashant's New Share = ´ =, 3 3 9, 2 1, 2, Nishant's New Share = ´ =, 3 3, 9, 4 2 3, New Ratio of Prashant, Nishant and Sushant = : : = 4 : 2 : 3, 9 9 9, Illustration 20, X commenced his business with a capital of ` 1,00,000 on 1st April, 2014. During the, four years ending 31st March, 2018 the results of his business were :, 2014-15, Loss, ` 10,000, 2015-16, Profit, ` 22,000, 2016-17, Profit, ` 32,000, 2017-18, Profit, ` 44,000, During this period he withdrew ` 1,000 p.m. in first two years and then ` 1,500 p.m. On, 1st April, 2018 he admitted Y into partnership on the following terms :, (i) Goodwill is to be valued at 3 years' purchase of the average profits of the last 3 years., (ii) He will bring his share of goodwill in cash., (iii) He will have 1/2 share in future profit., (iv) He will bring capital in cash equal to that of X after his admission., Calculate the amount to be brought in by Y and make entries to record the transactions, relating to admission., , 230
Page 245 :
Admission of a Partner, Solution, , Working Notes :, (a) Valuation of Goodwill :, Profits for last three years = ` 22,000 + 32,000 + 44,000 = ` 98,000, Goodwill = Average Profit´ No. of Years' Purchase, = 98,000 / 3´ 3 = ` 98,000, Goodwill to be brought in by Y = ` 98,000 ´ 1/2 = ` 49,000, (b) Capital of X :, Capital as on April 1, 2014, Add : Total Profits for four years, (–10,000 + 22,000 + 32,000 + 44,000), , `, 1,00,000, 88,000, 1,88,000, , `, , Less : Drawings :, 1st two years (1,000 ´ 12) ´ 2, Next 2 years (1,500 ´ 12)´ 2, , 24,000, 36,000, , Add : Goodwill received from Y, Capital of X after Y's Admission, Mr. Y should bring ` 1,77,000 as his share of capital and ` 49,000 for goodwill., , Jour nal En tries, Date, , Dr., , Particulars, , L.F. Amount, , 2018, Apr. 1 Bank A/c, To Y's Capital A/c, To Premium for Goodwill A/c, , `, , Dr., , 2,26,000, , (Being cash brought in by Y for his share of goodwill and capital), , Premium for Goodwill A/c, To X's Capital A/c, , Dr., , 49,000, , 60,000, 1,28,000, 49,000, 1,77,000, , Cr., Amount, `, , 1,77,000, 49,000, , 49,000, , (Being X's Capital A/c credited with the amount of goodwill), , (2) : When New Partner brings his Share of Goodwill/Premium in Kind, Sometimes, new partner brings his share of goodwill in the form of assets instead of, cash. Sometimes he brings in cash as well as some assets for his share of goodwill. In such, cases following entries are passed :, 1. For assets brought in as share of his goodwill Assets A/c (Individual Asset), , Dr., , To Premium for Goodwill A/c, (Being goodwill share brought in by the new partner), , Illustration 21 (Bringing of Cash and Assets for Capital and Goodwill), Raj and Vijay are partners in a firm sharing profits equally. They admitted Anurag as a, partner for 1/6th share of profit. The new profit-sharing ratio will be 3 : 2 : 1. Anurag brought, stock worth ` 25,000 and furniture ` 10,000 towards his capital and for his share of goodwill., Goodwill of the firm is valued at ` 60,000 which does not appear in the books., Pass necessary Journal entries., Solution, 1. Sacrificing Ratio = Old Ratio – New Ratio, 1, 1, Old Ratio of Raj and Vijay = 1 : 1 or, :, 2, 2, New Ratio of Raj, Vijay and Anurag = 3 : 2 : 1 or, , 3 2 1, : :, 6 6 6, , 231
Page 246 :
SBPD Pub li ca tions Accountancy (XII), 1 3 3–3, – =, = 0 (Nil), 2 6, 6, 1 2 3– 2 1, Vijay' s Sacrifice = – =, =, 2 6, 6, 6, Raj' s Sacrifice =, , 2. Anurag’s Share in Goodwill = ` 60,000 ´, , 1, = ` 10,000., 6, , Jour nal En tries, Date, , Dr., , Particulars, , L.F. Amount, `, , Stock A/c, Furniture A/c, To Anurag’s Capital A/c, To Premium for Goodwill A/c, , Dr., Dr., , Cr., Amount, `, , 25,000, 10,000, 25,000, 10,000, , (Being assets brought in by Anurag for capital and goodwill), , Premium for Goodwill A/c, To Vijay’s Capital A/c, , Dr., , 10,000, 10,000, , (Being goodwill credited to Vijay’s Capital A/c for his sacrifice), , Illustration 22 (Bringing of Assets for Goodwill and Capital), A and B carried on business in partnership sharing profits and losses in the ratio of, 3 : 2. They admitted C into partnership on 1st April, 2019 for 2/7th share. Goodwill of the, firm on this date is valued at ` 17,500. C contributed the following assets towards the, payment of his capital and goodwill :, Cash ` 2,500, Debtors ` 4,500, Stock ` 5,000, Machinery ` 4,000., Pass necessary entries in the Journal to give effect to the above., Solution, Working Notes :, (A) C's Share in Goodwill = ` 17,500 ´ 2 / 7 = ` 5,000, (B) Calculation of Sacrificing Ratio :, A's Sacrifice = 3/5 – 3/7 = 21/35 – 15/35 = 6/35, B's Sacrifice = 2/5 – 2/7 = 14/35 – 10/35 = 4/35, Thus, Sacrificing Ratio between A and B = 6 : 4 or 3 : 2., , Jour nal En tries, Date, , Dr., , Particulars, , L.F. Amount, , 2019, , `, , April 1 Cash A/c, Stock A/c, Debtors A/c, Machinery A/c, To C's Capital A/c, To Premium for Goodwill A/c, , Dr., Dr., Dr., Dr., , 2,500, 5,000, 4,500, 4,000, , Dr., , 5,000, , (Being cash and other assets contributed by C towards capital, and goodwill), , Premium for Goodwill A/c, To A's Capital A/c, To B's Capital A/c, , (Being the share of goodwill of new partner credited to sacrificing, partners in their sacrificing ratio, i.e., 3 : 2), , 232, , Cr., Amount, `, , 11,000, 5,000, , 3,000, 2,000
Page 247 :
Admission of a Partner, ❏ When Goodwill already appears (exists) in the books and new partner brings, his share of goodwill in cash, If at the time of admission of a new partner Goodwill Account already appears in the books, and the new partner brings his share of goodwill in cash, the following steps should be taken :, 1. First of all existing goodwill must be written off in the old ratio., Journal Entry :, Old Partners’ Capital A/c, Dr., To Goodwill A/c, (Being the goodwill written off in the old ratio), , 2. After making the above entry, the amount of goodwill brought in by the new partner, is recorded (Entry as explained earlier)., 3. Amount of goodwill brought in is then distributed among the old partners in their, sacrificing ratio (Recorded in the same way as discussed earlier)., Illustration 23 (Goodwill already appears in the books), A and B are partners sharing profits in the ratio of 3 : 2. They admit C into partnership, for 1/5th share. C brings ` 30,000 as capital and ` 10,000 as goodwill. At the time of, admission of C, goodwill appears in the Balance Sheet of A and B at ` 3,000. New profitsharing ratio of the partners shall be 5 : 3 : 2. Pass necessary entries., Solution, Sacrificing Ratio = Old Ratio – New Ratio, 3, 5, 6–5, 1, A' s Sacrifice = –, =, =, 5 10, 10, 10, 2, 3, 4 –3, 1, B' s Sacrifice = –, =, =, 5 10, 10, 10, Hence, Sacrificing Ratio of A and B = 1 : 1, Jour nal En tries, Date, , Dr., , Particulars, , L.F. Amount, `, , A’s Capital A/c, B’s Capital A/c, To Goodwill A/c, , Dr., Dr., , Cr., Amount, `, , 1,800, 1,200, 3,000, , (Goodwill already appearing in the books, now written off in old ratio), , Bank A/c, To C’s Capital A/c, To Premium for Goodwill A/c, , Dr., , 40,000, 30,000, 10,000, , (Amount of Capital and Premium brought in Cash by C), , Premium for Goodwill A/c, To A’s Capital A/c, To B’s Capital A/c, , Dr., , 10,000, 5,000, 5,000, , (Amount of goodwill transferred to Old Partners’ Capital A/cs in, their sacrificing ratio), , Illustration 24 (When only a Part of existing goodwill is written off), A and B are partners sharing profits in the ratio of 3 : 2. They admit C as a new partner., C pays a premium of ` 3,000 for his 3/10th share of profits which he acquires from A and B in, the ratio of 2 : 1. Goodwill Account appears in the books at ` 2,000. It was decided that, Goodwill should continue to appear in the books at ` 1,500. Give necessary Journal entries., (U.S.E.B., 2013), , 233
Page 248 :
SBPD Pub li ca tions Accountancy (XII), Solution, Date, , Jour nal En tries, , Dr., , Particulars, , L.F. Amount, `, , Cash A/c, To Premium for Goodwill A/c, , Dr., , Cr., Amount, `, , 3,000, 3,000, , (Being cash brought by C for premium), , Premium for Goodwill A/c, To A’s Capital A/c, To B’s Capital A/c, , Dr., , 3,000, 2,000, 1,000, , (Being Old Partners’ Capital A/cs credited in their sacrificing ratio,, i.e. 2 : 1), , A’s Capital A/c, B’s Capital A/c, To Goodwill A/c, , Dr., Dr., , 300, 200, 500, , [Being existing goodwill appearing in the books written off to the extent of, ` 500 (` 2,000 – 1,500)], , 3. When the New Partner does not bring his Share of Goodwill/Premium in Cash, Rec om men da tion of Ac count ing Stan dard-26 (AS-26)/New Indian AS-38 :, AS-26 (or New Indian AS-38) relates to Intangible Assets., AS-26/Indian AS-38 states that goodwill can be recorded in the books only when some, consideration in money or money’s worth has been paid for it. It means only purchased, goodwill should be recognised and recorded in the book., Purchased goodwill can be defined as being the excess of fair value of the purchase, consideration over the fair value of the separable net assets acquired., ❂ At the time of admission, retirement or death of a partner or in case of change in profit, , sharing ratio among the existing partners, Goodwill Account can not be raised in the, books of the firm because it will be non-purchased goodwill or internally generated, goodwill. In short, interenally generated goodwill (or non-purchased) goodwill, should not be recognised or recorded in the books as on asset as it is not identifiable, resource controlled by the enterprise. It cannot be measured reliably at cost, (AS-26/Indian AS-38)., ❂ If the goodwill of the firm is evaluated and the new partner is unable to bring his, share of premium (goodwill) in cash, it (goodwill) should be adjusted through, Partners’ Capital/Current Accounts. For this purpose, New Partner’s Capital, Account or Current Account is debited from his share of goodwill and Old Partners’, Capital Accounts are credited in their sacrificing ratio., Journal Entry :, New Partner’s Capital A/c, Dr., (or Current A/c) (for his share of goodwill), To Sacrificing Partners’/Old Partners’ Capital A/cs (in Sacrificing Ratio), (for goodwill share of the new partner adjusted among the old partners in their sacrificing ratio), , Im por tant Note, Generally, New Partner’s Current A/c is debited instead of his Capital A/c so that his, capital is not reduced and remains intact., , 234
Page 249 :
Admission of a Partner, Illustration 25 (Adjustment of Goodwill without Opening Goodwill A/c), X and Y are partners sharing profits in the ratio of 2 : 1. Z is admitted with 1/4th share, in profits. He brings ` 60,000 as his capital but is unable to bring his share of goodwill in, cash. Goodwill of the firm is valued at ` 30,000 is to be adjusted without opening Goodwill, Account. Pass necessary Journal entries., Solution, Date, , Jour nal En tries, , Dr., , Particulars, , L.F. Amount, `, , Cash A/c, To Z's Capital A/c, , Dr., , 60,000, , (Being capital brought in cash by Z), , Z's Current A/c, To X's Capital A/c, To Y's Capital A/c, , Dr., , 7,500, , (Being adjustment made for goodwill), , Cr., Amount, `, , 60,000, , 5,000, 2,500, , Working Notes :, 1 Value of Goodwill of the firm is ` 30,000, 1, \ Share of Z in Goodwill= 30, 000 ´ = ` 7,500., 4, 2 In this problem the sacrificing ratio is the same as the old ratio 2 : 1 on the presumption that the existing, partners make sacrifice in their old profit-sharing ratio., , Illustration 26 (Goodwill not brought in Cash), A and B are partners in a firm sharing profits in the ratio of 3 : 1. They admitted C as a, new partner. The new profit-sharing ratio of A, B and C will be 2 : 1 : 1. C brought ` 2,50,000, for his capital but does not bring his share of goodwill (premium) ` 10,000 in cash., Pass necessary Journal entries in the books of the firm., Solution, Sacrificing Ratio = Old Ratio – New Ratio, 3, 1, 2, 1, 1, Old Ratio = 3 : 1 or, : ,, New Ratio = 2 : 1 : 1 or, :, :, 4, 4, 4, 4, 4, 3 2 1, 1 1, A’s Sacrifice = – = ,, B’s Sacrifice = – = 0, 4 4 4, 4 4, Jour nal En tries, Date, , Dr., , Particulars, , L.F. Amount, `, , Cash A/c, To C’s Capital A/c, , Dr., , Cr., Amount, `, , 2,50,000, 2,50,000, , (Being the amount of capital brought in cash by C), , C’s Current A/c, To A’s Capital A/c, , Dr., , 10,000, 10,000, , (Being C’s share of goodwill transferred to sacrificing Partner’s Capital, A/c), , ❏ When goodwill already appears in the books and the new partner does not, bring his share of goodwill in cash, Step 1 : Write off the existing goodwill in the old ratio of old partners by debiting Old, Partners’ Capital Account and crediting the Goodwill Account., , 235
Page 250 :
SBPD Pub li ca tions Accountancy (XII), Step 2 : For goodwill not brought in cash apply the provisions of AS- 26/New Indian AS-38, (as discussed earlier), i.e., adjust the share of goodwill through Capital Accounts., Illustration 27, Mohan Lal and Sohan Lal are partners in a firm sharing profits and losses in 3 : 2 ratio., They admitted Ram Lal for 1/4th share on 1.1.2019. It was agreed that goodwill of the firm, will be valued at 3 years’ purchase of the average profits of last 4 years which were ` 50,000, for 2015, ` 60,000 for 2016, ` 90,000 for 2017 and ` 70,000 for 2018. Ram Lal does not bring, his share of goodwill (premium) in cash. Record the necessary Journal entries in the books of, the firm on Ram Lal’s admission when goodwill appears in the books at ` 2,05,000., Solution, Valuation of Goodwill :, Total Profit = ` 50,000 + 60,000 + 90,000 + 70,000 = ` 2,70,000, 2,70,000, Average Profit =, = ` 67,500, 4, Value of Goodwill = Average Profit × No. of Years’ Purchase, = ` 67,500 × 3 = ` 2,02,500, 1, Ram Lal’s Share in Goodwill = ` 2,02,500 × = ` 50,625, 4, This will be adjusted through Partners’ Capital Account., Jour nal En tries, Date, , Dr., , Particulars, , L.F. Amount, , 2019, , `, , Jan. 1 Mohan Lal’s Capital A/c, Sohan Lal’s Capital A/c, , Dr., , 1,23,000, , Dr., , 82,000, , To Goodwill A/c, , Cr., Amount, `, , 2,05,000, , (Being amount of goodwill written off in old ratio), , Ram Lal’s Current A/c, , Dr., , 50,625, , To Mohan Lal’s Capital A/c, , 30,375, , To Sohan Lal’s Capital A/c, , 20,250, , (Being amount of Ram Lal’s share of goodwill adjusted through, Capital A/c in sacrificing ratio), , 4. Part Payment of Goodwill in Cash, When New Partner brings in only a part of his share of Goodwill in Cash :, Sometimes, the new partner does not bring in cash for the full amount of his share of goodwill,, rather he brings in only a part of it. In such a case the following procedure should be adopted :, Step 1 : Pass entry for bringing the amount of premium for goodwill in cash by debiting, Cash/Bank Account and crediting the Goodwill Account., Cash/Bank A/c, Dr., To Premium for Goodwill A/c, Step 2 : Transfer the amount of premium for goodwill to Old Partners’ Capital, Accounts in their sacrificing ratio., Premium for Goodwill A/c, Dr., To Old Partners’ Capital A/cs, , 236
Page 251 :
Admission of a Partner, Step 3 : Deficiency of the amount of goodwill (i.e., the portion of share of goodwill of new, partner not brought in cash) is debited to New Partner's Capital Account or Current, Account and credited to old partners in their sacrificing ratio., Thus, the existing partners, i.e., old partners are credited with the full amount due to, them., New Partner’s Capital/Current A/c, Dr. (Unpaid Goodwill), To Old Partners’ Capital A/cs, (In Sacrificing Ratio), Effects on Balance Sheet : The Current Account the new partner will appear on the, assets side of the Balance Sheet till it is cleared or adjusted., Illustration 28 (Part Payment of Goodwill in Cash), P and Q share profits in the ratio of 3 : 2. They admit R for 1/4th share which he acquires, in the ratio of 2 : 1 from P and Q respectively. No Goodwill Account appears in books of the, firm. R brings ` 40,000 as capital and ` 6,000 out of his share of ` 10,000 as his share of, goodwill., Give the necessary Journal entries., Solution, Jour nal En tries, Dr., Cr., Date, , Particulars, , L.F. Amount, , Cash A/c, To R's Capital A/c, To Premium for Goodwill A/c, , Dr., , Premium for Goodwill A/c, To P's Capital A/c, To Q's Capital A/c, , Dr., , `, , 46,000, , (Being cash brought in by R for his capital and premium for Goodwill), , 6,000, , Amount, `, , 40,000, 6,000, , 4,000, 2,000, , (Being the amount of premium brought in by R credited to P and Q, in their sacrificing ratio 2 : 1), , R's Current A/c, To P's Capital A/c, To Q's Capital A/c, , Dr., , 4,000, , (Being the proportion of goodwill not brought in cash debited to, New Partners' Capital A/c and credited to old partners in the, sacrificing ratio), , 2,667, 1,333, , Illustration 29 (Part Payment of Goodwill in Cash and Goodwill Appears in the, Books), A and B are partners sharing profits equally. They admit C into partnership, C paying, only ` 1,000 for premium out of his share of premium of ` 1,800 for 1/4th share of profit., Goodwill Account appears in the books at ` 6,000. All the partners have decided that, goodwill should not appear in the new firm's books., Give the necessary Journal entries., Solution, In the Books of A, B and C, Jour nal En tries, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , A's Capital A/c, Dr., B's Capital A/c, Dr., To Goodwill A/c, (Being old goodwill appearing in the books written off to A and B, , 3,000, 3,000, , Amount, `, , 6,000, , in the old ratio), , 237
Page 252 :
SBPD Pub li ca tions Accountancy (XII), Bank A/c, C's Current A/c, To A's Capital A/c, To B's Capital A/c, , Dr., Dr., , 1,000, 800, , 900, 900, , (Being premium paid in cash debited to Bank A/c and unpaid amount, of goodwill debited to C's A/c while credit being given to A and B, in the sacrificing ratio), , Illustration 30 (Partial Payment of Goodwill in Cash), K, L and M with respective capitals of ` 30,000, ` 20,000 and ` 10,000 and sharing, profits in the ratio 3 : 2 : 1 agreed to admit N for 1/6th share on the terms that he brings, in ` 20,000 as capital and ` 10,000 as premium for goodwill and that M would retain his original, share. N paid in his capital money but in respect of premium he could bring in only ` 5,000., You are required to :, (i) Give the Journal entries to carry out the above arrangements;, (ii) Work out the new profit-sharing ratio of the partners., Solution, (1) New Profit-sharing Ratio :, 1, 1, Let Total Profit = 1, M's Share = , N's Share =, 6, 6, 1 1 4, Remaining Profit = 1 – – = (K + L), 6 6 6, 4 3 12, 4 2 8, K's New Share = ´ = , L's New Share = ´ =, 6 5 30, 6 5 30, 1 5, 1 5, M's New Share = = ,, N's New Share = =, 6 30, 6 30, New Profit-sharing Ratio of K, L, M and N, 12 8, 5 5, :, :, :, or 12 : 8 : 5 : 5, 30 30 30 30, (2) Since M does not make any sacrifice, he will not get any goodwill from N. Amount of, goodwill brought in by N shall be shared by K and L in their sacrificing ratio 3 : 2., =, , Cal cu la tion of Sac ri fic ing Ra tio, K, (A) Old Ratio, , L, , M, , N, , Total, , 3 ´ 5 = 15, , 2 ´ 5 = 10, , 1´ 5 = 5, , —, , 30, , 12, , 8, , 5, , 5, , 30, , 3, , 2, , 0, , 5, , —, , (B) New Ratio, Difference (A – B), , Jour nal En tries, Date, , Dr., , Particulars, , L.F. Amount, `, , Bank A/c, , Dr., , Cr., Amount, `, , 20,000, , To N's Capital A/c, , 20,000, , (Being amount brought in by N as his capital), , Bank A/c, To Premium for Goodwill A/c, (Being a part of share of goodwill brought in cash by N), , 238, , Dr., , 5,000, , 5,000
Page 253 :
Admission of a Partner, Premium for Goodwill A/c, To K's Capital A/c, , Dr., , 5,000, 3,000, , To L's Capital A/c, , 2,000, , (Being premium brought in cash by N credited to K and L in their, sacrificing ratio), , N's Current A/c, , Dr., , 5,000, , To K's Capital A/c, To L's Capital A/c, , 3,000, 2,000, , (Being unpaid amount of goodwill not brought in cash debited to N's, Capital A/c and credited to K and L in their sacrificing ratio, i.e., 3 : 2), , 5. Hidden or In ferred Good will, Sometimes the value of goodwill of the firm or goodwill share brought in by the new, partner is not given in the question., In case of admission of a partner, ‘‘Hidden Goodwill is the excess of total capital, as worked on the basis of new partner’s capital and his share in profit over the, adjusted capital of existing partners (i.e. Old partners) and capital of incoming, partner. Hidden Goodwill is also called as inferred goodwill/undisclosed goodwill., Formula for Computing Hidden Goodwill, Total Capital of the New Firm, –, Adjusted Capital of the Existing Partners, (Based on new partner’s share, + New Partner’s Capital, and capital), or, Total Adjusted Capital, –, Actual Capital1, (Based on New Partner’s Capital), 1. Where Actual Capital = Adjusted Capital of Old Partners + New Partner’s Capital., , ❏ When Hidden Goodwill is Calculated ?, Hidden Goodwill is calculated in the following cases :, ➤ When the value of goodwill of the firm is not clearly or specifically given., ➤ When partners do not desire to disclose the value of goodwill in the books of, accounts., ➤ When the new partner does not bring cash separately for share of goodwill., ➤ When the agreement or the question keeps quite about the method of calculating, goodwill., ❏ Method of Calculating Hidden or Inferred Goodwill, Following steps should be taken to calculate the amount of hidden goodwill :, Step I : Find out the total capital of the new firm (based on new partner’s capital), Total Capital of the New Firm = New (Incoming) Partner’s Capital ´, Reciprocal of Share of New Partner, For example, if new partner brings ` 20,000 as capital for his 1/5th share, then, the capital of the new firm will be ` 20,000 × 5 = ` 1,00,000., Step II : Ascertain the Total Capital of the Firm, Total Capital = Combined Adjusted Capital of Old Partners + Capital of New, Partner, Note : In case, items of assets and liabilities are given, the total capital of the old partners will be, the difference between assets and liabilities., , Thus, Capital = Assets – Liabilities, or, Assets – Outside Liabilities, , 239
Page 254 :
SBPD Pub li ca tions Accountancy (XII), Step III : Value of Goodwill : Goodwill is assumed to be the excess of the capital of the, new firm over the combined adjusted capital of old partners and capital of, new partner., Thus, Value of Good will = To tal Cap i tal of the New Firm – Com bined Cap i tal, of Old and New Part ners (i.e., Step I – Step II)., Example, A and B are partners with capitals of ` 40,000 and ` 30,000 respectively and share, profits and losses equally. They admit C for 1/5th share of profit. C brings in ` 20,000 as his, share of capital. Calculate the value of goodwill., Solution, C gets 1/5th share and brings in ` 20,000 as capital., Hence, Total Capital of the firm = ` 20,000´ 5 / 1 = ` 1,00,000, Joint Capital of 3 Partners = ` 40,000 + 30,000 + 20,000 = ` 90,000, Therefore, Value of Goodwill = ` 1,00,000 – 90,000 = ` 10,000, Note : Usually, this method is used when the new partner does not bring in amount of goodwill in cash., , Illustration 31 (Undisclosed/Hidden Goodwill), Karan and Tanya are partners with capitals of ` 35,000 and ` 30,000 respectively and, share profits equally. They admit Shilpa with 1/5th share who contributes ` 20,000 as her, share of capital. Calculate the amount of goodwill and pass necessary Journal entries., Solution, , 1, Shilpa’s Share in Profit = ; Shilpa’s Capital = ` 20,000, 5, Total Capital of the Firm = ` 20,000 ´ 5 / 1 = ` 1,00,000, Capital of 3 Partners = ` 35,000 + 30,000 + 20,000 = ` 85,000, Goodwill (a – b) = ` 1,00,000 – 85,000 = ` 15,000, 1, Shilpa's Share in Goodwill = 15,000´ = ` 3,000, 5, Jour nal En tries, , Date, , ....(a), ....(b), , Dr., , Particulars, , L.F. Amount, `, , Cash A/c, To Shilpa's Capital A/c, , Dr., , 20,000, , Shilpa's Current A/c, To Karan's Capital A/c, To Tanya's Capital A/c, , Dr., , 3,000, , (Being the amount brought in as share of capital), , (Being goodwill credited to Old Partners' Capital A/cs), , Cr., Amount, `, , 20,000, , 1,500, 1,500, , Illustration 32, In a firm A and B are partners sharing profit in 3 : 2 ratio. Their fixed capitals are ` 30,000, and ` 20,000 respectively. After admission of C, their new profit-sharing ratio is 3 : 1 : 1. C, brings ` 25,000 as capital and amount of goodwill in cash., Calculate the amount of C’s goodwill on the basis of adjusted capital and make Journal, entry for Goodwill., (Raj. Board, 2012), , 240
Page 255 :
Admission of a Partner, Solution, In this question value of Goodwill is hidden, which will be calculated as below :, Total Capital of Firm on the basis of C’s Capital = ` 25,000 ´ 5/1 = ` 1,25,000, `, , Less : Capital of A, Capital of B, Capital of C, , 30,000, 20,000, 25,000, `, Value of Goodwill `, , Amount of C Share of Goodwill = 50,000 ×, , 1, = ` 10,000, 5, , Jour nal En tries, Date, , 75,000, 50,000, , Dr., , Particulars, , L.F. Amount, , `, Cash A/c, To C’s Capital A/c, To Premium for Goodwill A/c, , Dr., , Cr., Amount, , `, , 35,000, 25,000, 10,000, , (Cash brought in by C for capital and goodwill), , Premium for Goodwill A/c, To B’s Capital A/c, , Dr., , 10,000, 10,000, , (Goodwill by B in his sacrificing ratio), Working Note :, Old Ratio of A and B = 3 : 2 or 3/5 : 2/5, 3 1 1, : :, 5 5 5, Sacrificing Ratio = Old Share – New Share, 3 3, A’s Sacrifice = - = Nil, 5 5, 2 1, 1, B’s Sacrifice = - =, 5, 5, 5, , New Ratio of A, B and C = 3 : 1 : 1 or, , ❏ 5.3.4 Treatment for Re val u a tion of As sets and Li a bil i ties, Revaluation of assets and liabilities means bringing into account the changes in the, values of assets and liabilities. Revaluation of assets and liabilities results in appearance of, assets and liabilities at their revised or current figures., Revaluation of assets and liabilities results in profit or loss which is shared by the old, partners in thier profit-sharing ratio. To carry the scheme of revaluation of assets and, re-assessment of liabilities, an account known as ‘Revaluation Account/Profit and Loss, Adjustment Account’ is prepared., Meaning of Revaluation Account or What is Revaluation Account ?, Revaluation Account is an account which is prepared in partnership firm at the time of, admission or retirement or death of a partner to find out profit or loss on revaluation of, assets and re-assessment of liabilities. Profit and loss arising from revaluation is shared by, old partners in their old profit-sharing ratio. Revaluation Account is a nominal account., Circumstances for preparing Revaluation Account : Following are the circumstances when there is a need to revalue assets and liabilities and prepare Revaluation, Account :, , 241
Page 256 :
SBPD Pub li ca tions Accountancy (XII), (i) On the admission of a new partner into the firm., (ii) On the retirement of a partner from the firm., (iii) On the death of an existing partner., (iv) Where there is a change in profit-sharing ratio., (v) When the firm is amalgamated with another firm., A new partner is not concerned with any pre-admission profit or loss because preadmission profit or loss belongs to the old partners. Therefore, it is always desirable to ascertain, whether assets and liabilities of the firm are shown in the books at their correct values. In case, the assets and liabilities are overstated or understated, these are revalued and any profit or loss, arising on account of such revaluation must be adjusted in the Old Partners' Capital Accounts., Thus, there is revaluation of assets and liabilities at the time of admission of a partner., Main Reasons for Preparing 'Revaluation Account', 1. At the time of admission of a new partner, the current value of various assets and, liabilities may be different from those stated in the books of the firm., 2. At times, there may be some unrecorded assets and liabilities of the firm. These also, have to be brought into books of the firm., 3. The value of assets and the amounts payable have to be brought to their correct, values so that the incoming partner is not put to an advantage or disadvantage., 4. Another reason for the preparation of Revaluation Account is that profit made or, loss sustained due to change in the value of assets and liabilities on the date of, admission of a new partner belongs to the old partners. Profit or loss arising from, Revaluation Account is adjusted in the Old Partners' Capital Accounts in their old, profit-sharing ratio., Preparation of Revaluation Account : Revaluation Account is a nominal account., Revaluation Account is credited with the increase in the value of assets and decrease in the, value of liabilities. In addition, Revaluation Account is debited with the increase in the, value of liabilities and decrease in the value of assets. Excess of credit side over debit side, i.e., profit or excess of debit side over credit side i.e. loss is distributed among the old, partners in their profit-sharing ratio. It should be noted that the new partner is not affected, by revaluation of assets and liabilities. After the revaluation, assets and liabilities are, shown in the new Balance Sheet as the revised/revalued figures/current values., Following Journal entries are passed to record the revaluation of assets and liabilities :, (1) Entry for Reduction in Value of Assets, Depreciation in Value, Bad Debts, Reserve for, Discount on Debtors, Reserve for Bills Receivable and Outstanding Expenses :, Profit & Loss Adjustment (or Revaluation) A/c, Dr., To Assets A/c, (Decrease in the Value), To Bad Debts A/c, To Outstanding Expenses A/c, To Provision for Bad and Doubtful Debts A/c, To Provision for Bills Receivable A/c, (Being the value of assets written off and provision made for Bad, and Doubtful Debts etc.), , (2) Entries for Appreciation in Value of Assets, Provision for Discount on Creditors,, Prepaid Expenses :, Assets A/c, (Increase in the Value) Dr., Prepaid/Unexpired Expenses A/c, Dr., Provision for Discount on Creditors A/c, Dr., To Profit & Loss Adjustment (or Revaluation) A/c, (Being appreciation in the value of assets and.......), , 242
Page 257 :
Admission of a Partner, (3) Increase in Value of Liability A/c :, Profit & Loss Adjustment (or Revaluation) A/c, To Particular Liability A/c, , Dr., , (Being increase in liability), , (4) Reduction in Value of Liability/Reduction in the Provision for Bad Debts :, Particular Liability* A/c, Dr., Provision for Bad Debts A/c, Dr., To Profit & Loss Adjustment (or Revaluation) A/c, (Being liability decreased), , (5) Entry for Asset not recorded in the Balance Sheet :, Particular Asset A/c, To Profit & Loss Adjustment (or Revaluation) A/c, , Dr., , (Being entry of the asset left to be recorded in the B/S), , (6) Liability not recorded in the Balance Sheet :, Profit & Loss Adjustment (or Revaluation) A/c, To Unrecorded Liability A/c, , Dr., , (Liability left to be recorded in the Balance Sheet), , (7) For Sale of Unrecorded Asset (If Unrecorded Asset is Realised) :, Cash/Bank A/c, Dr., To Profit & Loss Adjustment (or Revaluation) A/c, (Being unrecorded asset realised), Note : Now, post the above entries into the Profit & Loss Adjustment Account and ascertain the balance, (difference) between the debit and credit side. If total of debit side exceeds than that of the credit side, then, there will be loss and if total of credit side is more, then there will be profits, which will, then, be distributed, among the old partners in their old profit-sharing ratio., , (8) Profits arising on Revaluation :, Profit & Loss Adjustment (or Revaluation) A/c, To Old Partners' Capital A/cs, , Dr., , (Being the transfer of profit to Old Partners' Capital A/cs), , (9) Loss arising on Revaluation :, Old Partners' Capital A/cs, To Profit & Loss Adjustment (or Revaluation) A/c, , Dr., , (Being the transfer of loss to Old Partners' Capital A/cs), , Proforma of Profit & Loss Ad just ment Ac count, or Revaluation Account, , Dr., , Particulars, , Amount, , Particulars, , `, , To Asset A/c (Decrease in Assets), To Bad Debts, To Outstanding Expenses, To Liabilities A/c, To Wolkman’s Comp. Fund A/c, To Provision for Bad & Doubtful, Debts A/c (New), , *, , Decrease, in value, —, —, Increase, in liability, Increase, or, Provision, , Cr., Amount, `, , By Asset A/c (Increase in value), , Increase, in value, By Prepaid Expenses, —, By Reserve for Discount on Creditors, —, By Unrecorded Asset A/c, Unrecorded in B/S, By Decrease in Liability, —, By Reserve for Bad Debts (Old), Decrease, in reserve, , Balancing Figure, , 243
Page 258 :
SBPD Pub li ca tions Accountancy (XII), To Reserve for Discount on Debtors, To Reserve for Bills Receivable, To Unrecorded Liability, To Profit transferred to Old, Partners' Capital A/cs /Current, A/cs (in Profit-sharing Ratio), , —, —, —, , By Loss transferred to Old, Partners' Capital A/cs/Current, A/cs, , Balancing, figure, , Balancing, figure, , ❏ Explanation of Certain Terms, (1) To be Raised to or Increased to : This means raising of value of assets/liabilities, upto the value mentioned in adjustment. It is obvious that the value of such assets and, liabilities would be less in the old Balance Sheet. Therefore,, (i) Old value will be reduced from the new value and the balance will be shown in Profit, & Loss Adjustment Account on the appropriate side., (ii) Increased value of the assets/liabilities will be shown in the new Balance Sheet., (2) To be Raised by or Increased by : This means that the value of asset/liability is, to be raised by value mentioned in the adjustment. This adjustment value will then be, shown on the appropriate side of the Profit & Loss Adjustment Account. Value of asset/, liability in old Balance Sheet will be increased by this adjustment value for the purpose of, new Balance Sheet., (3) Reduced by or Written down by : This means that the concerned asset is to be, reduced by the adjustment value, i.e., there is depreciation or reduction in value. Therefore,, this amount is shown on the debit side of the Profit & Loss Adjustment Account and this, amount will be reduced from the concerned asset in the new Balance Sheet., (4) To be Reduced to or Written down to : This means that the asset is to be reduced, to that value which is given in the adjustment. Therefore, amount of depreciation = book, value as per old Balance Sheet less value of asset as given in the adjustment., Amount of depreciation will be shown on the debit side of the Profit & Loss Adjustment, Account and adjusted value of the asset will be shown in the Balance Sheet., (5) To be taken at/To be valued at : This means that the value mentioned in the, adjustment will be the value of the asset., (a) Therefore, if the value of the adjustment is more than the value of asset in the old, Balance Sheet, then this difference will be treated as the appreciation in value and if it is, less, then this difference will be the depreciation or reduction in the value., (b) The amount mentioned in the adjustment is shown in the Balance Sheet., Illustration 33 (Revaluation of Assets and Liabilities and Unrecorded Assets), Pass Journal entries for the following at the time of admission of a partner :, (1) Machinery : Book Value ` 3,00,000, Revalued at ` 2,80,000., (2) Building : Book Value ` 5,00,000, Revalued at ` 5,50,000., (3) Unrecorded Investments worth ` 10,000., (4) Creditors increased by ` 5,000., Solution, Jour nal En tries, Dr., Cr., S. No., (1), , Particulars, Revaluation A/c, To Machinery A/c, , L.F., Dr., , Amount, , Amount, , `, , `, , 20,000, 20,000, , (Being decrease in the value of machinery recorded), , (2), , Building A/c, To Revaluation A/c, (Being increase in the value of building recorded), , 244, , Dr., , 50,000, 50,000
Page 259 :
Admission of a Partner, (3), , Investments A/c, To Revaluation A/c, , Dr., , 10,000, 10,000, , (Being the investments recorded), , (4), , Revaluation A/c, To Sundry Creditors A/c, , Dr., , 5,000, 5,000, , (Being increase in creditors recorded), , Illustration 34 (Revaluation of Assets and Liabilities and bringing Cash as Goodwill), The following was the Balance Sheet of A and B who share profits and losses as 2/3rd, and 1/3rd on 31st March, 2019 :, Liabilities, , Amount, , Assets, , Amount, , `, , Capitals :, A, B, Sundry Creditors, , `, , 15,000, 10,000, , `, , Buildings, Plant & Machinery, 25,000 Stock, 32,950 Sundry Debtors, Cash at Bank, 57,950, , 25,000, 17,500, 10,850, 4,000, 600, 57,950, , They agree to admit C into partnership on the following terms :, (a) C was to be given 1/3rd share in profits and was to bring ` 7,500 as his capital and, ` 3,000 as his share of goodwill., (b) That the values of Stock and Plant & Machinery were to be reduced by 5%., (c) That a Reserve of 12.5% was to be created in respect of Sundry Debtors., (d) The Building was to be depreciated by 10%., (e) The Goodwill was to be withdrawn by the old partners., Pass the necessary Journal entries to give effect to the above arrangements., Solution, Jour nal En tries, Dr., Cr., Date, , Particulars, Bank A/c, To C's Capital A/c, To Premium for Goodwill A/c, , L.F., Dr., , Amount, , Amount, , `, , `, , 10,500, 7,500, 3,000, , (Being cash brought in by C as capital and share in goodwill), , Premium for Goodwill A/c, To A's Capital A/c, To B's Capital A/c, , Dr., , 3,000, 2,000, 1,000, , (Being transfer of goodwill into Old Partners’ Capital A/cs in the ratio, 2/3rd and 1/3rd), , Profit & Loss Adjustment A/c, To Stock A/c, To Plant & Machinery A/c, To Buildings A/c, To Reserve for Bad Debts A/c, , Dr., , 4,418, 543, 875, 2,500, 500, , (Being the value of assets adjusted and reserve created for Bad, Debts), , 245
Page 260 :
SBPD Pub li ca tions Accountancy (XII), A's Capital A/c, B's Capital A/c, To Profit & Loss Adjustment A/c, , Dr., Dr., , 2,945, 1,473, 4,418, , (Being the loss on adjustment transferred to Old Partners' Capital, A/cs in their profit-sharing ratio), , A's Capital A/c, B's Capital A/c, To Bank A/c, , Dr., Dr., , 2,000, 1,000, 3,000, , (Being the amount of goodwill withdrawn by old partners), Working Note :, Cr., , 1. Profit & Loss Adjustment Account, , Dr., Particulars, , Amount, , Particulars, , Amount, , `, To Stock A/c, , `, , 543 By Capital A/cs :, 875, A, , To Plant & Machinery A/c, To Buildings A/c, , 2,500, , To Reserve for Bad Debts A/c, , `, 2,945, , B, , 1,473, , 4,418, , 500, 4,418, , 4,418, , Note : Calculation has been made to nearest rupee., , Illustration 35 (Preparation of Revaluation Account), Following is the Balance Sheet of Rupa and Sunanda on 31st March, 2019 :, Bal ance Sheet (as at 31.3.2019), Liabilities, , Amount, , Assets, , `, , Creditors, Bills Payable, Capitals :, Rupa, Sunanda, , `, , 40,000, 60,000, , Amount, `, , 50,000 Cash, 25,000 Stock, Debtors, Machinery, 1,00,000 Patents, 1,75,000, , 10,000, 20,000, 60,000, 80,000, 5,000, 1,75,000, , They agreed to admit Jay as a partner on the following terms :, (i) Machinery is to be decreased by 10%., (ii) Creditors are increased by ` 5,000 and Bills Payable is decreased by ` 2,000., (iii) Patents are valueless., Prepare Revaluation Account., Solution, Dr., Revaluation Account, Cr., Particulars, , Amount, , Particulars, , `, , To Machinery A/c, To Creditors A/c, To Patents A/c, , 246, , 8,000 By Bills Payable A/c, 5,000 By Loss transferred to Capital A/cs : `, 5,000, Rupa (1/2), 8,000, Sunanda (1/2), 8,000, 18,000, , Amount, `, , 2,000, , 16,000, 18,000
Page 261 :
Admission of a Partner, Illustration 36, Ajay and Baldev are equal partners in a firm. Their Balance Sheet as on 31st December, 2019 is as follows :, Bal ance Sheet, Liabilities, , Amount, , Assets, , Amount, , `, , Bank Overdraft, Bills Payable, Creditors, Capitals :, Ajay, Baldev, , `, , 5,000 Cash, 7,000 Debtors, 8,000 Stock, Furniture, , `, , 20,000, 10,000, , 10,000, 20,000, 10,000, 10,000, , 30,000, 50,000, , 50,000, , They admitted Chetan as a new partner for 1/4th share. He brought ` 8,000 for Capital, and ` 6,000 for Goodwill. Furniture to be valued at ` 16,000 and Stock valued at ` 8,000., Prov. for reduction created on Creditors @ 10%., Prepare Revaluation Account and Partners’ Capital Accounts. (M.P. Board , 2014, 16), Solution, Dr., Revaluation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Stock, To Profit trans. to :, Ajay’s Capital A/c, Baldev’s Capital A/c, , `, , 2,400, 2,400, , `, , 2,000 By Furniture, By Prov. on Creditors, , 6,000, 800, , 4,800, 6,800, , 6,800, , Part ners’ Cap i tal Ac counts, , Dr., Particulars, , Ajay, `, , To Balance c/d, , 25,400, , 25,400, , Baldev, `, , 15,400, , 15,400, , Chetan, , Particulars, , `, , 8,000 By Balance b/d, By Cash A/c, By Premium for, Goodwill A/c, By Revaluation A/c, 8,000, , Cr., Ajay, `, , Baldev, `, , Chetan, `, , 20,000, —, , 10,000, —, , —, 8,000, , 3,000, 2,400, 25,400, , 3,000, 2,400, 15,400, , —, —, 8,000, , Mem o ran dum Re val u a tion Ac count, Or, When As sets and Li a bil i ties are not to be shown at Re vised Val ues, Sometimes all the partners may agree upon that assets and liabilities will continue to, appear in the new Balance Sheet at their old values instead of revised values. In such a case,, Memorandum Revaluation Account is prepared., Preparation of Memorandum Revaluation Account : Memorandum Revaluation, Account is divided into two parts., In the first part, the increase and decrease in the value of assets and liabilities are, recorded. This part is similar to Revaluation Account. Profit or loss shown by this part is, transferred to Old Partners’ Capital Accounts in their Old Profit-sharing Ratio., , 247
Page 262 :
SBPD Pub li ca tions Accountancy (XII), In the second part, all entries made in the first part of this account is reversed., The balance of the second part is transferred to all partners (including new partner) in, their new profit-sharing ratio., Remember, ❂ If there is profit in the first part, there will be loss of the same amount in the second, part and the vice-versa., ❂ Profit of the first part is shared by old partners in their old profit-sharing ratio, whereas the profit or loss of the second part is shared by all partners (old + new) in, their new profit-sharing ratio., ❂ All assets (except cash and bank balance) and liabilities (except capital accounts), are shown in the new Balance Sheet at their opening old values., Dif fer ence be tween Re val u a tion Ac count and Mem o ran dum Re val u a tion Ac count, Revaluation A /c, , Memorandum Revaluation A /c, , 1. Object, , It is prepared to record the effect of, revaluation of assets and liabilities, when the assets and liabilities are to, be shown at their revalued amounts., , It is prepared to record the effect of, revaluation of assets and liabilities, when the assets and liabilities are to, be shown at their old values., , 2. Parts, , It is not divided into two parts., , Basis of Difference, , 3. Transfer of, Profit or Loss, , It is divided into two parts. Items of, the first part are reversed in the, second part., Profit or loss shown by Revaluation Profit or loss shown by the second part, Account is transferred to Old is transferred to all Partner’s Capital, Partners’ Capital A/cs in their old A/cs (in the new one) in their new, ratio., profit-sharing ratio., , Illustration 37, Ansh and Vansh are partners in a firm sharing profits and losses in the ratio of 2 : 1., Their Balance Sheet as on 31st March, 2019 is as follows :, Bal ance Sheet, Liabilities, , Amount, , Assets, , `, , Creditors, Bills Payable, Capitals :, Ansh, Vansh, , `, , 36,000 Cash, 14,000 Stock, Debtors, , `, , 60,000, 42,000, , Furniture, 1,02,000 Machinery, 1,52,000, , Amount, 16,000, 22,000, 30,000, 40,000, 44,000, 1,52,000, , On that date Rabbani, who is an unemployed M.B.A., is admitted for 1/3rd share into, the firm. It is decided that :, (i) Rabbani is to bring ` 24,000 as his capital., (ii) Stock is to be decreased by ` 4,000 and furniture is valued at ` 46,000., (iii) Machinery is to be depreciated by 5%., (iv) Creditors have given up claim of ` 1,100., Prepare Memorandum Revaluation Account and Partners’ Capital Accounts., , 248
Page 263 :
Admission of a Partner, Solution, Memorandum Revaluation Account, , Dr., Particulars, , Amount, , Cr., , Particulars, , Amount, , `, , To Stock A/c, To Machinery A/c, To Partners’ Capital A/cs :, Ansh (2/3 ´ 900), Vansh (1/3 ´ 900), , `, , 4,000 By Furniture A/c, 2,200 By Creditors A/c, , 6,000, 1,100, , 900, 7,100, , 7,100, , `, , 600, 300, , To Furniture A/c, To Creditors A/c, , 6,000 By Stock A/c, 1,100 By Machinery A/c, By Partners’ Capital A/cs :, Ansh (4/9 ´ 900), Vansh (2/9 ´ 900), Rabbani (3/9 ´ 900), 7,100, , 4,000, 2,200, `, , 400, 200, 300, , 900, 7,100, , Working Note :, Calculation of New Profit-sharing Ratio :, Let Profit be 1, Rabbani’s Share = 1/3, 1 2, Now 1 – = (Ansh + Vansh); Old Ratio of Ansh and Vansh = 2 : 1, 3 3, 2 2 4, 2 1 2, 1, 3, Ansh’s New Share = ´ = , Vansh’s New Share = ´ = , Rabbani’s Share = or ., 3 3 9, 3 3 9, 3, 9, , Part ners’ Cap i tal Ac counts, , Dr., Particulars, , Ansh, `, , To Memorandum, Revaluation A/c, (4 : 2 : 3), To Balance c/d, , Vansh Rabbani, `, , 400, 60,200, , 200, 42,100, , 60,600, , 42,300, , Cr., , Particulars, , Ansh, , `, , `, , By Balance b/d, By Cash A/c, 300 By Memorandum, 23,700, Revaluation A/c, (2 : 1), 24,000, , Vansh Rabbani, `, , `, , 60,000, —, , 42,000, —, , —, 24,000, , 600, 60,600, , 300, 42,300, , —, 24,000, , ❏ 5.3.5 Treatment of Re serve & Accumulated Profit and Loss, If at the time of admission of a partner there is any reserve, general reserve, reserve, fund, accumulated profits and specific funds or undivided profit in the books (Balance, Sheet), then it will be distributed among the old partners in their old profit-sharing ratio, and credited to their Capital Accounts., Similarly if there is any accumulated loss (shown in the assets side of the Balance, Sheet), it will be debited to the Capital Accounts of the partners in their old profit-sharing, ratio. In fact, these reserves/reserve funds or undistributed profits or losses belong to the old, partners only and not to the new partner., Journal Entries :, (1) Distribution of Reserves and Accumulated Profit :, General Reserve A/c, Reserve Fund A/c, , Dr., Dr., , 249
Page 264 :
SBPD Pub li ca tions Accountancy (XII), Profit and Loss A/c, To Old Partners' Capital/Current A/cs, , Dr., , (Being undistributed profits and reserves transferred to, Old Partners' A/cs in old ratio), , (2) Distribution of Specific Funds :, Investment Fluctuation Fund A/c, Workman's Compensation Fund A/c, Contingency Reserve A/c, To Old Partners' Capital/Current A/cs, , Dr. (Excess of Reserve, Dr. or Fund over actual, Dr. Liabilities), , (Being specific fund(s) transferred to Old Partners' A/cs in old ratio), , (3) Distribution of Accumulated Loss (Profit & Loss Account on Assets side) and, Advertisement Suspense A/c, Fictitious Assets, etc. :, Old Partners' Capital/Current A/cs (In old ratio), Dr., To Profit and Loss A/c, To Advertisement Suspense A/c, To Deferred Revenue Expenditure A/c, To Fictitious Assets A/c, if any, (Being transfer of debit balance of P/L A/c to Old Partners', Capital A/cs in old ratio), Note : These accounts will not exist in the new Balance Sheet as the balances of these accounts are transferred to, Capital Accounts and capitals of partners have increased or decreased, as the case may be, to that extent., , Part ners’ Cap i tal Ac counts, On admission of a new partner general reserve accumulative profits and losses and, profit and loss on revaluation account are transferred to old partners’ capital accounts or, Current Accounts in case of fixed capital. Hence Partners’ Capital Accounts need to be, prepare before preparing new Balance Sheet, so that the balance of capital accounts may be, shown in the new Balance Sheet., Dr., For mat of Part ners’ Cap i tal Ac counts, Cr., Particulars, To Profit & Loss A/c, (Dr. Balance), To Revaluation A/c (Loss), To Advertisement, Suspense A/c, To Cash A/c (Goodwill, Withdrawn), To Old Goodwill A/c, To Balance c/d, , √, , 250, , A, , B, , C, , `, , `, , `, , √, √, , √, √, , √, √, , √, , √, , √, , √, √, √, , √, √, √, , √, √, √, , √, , √, , Particulars, By Balance b/d, By Cash A/c, By Premium for Goodwill A/c, (Cash for Goodwill), By New Partner’s, Current A/c, (Non-cash Goodwill), By Revaluation A/c, — Profit, By P/L A/c (Cr. Balance), By General Reserve A/c, By Reserve Fund A/c, By Workmen’s Compensation, Reserve A/c (Surplus), By Investment, Fluctuation Fund A/c, By Contingency Reserve A/c, , A, , B, , C, , `, , `, , `, , √, √, , √, √, , √, √, , √, , √, , √, , √, , √, , √, , √, √, √, √, , √, √, √, √, , √, √, √, √, , √, √, √, √, √, , √, √, √, √, √, , √, √, √, √, √
Page 265 :
Admission of a Partner, Treat ment of Joint Life Pol icy (J.L.P.), If the firm has taken joint life policy, it has to be adjusted among the old partners at the, time of admission of a partner. J.L.P. may be appearing in the Balance Sheet or it may not be, appearing in the books of the old firm. The premium paid for the J.L.P. may be treated as, revenue expenditure or capital expenditure. Hence, its treatment will be as under :, ❏ 1. When Premium of Joint Life Policy is Treated as a Revenue Expenditure, ❂ Under this method, premium paid is debited to Profit & Loss Account. Therefore, the, Joint Life Policy will not appear on the asset side of the Balance Sheet., b Every Joint Life Policy has a surrender value. So at the time of admission of a new, partner, old partners will credit their Capital Accounts in the old ratio., Journal Entry :, (i) Joint Life Policy A/c, Dr., (Surrender Value), To Old Partners’ Capital A/cs, (In Old Ratio), (Being the J.L.P. recorded at surrender value), , ❏ Disclosure in New Balance Sheet, ❂ The Joint Life Policy will be shown on the asset side of the new Balance Sheet at its, surrender value., However, if after the admission of a new partner, the new firm decides that the J.L.P., should not appear in the Balance Sheet then the Joint Life Policy Account will be written, off by crediting Joint Life Policy Account and debiting all the partners in the new ratio., (ii) Journal Entry for Writing off J.L.P. A/c, All Partners’ Capital A/c, Dr., (New Ratio), To Joint Life Policy A/c, (A Surrender Value), ❏ 2. When Premium Paid on J.L.P. is treated as Capital Expenditure (i.e., an, Investment), ❂ Since J.L.P. has already been recorded on the assets side of the Balance Sheet of the, old firm at surrender value, at the time of admission of a new partner, no adjustment, entry is required., ❂ However, if all the partners including the new partner wish not to show it in the, Balance Sheet, it can be written off in the new ratio by the entry given in 1(ii) above., Illustration 38 (Treatment of Reserves and Accumulated Profits), Benu and Sunil are partners sharing profits in the ratio of 3 : 2 on April 1, 2019. Ina was, admitted for 1/4th share who paid ` 2,00,000 as capital and ` 1,00,000 for premium in cash. At, the time of admission, general reserve amounting to ` 1,20,000 appear in the Balance Sheet, and Profit and Loss Account amounting to ` 60,000 appeared on the assets side of the Balance, Sheet. Give necessary Journal entries to record the above transactions., (N.C.E.R.T.), Solution, Jour nal En tries, Dr., Cr., Date, , Particulars, , L.F. Amount, , 2019, , `, , April 1 General Reserve A/c, , Dr., , Amount, `, , 1,20,000, , To Benu’s Capital A/c, To Sunil’s Capital A/c, , 72,000, 48,000, , (Being distribution of general reserve in old partners in the old ratio), , Benu’s Capital A/c, Sunil’s Capital A/c, To Profit and Loss A/c, , Dr., Dr., , 36,000, 24,000, 60,000, , (Being distribution of accumulated loss in old ratio), , 251
Page 266 :
SBPD Pub li ca tions Accountancy (XII), Bank A/c, To Ina’s Capital A/c, , Dr., , 3,00,000, 2,00,000, , To Premium for Goodwill A/c, , 1,00,000, , (Being amount of capital and goodwill brought in by Ina in cash), , Premium for Goodwill A/c, , Dr., , 1,00,000, , To Benu's Capital A/c, , 60,000, , To Sunil’s Capital A/c, , 40,000, , (Being the amount of goodwill distributed between Benu and Sunil in, sacrificing ratio), , Illustration 39 (Treatment of Reserves, Accumulated Loss & J.L.P.), Rajinder and Surinder are partners in a firm sharing profits in the ratio of 4 : 1., On April 15, 2019, they admit Narender as a new partner. On that date there was a balance, of ` 20,000 in general reserve and a debit balance of ` 10,000 in the Profit and Loss Account of, the firm. On that date the firm had also a Joint Life Policy for ` 30,000 (Surrender Value of, 15,000)., Pass necessary Journal entries., Solution, Date, , Jour nal En tries, , Dr., , Particulars, , 2019, April 15 General Reserve A/c, To Rajinder’s Capital A/c, To Surinder’s Capital A/c, , L.F. Amount, `, , Dr., , Cr., Amount, `, , 20,000, 16,000, 4,000, , (General Reserve transferred to the Capital A/cs of old partners, in the ratio of 4 : 1), , Rajinder’s Capital A/c, Surinder’s Capital A/c, To Profit and Loss A/c, , Dr., Dr., , 8,000, 2,000, 10,000, , (Debit balance of Profit and Loss A/c transferred to Old Partners’, Capital A/cs in their profit-sharing ratio), , Joint Life Policy A/c, To Rajinder’s Capital A/c, To Surinder’s Capital A/c, , Dr., , 15,000, 12,000, 3,000, , (Surrender value of J.L.P. credited to Old Partners’ A/cs in old ratio), , Illustration 40, Sumit and Sangeeta were partners in a firm sharing profits and losses in the ratio of, 5 : 3. On 1st Jan., 2019 they admitted Munna as a new partner for 1/5th share. On the date, of Munna’s admission the Balance Sheet of the firm showed following balances :, `, Profit & Loss Account, 60,000, Contingency Reserve, 30,000, Workmen Compensation Fund, 20,000, Investment Fluctuation Reserve, 25,000, Investments, 50,000, It is estimated that :, (i) Claim on account of Workmen’s Compensation will amount to ` 10,000., (ii) Market value of investments is ` 45,000., Give necessary Journal entries to adjust accumulated profits and losses., , 252
Page 267 :
Admission of a Partner, Solution, , Jour nal En tries, , Date, 2019, Jan. 1, , Dr., , Particulars, , L.F. Amount, `, , Profit & Loss A/c, Contingency Reserve A/c, Workmen’s Compensation Fund A/c (` 20,000 – 10,000), Investment Fluctuation Reserve A/c (` 25,000 – 5,000), To Sumit’s Capital A/c, To Sangeeta’s Capital A/c, , Dr., Dr., Dr., Dr., , Cr., Amount, `, , 60,000, 30,000, 10,000, 20,000, 75,000, 45,000, , (Being transfer of accumulated profits to Old Partners’ Capital A/cs in, their old profit-sharing ratio, i.e., 5 : 3), , Investment Fluctuation Reserve A/c, To Investments A/c, , Dr., , 5,000, 5,000, , (Being loss on revaluation of investments adjusted from Investment, Fluctuation Reserve A/c), , ❏ Journal Entries and Revaluation Account, Illustration 41, P and R are partners in a firm sharing profits in the ratio of 3 : 2. Their Balance Sheet on, 31st March, 2019 was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Bills Payable, General Reserve, Capitals :, P, R, , `, , 40,000, 35,000, , `, , 27,000 Cash, `, 24,000, 5,000 Debtors, 48,000, 18,000 Less : Provision for Bad Debts 4,800, 43,200, Furniture, 20,400, Patents, 7,400, 75,000 Stock, 30,000, 1,25,000, 1,25,000, , S was admitted into the partnership giving him 1/5th share in the profits on the, following terms :, (i) Stock to be reduced by 10% and provision for bad debts to be reduced by ` 2,400., (ii) Patent is valueless., (iii) There was a claim against the firm for damages amounting to ` 2,000. The claim, has now been accepted., Pass Journal entries and prepare Revaluation Account., Solution, Jour nal En tries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , General Reserve A/c, To P’s Capital A/c, To R’s Capital A/c, , Dr., , Amount, `, , 18,000, 10,800, 7,200, , (For reserve transferred to old partners in old ratio of 3 : 2), , Revaluation A/c, To Stock A/c, , Dr., , 12,400, 3,000, , 253
Page 268 :
SBPD Pub li ca tions Accountancy (XII), To Patent A/c, To Claim for Damages A/c, , 7,400, 2,000, , (For decrease in value of stock and patent and acceptance of claim, for damages), , Provision for Bad Debts A/c, To Revaluation A/c, , Dr., , 2,400, 2,400, , (For reduction in provision for doubtful debts), , P’s Capital A/c, R’s Capital A/c, To Revaluation A/c, , Dr., Dr., , 6,000, 4,000, 10,000, , (For loss on revaluation transferred to old partners in old ratio of 3 : 2), , Re val u a tion Ac count, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, , To Stock A/c, To Patent A/c, To Claim for Damages A/c, , `, , 3,000 By Provision for Bad Debts A/c, 7,400 By Loss trans. to Capital A/cs :, `, 2,000, P (3/5), 6,000, R (2/5), 4,000, 12,400, , 2,400, , 10,000, 12,400, , ❏ Comprehensive Illustrations, Illustration 42 (Revaluation of Assets, Revaluation A/c, Partner’s Capital A/cs and, Balance Sheet), Ranga and Chari are equal partners. On 1st June, 2019, they agreed to admit Philips as, a partner. Philips was to pay ` 2,000 as premium, the money to be left in the business and, contributed ` 5,000 as capital for one-third share in business. The Balance Sheet of Ranga, and Chari as on 31st May, 2019 was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Capitals :, Ranga, Chari, Sundry Creditors, Reserve A/c, , `, 9,000, 9,000, , `, , Land and Buildings, Plant and Machinery, 18,000 Bad Debts, 9,862 Stock, 1,000 Cash at Bank, Cash in hand, 28,862, , 7,962, 6,841, 10,210, 3,528, 271, 50, 28,862, , It was agreed that the following adjustments in the book values were to be made :, (a) Land and Buildings to be valued ` 12,000., (b) Plant and Machinery to be reduced to ` 5,000., (c) Bad Debts to be written off ` 749., (d) Stock to be valued at ` 3,000., (e) Reserve Account to be shared equally between Ranga and Chari., Show Journal entries and prepare the Balance Sheet of the new firm., Solution, Jour nal En tries, Dr., Cr., Date, 2019, June 1, , 254, , Particulars, , L.F. Amount, `, , Reserve A/c, , Dr., , 1,000, , Amount, `
Page 269 :
Admission of a Partner, (1), , To Ranga's Capital A/c, To Chari's Capital A/c, , 500, 500, , (Being reserve credited to Old Partners’ Capital A/cs), , (2), , Bank A/c, To Philips’s Capital A/c, To Premium for Goodwill A/c, , Dr., , 7,000, 5,000, 2,000, , (Being cash brought in by Philips as capital and goodwill), , (3), , Premium for Goodwill A/c, To Ranga's Capital A/c, To Chari’s Capital A/c, , Dr., , 2,000, 1,000, 1,000, , (Being the amount of goodwill credited to Partners' Capital A/cs), , (4), , Profit & Loss Adjustment A/c, To Plant & Machinery A/c, To Bad Debts A/c, To Stock A/c, , Dr., , 3,118, , Dr., , 4,038, , 1,841, 749, 528, , (Being the value of the above assets reduced as per agreement), , (5), , Land and Buildings A/c, To Profit & Loss Adjustment A/c, , 4,038, , (Being the value of the above assets appreciated as per agreement), , (6), , Profit & Loss Adjustment A/c, To Ranga's Capital A/c, To Chari's Capital A/c, , 920, , Dr., , 460, 460, , (Being the profit on adjustment of old assets credited to Old Partners', Capital A/cs), , Bal ance Sheet of Ranga, Chari & Philips, (as on 1st June, 2019), Liabilities, , Amount, , Assets, , Amount, , `, , Capitals :, Ranga, Chari, Philips, Sundry Creditors, , `, , 10,960, 10,960, 5,000, , `, , Land & Building, Plant & Machinery, Bad Debts, 26,920 Stock, 9,862 Cash at Bank, Cash in hand, 36,782, , 12,000, 5,000, 9,461, 3,000, 7,271, 50, 36,782, , Working Note :, Ranga's Capital = ` 9,000 + Goodwill ` 1,000 + Reserve ` 500 + Profit ` 460 = ` 10,960,, Chari's Capital = Same as Ranga., , Dr., Particulars, To Balance c/d, , Or, Part ners’ Cap i tal Ac counts, Ranga, Chari, Particulars, `, 10,960, , 10,960, , `, 10,960 By Balance b/d, By Reserve, By P/L Adjustment A/c, By Premium for Goodwill A/c, 10,960, , Ranga, `, 9,000, 500, 460, 1,000, 10,960, , Cr., Chari, `, 9,000, 500, 460, 1,000, 10,960, , 255
Page 270 :
SBPD Pub li ca tions Accountancy (XII), Illustration 43(A), A and B are parters in a firm sharing profits in the ratio of 3 : 2. Their Balance Sheet on, 31st March, 2019 was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Bank Loan, General Reserve, Capital Accounts :, A, B, , `, , 40,000, 35,000, , `, , 27,000 Cash, 5,000 Debtors, 18,000 (–) Provision, Furniture, Stock, 75,000 Patent, 1,25,000, , 2,400, , `, , 48,000, 4,800, , 43,200, 20,400, 30,000, 7,400, 1,25,000, , C was admitted for 1/6th share in profit of the firm on 1.4.2019 subject so the following, terms :, (i) C will bring ` 25,000 as capital and ` 10,000 for goodwill., (ii) Stock will be depreciated by 10% and provision for bad debts will be reduced by, ` 2,400. Furniture will be valued at ` 13,000., (iii) A provision of ` 2,000 be made for outstanding legal expenses., (iv) Bank loan will be paid off., Pre pare Re val u a tion Ac count and the Bal ance Sheet of the new firm., Solution, Dr., Revaluation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Stock A/c, To Furniture A/c, To Provision for Legal Charges, , `, , 3,000 By Provision for Bad Debts, 7,400 By Loss trans. to Capital A/cs :, `, 2,000, A (3/5), 6,000, B (2/5), 4,000, 12,400, , 2,400, , 10,000, 12,400, , Bal ance Sheet of the New Firm, (as at 1 April, 2019), Amount, , Liabilities, , Amount, , Assets, , `, , Creditors, Capital A/cs :, A, B, C, Outstanding Legal Charges, , `, , 50,800, 42,200, 25,000, , Working Notes :, 1. Cash = ` 24,000 + 25,000 + 10,000 =, Less : Bank Loan Paid off, , 256, , `, , 27,000 Cash (WN 1), Debtors, Less : Provision for Bad Debts, Furniture, 1,18,000 Stock, 2,000 Less : Preciation, Plant, 1,47,000, , 54,000, , `, , 48,000, 2,400, 30,000, 3,000, , 45,600, 13,000, 27,000, 7,400, 1,47,000, , Cash Balance, , `, 59,000, 5,000, 54,000
Page 271 :
Admission of a Partner, 2., Capital, General Reserve, Goodwill, Less : Revaluation A/c : (Loss), , Balance, , A, `, 40,000, 10,800, 6,000, 56,800, 6,000, 50,800, , B, `, 35,000, 7,200, 4,000, 46,200, 4,000, 42,200, , Illustration 43(B), The following is the Balance Sheet of Sandeep and Pradeep who share profits in the, ratio of 3 : 1 :, Liabilities, , Amount, , Assets, , Amount, , `, , Bank Overdraft, Sundry Creditors, Reserve Fund, Capital Accounts :, Sandeep, Pradeep, , `, , 80,000, 30,000, , `, , 25,000 Buildings, 23,000 Plant & Machinery, 16,000 Furniture, Stock, Debtors, 1,10,000 Less : Provision, Cash, 1,74,000, , `, , 20,000, 1,000, , 80,000, 40,000, 10,000, 20,000, 19,000, 5,000, 1,74,000, , They admit Kuldeep into partnership. The terms of agreement are as under :, (i) Kuldeep to bring ` 30,000 as capital and ` 12,000 for goodwill to get 1/5 share in, profit., (ii) Assets are to be valued as : Buildings are to be appreciated by ` 16,000 and Stock to, be depreciated by ` 5,000., (iii) Provision for Bad debts on Debtors to be raised to ` 2,000., Pre pare Re val u a tion Ac count and the Bal ance Sheet of the new firm., Solution, Dr., Revaluation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Stock, To Provision for Bad Debts, (2,000 – 1,000), To Profit transferred to :, Sandeep’s Capital A/c, Pradeep’s Capital A/c, , `, , 5,000 By Buildings A/c, , 16,000, , 1,000, `, , 7,500, 2,500, , 10,000, 16,000, , 16,000, , Bal ance Sheet of the New Firm, (as at .................), Liabilities, , Amount, `, , Bank Overdraft, Sundry Creditors, , Amount, , Assets, , 25,000 Buildings, 23,000 Add : Appreciation, , `, , 80,000, 16,000, , `, , 96,000, , 257
Page 272 :
SBPD Pub li ca tions Accountancy (XII), Capital Accounts :, Sandeep (WN 1), Pradeep (WN 2), Kuldeep, , `, , 1,08,500, 39,500, 30,000, , Plant and Machinery, 40,000, Furniture, 10,000, Stock (20,000 – 5,000), 15,000, 1,78,000 Debtors, 20,000, Less : Provision for Bad Debts 2,000, 18,000, Cash (WN 3), 47,000, 2,26,000, 2,26,000, , Working Notes :, , (1), Sandeep, `, 80,000, 9,000, 12,000, 7,500, 1,08,500, , Capital Balance, Goodwill, Reserve Fund, Revaluation A/c (Profit), 3. ` 5,000 + 30,000 + 12,000 = ` 47,000., , (2), Pradeep, `, 30,000, 3,000, 4,000, 2,500, 39,500, , Illustration 44 (Revaluation of Assets and Goodwill appearing in Old Balance Sheet), A and B are partners in a firm, sharing profits in the ratio 3 : 2. On 1st April, 2019 the, position of the business was as follows :, Bal ance Sheet, Liabilities, , Amount, , Assets, , Amount, , `, , Capital A/cs :, A, B, Sundry Creditors, General Reserve, , `, , 30,000, 25,000, 10,000, 5,000, , Goodwill, Stock, Plant and Machinery, Debtors, Less : Provision for Bad and, Doubtful Debts, Cash, , `, , 5,000, 19,000, 25,000, , 20,000, 1,000, , 70,000, , 19,000, 2,000, 70,000, , C agrees to join the business on the following conditions :, 1. He will contribute ` 20,000 as his capital and pay ` 10,000 to the partners as premium, for goodwill. The new profit-sharing ratio is 2 : 1 : 1 for A, B and C respectively., 2. A revaluation of the assets of the firm will be made by reducing plant and machinery by, ` 3,000, Stock to be reduced by ` 2,000 and a provision for bad and doubtful debts at 6% of, debtors., You are asked to prepare Revaluation Account and the new Balance Sheet., Solution, Dr., Re val u a tion Ac count, Cr., Particulars, To Plant & Machinery A/c, To Stock A/c, To Provision for B.D.D. (1,200 – 1,000), , 258, , `, , Particulars, , 3,000 By Loss transferred to :, 2,000, A’s Capital A/c, 200, B’s Capital A/c, 5,200, , `, `, 3,120, 2,080, , 5,200, 5,200
Page 273 :
Ad mis sion of a Part ner, Bal ance Sheet (as on 1st April, 2019), (Af ter C's Ad mis sion), Liabilities, , Amount, , Assets, , Amount, , `, , Capital A/cs :, , `, , Plant and Machinery, , 22,000, , A, B, , 30,8801, , C, , 20,000, , Less : Provision for Bad Debts 1,200, , 18,800, , 10,000, 89,800, , Cash, , 32,000, 89,800, , Stock, 28,9202 Debtors, , Sundry Creditors, , 1., A, `, 30,000, 3,000, 4,000, 37,000, 3,000, 34,000, 3,120, 30,880, , Working Notes :, Capital Balance, Add : General Reserve, Add : Goodwill (2 : 3) (Premium), Less : Goodwill (old, 3 : 2), Less : Revaluation A/c (Loss) 3/5 : 2/5, 3. Sacrificing Ratio :, Old Ratio of A : B = 3 : 2 or, , `, , 17,000, , 20,000, , 2., B, `, 25,000, 2,000, 6,000, 33,000, 2,000, 31,000, 2,080, 28,920, , 3 2, :, 5 5, , 2, 1, New Ratio of A : B : C = 2 : 1 : 1, A's Share = , B's Share =, 4, 4, 3 2 12 – 10 2, 2 1 8–5, 3, Now, A’s Sacrifice = – =, = ; B’s Sacrifice = – =, =, 5 4, 20, 20, 5 4, 20, 20, 2 3, \ Sacrificing Ratio of A and B =, :, or 2 : 3, 20 20, , Work men’s Com pen sa tion Fund & Em ploy ees Prov i dent Fund, Case 1 : When the amount of Workmen’s Compensation Fund (Reserve) as shown in, the Balance Sheet is less than the Claim or Liability., Case 2 : When the amount of Workmen’s Compensation Fund (W.C.F.) as shown in the, Balance Sheet is more than the ‘Claim’ or ‘Liability’., Case 3 : When W.C.F. does not appear in the Balance Sheet but in adjustment amount, of claim or liability in respect of W.C.F. is given., Case 4 : When the amount of W.C.F. is given in the Balance Sheet but ‘no claim’ or, liability is to arise, i.e., nothing is mentioned about it in the adjustment., Accounting Treatment, For Case 1 : Deduct the amount of claim/liability from Workmen’s Compensation, Fund (W.C.F.) and with the balance, credit the accounts of old partners in old profit sharing, ratio., For Case 2 : Deduct the amount of W.C.F. from the expected claim or liability and debit, old partners’ accounts with the rest amount so obtained in their old profit sharing ratio., For Case 3 : Debit Revaluation A/c with the amount of claim or liability in respect of, W.C.F. and write the amount on the Debit side of Revaluation A/c., For Case 4 : In case the W.C.F. appears in the Balance Sheet but no claim or liability is, to arise, then distribute the amount of W.C.F. or W.C. Reserve in old partners in their old, profit-sharing ratio, i.e., credit the partners’ capital accounts and debit W.C.F. A/c., , 259
Page 274 :
SBPD Pub li ca tions Accountancy (XII), Illustration 45 (Revaluation A/c & Partners’ Capital A/cs), The following is the Balance Sheet of Arun and Varun as on 31.12.2018 :, Liabilities, , Amount, , Amount, , Assets, , `, , Provision for Doubtful Debts, Workmen Compensation Fund, Outstanding Expenses, Creditors, Capitals :, Arun, Varun, , 4,000, 5,600, 3,000, 30,000, , `, , Cash, Sundry Debtors, Stock, Fixed Assets, Profit & Loss A/c, , 10,000, 80,000, 20,000, 38,600, 4,000, , 50,000, 60,000, 1,52,600, , 1,52,600, , Champa was taken into partnership from 1.1.2019. Champa brought ` 40,000 as his, capital but he is unable to bring any amount for goodwill. New profit-sharing ratio 3 : 2 : 1., Following terms were agreed upon :, 1. Claim on account of workmen's compensation is ` 3,000., 2. To write off bad debts amounting to ` 6,000., 3. Creditors are to be paid ` 2,000 more., 4. ` 2,000 be provided for an unforeseen liability., 5. Outstanding expenses be brought down to ` 1,200., 6. Goodwill is valued at 11 years' purchase of average profits of last three years less, 2, ` 12,000. Profits of 3 years amounting to ` 12,000; ` 18,000 and ` 30,000 respectively., Prepare Revaluation Account and Partners’ Capital Accounts., Solution, Dr., Re val u a tion Ac count, Cr., Particulars, , Amount, , Amount, , Particulars, , `, , To Bad Debts A/c, To Creditors A/c, To Unforeseen Liability A/c, , `, , 2,000 By Outstanding Expenses A/c, 2,000 By Loss transferred to :, 2,000, Arun's Capital A/c, Varun's Capital A/c, 6,000, , 1,800, `, , 2,100, 2,100, , Partners’ Capital Accounts, , Dr., Particulars, 1-1-2019, To Profit & Loss A/c, To Revaluation A/c, To Balance c/d, , Arun Varun Champa, `, , `, , 2,000 2,000, 2,100 2,100, 47,200 60,200, , 51,300 64,300, , Particulars, , 4,200, 6,000, , Cr., Arun Varun Champa, , ` 1-1-2019, `, `, — By Balance b/d, 50,000 60,000, — By Workmen’s Compen40,000, sation Fund A/c, 1,300 1,300, By Champa’s Current A/c, —, 3,000, By Cash A/c, —, —, 40,000, 51,300 64,300, , `, , —, —, —, 40,000, 40,000, , Notes : 1. Workmen compensation fund is of ` 5,600 whereas its actual claim is settled at` 3,000. Therefore,, ` 2,600 will be divided between old partners in old ratio. Alternatively, we can put it on the credit side of, Revaluation Account., 2. Provision for Bad Debts of ` 4,000 is given in the Balance Sheet whereas it is now estimated at ` 6,000., Therefore, ` 2,000 will be shown on the debit side of Revaluation Account., , 260
Page 275 :
Ad mis sion of a Part ner, 3. Valuation of Goodwill : Total Profits of 3 years = ` 12,000 + 18,000 + 30,000 = ` 60,000., 60, 000, Average Profit =, = ` 20,000., 3, æ, 3ö, Value of Goodwill at 11 years' purchase = çç ` 20, 000 ´ ÷÷÷ – ` 12,000 = ` 30,000 – 12,000 = ` 18,000., 2, çè, 2÷ø, 1, \ Champa's Share in Goodwill = ` 18,000´ = ` 3,000., 6, 4. Calculation of Sacrificing Ratio :, Sacrifice = Old Ratio – New Ratio, 1 3 3– 3, Arun = – =, = 0 (Nil), 2 6, 6, 3, –, 2, 1 2, 1, Varun = – =, = (Sacrifice), 2 6, 6, 6, Champa = 1/6 (Gain), , Illustration 46 (Hidden Goodwill, Revaluation A/c & Partners’ Capital A/cs), X and Y are partners sharing profits and losses in the proportion of 2 : 3. On 31st March,, 2018 their Balance Sheet was as follows :, Bal ance Sheet, Liabilities, , Amount, , Assets, , Amount, , `, , `, , Creditors, , 20,000 Cash, , 20,000, , Workmen’s Compensation Reserve, , 15,000 Debtors, , 15,000, , 30,000 Bills Receivable, Inventories, , 15,000, 10,000, , General Reserve, Capitals :, , `, , X, , 20,000, , Y, , 25,000, , Furniture, , 20,000, , 45,000 Business Premises, , 30,000, , 1,10,000, , 1,10,000, , On 1st April, 2018 they admitted Z for 1/5th share in profits on the following terms :, (i) Z brings ` 30,000 as capital., (ii) Goodwill of the firm is valued on the basis of Z’s share in profits and capital, contributed by him., (iii) The provision on Debtors is to be created by 5%., (iv) Furniture and Inventories are to be decreased by 10%., (v) The value of Business Premises be appreciated by 10%., Prepare Revaluation A/c and Partners’ Capital A/cs., Solution, Dr., Re val u a tion Ac count, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , `, , To Provision for Debtors A/c, To Furniture A/c, , 750 By Business Premises A/c, 2,000 By Loss transferred to :, , 3,000, , To Inventories A/c, , 1,000, 3,750, , `, , X’s Capital A/c, , 300, , Y’s Capital A/c, , 450, , 750, 3,750, , 261
Page 276 :
SBPD Pub li ca tions Accountancy (XII), Part ners’ Cap i tal Ac counts, , Dr., Particulars, To Revaluation A/c, (Loss), To Balance c/d, , X, , Y, , Z, , `, , `, , `, , 300, 40,160, , 40,460, , 450, 55,240, , 55,690, , Particulars, , By Balance b/d, — By Cash A/c, 30,000 By Gen. Reserve A/c, By Workmen’s Compensation Res. A/c, By Z’s Current A/c, 30,000, , Cr., X, , Y, , Z, , `, , `, , `, , 20,000, —, 12,000, , 25,000, —, 18,000, , —, 30,000, —, , 6,000, 2,460, 40,460, , 9,000, 3,690, 55,690, , —, —, 30,000, , Working Note :, Calculation of Hidden Goodwill :, Z brings ` 30,000 as capital for 1/5th share, ∴ Total Capital of the firm (` 30,000 × 5), Less : Adjusted Capital of X (` 38,000 – 300), Less : Adjusted Capital of Y (` 52,000 – 450), , `, 1,50,000, (37,700), (51,550), 60,750, (30,000), , Less : Capital of Z, Goodwill, , 30,750, , Z should Compensate 1/5 of ` 30,750 = ` 6,150, X’s Share = ` 6,150 × 2/5 = ` 2,460, Y’s Share = 61,250 × 3/5 = ` 3,690, , Illustration 47, , 1, A and B are partners who share profits in the ratio of 3 : 2. They admitted C for share., 6, On the date of admission, their Balance Sheet was as follows :, Bal ance Sheet, Liabilities, , Amount, , Assets, , Amount, , `, , Capital Accounts :, A, , 20,000, , B, 15,000, General Reserve, Workmen’s Compensation Fund, Investment Fluctuation Fund, Creditors, Bills Payable, , `, , Machinery, Furniture, , `, , 35,000, 40,000, 15,000, 8,000, 10,000, 2,000, 1,10,000, , Stock, Debtors, Less : Provision, Bills Receivable, Cash, Profit & Loss A/c, Advertisement Suspense A/c, , 18,000, 15,000, `, , 30,600, 1,600, , 12,600, 29,000, 2,400, 13,000, 8,000, 12,000, 1,10,000, , At the time of C’s admission following terms were agreed upon :, (i) The value of stock to be increased by ` 2,400., (ii) Provision for doubtful debts to be decreased to ` 1,200., (iii) The value of furniture be decreased by ` 3,200., (iv) The liability for workmen’s compensation is expected to be ` 18,000., (v) C will bring ` 15,000 as his share of capital and ` 10,000 as his share of premium in cash., You are required to prepare Revaluation A/c, Partners’ Capital A/cs and Balance Sheet, of the new firm., (J.A.C., 2017), , 262
Page 277 :
Ad mis sion of a Part ner, Solution, Re val u a tion Ac count, , Dr., Particulars, , Amount, , To Furniture A/c (Decrease), To Liability for Workmen’s, Compensation A/c (Increase, ` 18,000 – 15,000), , Cr., Particulars, , Amount, , `, , `, , 3,200 By Stock A/c (Increase), By Provision for Doubtful Debts A/c, (Decrease), 3,000 By Loss on Revaluation trans. to `, A’s Capital A/c, 2,040, B’s Capital A/c, 1,360, 6,200, , 2,400, 400, , 3,400, 6,200, , Part ners’ Cap i tal Ac counts, , Dr., Particulars, , A, `, , To Profit & Loss A/c, To Advertisement, Suspense A/c, To Revaluation A/c, (Loss), To Balance c/d, , B, , C, , `, , `, , 4,800, , 3,200, , 7,200, , 4,800, , 2,040, 1,360, 40,760 28,840, 54,800 38,200, , Cr., , Particulars, , — By Balance b/d, By Cash A/c, — By Premium for, Goodwill A/c, — By General Reserve, 15,000 By Investment Fluctuation Fund, 15,000, , A, , B, , C, , `, , `, , `, , 20,000 15,000, —, —, — 15,000, 6,000, 4,000, 24,000 16,000, , —, —, , 4,800, 3,200, —, 54,800 38,200 15,000, , Bal ance Sheet, Liabilities, , Amount, , Assets, , Amount, , `, , Capital Accounts :, `, A, 40,760, B, 28,840, C, 15,000, Workmen’s Compensation Fund, Creditors, Bills Payable, , 84,600, 18,000, 10,000, 2,000, , 1,14,600, , `, , Machinery, Furniture, Less : Decrease, Stock, Add : Increase, Debtors, Less : Provision, Bills Receivable, Cash (` 13,000 + 25,000), , `, , 15,000, 3,200, 12,600, 2,400, 30,600, 1,200, , 18,000, 11,800, 15,000, 29,400, 2,400, 38,000, 1,14,600, , Working Notes :, 1. Workmen’s Compensation Fund appears in the Balance Sheet at ` 15,000 whereas the liability for Workmen’s, Compensation is ` 18,000. Thus the excess liability of ` 3,000 `( 18,000 – 15,000) will be debited to, Revaluation Account and in the New Balance Sheet Workmen’s Compensation Fund will appear at ` 18,000., 2. Advertisement Suspense Account is a deferred revenue expenditure. It will be transferred directly to the old, Partners’ Capital Accounts in their old profit-sharing ratio., , Illustration 48, D and E are partners sharing profits and losses in the ratio of 1 : 4. On 31st March, 2019,, Their Balance Sheet was as follows :, , 263
Page 278 :
SBPD Pub li ca tions Accountancy (XII), Bal ance Sheet, Liabilities, , Amount, , Assets, , Amount, , `, , Bills Payable, Employees’ Provident Fund, General Reserve, Capitals :, D, E, , `, , 16,000 Bank, 4,000 Sundry Debtors, `, , 50,000, 1,00,000, , `, , 14,000, , 32,000, , 10,000 Less : Provision, Investments, Furniture, 1,50,000 Land and Building, 1,80,000, , 2,000, , 30,000, 18,000, 80,000, 38,000, 1,80,000, , On 1st April, 2019 they agreed to admit F into partnership on the following terms :, (i) F was entitled for 2/7th share in Profits., (ii) F will bring ` 80,000 as his capital and pay ` 40,000 to the partners as premium, privately., (iii) The book value of furniture would be reduced by ` 22,000., (iv) 20% of the general reserve is to remain as provision for Doubtful debts., (v) The value of investments was undervalued by 10%., Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of New, Firm., Solution, Dr., Re val u a tion Ac count, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Furniture A/c, , `, , 22,000 By Investment (` 18,000 × 10/90), By Loss transferred to :, `, D’s Capital A/c, 4,000, E’s Capital A/c, 16,000, 22,000, , 2,000, , 20,000, 22,000, , Part ners’ Cap i tal Ac counts, , Dr., Particulars, To Revaluation A/c, (Loss), To Balance c/d, , D, , E, , F, , `, , `, , `, , 4,000, 47,600, , 16,000, 90,400, , 51,600 1,06,400, , Particulars, , Cr., D, , E, , F, , `, , `, , `, , By Balance b/d, — By Bank A/c, 80,000 By General Reserve1, , 50,000 1,00,000, —, —, 1,600, 6,400, , —, 80,000, —, , 80,000, , 51,600 1,06,400, , 80,000, , Bal ance Sheet of the New Firm, (as at 1st April, 2019), Liabilities, , Amount, , Assets, , `, , Bills Payable, Employees Provident Fund, Capitals :, D, , 264, , `, , 47,600, , 16,000 Bank (` 14,000 + 80,000), `, 4,000 Sundry Debtors, 32,000, Less : Provision, 4,000, Investments (` 18,000 × 100/90), , Amount, `, , 94,000, 28,000, 20,000
Page 279 :
Ad mis sion of a Part ner, E, F, , 90,400, 80,000, , Furniture, 2,18,000 Less : Depreciation, Land and Building, 2,38,000, , 80,000, 22,000, , 58,000, 38,000, 2,38,000, , Working Notes :, 1. Furniture Provision for Doubtful Debts has been created out of General Reserve, so it should not be shown in, the Revaluation A/c., 2. Employees’ Provident Fund is a liability. Hence not to be distributed among old partners., , Illustration 49 (Based on Memorandum Balance Sheet), Mayank and Neeraj were partners in a firm with capital of ` 60,000 and ` 80,000, respectively. On. 1.4.2019, they admitted Ashutosh as a partner for 1/4th share in profits on, the payment of ` 1,00,000 as his capital and ` 45,000 for his 1/4th share of goodwill., On that date the creditors of the firm were ` 30,000 and Bank overdraft was ` 7,500., Their assets as apart from cash included Stock ` 5,000; Debtors ` 20,000; Furniture ` 40,000;, Land and Building ` 1,00,000. It was agreed that stock should be depreciated by ` 1,000;, Furniture by 20%, ` 2,500 should be written off as bad debts and Land and Building should, be appreciated by 25%., Prepare Revaluation Account, Capital Accounts of Partners and the Balance Sheet of, the new firm., Solution, Working Note :, , Mem o ran dum Bal ance Sheet, , Dr., , (Be fore Ashutosh’s Ad mis sion), Liabilities, , Cr., Assets, , `, , Creditors, Bank Overdraft, Capital A/cs :, Mayank, Neeraj, , `, , 30,000 Land and Building, 7,500 Furniture, Stock, 60,000 Debtors, 80,000 Cash (Bal. fig.), 1,77,500, , 1,00,000, 40,000, 5,000, 20,000, 12,500, 1,77,500, , Re val u a tion Ac count, , Dr., Particulars, To Stock A/c, To Furniture A/c, To Bad Debts, To Profit transferred to :, Mayank’s Capital A/c, Neeraj’s Capital A/c, , To Balance c/d, , Particulars, , `, , 1,000 By Land and Building A/c, 8,000, 2,500, , 25,000, , `, , 6,750, 6,750, , 13,500, 25,000, , 25,000, , Part ners’ Cap i tal Ac counts, , Dr., Particulars, , `, , Cr., , Mayank, , Neeraj, , Ashutosh, , `, , `, , `, , Particulars, , 89,250 1,09,250 1,00,000 By Balance b/d, By Revaluation, A/c Profit), By Cash A/c, , Cr., Mayank, `, , 60,000, 6,750, —, , Neeraj, , Ashutosh, , `, , `, , 80,000, , —, , 6,750, —, — 1,00,000, , 265
Page 280 :
SBPD Pub li ca tions Accountancy (XII), By Premium for, Goodwill A/c, 89,250 1,09,250 1,00,000, , 22,500, 22,500, —, 89,250 1,09,250 1,00,000, , Bal ance Sheet of the New Firm, (as on 1st April, 2019), Liabilities, Creditors, Bank Overdraft, Capital A/cs :, Mayank, Neeraj, Ashutosh, , `, , `, , 89,250, 1,09,250, 1,00,000, , Assets, , `, , 30,000 Cash in hand, 7,500, (` 12,500 + 1,00,000 + 45,000) `, 1,57,500, Stock, 5,000, Less : Depreciation, 1,000, 4,000, Debtors, 20,000, 2,98,500, Less : Bad Debts, 2,500, 17,500, Furniture, 40,000, Less : Depreciation, 8,000, 32,000, Land and Building, 1,00,000, Add : Appreciation, 25,000 1,25,000, 3,36,000, 3,36,000, , ❏ 5.3.6 Ad just ment of Cap i tals, Very after on the admission of a partner old partners agree to readjust their Capital, Accounts. Capital may be adjusted in the following manner :, Case 1 : Adjustment of Old Partners' Capital Accounts on the basis of New, Partner's Capital., In this case,, Step 1 : Calculate Total Capital of the Reconstituted Firm :, Total Capital of the firm, = New Partner’s Capital ´ Reverse of New Partner’s Share, Step 2 : Calculate Old Partners' New Capital, New Capital = Total Capital´ Their New Share, or, (Total Capital – New Partner’s Capital) ´ Partner’s Old Share, Step 3 : Calculate Adjusted Old Capital of the Old Partners :, Adjusted Capital of the Old Partner(s) :, Opening Capital, `, Add : Share in Reserve and Accumulated Profits, ....., Add : Share in Revaluation Profits, ....., Add : Share in Goodwill, ....., Add : Any other Adjustment which increases capital e.g., liability, take over by partner, ....., `, ....., Less : Share in Past Losses (P/L A/c Dr. Bal.), ....., Less : Share in Revaluation Loss, ....., Less : Goodwill Written off, ....., Less : Any other Adjustment which decreases capital, e.g., assets, ....., taken over by partners, ....., ....., Adjusted Old Capital or Net Capital, ....., , 266
Page 281 :
Ad mis sion of a Part ner, Step 4 : Calculate Surplus/Deficiency by deducting Adjusted Capital from, required new capital of the old partners :, Surplus = When New Capital is less than the adjusted capital, Deficiency = When New Capital is more than the adjusted capital., Step 5 : Surplus or Deficiency can be adjusted through cash or transferred to old, Partner’s Current A/c., Adjustment of Surplus/Deficiency through Cash, For this purpose the following entries will be passed :, Journal Entries, (i) For cash brought in if the net capital is less than the required capital :, Bank/Cash A/c, Dr., To Old Partners’ Capital A/cs, (Being cash brought in by....), , (ii) For excess (surplus) capital withdrawn (i.e., paid off) if the adjusted capital is, more than the required (new) capital :, Old Partners' Capital A/cs, Dr., To Bank/Cash A/c, (Being excess capital withdrawn by.....), , Adjustment of Surplus/Deficiency through Partners’ Current Account, Sometimes surplus or deficiency or deficiet in Partners’ Capital Accounts is adjusted, through newly opened Partners’ Current Account. In that case, following entries will be, passed :, 1. In case the Adjusted Old Capital is less than the New Capital (Deficit) :, Concerned Partner's Current A/c, Dr., To Concerned Partner's Capital A/c, 2. In case the Adjusted Old Capital is more than the New Capital (Surplus) :, Concerned Partner's Capital A/c, Dr., To Concerned Partner's Current A/c, If Current Account shows credit balance, it is taken to the Liabilities side of the Balance, Sheet., If Current Account shows debit balance, it is recorded on the Assets side of the Balance, Sheet., Im por tant Note :, In the absence of any agreement, surplus or deficiency should be adjusted in cash, and not by transfer to Current Account., Example, A, B and C are partners in a firm sharing profits and losses in the ratio 4 : 2 : 1, respectively. They admit D for 1/8th share who brings ` 7,000 as capital. Find the required, capital of old partners on the basis of D's capital., Solution, D brings ` 7,000 for 1/8th share, Hence, Total Capital of the Firm = 7,000´ 8 / 1 = ` 56,000, Combined Capital of (A + B + C) = ` 56,000 – 7,000 = ` 49,000, 4, \, A's Capital = ` 49,000 ´ = ` 28,000, 7, , 267
Page 282 :
SBPD Pub li ca tions Accountancy (XII), 2, = ` 14,000, 7, 1, C's Capital = ` 49,000 ´ = ` 7,000, 7, B's Capital = ` 49,000 ´, , Illustration 50(A), Mukul and Nakul are partners sharing profits and losses in the ratio of 3 : 1. On 1st, April, 2019 they admitted Bakul as a partner who brings in ` 40,000 for 1/4th share of, profits. The capitals of Mukul and Nakul after all adjustments are ` 1,00,000 and ` 25,000, respectively. It was decided that the capital accounts of old partners are to be adjusted on, the basis of the proportion of capital to his share in the business. Calculate the new capitals, of old partners and the amount to be brought in or withdrawn by them. Pass the necessary, Journal entries., Solution, Step1 :, Step 2 :, , Step 3 :, Step 4 :, , Total capital of the reconstituted firm = ` 40,000 × 4/1 = ` 1,60,000, New Capital of the Old Partners :, ` 1,60,000 – 40,000 = ` 1,20,000 (Mukul + Nakul), Mukul’s Capital, = ` 1,20,000 × 3/4 = ` 90,000, Nakul’s Capital, = ` 1,20,000 × 1/4 = ` 30,000, Adjusted Capital of Mukul = ` 1,00,000 (Given), Adjusted Capital of Nakul = ` 25,000 (Given), Calculation of Surplus/Deficiency :, Mukul, Nakul, `, , Step 5 :, , `, , (A) Adjusted Capital, 1,00,000, Less : (B) Required New Capital, 90,000, Surplus 10,000, Journal Entries, , Date, , Particulars, Mukul’s Capital A/c, To Cash A/c, , 25,000, 30,000, Deficiency (5,000), Dr., Cr., L.F., , Dr., , `, , `, , 10,000, 10,000, , (Being the excess amount withdrawn by Mukul), , Cash A/c, To Nakul’s Capital A/c, , Dr., , 5,000, 5,000, , (Being the shortage brought in by Nakul), , Illustration 50(B) (Capital Adjustments through Current Account), X and Y were partners in a firm sharing profits in the ratio of 3 : 2. Z was admitted for, 1/5th share. He paid ` 80,000 for his capital. Opening capitals of X and Y were ` 1,60,000 and, ` 80,000 respectively. Revaluation profit was ` 30,000 and reserves stood at ` 40,000 at the, time of admission of Z. It was decided that the capital of the partners will be in their profitsharing ratio. Any surplus or deficiency is to be transferred to Current Account of the, concerned partner., Find out (i) Capital of the partners, (ii) the amount to be transferred to the Current, Account of the concerned partners, and (iii) pass necessary Journal entries for such transfer., Solution, (i) Existing Profit-sharing Ratio of X and Y = 3/5 : 2/5, (ii) Share of Z = 1/5, Let Total Profit be 1, , 268
Page 283 :
Ad mis sion of a Part ner, 1 4, Remaining Profit = 1 - = (X + Y), 5 5, 4 3 12, (iv) X’s Share in Profit = ´ =, 5 5 25, 4 2, 8, (v) Y’s Share in Profit = ´ =, 5 5 25, Now,, 5, Step 1 : Total Capital = ` 80,000 × = ` 4,00,000, 1, Step 2 : Partner’s Capital in the New Firm :, X’s Capital = ` 4,00,000 × 12/25 = ` 1,92,000, Y’s Capital = ` 4,00,000 × 8/25 = ` 1,28,000, Z’s Capital = ` 4,00,000 × 1/5 = ` 80,000, Step 3 : Adjusted Capital of X and Y, (iii), , Particulars, , X, , Y, , `, , Opening Capital, Add : Revaluation Profit (3 : 2), Add : Reserves (3 : 2), , 1,60,000, 18,000, 24,000, 2,02,000, , Step 4 : Calculation of Surplus/Deficiency :, (A) Adjusted Capital, (B) New Capital Required (as per Step 2), (C) Difference (A – B), Step 5 :, Date, , `, , X, , Y, , `, , `, , 2,02,000, 1,92,000, 10,000, (Surplus), , Journal Entries, Particulars, , X’s Capital A/c, To X’s Current A/c, , L.F., Dr., , 80,000, 12,000, 16,000, 1,08,000, , 1,08,000, 1,28,000, (20,000), (Deficiency), Dr., , Cr., , `, , `, , 10,000, 10,000, , (Being the excess amount withdrawn by X), , Y’s Current A/c, To Y’s Capital A/c, , Dr., , 20,000, 20,000, , (Being the shortage brought in by Y), , Case 2 : Determination of New Partner’s Capital on the basis of Capital of Old, Partners, Step 1 : Find the Adjusted Capital of Old Partners after all adjustments :, Adjusted Old Capital = Capital + Share in Reserves and Accumulated Profits, + Goodwill – Share in Loss on Revaluation and, Accumulated Loss, Step 2 : Find the Total Capital of the New Firm :, Total Capital of the Firm = Combined Adjusted Capital of Old Partners ×, Reciprocal of Proportion of Share of Old Partners, Step 3 : Find the Rational Capital of the New Partner :, New Partner’s Capital = Total Capital × Proportion of Share of New Partners, , 269
Page 284 :
SBPD Pub li ca tions Accountancy (XII), Illustration 50(C) (Determination of New Partner’s Capital), A and B are in partnership with ` 40,000 and ` 20,000 as their respective capitals. They, admitted C as a partner for 1/6th share in profits. You are required to calculate the amount, of C’s share in the capital of the firm :, (i) if he is asked to bring in capital in proportion to his profit-sharing ratio, and, (ii) if he is to contribute 1/6th of the combined capitals of the existing partners., Solution, Combined Capital of A and B = ` 40,000 + 20,000 = ` 60,000, C’s Share in Profit = 1/6, Let profit of the firm be 1, then, 1, 5, Combined Share of A and B = 1 – =, 6 6, 5 6, Reciprocal of =, 6, 5, 6, Therefore, Total Capital of the Firm = ` 60,000 × = ` 72,000, 5, (i), C’s Share in Total Capital = ` 72,000 × 1/6 = ` 12,000, (ii) C’s Share in Capital on the basis of Combined Capital of A and B, = ` 60,000 × 1/6 = ` 10,000, Illustration 51 (Partners' Capital on the Basis of Total Capital of the Firm), Black and White are partners carrying on business of fruit gardening and sharing profits, and losses in the ratio of 3 : 2. On 31st March, 2019, their Balance Sheet was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Capitals :, Black, , 30,000, , White, , 25,000, , Reserves, Sundry Creditors, , `, , Land, Fruit Trees, , `, , 40,000, 20,000, , 55,000 Stock, , 11,000, , 10,000 Sundry Debtors, 16,000 Cash, , 8,000, 2,000, , 81,000, , 81,000, , On the above mentioned date Green was admitted into partnership on the following, terms :, 1. Green was to pay ` 20,000 as capital and ` 10,000 as goodwill for one-fourth share in, profits., 2. Land was to be revalued at ` 45,000 and fruit trees at ` 25,000, Stock was to be, written down by ` 2,000, creditors included ` 500, no longer payable and this sum was to be, written back., 3. Capitals of all partners were to be in the profit-sharing ratio, for this purpose, Current Accounts were to be opened., Give Journal entries to record matters arising out of Green's admission., Solution, Jour nal En tries, Dr., Cr., Date, 2019, Mar. 31 Cash A/c, , 270, , Particulars, , L.F. Amount, `, , Dr., , 30,000, , Amount, `
Page 285 :
Ad mis sion of a Part ner, To Green's Capital A/c, To Premium for Goodwill A/c, , 20,000, 10,000, , (Being cash brought in by Green for capital and goodwill), , Premium for Goodwill A/c, To Black's Capital A/c, To White's Capital A/c, , Dr., , 10,000, 6,000, 4,000, , (Being Old Partners' Capital A/cs credited with the amount of, goodwill in sacrifice ratio 3 : 2), , Land A/c, Fruit Trees A/c, Creditors A/c, To Revaluation A/c, , Dr., Dr., Dr., , 5,000, 5,000, 500, 10,500, , (Being appreciation in the value of land, fruit trees and creditors, no longer payable), , Revaluation A/c, To Stock A/c, , Dr., , 2,000, 2,000, , (Being reduction in the value of stock), , Reserve A/c, To Black's Capital A/c, To White's Capital A/c, , Dr., , 10,000, 6,000, 4,000, , (Being transfer of Reserve to Capital A/cs of old partners in their old, profit-sharing ratio), , Revaluation A/c, To Black's Capital A/c, To White's Capital A/c, , Dr., , 8,500, 5,100, 3,400, , (Being profit on revaluation transferred to Capital A/cs of old partners), , Black's Capital A/c, White's Capital A/c, To Black's Current A/c, To White's Current A/c, , Dr., Dr., , 11,100, 12,400, 11,100, 12,400, , (Being excess amount of Capital A/cs transferred to Current A/cs), Working Notes :, (1) New Profit and Loss Ratio :, , 3 3, 9, 1, 1 3, Total Profit = 1, Green's Share = , Remaining Profit = 1 – = , Black's Share = ´ = ,, 4, 4 4, 4 5 20, 3 2, 6, æ ö, White's Share = ´ =, ; New Ratio = 9 : 6 : 1 or çç 5 ÷÷÷ or 9 : 6 : 5, çè 20÷ø, 4 5 20, 20 20 4, (2) If nothing is given in the question, old ratio will be the sacrificing ratio. Hence, sacrificing ratio of A and, B would be 3 : 2., (3) Adjustment of Capitals :, 1, Green's Capital for Share = ` 20,000, Total Capital of the Firm = ` 20,000´ 4 = ` 80,000, 4, 9, 6, Black's Capital = 80,000´, = ` 36,000, White's Capital = 80,000´, = ` 24,000, 20, 20, Black, White, `, `, Balances of Capital, 30,000, 25,000, Reserve, 6,000, 4,000, Goodwill (Premium), 6,000, 4,000, , 271
Page 286 :
SBPD Pub li ca tions Accountancy (XII), Profit on Revaluation, Less : Desired Capital as per Profit & Loss Ratio, Amount transferred to Current A/cs, , 5,100, 47,100, 36,000, 11,100, , 3,400, 36,400, 24,000, 12,400, , Illustration 52, A and B share profits in the ratio of 3 : 1. On 31st March, 2019 their Balance Sheet was, as under :, Liabilities, , Amount, , Assets, , `, , Creditors, General Reserve, Capital A/cs :, A, B, , `, , 30,000, 16,000, , Amount, `, , 37,500 Cash at Bank, 4,000 Bills Receivable, Debtors, Stock, 46,000 Furniture, Land and Buildings, 87,500, , 22,500, 3,000, 16,000, 20,000, 1,000, 25,000, 87,500, , On 1st April, 2019 C was admitted into the partnership on the following terms :, (a) That C pays ` 20,000 as his capital for 1/5th share in future profit of the firm., (b) That Stock and Furniture be reduced by 10% each and 5% provision for Doubtful, Debts be created on debtors., (c) That the value of Land and Buildings be appreciated by 20%., (d) That the share of C, in firm's goodwill, be valued at ` 4,000 but C will not be required, to bring goodwill in cash., (e) That the capitals of the partners be in their profit-sharing ratio, the necessary, amounts being paid in or withdrawn., Give the Profit & Loss Adjustment Account and Capital Accounts of the partners., Solution, Dr., Profit & Loss Adjustment Account, Cr., Particulars, , Amount, , To Stock A/c, To Furniture A/c, To Reserve for Doubtful Debts, To Profit transferred to :, `, A's Capital A/c, 1,575, B's Capital A/c, 525, , Particulars, , `, , 2,000 By Land and Buildings A/c, 100, 800, , 5,000, , 2,100, 5,000, , 5,000, , A’s Capital Account, , Dr., Particulars, , Amount, , Cr., Particulars, , `, , To Balance c/d, , 272, , Amount, , `, , 60,000 By Balance b/d, By C’s Current A/c (Goodwill), By General Reserve A/c, By P. & L. Adjustment A/c, By Bank A/c, 60,000, , Amount, `, , 30,000, 3,000, 3,000, 1,575, 22,425, 60,000
Page 287 :
Ad mis sion of a Part ner, B’s Capital Account, , Dr., Particulars, , Amount, , Cr., Particulars, , `, , To Balance c/d, , `, , 20,000 By Balance b/d, By C's Current A/c (Goodwill), By General Reserve A/c, By P. & L. Adjustment A/c, By Bank A/c, 20,000, , 16,000, 1,000, 1,000, 525, 1,475, 20,000, , C’s Capital Account, , Dr., Particulars, , Amount, , Cr., Particulars, , `, , To Balance c/d, , Dr., , :, , `, , 20,000, 20,000, , C’s Current Account, , Cr., , Amount, , To A's Capital A/c, To B's Capital A/c, , Working Notes, 1., , Amount, , 20,000 By Cash A/c, 20,000, , Particulars, , Particulars, , Amount, , `, , `, , 3,000 By Balance c/d, 1,000, , 4,000, , 4,000, , 4,000, , 1, 5, Total Profit = 1, C’s Share =, , 2. Adjustment of Capitals :, C's Capital for 1/5th Share = ` 20,000, Total Capital of the Firm = 20, 000 ´ 5 = ` 1, 00, 000, 3, A’s Capital = 1, 00, 000 ´ = ` 60, 000, 5, 1, B’s Capital = 1, 00, 000 ´ = ` 20, 000, 5, , 1 4, = (A + B), 5 5, 4 3 3, A’s New Share = ´ =, 5 4 5, 4 1 1, B’s New Share = ´ =, 5 4 5, 3, Distribution of Profit : A = 2,100´ = ` 1,575;, 4, Remaining Profit = 1 –, , 3., , Amount, , 1, B = 2,100´ = ` 525, 4, , Illustration 53, Surendra and Mahendra are partners in a firm sharing profit and loss in the ratio of, 5 : 3. Their Balance Sheet on 31st December, 2018 was as follows :, Liabilities, , Amount, , Assets, , `, , Creditors, Bills Payable, General Reserve, Capital A/cs :, Surendra, Mahendra, , `, , 35,000, 25,000, , 22,000 Cash, 18,000 Debtors, 16,000 Stock, Investment, Land and Buildings, 60,000, 1,16,000, , Amount, `, , 8,000, 12,000, 25,000, 10,000, 61,000, 1,16,000, , 273
Page 288 :
SBPD Pub li ca tions Accountancy (XII), On 1st January, 2019, Ankur was admitted as partner. He brought ` 20,000 as capital., New Ratio will be 3 : 3 : 2. On admission of new partner, following decisions were taken :, (i) Ankur's share in firm’s goodwill was decided as ` 10,000. He brought amount of, goodwill in cash., (ii) Surendra took all investments in ` 8,000., (iii) A provision for Bad and Doubtful Debts of ` 2,000 is to be made on debtors and, Land & Building is to be valued at ` 85,000., (iv) Adjustment of all partners capital is to be done out of cash in new profit and loss, sharing ratio., Prepare Revaluation Account and Capital Accounts., Solution, Dr., Re val u a tion Ac count, Cr., Particulars, , Particulars, , `, , To Investment A/c, (Decrease in Value), To Provision for Bad & Doubtful, Debts, To Capital A/cs, (Profit transferred) :, `, Surendra, 12,500, Mahendra, 7,500, , `, , By Land and Building A/c, 2,000, (Increase in Value), , 24,000, , 2,000, , 20,000, 24,000, , 24,000, , Working Notes :, 1. Calculation of Total Capital of the Firm and that of Partners :, 5 3, Profit-sharing Ratio of Surendra and Mahendra = 5 : 3 or :, 8 8, 3 3 2, Profit-sharing Ratio of Surendra, Mahendra and Ankur = 3 : 3 : 2 or : :, 8 8 8, Ankur brings ` 20,000 for 2/8 share, 8, Therefore, Total Capital of the Firm = ` 20,000 × = ` 80,000, 2, \ Capital of Surendra = 80,000 × 3/8 = ` 30,000, Capital of Mahendra = 80,000 × 3/8 = ` 30,000, 2. Sacrificing Ratio = Old Ratio – New Ratio, 5 3 2, Surendra's Sacrifice = - = ,, 8 8, 8, 3 3, Mahendra's Sacrifice = - = Nil, 8 8, Hence, only Surendra will get the amount of goodwill brought by Ankur., , Partners’ Cap i tal Ac counts, , Dr., Particulars, 1.1.2019, To Investment, (taken over), To Balance c/d, , 274, , Surendra Mahendra Ankur, `, , 8,000, 59,500, , Particulars, , 1.1.2019, By Balance b/d, —, — By Cash A/c, 38,500 20,000 By Premium for, Goodwill A/c, By Revaluation, A/c (Profit), `, , `, , Cr., Surendra Mahendra Ankur, `, , 35,000, —, , `, , `, , 25,000, —, — 20,000, , 10,000, , —, , —, , 12,500, , 7,500, , —
Page 289 :
Ad mis sion of a Part ner, By General, Reserve A/c, To Cash A/c, (Bal. fig.), To Balance b/d, , 67,500, , 38,500 20,000, , 29,500, 30,000, 59,500, , 8,500, —, 30,000 20,000, 38,500 20,000, , By Balance b/d, , 10,000, 67,500, , 6,000, —, 38,500 20,000, , 59,500, , 38,500 20,000, , 59,500, , 38,500 20,000, , Illustration 54 (Contribution of Proportionate Capital by the New Partner), Pappu and Dhanraj are partners in a firm sharing profits in the ratio of 3 : 1. Their, Balance Sheet as on 31.3.2019 was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Bills Payable, Reserve Fund, Outstanding Salary, Capitals :, Pappu, Dhanraj, , `, , 60,000, 20,000, , `, , 30,000 Debtors, 1,000, Less : Provision, 16,000 Stock, 3,000 Bills Receivable, Patents, Machinery, 80,000 Cash, 1,30,000, , `, , 50,000, 5,000, , 45,000, 30,000, 10,000, 1,000, 40,000, 4,000, 1,30,000, , They admitted Leander as a new partner on this date. New profit-sharing ratio is, agreed as 3 : 2 : 3. Leander brings in proportionate capital after the following adjustments :, (i) Leander brings ` 16,000 as his share of goodwill., (ii) Provision for doubtful debts is to be reduced by ` 2,000., (iii) There is an old typewriter valued at ` 2,400. It does not appear in the books of the, firm. It is now to be recorded., (iv) Patents are valueless., Prepare Revaluation Account, Capital Accounts and the Opening Balance Sheet of, Pappu, Dhanraj and Leander., Solution, Dr., Revaluation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Patents (Valueless), To Profit transferred to :, Pappu's Capital A/c, Dhanraj's Capital A/c, , `, , 2,550, 850, , `, , 1,000 By Provision for Doubtful Debts, By Unrecorded Typewriter A/c, , 2,000, 2,400, , 3,400, 4,400, , 4,400, , Partners' Capital Accounts, , Dr., Particulars, , Pappu Dhanraj Leander, `, , To Balance c/d, , 90,550, , `, , Particulars, , `, , 24,850 69,240 By Balance b/d, , Cr., Pappu Dhanraj Leander, `, , 60,000, , `, , 20,000, , `, , —, , 275
Page 290 :
SBPD Pub li ca tions Accountancy (XII), , 90,550, , By Reserve Fund, By Revaluation A/c, , 12,000, , 4,000, , —, , —Profit, , 2,550, , 850, , —, , By Cash A/c, —, By Premium for Goodwill A/c, 16,000, 24,850 69,240, 90,550, , —, , 69,240, , —, —, 24,850 69,240, , Bal ance Sheet of Pappu, Dhanraj and Leander, (as on 31.3.2019), Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, , 30,000 Cash ( ` 4,000 + 85,240), , Bills Payable, , 1,000 Debtors, , Outstanding Salary, Capitals :, , `, , 3,000, `, , Less : Provision, , `, , 89,240, , 50,000, 3,000, , 47,000, , Stock, , 30,000, , Pappu, , 90,550, , Bills Receivable, , 10,000, , Dhanraj, , 24,850, , Machinery, , 40,000, , Leander, , 69,240, , 1,84,640 Typewriter, , 2,400, , 2,18,640, Working Notes :, (i) Calculation of Proportionate Capital of Leander :, , Pappu's Capital (after Adjustment), Dhanraj's Capital (after Adjustment), , 2,18,640, , `, 90,550, 24,850, 1,15,400, , The Capital of the New firm (` 1,15,400´ 8 / 5) = ` 1,84,640, , Proportionate Capital of Leander ( ` 1,84,640´ 3/ 8) = ` 69,240, (ii) Cash brought by Leander = ` 69,240 + 16,000 (Goodwill) = ` 85,240., 3 1, (iii)Profit-sharing Ratio between Pappu and Dhanraj = :, 4 4, 3 2 3, New Ratio = : :, 8 8 8, 3 3 24 – 12 12, Pappu’s Sacrifice = – =, =, 4 8, 32, 32, 1 2 8–8, Dhanraj’s Sacrifice = – =, = Nil, 4 8, 32, (iv) In this question only Pappu will get goodwill because he sacrifices his profit share ., , Illustration 55 (Adjustment of Capital through Current A/cs), Roy and Thakur share profits in the ratio of 5 : 3. They admit Yadav for 1/5th share in, profits. Yadav pays ` 1,60,000 as capital but does not contribute anything towards goodwill, which is valued at ` 1,20,000. The capital of partners are fixed. All adjustments are, made through Partners' Current Accounts. Their Balance Sheet as on 31st March, 2019 is as, follows :, , 276
Page 291 :
Ad mis sion of a Part ner, Bal ance Sheet, (as on 31st March, 2019), Liabilities, Capitals :, , Assets, , `, , Cash in hand, , `, , Roy, Thakur, , 1,60,000, 1,20,000, , Debtors, , 82,000, , Investment, , Roy, , 10,000, , Thakur, , 12,000, , General Reserve, Public Deposits, Creditors, , 60,000, 1,00,000, 1,80,000, , 2,80,000 Stock, , Current A/cs) :, , `, , 1,00,000, , Machine, 22,000, 1,20,000, 40,000, 60,000, , 5,22,000, , 5,22,000, , Other terms of admission are as follows :, 1. Machine is valued at ` 94,000 and stock at ` 1,90,000., 2. A creditor for ` 12,000 is dead and nothing is likely to be paid on this account., 3. The Capital Accounts are to be proportionately adjusted on the basis of Yadav's capital, and his share of profit through Current Accounts., Prepare Revaluation Account, Cash Account, Capital and Current Accounts and, Balance Sheet of the new firm., Solution, Dr., Revaluation Account, Cr., Particulars, To Machine A/c, To Profit transferred to :, `, Roy's Current A/c (5/8), 10,000, Thakur's Current A/c (3/8) 6,000, , Amount, , Particulars, , `, , 6,000 By Stock A/c, By Creditors A/c, 16,000, 22,000, , Amount, `, , 10,000, 12,000, , 22,000, , Working Notes :, 1. Sacrificing Ratio : As thus is no mention, so old ratio shall be sacrificing ratio., 2. Now profit sharing ratio :, 1, 4, Share of Yadav (1/5), remaining share = 1 – =, 5 5, 4 5 20, 4 3 12, \, Share of Roy = ´ =, Share of Thakur = ´ =, 5 8 40, 5 8 40, 20 12 1, \, New Ratio =, :, :, ; or k 5 : 3 : 2, 40 40 5, 3. On the basis of share of profit new partner and capital introduced, capital of partners in new firm, (i) Share of Yadav 1/5;, (ii) Capital of Yadav ` 1,60,000 (for 1/5 ), 5, (iii) Total Capital of firm = 1,60,000´ 5/1 = ` 8,00,000, (iv) Capital of Roy = 8,00,000 ´, = ` 4,00,000, 10, 3, (v) Capital of Thakur = 8,00,000 ´ = ` 2,40,000, 10, They shall bring sufficient capital for necessary Capital Account., , 277
Page 292 :
SBPD Pub li ca tions Accountancy (XII), Capital Adjustment Table, , 4., Partner, , Old Capital, , Proportional Capital, , Decrease, , (b), , (a), , (b – a), , Roy, , 1,60,000, , 4,00,000, , 2,40,000 (Brought), , Thakur, , 1,20,000, , 2,40,000, , 1,20,000 (Brought), , Total, , 2,80,000, , 6,40,000, , 3,60,000, , Partners' Current Accounts, , Dr., Particulars, , Roy, , Thakur, , `, , To Roy's Current A/c, (Goodwill), , `, , —, , Yadav, , Cr., , Particulars, , Roy, , `, , —, , `, , By Balance b/d, 15,000 By Yadav's Current, , To Thakur's, —, , —, , To Balance c/d, , 1,10,000, , 72,000, 72,000, , 15,000, , 9,000, , —, , 75,000, , 45,000, , —, , 10,000, , 6,000, , —, , —, , —, , 24,000, , 1,10,000, , 72,000, , 24,000, , By General, 9,000, Reserve, — By Revaluation A/c, 24,000, , Partners' Capital Accounts, , Dr., Particulars, To Balance c/d, , Roy, , Thakur, , `, , Yadav, , `, , Particulars, , `, , 4,00,000 2,40,000 1,60,000 By Balance b/d, By Cash A/c, By Cash A/c, 4,00,000 2,40,000 1,60,000, Amount, , Particulars, , Roy, `, , Thakur, `, , Yadav, `, , 1,60,000 1,20,000, —, —, — 1,60,000, 2,40,000 1,20,000, —, 4,00,000 2,40,000 1,60,000, , Cr., Particulars, , `, , To Balance b/d, To Yadav's Capital A/c, To Roy's Capital A/c, To Thakur's Capital A/c, , —, , Cr., , Cash Account, , Dr., , `, , 12,000, , By Balance c/d, 1,10,000, , `, , Yadav, , 10,000, , A/c (Goodwill), , Current A/c, (Goodwill), , Thakur, , Amount, `, , 60,000 By Balance c/d, 1,60,000, 2,40,000, 1,20,000, , 5,80,000, , 5,80,000, , 5,80,000, , Bal ance Sheet, (as on 31st March, 2019), Amount, , Liabilities, Capitals :, Roy, Thakur, Yadav, , 278, , `, , `, , 4,00,000, 2,40,000, 1,60,000, , Cash in hand, Debtors, Stock, 8,00,000 Investments, , Assets, , Amount, `, , 5,80,000, 1,00,000, 1,90,000, 82,000
Page 293 :
Ad mis sion of a Part ner, Current A/cs :, Roy, Thakur, Public Deposits, Creditors, , 1,10,000, 72,000, , Machine, Yadav's Current A/c, 1,82,000 (Dr. Balance), 40,000, 48,000, 10,70,000, , 94,000, 24,000, , 10,70,000, , Miscellaneous and Boards' Questions, Illustration 56, V and N were partners in a firm sharing profits in the ratio of 7 : 3. Their Balance Sheet, as on 31.3.2019 was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Bills Payable, Provision for Bad Debts, General Reserve, P's Loan, Capital :, V, N, , 10,000, 15,000, 500, 10,000, 80,000, `, , 1,50,000, 50,000, , `, , Cash, Debtors, Bills Receivable, Stock, Building, Land, , 15,500, 20,000, 50,000, 30,000, 1,00,000, 1,00,000, , 2,00,000, 3,15,500, , 3,15,500, , On 1.4.2019 they admitted P as a new partner on the following terms :, (i) P will get 1/5th share in the profits of the firm., (ii) P's loan will be converted into his capital., (iii) The goodwill of the firm was valued at ` 2,00,000 and P bought his share of, goodwill premium in cash., (iv) Provision for bad debts was to be made equal to 4% of debtors., (v) Stock was to be depreciated by 5%., (vi) Land was to be appreciated by 10%., Prepare Revaluation Account, Capital Accounts of V, N and P and the Balance Sheet of, the new firm as on 1.4.2019., Solution, Dr., Re val u a tion Ac count, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Provision for Bad Debts A/c, (800 – 500), To Stock A/c, To Profit transferred to :, `, V’s Capital A/c (7/10 ´ 8,200) 5,740, N’s Capital A/c (3/10 ´ 8,200) 2,460, , `, , By Land A/c, , 10,000, , 300, 1,500, , 8,200, 10,000, , 10,000, , Part ners' Cap i tal Ac counts, , Dr., Particulars, , V, , N, `, , To Balance c/d, , 1,90,740, , Particulars, `, , 67,460 By Balance b/d, , Cr., V, , N, `, , 1,50,000, , `, , 50,000, , 279
Page 294 :
SBPD Pub li ca tions Accountancy (XII), By Revaluation A/c (Profit), By General Reserve A/c, By Premium for Goodwill, (7 : 3), 1,90,740, , 67,460, , 5,740, 7,000, , 2,460, 3,000, , 28,000, 1,90,740, , 12,000, 67,460, , P's Capital Ac count, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, , To Balance c/d, , `, , 80,000 By P’s Loan A/c, 80,000, , 80,000, 80,000, , Bal ance Sheet of the New Firm, (as on 1.4.2019), Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Bills Payable, Provision for Bad Debts, Capitals :, V, N, P, , `, , 1,90,740, 67,460, 80,000, , `, , 10,000 Cash (` 15,500 + 40,000), 15,000 Debtors, 800 Bills Receivable, Stock, Less : Depreciation, Building, 3,38,200 Land, Add : Appreciation, 3,64,000, , `, , 30,000, 1,500, 1,00,000, 10,000, , 55,500, 20,000, 50,000, 28,500, 1,00,000, 1,10,000, 3,64,000, , Illustration 57, Qadir and Rishabh are partners sharing profits in the ratio of 3 : 2. Their Balance Sheet, as at 31st March, 2019 is given below :, Liabilities, , Amount, , Assets, , Amount, , `, , Qadir’s Capital, Rishabh’s Capital, Workmen’s Compensation Reserve, Creditors, , 11,40,000, 7,00,000, 60,000, 1,00,000, , 20,00,000, , `, , Land & Building, Plant & Machinery, Stock, Debtors, Less : Provision, Bank, , `, , 6,00,000, 20,000, , 5,60,000, 6,00,000, 1,60,000, 5,80,000, 1,00,000, 20,00,000, , Qadir and Rishabh decides to admit Sapna as a new partner from 1st April, 2019. Their, new profit-sharing ratio was 3 : 2 : 5. Sapna brought in ` 6,00,000 as her capital and her share of, goodwill premium in cash., (a) Sapna’s share of goodwill premium was valued at ` 30,000., (b) Plant and Machinery be valued at 125%., (c) Creditors were unrecorded to the extent of ` 30,000., (d) Claim on account of workmen compensation was ` 40,000., Prepare Revaluation A/c, Partners’ Capital Accounts and the Balance Sheet of the, reconstituted firm., (C.B.S.E., A.I., 2017, Set I), , 280
Page 295 :
Ad mis sion of a Part ner, Solution, Dr., , Re val u a tion Ac count, Particulars, , Particulars, , Cr., Amount, , 30,000 By Plant and Machinery, , 1,50,000, , Amount, `, , To Creditors A/c, To Profit transferred to :, Qadir’s Capital A/c, Rishabh’s Capital A/c, Dr., Particulars, , `, , `, , 72,000, 48,000, , 1,20,000, 1,50,000, , 1,50,000, , Part ners’ Cap i tal Ac counts, Qadir, , Rishabh, , `, , To Balance c/d 12,42,000, , 12,42,000, , Sapna, , `, , 7,68,000, , 7,68,000, , Particulars, , Qadir, , `, , `, , 6,00,000 By Balance b/d 11,40,000, By Bank A/c, —, By Premium for, 18,000, Goodwill A/c, By Revaluation A/c, 72,000, By Workmen’s, Compensation, Reserve, 12,000, 6,00,000, 12,42,000, , Working Notes :, 1. Calculation of Sacrificing Ratio :, Sacrificing Ratio = Old Ratio – New Ratio, Old Ratio = 3 : 2, New Ratio 3 : 2 : 5, 3, 3, 6- 3, 3, Qadir, = =, =, 5 10, 10, 10, 2, 2, 4- 2, 2, Rishabh = =, =, 5 10, 10, 10, 2. Workmen’s Compensation Reserve, Less : Claim on account of WCR, Balance to be Credited to Old Partners, , Rishabh, `, , Cr., Sapna, `, , 7,00,000, —, 12,000, , —, 6,00,000, —, , 48,000, , —, , 8,000, 7,68,000, , —, 6,00,000, , Sacrificing Ratio, 3 2, =, :, =3:2, 10 10, ` 60,000, ` 40,000, ` 20,000, , Bal ance Sheet of the Re con sti tuted Firm, Liabilities, , Amount, , Assets, , Amount, , `, , Capital A/cs :, Qadir, Rishabh, Sapna, , `, , 12,42,000, , Land and Building, , 5,60,000, , Plant and Machinery, , 7,50,000, , 7,68,000, Stock, 6,00,000 26,10,000 Debtors, , Workmen’s Compensation Reserve, Creditors, , `, , 40,000 Less : Provision, 1,30,000 Bank, 27,80,000, , `, , 1,60,000, , 6,00,000, 20,000, , 5,80,000, 7,30,000, 27,80,000, , 281
Page 296 :
SBPD Pub li ca tions Accountancy (XII), , 5.4 FAST RE VI SION, l Meaning of Admission of a Partner : Admission of a partner is one of the modes of, reconstitution of partnership firm under which a new partner is admitted with the consent of, all the partners. With the admission of a new partner into the firm, the number of partners, increases and such a partner is known as incoming partner or a new partner., l Effect of Admission : The effect of admission of a new partner on the firm is that there is a, change in relation of the partner of the firm and reconstitution of the partnership firm take place., l Position of a New Partner :, (i) He is not liable to pay any debt of the firm incurred before the admission ., (ii) He cannot be held responsible for acts of the old partners., l Main Rights acquired by the New Partner :, (i) Right of sharing in the assets of the firm., (ii) Right of sharing in the future profits of the firm., l Adjustments at the Time of Admission of the New Partner :, (i) New Profit-sharing Ratio of all the partners., (ii) Sacrificing Ratio of old partners., (iii) Revaluation of Assets and Liabilities., (iv) Valuation and Accounting Treatment of Goodwill., (v) Accounting Treatment of Reserves and Accumulated Profits or Losses., (vi) Adjustment of Partners’ Capital., l Treatment of Goodwill : Goodwill is an intangible asset and belongs to its owners at the, point of time. Hence, on the admission of a new partner the goodwill of the firm belongs to the, old partners and new partner has to pay amount for goodwill. The amount of premium (i.e.,, goodwill) brought in by the new partner is shared by the old partners in their sacrificing ratio., If new partner fails to bring his share of premium for goodwill in cash, then the Capital or, Current Account of the new partner is debited for his share of premium of goodwill and the Old, Partners' Capital Accounts are credited in their sacrificing ratio (as per AS-26)., l Accumulated Profits or Losses/Reserves etc. : Accumulated profits or losses and, reserves, if any are divided among the old partners in their old profit-sharing ratio., l Revaluation of Assets and Liabilities : At the time of admission of a partner, the assets, and liabilities are revalued. Adjustments are made for revaluation as well as that of, unrecorded assets and liabilities. Adjustments are made through Revaluation Account or, Profit & Loss Adjustment Account. The profit or loss arising from Revaluation Account is, distributed among the old partners in their old profit-sharing ratio., l Change in Profit-sharing Ratio : With the admission of a new partner, their is a change in, the profit-sharing ratio and so new profit-sharing ratio is to be calculated., l Adjustment of Partners’ Capital Accounts : It is sometimes agreed that on the admission, of a partner, the capital of the partners should also be adjusted in new profit-sharing ratio or, on the basis of new partner's capital. Hence, necessary adjustment is required in Capital, Accounts of the old partners. Excess money is withdrawn and for deficit, amount has to be, brought in by the concerned old partner(s)., , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6 Marks Questions), , 1. What is Goodwill ? Why should a new partner be called upon to pay for Goodwill ?, 2. State the treatment of goodwill at the time of admission of a new partner as per Accounting, Standard 26 ?, 3. What are the different methods of dealing with goodwill on admission of a new partner in a, firm ? Explain with examples., 4. Do you advise that assets and liabilities must be revalued at the time of admission of a partner ?, If so, why ? Also describe how this is treated in the books of account ?, 5. If it is agreed that the capital of all the partners should be proportionate to the new profit-, , sharing ratio, how will you work out the new capital of each partner ? Give examples and, state how necessary adjustments will be made., , 6. Explain the need and calculation of new sacrificing ratios at the time of admission of a new, partner and state main points of AS-26 regarding treatment of goodwill., , 282
Page 297 :
Ad mis sion of a Part ner, 7. What Journal Entries are passed in the books of the firm at the time of admission of a new, partner ?, , (B) Short Answer Type Questions, , (3/4 Marks Questions), , 1., 2., 3., 4., , Why Profit and Loss Adjustment Account or Revaluation Account is prepared ?, Why should a new partner be called upon to pay for goodwill ?, State the main points of AS-26 in respect of treatment of goodwill., What is meant by admission of a partner ? Explain and illustrate the different methods of, calculation of Goodwill., (J.A.C., 2010), 5. Why Revaluation Account is prepared on admission of a partner ?, , (C) Very Short Answer Type Questions, , (1/2 Marks Questions with Answers), , 1. What is the meaning of admission of a partner ?, [Ans. Admission of a new partner means increase in the number of partners or entering of a, new person as owner in the partnership firm.], 2. How can a new partner be admitted in a partnership firm ?, [Ans. According to Section 31 of the Indian Partnership Act, 1932, a person can be admitted as, a new partner only with the consent of all the existing partners.], 3. State the two main rights acquired by the new partner., [Ans. (i) Right to share future profits of the firm. (ii) Right to share the assets of the firm.], 4. When a new partner may be admitted ?, [Ans. A new partner may be admitted when the firm needs additional capital or managerial, help and existing partners unanimously agree for it.], 5. Give two effects of admission of a new partner., [Ans. (i) Change in the relations of the partners and reconstitutions of the partnership firm., (ii) The number of partners increases in the firm.], 6. What is the position of a new partner in the firm ? (Give two points only), [Ans. (i) He is not liable to pay any debts on the firm incurred before his admission., (ii) He cannot be held responsible for the acts of the old partners.], 7. Is admission of a partner amounts to reconstitution of the partnership firm ?, [Ans. Admission of a partner amounts to reconstitution of partnership firm. The reason is, that when a new partner is admitted, existing agreement comes to an end and new one, comes into existence. A new partnership deed is prepared which shows change in, relationship.], 8. State the matters requiring adjustments at the time of admission of a partner., [Ans. Matters requiring adjustments are as follows :, (i) New profit-sharing ratio of all partners, (ii) Goodwill, (iii) Revaluation of Assets and, Liabilities, (iv) Reserves, (v) Accumulated Profits and Losses, (vi) Capitals of the old, partners (if agreed).], 9. What is the new profit-sharing ratio ?, Ans. The ratio in which all partners (including new partner) share the profits (and losses) of the, business is called the new profit-sharing ratio.], 10. What is sacrificing ratio ?, [Ans. The ratio in which the old partners have agreed to sacrifice their shares in profit in favour, of a new partner is known as sacrificing ratio.], 11. How sacrificing ratio is calculated ?, [Ans. Sacrificing ratio is calculated on the basis of sacrifices made by the old partners by, deducting their new share from the old one. In other words, Sacrificing Ratio = Old Share, in Profit – New Share in Profit.], , 283
Page 298 :
SBPD Pub li ca tions Accountancy (XII), 12. Why do we determine new profit-sharing ratio even for old partners when a new, partner is admitted ?, [Ans. When a new partner is admitted, he acquires his share in profits from the old partners., This reduces the old partner's share in profit. Hence, new profit-sharing ratio of old, partners is calculated.], 13. Distinguish between sacrificing ratio and new profit-sharing ratio. (Give only two, points of difference.), (U.S.E.B., 2014), Sacrificing, Ratio, is, related, to, old, partners, whereas, new, profit-sharing, ratio is related, [Ans. (i), to all the partners of the firm., (ii) Sacrificing Ratio is the ratio in which the existing partners sacrifice or lose a share of, the future profits in favour of the new partner. New profit-sharing ratio is the ratio in, which all the partners share future profits of the new firm.], 14. Explain the accounting treatment for premium of goodwill, if paid privately., [Ans. If the new partner pays the amount of goodwill/premium in cash to the old partners, privately (outside the business), no entry is required to be passed in the firm's books of, accounts. The reason is that the amount of goodwill is not paid through the firm.], 15. Under what circumstances premium for goodwill paid by the incoming partner, would not be recorded in the books of account of the firm., [Ans. When the incoming partner pays the amount of premium for goodwill in cash to the old, partners privately or directly outside the business, no entry is passed for it.], 16. Explain how will you deal with goodwill, if new partner brings in cash for goodwill ?, [Ans. If the goodwill (premium) is brought in cash and old partners decide to retain it in the, business, the following entries will be passed :, (i) Cash/Bank A/c, Dr., To Premium for Goodwill A/c, (Being cash brought in by new partner for goodwill), , (ii) Premium for Goodwill A/c, To Old Partners' Capital A/cs, , Dr., , (Being goodwill amount transferred to the Old Partners', Capital A/cs in their sacrificing ratio)], , 17. Explain how will you deal with goodwill, if new partner is not in a position to bring, his share of goodwill in cash ?, [Ans. When the new partner is not in a position to pay cash for goodwill then his Capital (or, Current) Account is debited for his share of goodwill and the Capital Accounts of old, partners are credited in the sacrificing ratio.], 18. Mention the provision of Accounting Standard (AS)-26 regarding goodwill., [Ans. As per AS-26 (Para 16) goodwill can be recorded in the books only when some, consideration in money or money's worth has been paid for it. It means only purchased, goodwill/premium can be recorded in the books. If new partner does not bring cash for, goodwill, it will be recorded through Capital Accounts or Current Accounts.], 19. How would you deal with existing goodwill on admission of a partner ?, Or, If some goodwill already appears in books, how will you deal with existing amount of, goodwill ?, [Ans. If there is any Goodwill Account existing in the Balance Sheet of old partners before, admission, it should be written off by debiting Old Partners' Capital Accounts and, crediting Goodwill Account in old ratio.], 20. What is Revaluation Account ? Or, What is Profit and Loss Adjustment Account ?, , 284
Page 299 :
Ad mis sion of a Part ner, , 21., , 22., , 23., , 24., , 25., , 26., , 27., , 28., , [Ans. Revaluation Account is prepared to find out profit or loss on revaluation of assets and, re-assessment of liabilities at the time of reconstitution of partnership firm. Profit or loss, arising from revaluation is shared by the old partners in their old profit-sharing ratio.], Why are assets and liabilities revalued on the admission of a new partner ?, [Ans. On admission of a new partner, the firm stands reconstituted, consequently the assets, are revalued and liabilities are re-assessed. Assets and liabilities are revalued to show, the true position of the firm at the time of admission of a partner.], Why is the profit and loss on revaluation not transferred to the New Partner's, Capital Account ?, [Ans. Because it is done just before the admission of the new partner. New partner is not, affected by revaluation of assets and liabilities.], What are accumulated profits ?, [Ans. The profits which have not been credited to Partners’ Capital Accounts over the years, and as such have accumulated are called accumulated profits or undistributed profits.], What are accumulated losses ?, [Ans. The losses which have not been distributed among the partners are called accumulated, or undistributed losses. Accumulated losses appear on the assets side of the Balance, Sheet as Profit and Loss Account.], What treatment is made for accumulated profits on the admission of a new partner ?, [Ans. Accumulated profits are distributed among the old partners in their old profit-sharing ratio., Journal Entry : Profit and Loss A/c, Dr., To Old Partners' Capital A/cs], What treatment is made for accumulated loss on the admission of a new partner ?, [Ans. Accumulated losses are shared by the old partners in their old profit-sharing ratio. For, this, Old Partners' Capital Accounts are debited and Profit and Loss Account is credited.], What is General Reserve ?, [Ans. A General Reserve refers to reserve which is created without any specific (or particular), purpose. It is created for safeguarding the business against unforeseen losses in the future.], Give the Journal entry to distribute General Reserve., [Ans. General Reserve A/c, Dr., To Old Partners’ Capital A/cs (In Old Ratio), (Distribution of General Reserve in old ratio)], , 29. Give the Journal entry to distribute Profit & Loss Account appearing on the, liabilities side of the Balance Sheet., [Ans. Profit & Loss A/c, Dr., To Old Partner’s Capital A/cs, (Distribution of profit and loss balance in old ratio)], , 30. Give the Journal entry to distribute Profit & Loss Account (or Loss) appearing on, the assets side of the Balance Sheet., [Ans. Old Partners' Capital A/cs, Dr. (In Old Ratio), To Profit & Loss A/c, (Old loss distributed among old partners)], , 31. Why is Memorandum Revaluation Account prepared ?, [Ans. A Memorandum Revaluation Account is prepared when the partners decide to record the, effect of revaluation of assets and liabilities without affecting the old figures of assets and, liabilities in the Balance Sheet.], , 285
Page 300 :
SBPD Pub li ca tions Accountancy (XII), 32. Amit and Sumit are partners sharing profits in the ratio of 3 : 2. They admitted Vishal, as a new partner for 1/5th share in the profit. Calculate the new profit-sharing ratio., [Ans. 12 : 8 : 5.], 33. Deepak and Vivek are partners sharing profits in the ratio of 3 : 2. They admit, Animesh as a new partner for 1/5th share in profit. He aquires the share as equal, ratio from Deepak and Vivek. Calculate the new profit-sharing ratio., [Ans. 5 : 3 : 2.], 34. Neha and Prateek are partners, sharing profits in the ratio of 5 : 3. They admit Nisha, as a new partner for 1/6th share in profit. She acquires this share as 1/8th from Neha, and 1/24th from Prateek. Calculate the new profit-sharing ratio find out the, sacrificing ratio., 1 1, [Ans. 3 : 2 : 1, Sacrificing Ratio :, or 3 : 1.], 8 20, 35. Pawan and Jayshree are partners. Bindu is admitted for 1/4th share. What is the, sacrificing ratio of Pawan and Jayshree ?, [Ans. Equal, i.e., 1 : 1.], 36. Find out the sacrificing ratio in Q. No. 34., 1 1, [Ans. :, or 3 : 1.], 8 24, 37. Vishal and Raj shared profits in the ratio of 5 : 3. Julie was admitted as a partner., Vishal surrendered 1/5th of his share and Raj 1/3rd of his share in favour of Julie., Calculate the sacrificing ratio., 1 1, [Ans. : or equal.], 8 8, , (D) Objective Type Questions, I. Select the correct alternative :, 1. At the time of admission of a new partner, general reserve appearing in the old Balance Sheet is, transferred to :, (a) All Partners’ Capital A/cs, (b) New Partners’ Capital A/c, (c) Old Partners’ Capital A/cs, (d) None of these, 2. A, B and C are partners in a firm. D is admitted as a new partner :, (a) Old firm is dissolved, (b) Old firm and old partnership is dissolved, (c) Old partnership is reconstituted, (d) None of these, 3. On the admission of a new partner, the decrease in the value of assets is debited to :, (a) Profit and Loss Adjustment Account, (b) Assets Account, (c) Old Partners' Capital Accounts, (d) None of these, 4. General Reserve at the time of admission of a new partner is transferred to :, (a) Revaluation Account, (b) Old Partners' Capital Accounts, (c) Profit and Loss Adjustment Account, (d) Realisation Account, 5. X and Y are partners sharing profits in the ratio of 1 : 1. They admit Z for 1/5th share who, contributed ` 25,000 for his share of goodwill. The total value of the goodwill of the firm will be :, (a) ` 2,50,000, (b) ` 50,000, (c) ` 1,00,000, (d) ` 1,25,000, 6. The balance of Revaluation Account or Profit and Loss Adjustment Account is transferred to, Old Partners' Capital Accounts in their :, (M.P. Board, 2015), (a) Old profit-sharing ratio, (b) New profit-sharing ratio, (c) Equal ratio, (d) Capital ratio, , 286
Page 301 :
Ad mis sion of a Part ner, 7. Recording of an unrecorded liability on the reconstitution of a partnership firm will be :, (a) A gain to the existing partners, (b) A loss to the existing partners, (c) Neither gain nor loss to the existing partner, (d) None of these, 8. Share of Goodwill brought in cash by the new partner is called :, (J.A.C., Mock Test Paper), (a) Assets, (b) Profit, (c) Premium, (d) Liabilities, 9. Profit or Loss on revaluation is borne by :, (a) Old Partners, (b) New Partners, (c) All Partners, (d) None of these, (J.A.C., 2019), [Ans. 1. (c), 2. (c), 3. (a), 4. (b), 5. (d), 6. (a), 7. (b), 8. (c), 9. (a).], II. State whether the following statements are ‘True’ or ‘False’ :, 1. New profit-sharing ratio is calculated at the time of admission of a new partner., 2. Profit and Loss Adjustment Account is prepared for revaluation of assets and liabilities on the, admission of a partner., 3. The new partner is liable for the past losses of the firm., 4. In case the new partner is unable to bring in cash for goodwill, a Goodwill Account may be, raised in the firm’s book as per AS-26., 5. When a partner is admitted, there is dissolution of a firm., 6. A minor can also be admitted as a partner., (J.A.C., 2019), [Ans. : 1.True, 2. True, 3. False, 4. False, 5. False, 6. False.], , PRACTICAL PROBLEMS, ❏ Short Answer Type Questions, , (3/4 Marks), ❏ Calculation of New Profit-sharing Ratio, ❏ Questions based on Case-I, 1A. A and B who share profits in the ratio of 3 : 2, admit C to give him 1/3rd share. Calculate the new, profit-sharing ratio., [Ans. 6 : 4 : 5], 1B. L, M and N are partners. Their profit-sharing ratio were 7 : 6 : 2 respectively. They admit O as a, partner and give him 1/6th share. Calculate the new profit-sharing ratio., [Ans. 7 : 6 : 2 : 3], 1C. A, B, C and D are partners sharing profits in the ratio of 4 : 3 : 2 : 1. E is admitted for 1/10th, share. Find the new profit-sharing ratio., [Ans. 36 : 27 : 18 : 9 : 10], ❏ Questions based on Case-II, 2A. A and B are partners sharing profits and losses in the ratio of 7 : 5. They agree to admit C into, partnership who is to get 1/6th share of profits. C acquires the share as 1/24th from A and 1/8th, from B. Calculate the new profit-sharing ratio., [Ans. 13 : 7 : 4], 2B. Ankit and Basant are partners in a firm sharing profits and losses in the ratio of 3 : 2. Govind is, admitted in the firm for 1/5th share in profit. Govind gets it from Ankit and Basant in the ratio, of 2 : 3. Calculate the new profit and loss sharing ratio of the partners., [Ans. Ankit : Basant : Govind = 13 : 7 : 5], ❏ Questions based on Case-III, 3A. P and Q sharing profits in the ratio of 2 : 1, admit R who purchases 1/3rd share from P. Compute, the new profit-sharing ratio., [Ans. 1 : 1 : 1], 3B. X and Y are partners in the ratio of 2 : 3. Z is admitted for 2/5th share which he entirely acquires, from Y. Calculate the new profit-sharing ratio., [Ans. 2 : 1 : 2], , 287
Page 302 :
SBPD Pub li ca tions Accountancy (XII), 3C. L and M are partners sharing profits in the ratio of 3 : 2. N was admitted. The new partner, acquires his 1/5th share entirely from L. Calculate new profit-sharing ratio. (J.A.C., 2016), [Ans. L : M : N = 2/5 : 2/5 : 1/5 or 2 : 2 : 1], ❏ Questions based on Case-IV, 4. Radha and Geeta share profits in the ratio of 3 : 1 and Seema is admitted taking 1/8th of profit, from each partner. Calculate the new profit-sharing ratio., [Ans. 5 : 1 : 2], 5. Ram and Shyam are partners in a firm sharing profits in the ratio of 3 : 2. They admit, Ghanshyam as a new partner. Ram surrender 1/4th of his share and Shyam 1/3rd of his share in, favour of Ghanshyam. Calculate the new profit-sharing ratio of Ram, Shyam and Ghanshyam., [Ans. 27 : 16 : 17], (N.C.E.R.T.), ❏ Question based on Case-V, 6. Ankit and Basant are Partners in a firm sharing profits and losses in the ratio of 3 : 2. They, admit Chandan into the partnership for 1/5th share. In future, profit-sharing ratio between, Ankit and Basant would be 5 : 7. Calculate new profit-sharing ratio., [Ans. 5 : 7 : 3], ❏ Calculation of Sacrificing Ratio/Sacrifice or Gain, 7. A, B and C are partners sharing profits in the ratio of 4 : 3 : 2. D is admitted for 1/3rd share in, future profits. What is the sacrificing ratio ?, [Ans. Sacrificing Ratio 4 : 3 : 2.], 8. Amar and Bahadur are partners in a firm sharing profits in the ratio of 3 : 2. They admitted, Marry as a new partner for 1/4th share. The new profit-sharing ratio between Amar and, Bahadur will be 2 : 1. Calculate their sacrificing ratio., (U.S.E.B., 2015), [Ans. 2 : 3], 9. Ramesh and Suresh are partners in a firm sharing profits in the ratio of 4 : 3. They admitted, Mohan as a new partner. The new profit-sharing ratio of Ramesh, Suresh and Mohan will be, 2 : 3 : 1. Calculate the gain or sacrifice of old partner., (N.C.E.R.T.), [Ans. Ramesh’s Sacrifice 10/42, Suresh’s Gain 3/42], 10. A and B are partners sharing profits and losses in the ratio of 5 : 3. C is admitted as a new, partner, the new profit-sharing ratio being 9 : 5 : 2. Find out the sacrificing ratio., (J.A.C., 2013), [Ans. Sacrificing Ratio of A and B 1 : 1], ❏ Calculation of New Profit-sharing Ratio and Sacrificing Ratio, 11. A and B are partners sharing profits and losses in the ratio of 5 : 3. They admit C who will, receive 1/4th share in future profits which he receives equally from A and B. Calculate new, ratio and sacrificing ratio., [Ans. New Ratio 2 : 1 : 1, Sacrificing Ratio 1 : 1], 12A. A and B are partners sharing profits in the ratio of 4 : 1. A surrenders 1/4th of his share and B, surrenders 1/2 of his share in favour of C, a new partner. What is the sacrificing ratio and the, new ratio ?, 1 1, 3 1 3, [Ans. Sacrificing Ratio A : B : 2 : 1 or : ; New Ratio A : B : C = 6 : 1 : 3 or :, : ], 5 10, 5 10 10, 12B. P, Q and R are partners sharing profits in the ratio of 3 : 2 : 1. They admit S for 1/6th share. It is, agreed that R would retain his original share. Calculate the new ratio and sacrificing ratio., [Ans. Sacrificing Ratio 3 : 2 : 0; New Profit-sharing Ratio 12 : 8 : 5 : 5.], ❏ Accounting Treat ment of Good will, (A) Goodwill brought in Cash, 13. On 1st January, 2019, A and B, sharing profits in the ratio of two-third and one-third, respectively, agree to admit C into partnership on condition that he pays ` 30,000 as capital and, ` 9,000 for one-sixth share of goodwill which he acquires equally from A and B., Give necessary Journal entries to record these transactions., [Ans. Premium for Goodwill Credited to A's & B's Capital A/cs ` 4,500 each.], , 288
Page 303 :
Ad mis sion of a Part ner, 14. X and Y are partners in a firm sharing profits and losses in the ratio of 3 : 1. They admit Z as, partner for 1/5th share of future profits of the firm. Z introduces ` 40,000, out of which ` 20,000, is towards goodwill of the firm. You are asked to Journalise the above transactions in the books, of the firm., [Ans. Z's Capital ` 20,000; Premium (Dr.) ` 20,000; X's Capital (Cr.) ` 15,000; Y's Capital (Cr.), ` 5,000.], 15. X and Y are partners sharing profits in the ratio of 5 : 4. They admit Z in the firm for 1/3rd profit, which he takes 2/9th part from X and 1/9th from Y and brings` 1,500 as premium. Pass Journal, entries on Z’s admission., (U.S.E.B., 2011, 16), [Ans. Goodwill (Dr.) ` 1,500; X’s Capital (Cr.) ` 1,000; Y’s Capital (Cr.) ` 500.], [Hint : Sacrificing Ratio 2 : 1], 16. A and B are partners sharing profits and losses in the ratio of 3 : 2. They admit C into the, partnership for 1/4th share in profits. C brings ` 30,000 as capital and ` 10,000 as goodwill. New, profit-sharing ratio of the partners shall be 3 : 3 : 2. Pass necessary Journal entries., [Ans. Goodwill distributed to A and B in 9 : 1, i.e., A ` 9,000 and B ` 1,000.], 17. A and B carrying on business as partners used to share profits and losses thus, A 4/7th and B, 3/7th and goodwill appeared in the books of the firm at ` 5,600 when C was admitted as a, partner having 1/7th share in profits and losses. C was asked to pay a premium of ` 1,400 for, goodwill and the profit-sharing ratio as between A and B remained unchanged., Show entries in the Journal of firm., [Ans. New Profit-sharing Ratio 24 : 18 : 7], 18. L and M are partners sharing profits and losses in the ratio of 3 : 2. N is admitted as a partner, and is to be given 1/10th share of profits. N has to bring ` 80,000 as capital and his share of, goodwill which is valued for the firm at ` 1,00,000. The old partners withdraw half the amount, of goodwill., Pass the Journal entries assuming that the capitals are fixed., [Ans. J/E, N’s Share of Goodwill ` 10,000], 19. X and Y are partners sharing profits and losses in the proportion of 3/5 : 2/5. They agree to, admit Z into partnership who is to get 1/5th share in the business. Z brings in ` 1,00,000 for his, capital and ` 40,000 for the 1/5th share of goodwill which he acquired 3/20th from X and 1/20th, from Y. The profit for the first year of the new partnership amounted to ` 1,00,000., Make the necessary Journal entries in connection with Z's admission and apportion the profit, among the partners., [Ans. Profit X ` 45,000; Y ` 35,000; Z ` 20,000], [Hint : New Ratio 9 : 7 : 4], 20. A and B are partner in a firm sharing profit in the ratio of 3 : 2. They admitted C as a new, partner. The new profit sharing ratio between A, B and C will be 5 : 3 : 2. C brings ` 75,000 as, capital and ` 25,000 for his share of goodwill. Pass necessary Journal entries., [Ans. Total of Journal ` 1,25,000], (J.A.C., Mock Test Paper), ❏ Cash and Asset brought for Goodwill, 21. E and F were partners in a firm sharing profits in the ratio of 3 : 1. They admitted G as a new, partner on 1.3.2019 for 1/3rd share. It was decided that E, F and G will share future profit, equally. G brought ` 50,000 in cash and machinery worth ` 70,000 for his share of profit as, premium for goodwill., Showing your working calculation clearly, pass Journal entries in the books of the firm., [Ans. J/E, Premium for Goodwill ` 1,20,000], ❏ When Goodwill already appears in the Books, 22. A, B and C are partners sharing profits in the ratio of 5 : 3 : 2. Goodwill appeared in the books a t, ` 50,000. D is admitted to the partnership, the new profit-sharing ratio among, A, B, C and D, being 3 : 3 : 2 : 2., , 289
Page 304 :
SBPD Pub li ca tions Accountancy (XII), Give the Journal entries for goodwill if the new partner, D brings in ` 1,00,000 for capital and, cash for his share of goodwill. The goodwill of the firm is valued at ` 1,20,000 and is not to, appear in the books of accounts after D’s admission., [Ans. Total of Journal ` 1,98,000], 23. A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. They admit C into, partnership for 1/3 share in profits. C brings ` 20,000 for capital. Goodwill is valued at ` 15,000., Show what entries shall be made in the following cases :, (i) Goodwill does not appear in the books., (ii) Goodwill appears in the books at ` 9,000., (U.S.E.B., 2015), [Ans. (i) C’s share of Goodwill ` 5,000 to be adjusted through capital current account,, (ii) First of all existing goodwill a/c will be closed and the other two entries will be made.], ❏ Goodwill not brought in Cash, 24. X and Y are partners and share profits in the ratio of 3 : 2. They take Z as the new partner and it, is supposed that he would bring ` 60,000 against capital and ` 20,000 against goodwill. New, profit- sharing ratio is 1 : 1 : 1. Z is able to bring only ` 60,000. How this will be treated in the, books of the firm ?, [Ans. J/E], Note : Goodwill A/c to be adjusted through Capital Accounts ` 20,000., , 25. Kishan and Gopal are partners in a firm sharing profits and losses equally. They admit Shyam, as a partner for 1/5th share of profits. Shyam brings into partnership book debts amounting to, ` 20,000, the goodwill of his connections valued at ` 40,000 and balance in cash, borrowed from, his friend Murlidhar, so as to make his capital equal to ` 1,20,000. The goodwill of the old firm, (Kishan and Gopal) is to be taken at ` 60,000., Show Journal entries in the books of the firm., [Ans. New Profit-sharing Ratio 2 : 2 : 1], ❏ Goodwill partly brought in Cash, 26A. A and B are partners in the ratio of 3 : 4. They admit C for 3/7 which he acquires 2/7 from A and, 1/7 from B and brings ` 1,000 as premium out of his share of goodwill of ` 1,900. Goodwill, Account does not appear in the books of A and B. Give necessary Journal entries., [Ans. Total of Journal ` 2,900, Sacrificing Ratio 2 : 1.], 26B. A and B are partners sharing profits equally. They admit C into partnership. C is to pay ` 2,000, as goodwill for 1/4th share of profit, but brings only ` 1,000. Goodwill Account appears in, the books at ` 6,000. All partners have decided that Goodwill Account shall not appear in the, books. Give Journal entries., [Ans. Total of Journal ` 9,000], ❏ Hidden Goodwill, 27A. A and B are partners with capitals of ` 13,000 and ` 9,000 respectively. They admit C as a, partner for 1/5th share in the profits of the firm. C brings ` 8,000 as his capital. Give Journal, entries to record goodwill., [Ans. Hidden Goodwill ` 10,000], 27B. X and Y are partners with capitals of ` 16,000 and ` 12,000 respectively. They admit Z as a, partner with one-fourth share in the profits of the firm. Z brings ` 16,000 as his capital., Calculate goodwill of the firm and Z’s share in the goodwill., [Ans. Value of Goodwill of the Firm ` 20,000. Z's Share in Goodwill ` 5,000.], 27C. Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with 1/5th share in, the profits of the firm. Ajay brings ` 5,00,000 as his share of capital. The value of the total assets, of the firms was ` 15,00,000 and outside liabilities were valued at ` 5,00,000 on that date. Give, the necessary Journal entry to record goodwill at the time of Ajay’s admission. Also show your, workings., (C.B.S.E., A.I., 2013), [Ans. Value of Goodwill ` 10,00,000, Ajay’s Share in Goodwill ` 2,00,000. J/E—Adjustment, through Capital Accounts.], , 290
Page 305 :
Ad mis sion of a Part ner, ❏ Long Answer Type Questions, ❏ Accounting Treatment of Goodwill, 28A. Gyanchand and Govind are partners in a business sharing profits and losses in the ratio of, 1/3rd and 2/3rd. On 1st April, 2019 their capitals are ` 40,000 and ` 50,000 respectively. On that, date they admit Gangaram in partnership and give him 1/4th share in future profits., Gangaram brings ` 40,000 as his capital and ` 30,000 as goodwill. The amount of goodwill is, immediately withdrawn by the old partners in cash., Draft Journal entries and show the Capital Accounts of all the partners as well as Goodwill, Account. Calculate the proportion in which partners would share profits and losses in future., 1 1 1, [Ans. New Profit-sharing Ratio : : or 1 : 2 : 1], 4 2 4, 28B. X and Y are partners in a firm. They share profits and losses in the ratio of 2 : 1. Their capitals, are ` 24,000 and ` 12,000 respectively. They admit Z into partnership on the condition that he, would bring ` 9,000 for goodwill and ` 15,000 as capital and that he would receive 1/3rd share in, profits. Assuming that the new partner has brought capital and goodwill in cash, pass Journal, entries and find out new profit-sharing ratio, when :, (i) The old partners have withdrawn goodwill., (ii) They have allowed it to remain in the business., 4 2 1, [Ans. New Profit-sharing Ratio : : or 4 : 2 : 3], 9 9 3, ❏ Revaluation of Assets and Liabilities and Journal Entries, 29A. X and Y are partners in a firm. Z is admitted for 1/4 share. Make entries in firm’s book for the, following on the admission of a partner :, (i) Unrecorded Investment worth ` 10,000., (ii) Unrecorded Creditors ` 3,000., (iii) Increase in the value of Building ` 12,000., (iv) Depreciation on furniture ` 1,000., [Ans. Profit on Revaluation ` 18,000], 29B. A and B share the profits of a business in the ratio of 5 : 3. They admitted C into the firm for, 1/4th share in profits which is to be contributed equally by A and B. On the date of admission of, C the Balance Sheet of the firm was as follows :, Liabilities, Amount, Assets, Amount, `, , `, , A’s Capital, , 50,000 Machinery, , 35,000, , B’s Capital, General Reserve, , 30,000 Furniture, 16,000 Stock, , 15,000, 10,000, , Creditors, , 4,000 Bank, 1,00,000, , 40,000, 1,00,000, , Terms of C’s admission were as follows :, (i) C will bring ` 30,000 for his share of capital and goodwill., (ii) Goodwill of the firm has been valued at 3 years’ purchase of the super profit ` 8,000., (iii) Machinery, furniture and stock are revalued at` 30,000, ` 12,000 and ` 8,000 respectively., Pass necessary Journal entries from the above information., [Ans. J/E, Revaluation A/c—Loss ` 10,000], ❏ Revaluation of Assets and Liabilities/Revaluation A/c, 30A. Rajesh and Sitaram are partners sharing profits and losses in the ratio of 3 : 2. Their Balance, Sheet is as follows :, , 291
Page 306 :
SBPD Pub li ca tions Accountancy (XII), Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Bills Payable, General Reserve, Capitals :, Rajesh, Sitaram, , `, , 7,500, 4,500, , `, , 1,500 Cash, 1,000 Debtors, 2,000, Less : Provision, Stock, Plant, 12,000 Building, 16,500, , `, , 3,000, 500, , 500, 2,500, 4,500, 5,000, 4,000, 16,500, , They admitted Mohan into partnership on the following terms :, The value of building to be increased by ` 1,500, Plant to be increased by ` 1,000. Reserve for, doubtful debts to be reduced upto ` 200. The stock to be valued at ` 4,200. Mohan will bring cash, for goodwill ` 3,000 and will bring ` 5,000 as capital for getting 1/5th share in the profit., Prepare Revaluation Account., [Ans. Revaluation Account Profit ` 2,500], 30B. Madan and Krishna were partners in a firm. Their Balance Sheet as on 31st December, 2018, stood as follows :, Liabilities, `, Assets, `, O/s Expenses, Cash, 4,000, 10,000, Creditors, Bank Overdraft, Bills Payable, Reserve, Capital A/cs :, Madan, Krishna, , 30,000, 20,000, 30,000, 18,000, `, , 45,000, 30,000, , 75,000, 1,83,000, , Bank, Debtors, Furniture, Machinery, Building, , 56,000, 30,000, 12,000, 24,000, 57,000, , 1,83,000, , They decided to admit Ram in the firm on the following terms :, (a) Ram brings ` 45,000 as capital and he will receive 1/4th share in future profits., (b) He brings ` 30,000 as goodwill in cash., (c) The machinery, building and furniture be depreciated by 5%., (d) A provision of 5% to be created for doubtful debts., Prepare Revaluation Account., (U.S.E.B., 2013), [Ans. Loss on Revaluation A/c ` 6,150; Madan ` 3,075, Krishna ` 3,075], ❏ Treatment of Reserves and Profits, 31A. A and B are partners in the ratio of 3 : 1. They are agreed to admit C for the 1/5 share in profit. At, the date of admission of C, following balances in the Balance Sheet of A and B., `, General Reserve, 12,000, Contingency Reserve, 8,000, Employee’s Compensation Fund, 10,000, Deferred Revenue Expenditure – Advertisement Examples, 16,000, Pass necessary Journal entries for the treatment of these items on C’s admission., [Ans. Total of Journal ` 46,000], 31B. A and B are partners sharing profits in the ratio of 7 : 8. C was admitted in the firm for 1/6th, share who paid ` 1,80,000 as capital and ` 45,000 as premium in cash. At the time of admission,, General Reserve amounting to ` 45,000 and Profit and Loss Account amounting to ` 24,000, appeared on the liabilities side of the Balance Sheet., Show necessary Journal entries to record the above transactions., [Ans. Total of Journal ` 3,39,000], , 292
Page 307 :
Ad mis sion of a Part ner, ❏ Treatment of Accumulated Profits & Hidden Goodwill, 32. Sonali and Rupali are partners in a firm with capitals of ` 6,00,000 each. They decided to admit, Rakhi as a partner with 1/4th share in the profits of the firm. Rakhi brings ` 8,00,000 as her, share of capital. Their Profit and Loss Account shows a credit balance of ` 4,00,000 as on the, date of admission. Give Journal entries to record goodwill on Rakhi’s admission., (U.S.E.B., 2019), [Ans. J/E for distribution of profit cash brought for capital and entry for Rakhi’s Share of, Goodwill.], ❏ Division of J.L.P., Reserves, Profit and Goodwill, 33. Ram and Mohan were partners in a firm sharing profits in the ratio of 4 : 1. On 1.3.2019, they, admitted Sohan as a new partner for 1/3rd share in the profit of the firm. They fixed new profitsharing ratio as 4 : 2 : 3., On the date of Sohan’s admission, the firm had a J.L.P. for ` 60,000 (surrender value of, ` 20,000). The Profit & Loss Account on the date of admission showed a balance of ` 32,000 (Dr.)., The firm also had a reserve of ` 1,00,000., Sohan is to bring ` 60,000 as premium for his share of goodwill., Showing your working clearly, pass necessary Journal entries to record the above transactions., [Ans. Valuation of Goodwill ` 1,80,000, Ram’s Sacrifice 16/45, Mohan Gains 1/45, Ram’s, Capital A/c to be Credited with ` 64,000 ( ` 60,000 (goodwill) and ` 4,000 Compensated by, Mohan], ❏ Journal Entries and Preparation of Revaluation Account, 33A. The following is the Balance Sheet of Ram and Shyam, who are sharing profits and losses as, two-third and one-third on 31st March, 2019 :, Liabilities, , Amount, , Assets, , `, , Capitals :, Ram, Shyam, Sundry Creditors, , Amount, `, , Building, 15,000 Plant and Machinery, 10,000 Stock, 32,950 Sundry Debtors, Cash at Bank, , 25,000, 17,500, 10,850, 4,000, 600, , 57,950, , 57,950, , They agreed to admit Mohan into partnership on the following terms :, (a) Mohan was to be given 1/3rd share in the profit and was to bring ` 7,500 as his capital and, ` 3,000 as his share of goodwill., (b) That the value of Stock and Plant & Machinery were to be reduced by 5%., (c) That a reserve of 10% was to be created in respect of sundry debtors., (d) The Building was to be depreciated by 10%., (e) That the goodwill was to be withdrawn by the old partners., Pass Journal entries to give effect to the above arrangements and prepare Revaluation, Account., (U.S.E.B., 2010, 14), [Ans. Revaluation Loss : Ram—` 2,878.33; Shyam— ` 1,439.17], 33B. Rohit and Bal, sharing profits in the ratio of 5 : 3, had the following Balance Sheet as on, December 31, 2018 :, Liabilities, , Amount, `, , Creditors, Bills Payable, General Reserve, Capital A/cs :, Rohit, , `, , 80,000, , 20,000 Goodwill, 8,000 Building, 28,000 Plant, Furniture, Debtors, , Assets, , Amount, `, , 30,000, 34,000, 27,000, 4,000, 32,500, , 293
Page 308 :
SBPD Pub li ca tions Accountancy (XII), Bal, , 40,000 1,20,000 Bills Receivable, Stock, Bank, , 15,000, 22,500, 11,000, 1,76,000, , 1,76,000, , On 1st January, 2019, they decided to admit Khosla into the partnership giving him 1/5th share., He brings in ` 50,000 as his share of capital. The partners decide to revalue the assets as follows :, Goodwill ` 50,000, Plant ` 25,000, Debtors ` 31,000, Stock ` 32,500, Building ` 40,000,, Furniture ` 2,000, Bills Receivable ` 12,500., You are required to show the Journal entries and prepare Revaluation Account, [Ans. Profit on Revaluation ` 8,000, For Goodwill : Dr. Khosla's Capital A/c ` 10,000, Cr. Rohit, ` 6,250, Cr. Bal ` 3,750. For Goodwill written off : Dr. Rohit ` 18,750 and Dr. Bal ` 11,250,, Credit Goodwill ` 30,000.], ❏ Preparation of Revaluation A/c and Capital A/cs, 34A. The following is the Balance Sheet of the firm of X and Y on 31st March, 2019. They share, profits in the ratio of 3 : 2 :, Liabilities, , Amount, , Assets, , `, , Creditors, Capital A/cs :, X, Y, , `, , 17,500, 17,500, , Amount, `, , 31,000 Cash at Bank, Land & Buildings, Plant & Machinery, 35,000 Furniture, Stock, Debtors, 66,000, , 2,500, 12,500, 17,500, 750, 10,250, 22,500, 66,000, , They take Z into partnership on 1st April, 2019 on the following terms :, (1) Z is to bring ` 2,500 for goodwill which is to be retained in the business., (2) He also brings in ` 7,500 as his capital., (3) For the purpose of admission of Z, the firm's assets were valued as under :, Land and Buildings to be taken at ` 15,000; Plant and Furniture to be reduced by 10% and a, provision of 5% on debtors is to be made for Doubtful Debts. The stock is to be taken at ` 12,500., Prepare Profit & Loss Adjustment Account and the Capital Accounts of the partners., [Ans. Profit on Profit & Loss Adjustment A/c : X—` 1,080; Y—` 720; Balance of Capital A/cs : X, ` 20,080; Y ` 19,220; Z ` 7,500.], 34B. X, Y and Z are partners in a firm. On 31st March 2019, their Balance Sheet was as follows :, Liabilities, Creditors, Profit & Loss A/c, Capitals :, X, Y, Z, , Amount, , `, , 2,000, 1,750, 1,500, , Assets, , `, , `, , 1,800 Machinery, 1,200 Furniture, Stock, Debtors, Cash, 5,250, 8,250, , 1,200, 400, 2,650, 3,780, 220, , On 1st April 2019, they agreed to admit A on the following conditions :, (1) He brings in ` 1,800 for capital and ` 1,500 for his share of Goodwill., (2) Machinery and Furniture to be revalued at ` 950 and ` 380 respectively., (3) Value of stock to be increased by ` 450., , 294, , Amount, , 8,250
Page 309 :
Ad mis sion of a Part ner, Prepare Revaluation A/c and Partners’ Capital A/c., [Ans. Revaluation Profit ` 180; Partners Capital A/c : X ` 2,960; Y ` 2,710; Z ` 2,460; A ` 1,800.], 34C. Usha and Asha are partners in a firm sharing profits in the ratio of 3 : 2. Their Balance Sheet on, 31st March, 2019 was as follows :, Liabilities, Amount, Assets, Amount, `, , Creditors, General Reserve, Bills Payable, Capitals :, Usha, Asha, , `, , 40,000, 35,000, , `, , 27,000 Cash, 18,000, `, 5,000 Debtors, 48,000, Less : Provision for Bad, Debts, 4,800, 75,000 Stock, Patents, Building, 1,25,000, , 24,000, , 43,200, 30,000, 7,400, 20,400, 1,25,000, , Neelam is admitted into the partnership for 1/5th share in the profits. Neelam is to bring in, ` 30,000 as her capital and her share of goodwill in cash, subject to the following conditions :, (a) Goodwill of the firm to be valued at ` 50,000., (b) Stock to be reduced by 10% and provision for Bad Debts to be reduced by ` 2,400., (c) Patents are valueless., (d) There was a claim against the firm for damages amounting to ` 2,000. The claim has now, been accepted., Prepare Revaluation Account and Partners' Capital Accounts., [Ans. Loss on Revaluation ` 10,000; Capital Balance : Usha ` 50,800; Asha ` 42,200; Neelam, ` 30,000.], ❏ Preparation of New Balance Sheet, 35. Mohan Lal and Sohan Lal are equal partners in a firm. Their total capital is ` 1,52,000, being, contributed equally. Their Balance Sheet shows the following :, Sundry Creditors ` 1,26,000; Sundry Assets ` 1,70,000 and Cash at Bank ` 1,08,000., Ram Lal was admitted into partnership on payment of ` 40,000 for goodwill for 1/3rd share., Ram Lal also brought ` 1,00,000 as capital., Show the Balance Sheet of the new firm., [Ans. B/S Total ` 4,18,000], 36. The following was the Balance Sheet of L and M who share profits and losses as 2 : 1 on 31st, December, 2018 :, Liabilities, , Amount, , Assets, , `, , Capitals :, L, M, Creditors, , `, , 30,000, 20,000, , Building, Machinery, 50,000 Stock, 65,900 Debtors, Cash, 1,15,900, , Amount, `, , 28,400, 35,000, 21,700, 18,800, 12,000, 1,15,900, , They agree to admit N into partnership on the following terms :, (i) N was to be given 1/3rd share in profit of business., (ii) N was to bring ` 15,000 as his capital and ` 6,000 as his share of goodwill., (iii) That the values of stock and machinery were to be reduced by 10%., (iv) The building is to be depreciated by 15%., (v) The goodwill was to be withdrawn by the old partners., , 295
Page 310 :
SBPD Pub li ca tions Accountancy (XII), Pass necessary Journal entries to give effect to the above arrangements. Prepare Profit & Loss, Adjustment Account and the opening Balance Sheet of the new firm., (J.A.C., 2013), [Ans. P/L Adj. A/c Loss; ` 9,930, B/S Total ` 1,20,970; Cash ` 27,000], ❏ Revaluation A/c, Partners’ Capital A/cs and Balance Sheet, 37A. A and B are partners in a firm. They share profits and losses in the ratio of 5 : 3. Their Balance, Sheet as on 31st March, 2019 was as under :, Liabilities, Amount, Assets, Amount, `, , Creditors, Bills Payable, Capitals :, A, B, , `, , 30,000 Cash, 10,000 Debtors, Buildings, 35,000 Furniture, 20,000, 95,000, , 5,000, 20,000, 60,000, 10,000, 95,000, , They admitted C as a new partner on 1st April, 2019. C brings in ` 15,000 for capital and ` 8,000, for goodwill. Goodwill remain in business. He will get 1/5 share in future profits of the firm., Assets and liabilities were revalued as under :, (i) Valuation of building was made at ` 70,000., (ii) Furniture was valued at 10% less., (iii) 5% provision for bad debts is to made on debtors., (iv) Creditors were valued at ` 28,000., Prepare Revaluation Account, Capital Account of partners and new Balance Sheet in the Books, of the firm., (U.S.E.B., 2019), [Ans. Revaluation A/c Profit ` 10,000 Partners' Capital A/c Balance : A ` 46,250, B ` 26,750, C, ` 15,000, Cash Total ` 28,000], 37B. The following is the Balance Sheet of A and B who are in partnership and share profits and, losses in the ratio of 3 : 2 :, Liabilities, Amount, Assets, Amount, `, , Creditors, Bills Payable, Capitals :, A, B, , `, , 24,000, 9,000, , 15,000 Land & Buildings, 4,310 Machinery & Plant, Furniture, Stock, Debtors, Less : Reserve, Investment, 33,000 Cash, 52,310, , `, , `, , 22,500, 4,000, , 10,000, 4,500, 900, 12,500, 18,500, 4,250, 1,860, 52,310, , They admit C into partnership. The terms of agreement are as under :, (i) C to bring ` 10,000 as capital and ` 4,400 for goodwill in order to get 2/7 share in profit., (ii) Goodwill is to be shared by old partners in ratio of sacrifice., (iii) Assets are to be valued as : Land and Buildings 15,000; Machinery and Plant ` 4,000; Stock, to be discounted at 10% and Reserve for doubtful debts be reduced by ` 1,000., (iv) Investments are to be brought down at their market price being ` 3,200., Prepare Revaluation Account and Balance Sheet of the new firm., (U.S.E.B., 2018), [Ans. Realisation A/c Profit ` 3,200. New Balance Sheet Total ` 69,910.], [Hint : A’s Capital ` 28,560 B’s Capital ` 12,040, Cash Balance ` 16,060.], , 296
Page 311 :
Ad mis sion of a Part ner, 38., , A and B are equal partners. Their Balance Sheet as on 31st December, 2018 is as follows :, Liabilities, Amount, Assets, Amount, `, , Creditors, Reserve, Capitals :, A, B, , `, , 25,000, 20,000, , `, , 20,000 Cash, 10,000 Sundry Debtors, Stock, Furniture, 45,000 Land and Building, 75,000, , 5,000, 20,000, 15,000, 10,000, 25,000, 75,000, , C is admitted into firm for 1/4th share in future profit on the following terms :, (a) C brings ` 20,000 as capital but he is unable to bring his share of goodwill` 4,000 in cash. No, Goodwill Account is raised., (b) Furniture is depreciated by 10% and 5% Reserve for bad debts is created., (c) Land and building is appreciated by 20%., Prepare Revaluation A/c, Partners' Capital A/cs and the opening Balance Sheet after, admission of C., [Ans. Revaluation A/c Profit ` 3,000, Partners' Capital A/cs Balances : A ` 33,500; B ` 28,500;, C ` 16,000, Balance Sheet Total ` 98,000.], 39. A and B are partners sharing profits and losses in the ratio of 3 : 1. Their Balance Sheet as on, 31.12.2018 was as follows :, Liabilities, Amount, Assets, Amount, `, , Capitals :, `, A, 90,000, B, 30,000, Creditors, Workmen’s Compensation Fund, , `, , Bank, Debtors, 1,20,000 Stock, 20,000 Investments, 20,000 Goodwill, 1,60,000, , 10,000, 60,000, 30,000, 50,000, 10,000, 1,60,000, , C is admitted for 2/5th share in profits. For this purpose, the following adjustments are agreed upon :, (i) C will bring in ` 80,000 for capital and ` 20,000 for goodwill., (ii) Goodwill is not to appear in the new firm at all., (iii) Market value of investment is ` 45,000., (iv) Claim on account of Workmen’s Compensation is ` 10,000., Prepare Revaluation Account, Partner’s Capital A/cs and the Balance Sheet of the, reconstituted firm., [Ans. Revaluation A/c Loss : A ` 3,750, B ` 1,250; Capital A/cs Balances (Cr.) : A ` 1,01,250, B, ` 33,750, C ` 80,000; Balance Sheet Total ` 2,45,000.], 40. Amritanshu and Adarsh are partners sharing profits and losses in the ratio of 3 : 2. Their, Balance Sheet as on 31st December, 2018 was as follows :, Liabilities, Amount, Assets, Amount, `, , Creditors, General Reserve, Capital A/cs :, Amritanshu, Adarsh, Current A/cs :, Amritanshu, Adarsh, , `, , 80,000, 50,000, 12,000, 8,000, , 30,000 Cash, 20,000 Debtors, Less : Provision, Investments, 1,30,000 Trade Mark, Land and Building, Goodwill, 20,000, 2,00,000, , `, `, , 30,000, 1,000, , 16,000, 29,000, 25,000, 20,000, 90,000, 20,000, 2,00,000, , 297
Page 313 :
Ad mis sion of a Part ner, Capitals :, A, B, , `, , 1,00,000, 1,20,000, , Sundry Debtors, Cash at Bank, 2,20,000 Cash in hand, 2,80,000, , 70,000, 7,000, 3,000, 2,80,000, , On the above date they decided to admit C as a partner on the following terms :, (a) A, B and C's new profit-sharing ratio will be 7 : 5 : 4., (b) C will bring ` 1,00,000 as his capital and ` 48,000 for his share of goodwill., (c) A and B will draw half of the goodwill in cash., (d) Machinery is to be valued at ` 1,50,000, Stock ` 1,00,000 and provision for bad debts of, ` 10,000 is to be created., Prepare necessary Accounts and Balance Sheet., (J.A.C., 2018), [Ans. Revaluation Profit ` 40,000, Capital A/cs : A ` 1,43,000, B ` 1,41,000, C` 1,00,000, Total of, B/S ` 4,44,000.], ❏ Adjustment of Capital Accounts, 43A. A and B are in partnership sharing profits and losses in the ratio of 3 : 2. The capitals of A and B, after all adjustments are ` 1,60,000 and ` 1,20,000 respectively. They admit C as a partner who, brings ` 70,000 as capital for 1/5th share of profits to acquired equally from A and B. The capital, accounts of old partners are to be adjusted on the basis of new partner’s capital., Calculate the new capitals of A and B and pass the necessary Journal entries for cash brought, in or withdrawn by the old partners for this purpose., [Ans. Total Capital of the Firm ` 3,50,000; New Capital of A ` 1,75,000; B ` 1,05,000; Cash to be, brought in by A ` 15,000; Cash to be withdrawn by B ` 15,000.], 43B. X and Y share profits in the ratio of 3 : 2 and their adjusted capitals are ` 50,000 and ` 30,000., They admit Z with 1/5 share who has to bring sufficient capital to be equal to 1/5 of the total, capital of the firm. Calculate the capital to be brought in by Z., [Ans. ` 20,000.], 43C. A and B are equal partners in a firm. On 1st January 2019, their capital respectively are, ` 13,000 and ` 11,000. They made C a partner for 1/4th share of the firm. This new partner, brought his capital on the basis of the combined capital of the old partners. Adjust the old, partner’s capital account according to new profit/loss sharing ratio., (U.S.E.B., 2012), [Ans. Total Capital of the Firm ` 32,000; Capital brought by C ` 8,000; New Capital of A, ` 12,000; B ` 12,000; Amount to be withdrawn by A ` 1,000; to be brought in by B ` 1,000.], 44. The following is the Balance Sheet of A, B and C sharing profits and losses in proportion of 6 : 5 : 3, respectively :, Liabilities, `, Assets, `, Creditors, Bills Payable, General Reserve, Capitals :, A, B, C, , 18,900 Cash, 6,300 Debtors, 10,500 Stock, `, Furniture, 35,400, Land & Building, 29,850, Goodwill, 14,550, 79,800, 1,15,500, , 1,890, 26,460, 29,400, 7,350, 45,150, 5,250, 1,15,500, , They agreed to take D into partnership and give him 1/8th share on the following terms :, (1) That Furniture be depreciated by ` 920., (2) An old customer, whose account was written off as bad, has promised to pay ` 2,000 in full, settlement of his full debt., (3) That a provision of ` 1,320 be made for outstanding repair bills., (4) That the value of land and building having appreciated be brought upto ` 54,910., (5) That D should bring in ` 14,700 as his capital., (6) That D should bring in ` 14,070 as his share of goodwill., , 299
Page 314 :
SBPD Pub li ca tions Accountancy (XII), (7) That after making the above adjustments, the capital accounts of old partners be adjusted, on the basis of the proportion of D’s Capital to his share in business i.e., actual cash to be, paid off or brought in by the old partners, as the case may be., Pass the necessary journal entries and prepare the balance sheet of the new firm., [Ans. J/E, Revaluation Profit ` 9,520, Total of B/s ` 1,44,120.], 45. A and B are in partnership sharing profits and losses in the ratio of 3 : 2. The capitals of A and B, remaining after adjustments are ` 92,000 and ` 70,000 respectively. They admit C as a partner, on his contribution of ` 40,000 as capital for 1/5th share of profits to be acquired equally from, both A and B. The capital accounts of old partners are to be adjusted on the basis of the, proportion of C’s capital to his share in the business., Pass entries assuming that capital accounts of A and B are to be adjusted by opening current, accounts., [Ans. New Profit Sharing Ratio 5 : 3 : 2, Capital of A ` 1,00,000, Capital of B ` 60,000.], 46. Babulal and Ramlal are in partnership sharing profits and losses in the ratio of 3 : 2. Their, Balance Sheet on 31st December, 2018 stood as follows :, Liabilities, `, Assets, `, Capital A/c :, Babulal, Ramlal, Creditors, Reserve, Bank Loan, , `, , 7,000, 3,000, , Cash, Debtors, 10,000 Stock, 1,600 Investment, 1,400 Building, 2,000, 15,000, , 1,340, 2,960, 1,870, 3,080, 5,750, 15,000, , On 1.1.2019, they agree to take Premlal into partnership giving him 1/5th share of profit on the, following terms :, (a) The goodwill of the firm is to be valued at two years purchase calculated on twice the, average profit of last three years which amounted to ` 4,000, ` 3,000 and ` 5,000., (b) Premlal brings his share of Goodwill in cash which is retained in the business., (c) Premlal also brings in capital in proportion to his profit-sharing arrangements., Pass necessary Journal entries to give effect to the above arrangements and prepare new, Balance Sheet of the firm., (J.A.C., 2015), [Ans. (a) Premlal’s Share of Goodwill ` 1,600; (b) Total Capital of the New Firm ` 16,250;, (c) Premlal’s Share in Capital ` 3,250; (d) Balance of Cash (1.1.2019) ` 6,190, Total B/s, ` 19,850], 47. A and B were partners in a firm sharing profits in the ratio of 3 : 2. They admitted C as a new, partner for 1/6th share in the profits. C was to bring ` 40,000 as his capital and the capitals of A, and B were to be adjusted on the basis of C's capital having regard to profit-sharing ratio. The, Balance Sheet of A and B as on 31.3.2019 was as follows :, Bal ance Sheet of A and B, (as on 31.3.2019), Liabilities, Amount, Assets, Amount, `, , Creditors, Bills Payable, General Reserve, Capitals :, A, B, , 300, , `, , 1,50,000, 80,000, , 36,000 Cash, 20,000 Debtors, 24,000 Stock, Machinery, Building, 2,30,000, 3,10,000, , `, , 10,000, 34,000, 24,000, 42,000, 2,00,000, 3,10,000
Page 315 :
Ad mis sion of a Part ner, The other terms of agreement on C's admission were as follows :, (i) C will bring ` 12,000 for his share of goodwill., (ii) Building will be valued at ` 1,85,000 and Machinery at ` 40,000., (iii) A provision of 6% will be created on debtors for bad debts., (iv) Capital Accounts of A and B will be adjusted by opening Current Accounts., Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of A, B and C., [Ans. Revaluation Loss ` 19,040, Capital Balances : A ` 1,20,000; B ` 80,000; C ` 40,000; A’s, Current A/c ` 40,176 (Cr.) and B’s Current A/c ` 6,784 (Cr.), B/S Total ` 3,42,960], 48. The Balance Sheet of Ram and Shyam, who were sharing profits in the ratio of 3 : 1, on 31st, March, 2017 was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , `, , Creditors, , 2,800 Cash at Bank, , Employees’ Provident Fund, General Reserve, , 1,200 Debtors, 2,000 Less : Provision for Dou-, , Capitals :, Ram, Shyam, , btful Debts, , `, , 6,000, 4,000, , `, , 2,000, , 6,500, 500, , Stock, 10,000 Investments, , 6,000, 3,000, 5,000, , 16,000, , 16,000, , They decided to admit Mohan on April 1st 2017 for 1/5th share on the following terms :, (i) Mohan shall bring ` 6,000 as his share of premium., (ii) That unaccounted accrued income of ` 100 be provided for., (iii) The market value of investments was ` 4,500., (iv) A debtor whose dues of ` 500 was written off as bad debts paid ` 400 in full settlement., (v) Mohan to bring in capital to the extent of 1/5 of the total capital of the new firm., Prepare Revaluation A/c, Partners’ Capital A/cs and the Balance Sheet of the new firm., [Ans. Revaluation Profit NIL, Total of B/s ` 26,500.], 49. Jain and Gupta were partners sharing profits in the ratio of 3 : 2. Their Balance Sheet on 31st, March, 2016 was as follows :, Liabilities, Amount, Assets, Amount, `, , Creditors, Bills Payable, Bank Overdraft, Reserve, Jain’s Capital, Gupta’s Capital, , 20,000, 3,000, 17,000, 15,000, 70,000, 60,000, , 1,85,000, , `, , Cash, Debtors, Less : Provision for Bad, Debts, Stock, Plant, Buildings, Motor Vehicles, , `, , 14,800, , 20,500, 300, , 20,200, 20,000, 40,000, 70,000, 20,000, 1,85,000, , They agreed to admit Mishra for 1/4th share from 1-4-2016 subject to the following terms :, (a) Mishra to bring in capital equal to 1/4th of the total capital of Jain and Gupta after all, adjustments including premium for goodwill., (b) Buildings to be appreciated by ` 14,000 and Stock to be depreciated by ` 6,000., , 301
Page 316 :
SBPD Pub li ca tions Accountancy (XII), (c) Provision for Bad debts on Debtors to be raised to ` 1,000., (d) A provision be made for ` 1,800 for outstanding legal charges., (e) Mishra’s share of goodwill/premium was calculated at ` 10,000., Prepare Revaluation Account, Partner’s Capital Accounts and the Balance Sheet of the new, firm on Mishra’s admission., [Ans. Revaluation Profit ` 5,500, Total of B/s ` 2,42,425.], 50. Jadeja and Tendulkar share profits in the ratio of 3 : 1. On 31st March, 2019, their Balance, Sheet was as under :, Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, General Reserve, , 37,500 Bank, 4,000 Goodwill, , Capital A/cs :, Jadeja, Tendulkar, , `, , Bills Receivable, , `, , 30,000, 16,000, , 12,500, 10,000, 3,000, , Debtors, 46,000 Stock, , 16,000, 20,000, , Furniture, , 1,000, , Land & Building, , 25,000, 87,500, , 87,500, , On 1st April, 2019 Dhoni was admitted into partnership on the following terms :, (a) Dhoni pays ` 20,000 as capital for a one-fifth share., (b) Stock and Furniture be reduced by 10% and 5% provision for doubtful debts be created., (c) Value of land and building be appreciated by 20%., (d) Share of Goodwill of Dhoni be valued at ` 8,000 which he brings in cash., (e) The capitals of partners be in their profit-sharing ratio, necessary amount being paid in or, withdrawn., Give Revaluation Account, Capital Accounts and Balance Sheet after admission., [Ans. Profit on Revaluation ` 2,100, Capital : Jadeja ` 60,000, Tendulkar ` 20,000, Dhoni, ` 20,000, Total of B/S ` 1,37,500], 51. Raghu and Rishu are partners, sharing profits in the ratio 3 : 2. Their Balance Sheet as at 31st, March, 2019 was as follows :, Liabilities, , Assets, , `, , Creditors, , 86,000 Cash in hand, , Employees’ Provident Fund, , 10,000 Debtors, , Investment Fluctuation Fund, Capital A/cs :, `, , `, `, , 42,000, , 4,000 Less : Provision for Doubtful, Debts, 7,000, , Raghu, , 1,19,000, , Investments, , Rishu, , 1,12,000 2,31,000 Buildings, Plant & Machinery, 3,31,000, , 77,000, , 35,000, 21,000, 98,000, 1,00,000, 3,31,000, , On this date Rishabh is admitted in the firm for 1/4th share of profit on the following terms :, (i) Rishabh will bring ` 50,000 as his share of capital., (ii) Goodwill of the firm is valued at ` 42,000 and Rishabh will bring his share of goodwill in cash., (iii) Buildings were appreciated by 20%., , 302
Page 317 :
Ad mis sion of a Part ner, (iv) All debtors were good., (v) Creditors include a liability of ` 10,800 which is not to be paid., (vi) New profit sharing ratio will be 2 : 1 : 1., (vii) Capital of Raghu and Rishu will be adjusted on the basis of Rishabh’s share of capital and, any excess or deficiency will be made by withdrawing or bringing in cash by the concerned, partners, as the case may be., Prepare Revaluation Account and Partners’ Capital Accounts., [Ans. Profit on Revaluation ` 37,400, Partners’ Capital Accounts : Raghu ` 1,00,000, Rishu, ` 50,000, Rishabh ` 50,000.], [Hint : Raghu withdrew ` 48,040; Reshu withdrew ` 84,860.], ❏ Miscellaneous and Board’s Questions, 52. Balance Sheet of A, B and C, who shared profits and losses in the ratio of 6 : 5 : 4 respectively, as, on 31st December, 2018 was as under :, Liabilities, , Amount, , Assets, , `, , Sundry Creditors, Capital A/cs :, A, , `, , 15,000 Land and Building, , Bills Payable, , 7,000 Furniture, 40,000, , Stock, Debtors, , B, , 35,000, , Bills Receivable, , C, , 25,000, , `, , Amount, , 1,00,000 Cash in hand, 1,22,000, , 50,000, 7,500, 38,000, 15,000, 7,500, 4,000, 1,22,000, , It was decided to admit D on 1st January, 2019 and give him 1/10 share in profits according to, the following terms :, (a) The new partner D would bring in ` 15,000 as his share in capital and ` 7,000 as goodwill in, cash which will directly be taken by the old partners., (b) Stock would be revalued at ` 34,200 and furniture at ` 6,600., (c) Provision for bad debts to be made ` 1,300., (d) Land and building to be appreciated by ` 15,000., Pass necessary Journal entries to record the above transactions., (U.S.E.B., 2009, 16), [Ans. Total of Journal ` 66,000], [Hint : Profit on Revaluation ` 9,000], 53. L, M and N were partners in a firm sharing Profits in the ratio of 3 : 2 : 1. Their Balance Sheet on, 31.3.2019 was as follows :, Balance Sheet of L, M and N as on 31.3.2019, Liabilities, Amount, Assets, Amount, `, , Creditors, General Reserve, Capitals :, L, M, N, , 1,68,000 Bank, 42,000 Debtors, `, Stock, 1,20,000, Investment, 80,000, Furniture, 40,000 2,40,000 Machinery, 4,50,000, , `, , 34,000, 46,000, 2,20,000, 60,000, 20,000, 70,000, 4,50,000, , On the above date O was admitted as a new partner and it was decided that :, (i) The new profit sharing ratio between L, M, N and O will be 2 : 2 : 1 : 1., , 303
Page 318 :
SBPD Pub li ca tions Accountancy (XII), (ii) Goodwill of the firm was valued at ` 1,80,000 and O brought his share of goodwill premium, in cash., (iii) The market value of investment was ` 36,000., (iv) Machinery will be reduced by to ` 58,000., (v) A creditor of ` 6,000 was not likely to claim the amount and hence was to be written off., (vi) O will bring proportionate capital so as to give him 1/6th share in the profits of the firm., Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the New Firm., [Ans. Realisation A/c Loss ` 30,000; Capital A/c Balance : L ` 1,56,000, M ` 84,000,, N ` 42,000, O ` 56,400; Balance Sheet Total : ` 5,00,400], (C.B.S.E., 2016), [Hint : L’s Sacrifice 1/6, Hence the will get goodwill.], 54. A and B are partners in a firm. They share profit and loss in the ratio of 3 : 2. C is admitted as a, new partner. A surrendered 1/5 share of his profit and B 1/8 share of his profit in favour of C., Find out new profit sharing ratios of all the partners., (U.S.E.B., 2019), [Ans. New Ratio 48 : 35 : 17], 55. Sanjana and Alok were partners in a firm sharing profit and losses in the ratio 3 : 2. On 31st, March, 2018 their Balance Sheet was as follows :, , Bal ance Sheet of Sanjana and Alok, (as on 31-3-2018), Liabilities, , Amount, , Assets, , `, , Creditors, Workmen's Compensation, Fund, Capitals :, `, Sanjana, 5,00,000, Alok, 4,00,000, , 60,000 Cash, `, Debtors, 1,46,000, 60,000 Less : Provision of Doubtful Debts, 2,000, Stock, 9,00,000 Investments, Furniture, 10,20,000, , Amount, `, , 1,66,000, , 1,44,000, 1,50,000, 2,60,000, 3,00,000, 10,20,000, , On 1st April, 2018, they admitted Nidhi as a new partner for 1/4th share in the profits on the, following terms :, (a) Goodwill of the firm was valued at ` 4,00,000 and Nidhi brought the necessary amount in, cash for her share of goodwill for premium, half of which was withdrawn by the old, partners., (b) Stock was to be increased by 20% and furniture was to be reduced to 90%., (c) Investments were to be valued at ` 3,00,000. Alok took over investments at this value., (d) Nidhi brought ` 3,00,000 as her capital and the capitals of Sanjana and Alok were adjusted, in the new profit sharing ratio., Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the, reconstituted firm on Nidhi's admission., [Ans. Revaluation Profit ` 40,000, Capital Balances : Sanjana ` 5,40,000 Alok ` 3,60,000, Nidhi ` 3,00,000 Balance Sheet Total ` 12,60,000], , l, , 304
Page 319 :
6, RETIREMENT OF A PARTNER, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 6.1 Meaning of Retirement of a Partner, , 306, , 6.2 Adjustments at the time of Retirement of a Partner, , 306, , l Change in Profit-sharing Ratio l Accounting Treatment of Goodwill, (As per AS-26) l Revaluation of Assets and Liabilities l A c c u m u l a t e d, Profits/ Losses and Reserves l Calculation of Total Amount Payable to, Retiring Partner l Settlement of the Total Amount Payable to Retiring, Partner l Adjustment of Capitals, 6.3 Fast Revision, , 350, , ❑ Useful Questions, , 351, , ❑ Practical Problems, , 353, , 305
Page 320 :
SBPD Publications Accountancy (XII), , 6.1 Meaning of Retirement of a Partner, ❏ Meaning, A partner has the right of retiring from the firm by giving suitable notice. When a, partner severes (breaks off or cuts off) his relationship from the partnership and settles his, account and leaves the firm, he is said to have retired from the business., ❏ Modes or Ways of Retirement, According to the provisions of Section 32 of the Indian Partnership Act, 1932 a, partner may retire :, Reconstitution of Partnership : Retirement/Death of a Partner, (i) with the consent of all the other partners;, (ii) by the virtue of an express agreement between the partners; or, (iii) in the case of a partnership at will, by giving notice in writing to all other, partners of his intention to retire., ❏ Position of Retiring Partner, The liability of a retiring partner may be discussed as under :, (1) A retiring partner remains liable to the creditors for the acts of the firm done, before and upto the date of his retirement. The retiring partner is also liable to third, parties for all transactions of the firm begun but unfinished at the time of his retirement., (2) A retiring partner remains liable to third parties for the act of the firm done after, his retirement until a public notice of his retirement is given., The rights of a retiring partner are as follows :, (i) An outgoing partner may carry on a business competing with that of the firm, but he must not use the firm name, must not represent that he is carrying on, the business of the firm and must not solicit the customers of the firm., (ii) If on retirment, the accounts of the firm are not settled and the outgoing, partner is not paid his dues, he is entitled to a share in the profits even after his, retirement or interest at the rate of 6% on the amount of his share in the firm., ❏ Effects of Retirement of a Partner, The following are the effects of retirement of a Partner :, 1. The retirement of a partner will terminate the old partnership and a new, partnership comes into existence., 2. The combined shares of the remaining Partners is increased. Infact their profitsharing ratio changes., 3. Accumulated Profits and Losses and Reserves are distributed among all the, partners., 4. The assets and liabilities are revalued and proper adjustments are to be made., 5. The goodwill of the firm has to be valued and retiring partner’s share of, goodwill has to be adjusted., 6. The claim of the retiring partner is to be determined., 7. Due to payment of the claim of the retiring partner, assets of the firm are, reduced. And if the claim is not met from the firm’s resources, loan has to be, arranged to pay off the claim. In such a situation, the liability of the new firm, gets increased., , 6.2 Adjustments at the time of Retirement of a Partner, On the retirement of a partner, there is a change in the relations of the partners and, reconstitution of the partnership firm takes place. An existing partner leaves the firm and, remaining partners continue in the firm under the fresh agreement. Following are the, various matters that need adjustment at the time of retirement of a partner :, (1) Change in Profit-sharing Ratio., , 306
Page 321 :
Retirement of a Partner, (2) Accounting Treatment of Goodwill as per AS-26., (3) Revaluation of Assets and Liabilities., (4) Distribution of Accumulated Profits (Reserve) and Losses., (5) Joint Life (Insurance) Policy., (6) Calculation of Total Amount Payable to Retiring Partner., (7) Settlement of the Total Amount Payable to Retiring Partner., (8) Adjustment of Capitals., ❏ 6.2.1 Change in Profit-sharing Ratio, Change in Profit-sharing Ratio, , New Profit, Sharing Ratio, , Gaining Ratio, , New Profit-sharing Ratio, When a partner retires, the remaining partners gain some portion of the retiring, partner's share of profit. This would change the remaining partners' share in profits., Hence, the calculation of new profit-sharing ratio is necessary. New profit-sharing ratio is, the ratio in which remaining partners will share the future profits and losses. New profitsharing ratio depends on how remaining partners acquire retiring partner's share of profit., ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., 1(A), (B) to 3(A),, (B), (C), 4 to 6, 7(A), (B), 8 to 12, 13(A), (B), 14(A), 14(B), 14(C), 15, 16(A),(B) 17, 18 to 21, 22(A), 22(B), 23 to 29, 30 to 32, 32, , Details, New Profit-sharing Ratio, Gaining Ratio, New Ratio and Gaining Ratio, Accounting Treatment of Goodwill, Revaluation of Assets and Liabilities/Revaluation A/c, Distribution of Accumulated Profits (Reserves) and Losses, Journal & Revaluation A/c, Revaluation A/c, Partner’s Capital A/cs, Revaluation A/c, Partner’s Capital A/cs & Balance Sheet, Retiring Partner’s Loan Account, Adjustment of Capital Accounts, Miscellaneous and Boards' Questions, Total, , Practical Problem No., 1 to 3, 4 to 8, 9(A), 9(B), 10(A) to 15, 16 to 18, 19(A), 19(B), 20, 21, 22 to 27, 28 to 31, 32 to 34, 35 to 40, 41 to 44, 44, , ❏ Calculation of New Profit-sharing Ratio, Following are the various possibilities of calculating new profit-sharing ratio :, Case (1) : When nothing is mentioned about the new ratio or gaining ratio, between the remaining partners : When nothing is mentioned about the new ratio or, gaining ratio, it is presumed that remaining partners continue to share profits as between, themselves in the old ratio. It means that remaining partners acquire retiring partner's, share in their old profit-sharing ratio and mutual profit-sharing ratio of remaining, partners will not change. In the absence of an agreement, old ratio would continue to be, the future ratio of remaining partners., , 307
Page 322 :
SBPD Publications Accountancy (XII), ❏ Short Answer Type Questions, Calculate New Profit-sharing Ratio, Illustration 1(A), A, B and C are three partners in a firm sharing profits and losses in the ratio of, 5 : 4 : 1. You are required to calculate the new profit-sharing ratios when : (i) A retires,, (ii) B retires, (iii) C retires., Solution, Old Ratio of A, B and C = 5 : 4 : 1, (i) If A retires, New Ratio of B and C = 4 : 1 (x : 4 : 1), (ii) If B retires, New Ratio of A and C = 5 : 1 (5 : x : 1), (iii) If C retires, New Ratio of A and B = 5 : 4 (5 : 4 : x), If ratio is given in fraction, first change it into integer., Write down the ratio of all partners and strike out or eliminate the ratio of outgoing, partner. The remaining figures will indicate new ratio of the continuing partner., Illustration 1(B), 1 2, 7, X, Y and Z were partners sharing profits in the ratio of , and, . Z retires from, 4 5, 20, the firm. Calculate the new profit-sharing ratio., Solution, 1 2 7, 5, 8, 7, Old Ratio of X, Y and Z = : :, =, :, :, = 5:8:7, 4 5 20, 20 20 20, If Z retires, New Ratio of X and Y = 5 : 8, Case (2) : When only one partner acquires entire share of profit of retiring, partner : Sometimes entire share of profit of retiring partner is acquired by one of the, partners. In such a case the profit-sharing ratio of the partner who acquires the retiring, partner's share, would be affected. The profit-sharing ratio of all other remaining partners, would continue to be the same. The new profit-sharing ratio of the gaining partner would, be ascertained by adding the gain from retiring partner to his old ratio. Thus,, New Ratio = Old Ratio + Gaining Ratio, Illustration 2(A), P, Q and R are partners sharing profits and losses in the ratio of 3 : 2 : 1. R retires, selling his share to Q. Calculate new profit-sharing ratio., Solution, New Share = Old Share + Acquired Share, 3, 3, Old Share of P = , New Share of P = (No Change), 6, 6, 2, 2 1, 3, Old Share of Q = , New Share of Q = + (From R) =, 6, 6 6, 6, 3 3, New Ratio of P and Q = : = 1 : 1, 6 6, Illustration 2(B), A, B and C are partners sharing profits and losses in the ratio 2 : 3 : 5. C wants to retire, and A agrees to purchase C's share of profit. Calculate new profit-sharing ratio., Solution, New Share = Old Share + Acquired Share, 2, 2, 5, 7, Old Share of A =, , New Share of A =, +, =, 10, 10 10 10, , 308
Page 323 :
Retirement of a Partner, 3, 10, 7, 3, New Share of A and B =, :, =7 :3, 10 10, Case (3) : When remaining partners acquire or purchase the share of, retiring partner in a specific ratio : When the remaining partners acquire or purchase, retiring partner's share of profit in a specific ratio, share taken by remaining partners is added, to the old share of remaining partners respectively to ascertain new profit-sharing ratio., B’s Old and New Share =, , New Share = Old Share + Acquired Share or Gaining Share, Illustration 3(A), A, B and C are partners in a firm sharing profits in the ratio of 5 : 4 : 3. B retired and, his share was divided equally between A and C. Calculate the new profit-sharing ratio of A, and C., Solution, 4, B’s Share =, and A and C took equally from B,, 12, i.e., in the ratio of 1 : 1, 1, 4, 2, 1, 4, 2, A’s Gain =, of, = , C’s Gain = =, of, =, 2, 12 12, 2, 12 12, New Share = Old Ratio + Acquired Share or Gain, 5, 2, 7, 3, 2, 5, Hence,, A’s New Share =, +, = , C’s New Share =, +, =, 12 12 12, 12 12 12, 7, 5, Thus, New Ratio of A and C is, :, or 7 : 5, 12 12, Illustration 3(B), Anubha, Bharti and Bhawna are partners sharing profits in the ratio of 1/2, 3/10, and 2/10 respectively. Bharti retires and her share is taken up by Anubha and Bhawna in, the ratio of 2 : 1. Find out the new profit-sharing ratio., Solution, Anubha, :, Bharti, :, Bhawna, 1, 2, , :, , 3, 10, , :, , 2, 10, , 2, 3, of, 3, 10, , 1, 3, of, 3 10, 2, 3, 6, Anubha's Gain from Bharti = ´, =, 3 10 30, 1, 3, 3, Bhawna's Gain from Bharti = ´, =, 3 10 30, New Ratio = Old Ratio + Acquired Ratio or Gaining Ratio, 1, 6, 15 + 6, 21, Anubha's New Ratio = +, =, =, 2 30, 30, 30, 2, 3, 6+3, 9, Bhawna's New Ratio =, +, =, =, 10, 30, 30, 30, , 309
Page 324 :
SBPD Publications Accountancy (XII), \ New Profit-sharing Ratio of Anubha and Bhawna, 21 9, =, :, or 21 : 9 = 7 : 3, 30 30, Illustration 3(C), 1 3, 1, , and, respectively., 2 8, 8, B retires selling his share of profits to A and C for ` 45,000 out of which ` 20,000 being, paid by A and ` 25,000 being paid by C. Calculate new profit-sharing ratio., A, B and C are partners sharing profits in the ratio of, , Solution, A and C will acquire share of profit from B in the ratio of money paid by them to him., It means that B's share is taken up by A and C in the ratio of ` 20,000 and ` 25,000 i.e., 4 : 5., Old Ratio of A, B and C, 1 3 1 4 3 1, = : : = : :, 2 8 8 8 8 8, 3 4 12, A's Gain from B = ´ =, 8 9 72, 4 12 48, A's New Ratio = +, =, 8 72 72, , 3 5 15, C's Gain from B = ´ =, 8 9 72, 1 15 24, C's New Ratio = +, =, 8 72 72, 48 24, A's and C's New Ratio =, :, =2 :1, 72 72, Gaining Ratio, When a partner retires, remaining partners acquire the retiring partner's share., This increases the old partner's share in profits. This increase is known as gain enjoyed by, the old partners. The ratio in which the old partners acquire retiring partner's share of, profit is called the gaining ratio. Thus,, Gaining Ratio = New Ratio – Old Ratio., It is necessary to calculate the gaining ratio because the amount of compensation for, goodwill is to be paid by remaining partners to retiring partner in their gaining ratio., Following are the various possibilities of calculating gaining ratio :, Case : (1) When New Profit-sharing Ratios are given : When old profit-sharing, ratio and new profit-sharing ratio of partners are given, gaining ratio will be calculated as under :, Gaining Ratio = New Ratio – Old Ratio., Illustration 4 (Calculation of Gaining Ratio), A, B and C are equal partners in firm. B retires and the remaining partners decide to share, profits of the new firm in the ratio of 5 : 4. Calculate the gaining ratio., Solution, Gaining Ratio = New Ratio – Old Ratio, 5 1 5-3, 2, A's Gain = - =, =, 9 3, 9, 9, 4 1 4 -3 1, C's Gain = - =, =, 9, 3, 9, 9, 2 1, Thus, Gaining Ratio between A and C = : = 2 : 1, 9 9, Case : (2) When nothing is mentioned about the new ratio : When nothing is, mentioned about the new ratio, it is presumed that remaining partners acquire retiring, partner's share in their old ratio. Hence, old ratio would be the gaining ratio., Case : (3) When gain earned by the partners is given : No need of calculation of, ratio such condition., , 310
Page 325 :
Retirement of a Partner, Illustration 5, , 1 2, 7, : and . C retires and his, 4 5, 20, share is taken up by A and B in the ratio of 1 : 2. Calculate the gaining ratio., Solution, 7 1 7, Gain of A = ´ =, 20 3 60, 7 2 14, Gain of B = ´ =, 20 3 60, 7 14, Gaining Ratio of A and B =, :, = 7 : 14 = 1 : 2, 60 60, Illustration 6, R, S and T are partners sharing profits in the ratio of 8 : 4 : 3. R retires from the firm., Calculate gaining ratio in the following cases, if :, (a) R's share is taken equally by S and T., (b) R's share is taken in the ratio of 5 : 3 by S and T., (c) R's share is taken in the ratio of 3 : 1 by S and T., Solution, 1 8, 8, 1 8, 8, (a), Gain of S = ´, = ; Gain of T = ´, =, 2 15 30, 2 15 30, 8, 8, Gaining Ratio of S and T =, :, =1 : 1, 30 30, 5 8, 40, 3 8, 24, (b), Gain of S = ´, =, , Gain of T = ´, =, 8 15 120, 8 15 120, 40 24, Gaining Ratio of S and T =, :, =5:3, 120 120, 3 8, 24, 1 8, 8, (c), Gain of S = ´, = , Gain of T = ´, =, 4 15 60, 4 15 60, 24 8, Gaining Ratio of S and T =, :, =3 :1, 60 60, Illustration 7(A) (Calculation of New Ratio and Gaining Ratio), L, M and N are partners sharing profits and losses in the ratio of 5 : 2 : 2. N retires, from the firm and surrenders 2/3 of his share in favour of L and 1/3 in favour of M., Calculate new ratio and gaining ratio., Solution, Calculation of New Profit-sharing Ratio :, 2 1, N’s Share (2/9) will be divided between L and M in the ratio of, :, 3 3, 2, 2, 4, L’s Gain = of =, 3, 9, 27, 1, 2, 2, M’s Gain = of =, 3, 9, 27, New Share = Old Share + Gaining Share, 5, 4, 15 + 4, 19, L’s New Share = +, =, =, 9 27, 27, 27, 2, 2, 6+ 2, 8, M’s New Share = +, =, =, 9 27, 27, 27, 19 8, New Ratio of L, M and N=, :, or 19 : 8, 27 27, A, B and C are partners sharing profits in the ratio of, , 311
Page 326 :
SBPD Publications Accountancy (XII), Illustration 7(B) (Calculation of New Profit-sharing Ratio and Entries for Sale, of Share and Distribution of Profits), X, Y and Z are partners sharing profits and losses in the ratio of 2 : 3 : 1. At the, beginning of the year X retires after selling his share to Y and Z for ` 1,60,000 out of which, ` 60,000 being paid by Y and ` 1,00,000 by Z. The profit of the firm for the year after X’s, retirement is ` 2,40,000., Calculate the new profit and loss sharing ratio and pass entries for sale of share and, distribution of profit., Solution, 2 3 1, Old Profit-sharing Ratio of X, Y and Z = 2 : 3 : 1 or : : ., 6 6 6, æ 2ö, X retires. His share çç ÷÷÷ is taken by Y and Z in the ratio of 60,000 : 1,00,000, i.e., 3 : 5., çè6 ÷ø, 2 3 1, \, Y receives from X = ´ =, 6 8 8, 2 5, 5, Z receives from X = ´ =, 6 8 24, Hence, New Profit and Loss Sharing Ratio of Y and Z, = Old Ratio + Gain, 3 1 12 + 3 15, \, Y’s New Share = + =, =, 6, 8, 24, 24, 4+ 5 9, 1, 5, Z’s New Share = +, =, =, 6, 24, 24, 24, 15 9, \, New Ratio =, :, or 15 : 9 or 5 : 3, 24 24, Journal Entries, Date, , Dr., , Particulars, Y’s Capital A/c, Z’s Capital A/c, To X’s Capital A/c, , L.F., , `, , Dr., Dr., , 60,000, 1,00,000, , Dr., , 2,40,000, , Cr., `, , 1,60,000, , (Being sale of X’s share to Y and Z), , Profit and Loss Appropriation A/c, To Y’s Capital A/c, To Z’s Capital A/c, , 1,50,000, 90,000, , (Being amount of profit distributed in the new ratio), , DIFFERENCE BETWEEN SACRIFICING RATIO AND GAINING RATIO, Basis of, Difference, 1. Meaning, 2. When, Calculated, 3. Object, , 4. Effect on, Capital, , 312, , Sacrificing Ratio, , Gaining Ratio, , It is the ratio in which the old partners, surrender their share of profit in favour, of the new partner., It is calculated at the time of admission, of a new partner., The purpose of calculating sacrificing, ratio is to calculate the share of goodwill, payable to old partners at the time of, admission of a partner., Old Partners' Capital Accounts increase, with the amount received as goodwill., New partner losses., , It is the ratio in which the remaining, partners share the retiring partner's, share of profit., It is calculated at the time of retirement, or death of a partner., The purpose of calculating gaining ratio, is to calculate the share of goodwill, payable to the retiring partner by each of, the remaining partners., Retiring partner is paid for goodwill and, the remaining partners' capital reduces.
Page 327 :
Retirement of a Partner, 5. Method of, Calculation, 6. Accounting, Treatment, , It is calculated by deducting new ratio It is calculated by deducting old ratio, from the old ratio., from the new ratio., New Partner's Capital A/c, Dr. Remaining Partners' Capital A/cs Dr., To Old Partners' Capital A/c, To Retiring Partner's Capital A/c, (In sacrificing ratio), , (In gaining ratio), , ❏ 6.2.2 Accounting Treatment of Goodwill (As per AS-26), Step 1 : Finding out the share of Outgoing Partner in Goodwill, When a partner retires, remaining partners acquire retiring partner's share of, profit. For this gain, remaining partners are required to compensate the retiring partner, in the form of goodwill. Goodwill is valued in accordance with the provisions of partnership, deed. The central idea of treatment of goodwill at the time of retirement is that retiring, partner should gain at the cost of remaining partners., Accounting Standard-10 and 26/New Indian AS-38, ● AS-10 issued by the Institute of Chartered Accountants of India states that, goodwill is recorded only when consideration in money or kind has been paid. It, means only purchased goodwill should be recorded in the books., ● AS-26/Indian AS-38 which relates to ‘Intangible Assets’ also states that, self-generated or internally generated goodwill should not be recognised as an asset, as it is not an identifiable resource that can be measured reliably at cost., ● Following AS-26/New Indian AS-38 goodwill should not be raised in the books of, accounts at the time of admission/retirement/death as no consideration has come in, cash. However, the value of goodwill should be adjusted through Partners’ Capital, Accounts (or Current Accounts)., ● AS-26 are mandatory in nature and must be followed strictly., The accounting treatment of goodwill depends upon the two broader situations viz.,, whether or not goodwill already appears in the books of the firm., Accounting Treatment of Goodwill, , When Goodwill is not appearing, When Goodwill is appearing, in the books, in the books, (See Illustration 8 and 9), (See Illustration 10), The following points may be noted in the context of treatment of goodwill on, retirement of a partner :, 1. The goodwill may be valued as per agreement among the partners. Once the value of, goodwill is determined, the retiring partner will be credited for his share of goodwill and the, continuing partners will be debited in Gaining Ratio with the same amount. This will, compensate the retiring partner. Thus retiring partner's share in the value of goodwill can, be adjusted through Capital Accounts without raising Goodwill Account., 2. It may also be noted that if any of the continuing partner has sacrificed and has, suffered a reduction in his share of profits, his Capital Account will also be credited, alongwith the retiring partner's account with his proportion of sacrifice. In such a case too,, other continuing partner's capital accounts will be debited., Journal Entries :, For Adjustment through Capital Accounts :, Gaining/Continuing Partners' Capital/Current A/c Dr. (In Gaining Ratio), To Retiring Partner's Capital A/c, (Share in Goodwill), To Other Sacrificing Partner's Capital A/c, (Who has sacrificed), (Being retiring partner and other sacrificing Partners', Capital A/cs credited), , 313
Page 328 :
SBPD Publications Accountancy (XII), Step 2 : Write off the Goodwill, if any, appearing in the Books on, Retirement/Death in their old Profit-sharing Ratio, All Partners' Capital A/cs, Dr. (In Old Ratio), To Goodwill A/c, (Value of Goodwill appe(Being Goodwill written off in old ratio), aring in the Books), Illustration 8 (Treatment of Goodwill), A, B and C are partners sharing profits in the ratio of 4 : 3 : 3. On C's retirement, the, value of the firm’s goodwill was agreed at ` 30,000. A and B agreed to share profits and, losses in future in the ratio of 7 : 3 respectively. Give necessary Journal entry in relation to, goodwill, without opening its accounts., Solution, (i), Gaining Ratio = New Ratio – Old Ratio, 7, 4, 7-4, 3, A’s Gain =, –, =, =, (Gain), 10 10, 10, 10, 3, 3, 3-3, 0, B’s Gain =, –, =, =, (No Gain), 10 10, 10, 10, 3, (ii) C’s Share of Goodwill= ` 30,000 ×, = ` 9,000, 10, Journal Entry, Dr., Cr., Date, , Particulars, A’s Capital A/c, To C’s Capital A/c, , L.F., Dr., , `, , `, , 9,000, 9,000, , (C’s share of goodwill adjusted with gaining partner, A), , Illustration 9, X, Y and Z were partners in a firm sharing profits in the ratio of 3 : 2 : 1. Z retired, and new profit-sharing ratio between X and Y was 1 : 2. On Z's retirement, the goodwill of, the firm was valued at 30,000. Pass the necessary Journal entries for the treatment of, goodwill on Z's retirement without opening the Goodwill Account., Solution, (i) Gaining Ratio = New Ratio – Old Ratio, Z’s Share 1/3, New Share of X and Y 1 : 2, 1 3 -1, X’s Gain = - =, (Sacrifice), 3 6, 6, 2 2 4-2 2, Y’s Gain = - =, = (Gain), 3 6, 6, 6, Here, Y alone is gaining, so he will compensate both Z (retiring partner) and X, (continuing partner) who are sacrificing in his (Y’s) favour., 1, (ii), Z’s Share of Goodwill = ` 30,000 ´ = ` 5,000, 6, 1, (iii), X’s Share of Goodwill = ` 30,000 ´ = ` 5,000, 6, (iv) Y must compensate Z and X = ` 5,000 + 5,000 = ` 10,000, Journal Entry, Dr., Cr., Date, , Particulars, Y’s Capital A/c (2/6th of ` 30,000), To X’s Capital A/c (1/6th of ` 30,000), To Z’s Capital A/c (1/6th of ` 30,000), , L.F., Dr., , (Amount compensated to X and Z for their sacrifice in the form of, goodwill), , 314, , `, , `, , 10,000, 5,000, 5,000
Page 329 :
Retirement of a Partner, Illustration 10(A) (Treatment of Goodwill when Goodwill is already appearing, in the Books), Lala, Vikram and Pal are partners sharing profit and loss in the ratio of 2 : 3 : 4., Goodwill is appearing in the books of then at a value of ` 36,000. Pal takes retirement. On, that day goodwill is valued at ` 63,000. No Goodwill Account is maintained in the books., Pass the necessary Journal entries for recording the treatment of goodwill., Solution, Journal Entries, Dr., Cr., Date, , Particulars, Lala’s Capital A/c, Vikram’s Capital A/c, Pal’s Capital A/c, To Goodwill A/c, , L.F., Dr., Dr., Dr., , `, , `, , 8,000, 12,000, 16,000, 36,000, , (Being the Goodwill A/c written off and debited to Partners’ Capital, A/cs in their profit-sharing ratio), , Lala’s Capital A/c, Vikram’s Capital A/c, To Pal’s Capital A/c, , Dr., Dr., , 11,200, 16,800, 28,0001, , (Being Pal’s share of goodwill adjusted in remaining partners in the, gaining ratio i.e., 2 : 3), Working Note :, 1. Value of Goodwill ` 63,000, , 4, = ` 28,000., 9, New Ratio of Lala and Vikram 2 : 3 Lala’s share ` 28,000 ´ 2/5 = ` 11,200 Vikram = ` 28,000 ´, 3/5 = ` 16,800., Pal’s Share of Goodwill = ` 63,000 ´, , Illustration 10(B) (When Goodwill already appears in the Books), Jyoti, Shruti and Ruchi are partners sharing profits in the ratio of 4 : 3 : 1. Jyoti, retires. The goodwill of the firm is valued at 2 years’ purchase of average super profits of, last 3 years. The profit for the last 3 year are ` 55,000, ` 60,000 and ` 65,000 respectively., The normal profit for the similar firm are ` 40,000. Goodwill already appears in the books, at ` 32,000. Give necessary Journal entries., Solution, Working Note, 1. Calculation of Goodwill :, 55, 000 + 60, 000 + 65, 000, Average Profit =, = ` 60,000, 3, Super Profit = Average Profit – Normal Profit, = ` 60,000 – 40,000 = ` 20,000, Goodwill = Super Profit × No. of years’ Purchase, = ` 20,000 × 2 = ` 40,000, 4, Jyoti’s Share of Goodwill = ` 40,000 ´ = ` 20,000, 8, , Journal Entries, Date, , Particulars, Jyoti’s Capital A/c, Shruti’s Capital A/c, Ruchi’s Capital A/c, To Goodwill A/c, , L.F., Dr., Dr., Dr., , Dr., , Cr., , `, , `, , 16,000, 12,000, 4,000, 32,000, , (Goodwill written off in old ratio 4 : 3 : 1), , 315
Page 330 :
SBPD Publications Accountancy (XII), Shruti’s Capital A/c, Ruchi’s Capital A/c, To Jyoti’s Capital A/c, , Dr., Dr., , 15,000, 5,000, 20,000, , (Jyoti’s share of goodwill adjusted through Capital A/cs in the ratio of, 3 : 1), , Illustration 11 (When Goodwill already appears in the Books), H, P and S are partners sharing profits in the ratio of 3 : 2 : 1. Goodwill is appearing, in the books at a value of ` 60,000. P retires and at the time of P’s retirement, goodwill is, valued at ` 84,000. H and S decided to share profits in the ratio of 2 : 1. Record the, necessary Journal entries., Solution, In the Books of H, P and S, Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , H’s Capital A/c, P’s Capital A/c, S’s Capital A/c, To Goodwill A/c, , Dr., Dr., Dr., , Amount, `, , 30,000, 20,000, 10,000, 60,000, , (Being existing goodwill written off by all partners in their profitsharing ratio i.e., 3 : 2 : 1), , H’s Capital A/c, S’s Capital A/c, To P’s Capital A/c, , Dr., Dr., , 14,000, 14,000, 28,000, , (Being P’s share of goodwill debited to H and S’s Capital A/cs in their, gaining ratio i.e., equally), Working Note :, Calculation of Gaining Ratio :, Old Ratio of H : P : S = 3 : 2 : 1 or 3/6 : 2/6 : 1/6, New Ratio of H and S = 2 : 1 or 2/3 : 1/3, Gaining Ratio = New Ratio – Old Ratio, 2 3 4–3 1, H’s Gain =, – =, =, 3 6, 6, 6, 1 1 2–1 1, S’s Gain =, – =, =, 3 6, 6, 6, 2, \, Gaining Ratio = ` 84,000 × = ` 28,000, 6, , ❏ Hidden Goodwill, When a firm decides to pay off outgoing/retiring partner with more than that is due, to him (after making all adjustments), the excess being paid is actually the share of, goodwill due to him. This is in fact payment for hidden goodwill. For example, Amit, Bimal, and Chandan are partners. Bimal retires. Total amount payable to Bimal in respect of his, capital balance, share in reserve, profit on revaluation stands at ` 2,50,000. But the firm, decides to pay him ` 3,00,000. Thus, balance of ` 50,000 ( ` 3,00,000 – 2,50,000) is the, amount paid for his share of goodwill., Illustration 12 (Hidden Goodwill), S, T and R partners sharing profits in the ratio of 3 : 2 : 3. R retires and his capital,, after making of adjustments for reserves and profits on revaluation stands at ` 2,40,000. S, and T decided to pay ` 3,00,000 in full settlement of his claim., Pass necessary Journal entry for the settlement of goodwill if the new profit-sharing, ratio is 5 : 3., , 316
Page 331 :
Retirement of a Partner, Solution, (i) Calculation of Hidden Goodwill :, Amount decided to be paid in full settlement, Less : R’s Capital (after all adjustments), , `, , 3,00,000, 2,40,000, Hidden Goodwill 60,000, , (ii) Calculation of Gaining Ratio :, Gain of a Partner = New Share – Old Share, 5 3 2, 3 2 1, 2 1, S’s Gain = - = , T’s Gain = - = Gaining Ratio = : or 2 : 1, 8 8 8, 8 8 8, 8 8, Journal Entry, Dr., Cr., Date, , Particulars, , L.F., , S’s Capital A/c, T’s Capital A/c, To R’s Capital A/c, , Dr., Dr., , `, , `, , 40,000, 20,000, 60,000, , (Being R’s share of goodwill adjusted in gaining ratio of S and, T, i.e., 2 : 1), , ❏ 6.2.3 Revaluation of Assets and Liabilities, On retirement of a partner, the assets and liabilities are revalued. On revaluation it, is necessary to keep in mind the provisions mentioned in the Partnership Deed. For the, purpose of revaluation, Revaluation Account or Profit & Loss Adjustment Account is, prepared in the same manner as it is prepared at the time of admission of a partner. The, only difference is that while at the time of admission the profit or loss arising on, revaluation is distributed only among old partners, on retirement such profit or loss is, distributed among all the partners (both continuing and retiring partners) in their profitsharing ratio., Assets and liabilities are shown at their new value, i.e., adjusted value in, the new Balance Sheet., Journal Entries, Revaluation, , Effect, , 1. Increase in Value of Asset, Revised Value – Book Value, , Profit, , 2. Decrease in Value of Asset/, Dep. on Asset, Book Value – Revised Value, Asset ´ Rate of Dep., Dep. =, 100, 3. On increase in Liabilities, Revised Value – Book Value, , Loss, , 4. On decrease in Liabilities, Book Value – Revised Value, , Profit, , 5. For recording unrecorded Asset, , Profit, , Journal Entries, Particular Asset A/c, To Revaluation A/c, , Dr., , (Being increase in value of asset recorded), , Revaluation A/c, To Particular Asset A/c, , Dr., , (Being decrease in the value of asset recorded), , Loss, , Revaluation A/c, To Particular Liability A/c, , Dr., , (Being increase in liabilities recorded), , Particular Liability A/c, To Revaluation A/c, , Dr., , (Being decrease in liabilities recorded), , Unrecord Asset A/c, To Revaluation A/c, , Dr., , (Being unrecorded asset recorded), , 317
Page 332 :
SBPD Publications Accountancy (XII), 6. For recording unrecorded, Liability, , Loss, , Revaluation A/c, To Unrecorded Liability A/c, , Dr., , (Being unrecorded liability recorded), , 7. For Profit on Revaluation, If Total of Credit side of revaluation, A/c is greater than Total of Debit, side, 8. For Loss on Revaluation, If Total of Debit side of Revaluation, A/c is greater than Total of Credit, side, , Profit, , Revaluation A/c, To All Partners’ Capital A/cs, , Dr., , (Being distribution of profit on revaluation), (In old ratio), , Loss, , Partners’ Capital A/cs, To Revaluation A/c, , Dr., , (Being distribution of loss on revaluation A/c), (In old ratio), , Illustration 13(A) (Revaluation of Assets and Liabilities), Rohan, Chandan and Kundan are partners sharing profits in the ratio of 3 : 1 : 1., Rohan retires from the firm. On the date of his retirement Plant & Machinery which stood, in the books at ` 1,00,000 was valued at ` 80,000, Debtors at ` 2,000 less than the book, value of ` 20,000 and Building of ` 1,00,000 was valued at ` 1,25,000. A provision of ` 500, was made for outstanding expenses., Pass the necessary Journal entries for the above and prepare Revaluation Account., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , Revaluation A/c, To Plant & Machinery A/c, To Debtors A/c, , Dr., , 22,000, , Revaluation A/c, To Provision for Outstanding Expenses A/c, , Dr., , 500, , Building A/c, To Revaluation A/c, , Dr., , 25,000, , Revaluation A/c, To Rohan's Capital A/c, To Chandan's Capital A/c, To Kundan's Capital A/c, , Dr., , 2,500, , (Being fall in the value of plant and machinery and debtors), , (Being provision made for outstanding expenses), , (Being appreciation in the value of building), , (Being profit on revaluation credited to Partners’ Capital A/cs), , Revaluation Account, , Dr., Particulars, , Amount, , 318, , `, , 20,000, 2,000, 500, , 25,000, 1,500, 500, 500, , Cr., Particulars, , `, , To Plant & Machinery A/c, To Debtors A/c, To Provision for Outstanding, Expenses A/c, To Profit transferred to :, Rohan's Capital A/c, Chandan's Capital A/c, Kundan's Capital A/c, , Amount, , 20,000 By Building A/c, 2,000, , Amount, `, , 25,000, , 500, `, , 1,500, 500, 500, , 2,500, 25,000, , 25,000
Page 333 :
Retirement of a Partner, Illustration 13(B) (Preparation of Revaluation A/c), A, B and C are partners sharing profits and losses in the ratio of 5 : 3 : 2. Their, Balance Sheet as at 31.12.2017 was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Capitals :, A, B, C, , `, , 50,000, 40,000, 40,000, , `, , 30,000 Cash, Stock, Machinery, Patents, 1,30,000, 1,60,000, , 30,000, 40,000, 80,000, 10,000, 1,60,000, , A retired on the above date and following terms were agreed upon :, (i) Goodwill of the firm is valued at ` 50,000., (ii) Machinery is to be depreciated by 15%., (iii) Patents are valueless., (iv) Creditors to be brought down to ` 28,000., Prepare Revaluation Account., Solution, Dr., Revaluation Account, Particulars, , Amount, , Particulars, , `, , To Machinery A/c, To Patents, , Cr., Amount, `, , 12,000 By Creditors, 10,000 By Loss transferred to :, A’s Capital A/c, B’s Capital A/c, C’s Capital A/c, 22,000, , 2,000, `, , 10,000, 6,000, 4,000, , 20,000, 22,000, , ❏ 6.2.4 Accumulated Profits/Losses and Reserves, Sometimes a firm may have reserves and accumulated profits or losses on the date, of retirement of a partner. All partners including the retiring partner are entitled to share, these past profits or losses. Hence, past profits and past losses are divided among all the, partners in their profit-sharing ratio. As a result, past profits and losses are no more, shown in the new Balance Sheet., Following entries are passed to divide reserves and accumulated profits or losses :, (i) For dividing reserves and accumulated profits :, Reserve A/c, Dr., Profit & Loss A/c, Dr., To Partners' Capital A/cs, (Being Reserves and Accumulated Profits transferred to Partner’s Capital A/c), , (ii) For dividing accumulated losses :, Partners' Capital A/cs, To Profit and Loss A/c, , Dr., , (Being Accumulated losses shared by Partners in their ratio), , (iii) Alternatively, when reserves and profits are written off only with the share of, retiring partner’s share and continuing partners want to show reserves and profits in the, new Balance Sheet., General Reserve A/c, Dr. (With retiring partner’s, share), Profit & Loss A/c, Dr. (Do), To Retiring Partner’s Capital A/c, (Being retiring partner’s share of accumulated profits transferred to his Capital A/c), , 319
Page 334 :
SBPD Publications Accountancy (XII), (iv) For Distribution of Specific Reserve or Funds : If specific reserves or funds, like Workmen’s Compensation Fund, Investment Fluctuation Fund, etc. are more in value, than the actual liability or if liability does not exist, they should be distributed among all, partners (including the retiring partner) in their old profit-sharing ratio., Workmen’s Compensation Fund A/c, Dr., Investment Fluctuation Fund A/c, Dr., To All Partner’s Capital A/cs, (Being excess of funds transferred to Partners' Capital A/cs in, their old ratio), Note : Employees' Provident Fund is a liability of the firm and so it is not distributed among partners., , Illustration 14(A) (Distribution of Reserve Fund), X, Y and Z are in partnership sharing profits and losses in the ratio of 5 : 3 : 2. X retired, and Y and Z agreed to continue the business sharing profits and losses in the ratio of 3 : 2., Reserve fund showed a balance of ` 20,000. Pass the Journal entry for its distribution., Solution, Journal Entry, Dr., Cr., Date, , Particulars, , L.F., , Amount, , Amount, , `, , Reserve Fund A/c, To X's Capital A/c, To Y's Capital A/c, To Z's Capital A/c, , Dr., , 20,000, , `, , 10,000, 6,000, 4,000, , (Being transfer of Reserve Fund to Partners’ Capital A/cs in the ratio, of 5 : 3 : 2), , Illustration 14(B), A, B and C are partners sharing profits and losses in the ratio of 3 : 2 : 1. B retires, from the firm on 1st April, 2019. On the date of B’s retirement, the following balances, appeared in the books of the firm :, General Reserve ` 1,20,000; Profit and Loss Account (Dr.) ` 18,000; Workmen’s, Compensation Fund ` 12,000. There was no liability on account of Workmen’s Compensation Fund., Pass necessary Journal entries at the time of retirement., Solution, Journal Entries, Dr., Cr., Date, 2019, Apr. 1 General Reserve A/c, To A's Capital A/c, To B's Capital A/c, To C's Capital A/c, , Particulars, , L.F., , Amount, , Amount, , `, , `, , Dr., , 1,20,000, , Dr., Dr., Dr., , 9,000, 6,000, 3,000, , 60,000, 40,000, 20,000, , (Being the general reserve transferred to Capital A/cs), , A's Capital A/c, B's Capital A/c, C's Capital A/c, To Profit and Loss A/c, , 18,000, , (Being the accumulated loss transferred to Capital A/cs), , Workmen's Compensation Fund A/c, To A's Capital A/c, To B's Capital A/c, To C's Capital A/c, , Dr., , (Being distribution of workmen's compensation fund among partners), , 320, , 12,000, 6,000, 4,000, 2,000
Page 335 :
Retirement of a Partner, Illustration 14(C), Ravi, Som and Mangal are partners sharing profits and losses in the ratio of 5 : 3 : 2., Their Balance Sheet as on 1st April, 2019 were as under :, Balance Sheet, (as on 1st April, 2019), Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Profit and Loss A/c, General Reserve, Capital A/cs :, Ravi, Som, Mangal, , `, , 20,000 Current Assets, 50,000 Non-current Assets :, 30,000, Plant, Patents, , `, , 1,00,000, 80,000, 50,000, , 1,10,000, 2,00,000, 20,000, , 2,30,000, 3,30,000, , 3,30,000, , Ravi retires on the above date and it was agreed that plant be brought down to, , ` 1,80,000. Patents were valueless., , Record necessary Journal entries at the time of Ravi’s retirement., Solution, Journal Entries, Date, Particulars, 2019, Apr. 1 Profit and Loss A/c, General Reserve A/c, To Ravi's Capital A/c, To Som’s Capital A/c, To Mangal's Capital A/c, , Dr., L.F., Dr., Dr., , Cr., , Amount, , Amount, , `, , `, , 50,000, 30,000, 40,000, 24,000, 16,000, , (Being distribution of accumulated profit and general reserve), , Revaluation A/c, To Plant A/c, To Patents A/c, , Dr., , 40,000, 20,000, 20,000, , (Being decrease in assets), , Ravi's Capital A/c, Som's Capital A/c, Mangal's Capital A/c, To Revaluation A/c, , (Being transfer of loss on revaluation to Partners' Capital A/cs), , Dr., Dr., Dr., , 20,000, 12,000, 8,000, 40,000, , ❏ 6.2.5 Calculation of Total Amount Payable to Retiring Partner, On retirement a partner separates himself from a partnership firm, therefore, it is, necessary to determine as to how much amount he would get. Following items are included, in calculating the total amount to be paid to the retiring partner., Amounts to be Added, (i) Balance of his capital account and current account as reflected in the last, Balance Sheet;, (ii) His share in the undistributed or accumulated profits (shown on the liability, side of the Balance Sheet);, , 321
Page 336 :
SBPD Publications Accountancy (XII), (iii), (iv), (v), (vi), Amounts, (i), (ii), (iii), (iv), Dr., , His share in Reserves, General Reserve, Reserve Fund, etc.;, Interest on capital and salary outstanding or accrued to him;, Profit arising to him on revaluation of assets and liabilities;, If a partner is retiring in the middle of the year, then his share in profits from, the date of last Balance Sheet upto the date of retirement., to be Deducted, His share in accumulated or undistributed losses., His share in loss arising from revaluation of assets and liabilities., Loan if any, given to him by the firm., Share in Goodwill, if any, appearing in the Balance Sheet., Specimen of Retiring Partner's Capital Account, Cr., Particulars, , To Profit & Loss A/c (as per B/S) or, Undistributed Loss (Dr.), To Advertisement Suspense A/c, To Revaluation A/c (Loss), To Goodwill A/c, To Cash A/c (Paid in Cash), To Retiring Partner's Loan A/c, , Amount, `, , Particulars, , By Balance b/d (Capital as per B/S), √√ By Continuing Partners’ Capital A/cs, (Goodwill), √√, √√ By Reserve A/c, √√ By Revaluation A/c (Profit) or, P. & L. Adjustment A/c (Profit), √√, √√ By Investment Fluctuation Fund, By Profit & Loss Suspense A/c, By Profit & Loss A/c (Cr.), , Amount, `, , √√, √√, √√, √√, √√, √√, √√, , ❏ 6.2.6 Settlement of the Total Amount Payable to Retiring Partner, Either of the following methods can be followed for payment of the amount due to, the retiring partner :, (1) Payment of Full Amount in Lump-sum, (2) Payment in Instalments, (1) Payment of Full Amount in Lump-sum : (i) If the firm possesses sufficient, amount of cash, then full amount of claim can be paid to the retiring partner on the date of, retirement itself., Journal Entry :, Retiring Partner's Capital A/c, Dr., To Cash A/c, (ii) Sometimes bank loan is obtained to pay off the amount due to the retiring partner., Journal Entries :, (a) To obtain loan from bank :, Bank or Cash A/c, Dr., To Bank Loan A/c, (b) For making payment to retiring partner on obtaining loan :, Retiring Partner's Capital A/c, Dr., To Bank or Cash A/c, Note : Bank loan will be shown on the liabilities side of the Balance Sheet., , ❏ By Transferring Capital Balance into Retiring Partner's Loan Account :, When nothing is mentioned, for closing the Capital Account of the retiring partner,, and the firm does not have sufficient amount to pay off the balance in his account, then his, balance is transferred to his Loan Account., , 322
Page 337 :
Retirement of a Partner, Journal Entry :, Retiring Partner's Capital A/c, Dr., To Retiring Partner's Loan A/c, Payment partly in Cash and partly by transferring to Loan Account :, Sometimes amount due to the retiring partner is partly paid in cash and balance is, transferred to his Loan A/c. On which interest will be paid as per agreement or @ 6% p.a. in, the absence of partnership deed., Journal Entry :, Retiring Partner's Capital A/c, Dr., To Cash A/c, To Retiring Partner's Loan A/c, (2) Payment in Instalments : When the amount payable to the retiring partner is, substantial and enough cash/bank balance is not there, the amount may be paid in, instalments. The number of instalments, rate of interest, the time and amount of each, instalment is decided by the partners mutually as there is no provision in the partnership, deed in this respect. Under such a situation, interest is calculated on unpaid amount, outstanding amount and is credited to Retiring Partner's Loan Account. Now this interest, amount is paid along with the agreed amount of instalment., Journal Entries, 1. For transferring amount due to retiring Retiring Partner’s Capital A/c, Partner's Loan A/c :, To Retiring Partner's Loan A/c, 2. For Interest on Balance of Loan Amount Interest A/c, To Retiring Partner's Loan A/c, or Balance due :, 3. For Payment of Instalment Amount, Retiring Partner's Loan A/c, To Cash or Bank A/c, along with Interest (i.e. Instalment, Amount + Interest) :, 4. For transfer of Amount of Interest to, Profit & Loss A/c, Profit & Loss Account :, To Interest A/c, , Dr., Dr., Dr., , Dr., , Notes : 1. Interest will be calculated for the period until when the loan is not fully paid., 2. On the payment of instalments the amount of loan goes on decreasing and therefore, interest also, decreases., 3. On the payment of last instalment both sides of the Loan Account will be equal and the Loan Account, will be closed., , Payment to the Retiring Partner, l The amount due to retiring partner is paid off according to the agreement between, the partners., l In the absence of any agreement, provision of Section 37 of the Indian Partnership Act, is followed in respect of interest on loan or share in profit., l According to Sec. 37 the outgoing partner has the option either to claim interest on, the amount of his share in the property of the firm @ 6% per annum or to such a share, of the subsequent profits as may be attributable to the use of his share of the property, of the firm., ❏ Payment by Way of an Annuity, Annuity means an annual payment. The continuing partners may agree to settle the, claim of the retiring partner by paying him a fixed annual sum called an annuity as long as, the retiring partner lives or say, the widow of the deceased partner lives. Under this method :, ✪ The total amount payable to the retiring partner (i.e., Annuitant) is transferred to an, ‘‘Annuity Suspense Account’’., , 323
Page 338 :
SBPD Publications Accountancy (XII), ✪ Annuity Suspense Account is credited with interest at a fixed rate p.a. on the unpaid, balance., ✪ When annual payment is made, Annuity Suspense Account is debited., ✪ The balance is Annuity Suspense Account is treated as a liability and shown in the, Balance Sheet., ✪ In the event of the retiring partner dying before this amount is exhausted, the, balance of Annuity Suspense Account is treated as profit and transferred to the, Continuing Partner’s Capital Accounts in their profit-sharing ratio., ✪ If the credit balance of the Annuity Suspense Account is exhausted and the retiring, partner continue to live, the payments made in future will be treated as loss and, debited to Profit and Loss Account., Journal Entries, 1. For transferring of total amount payable to, Annuity Suspense A/c, , Retiring Partner’s Capital A/c, To Annuity Suspense A/c, , Dr., , (For amount payable to retiring partner transferred, to Annuity Suspense A/c), , 2. For Interest on unpaid balance, , Interest A/c, To Annuity Suspense A/c, , Dr., , (For interest credited to Annuity Suspense A/c on, unpaid balance), , 3. For Annuity Payment, , Annuity Suspense A/c, To Cash/Bank A/c, , Dr., , (For amount of annuity paid), , 4. For transferring balance of Annuity Suspense Annuity Suspense A/c, A/c, if the retiring partner dies before this, To Continuing Partner’s Capital A/c, amount is exhausted, (in profit-sharing ratio), , Dr., , (For transferring of balance of Annuity Suspense A/c, to Continuing Partners’ Capital A/cs in their, profit-sharing ratio), , ❏ Long Answer Type Questions, Journal Entries and Revaluation Account, Illustration 15, Mitali, Indu and Geeta are partners sharing profits and losses in the ratio of 5 : 3 : 2, respectively. On March 31, 2019, their Balance Sheet was as under :, Liabilities and Liabilities, , Amount, , Assets and Properties, , `, , Sundry Creditors, Reserve Fund, Capital A/cs :, Mitali, Indu, Geeta, , `, , 1,50,000, 1,25,000, 75,000, , Amount, `, , 55,000 Goodwill, 30,000 Buildings, Patents, Machinery, Stock, 3,50,000 Debtors, Cash, , 25,000, 1,00,000, 30,000, 1,50,000, 50,000, 40,000, 40,000, , 4,35,000, , 4,35,000, , Geeta retires on the above date. It was agreed that Machinery be valued at, , ` 1,40,000; Patents at ` 40,000 and Buildings at ` 1,25,000. Record the necessary Journal, , entries and prepare the Revaluation Account., , 324, , (N.C.E.R.T.)
Page 339 :
Retirement of a Partner, Solution, , In the Books of Firm, Journal Entries, , Dr., , Date, Particulars, 2019, Mar. 31 Reserve Fund A/c, To Mitali’s Capital A/c, To Indu’s Capital A/c, To Geeta’s Capital A/c, , L.F., , Amount, `, , Dr., , Cr., Amount, `, , 30,000, 15,000, 9,000, 6,000, , (Being reserve fund distributed among partners in the ratio of 5 : 3 : 2), , Mitali’s Capital A/c, Indu’s Capital A/c, Geeta’s Capital A/c, To Goodwill A/c, , Dr., Dr., Dr., , 12,500, 7,500, 5,000, , Dr., , 10,000, , 25,000, , (Being decrease in the value of machinery adjusted), , Revaluation A/c, To Machinery A/c, , 10,000, , (Being decrease in the value of machinery adjusted), , Patents A/c, Buildings A/c, To Revaluation A/c, , Dr., Dr., , 10,000, 25,000, 35,000, , (Being increase in the value of patents and buildings adjusted), , Revaluation A/c, To Mitali's Capital A/c, To Indu's Capital A/c, To Geeta's Capital A/c, , Dr., , 25,000, 12,500, 7,500, 5,000, , (Being profit on revaluation transferred to all Partners’ Capital A/cs, in their profit-sharing ratio i.e., 5 : 3 : 2), , Revaluation Account, , Dr., Particulars, , Amount, , To Machinery A/c, To Profit on Revaluation transferred, to :, `, Mitali's Capital A/c, 12,500, Indu's Capital A/c, 7,500, Geeta's Capital A/c, 5,000, , Cr., Particulars, , `, , Amount, `, , 10,000 By Patents, By Buildings, , 10,000, 25,000, , 25,000, 35,000, , 35,000, , Illustration 16(A) (Revaluation A/c and Partner’s Capital Accounts), C, P and S were partners sharing profits 2/5, 3/10 and 3/10 respectively. Their, Balance Sheet on 31st December, 2018 was as follows :, Liabilities, , Amount, , Assets, , `, , Capitals :, C, P, S, , `, , 16,000, 12,000, 10,000, , Amount, `, , Buildings, Plant, Motor-car, 38,000 Stock, , 18,000, 14,000, 4,000, 10,000, , 325
Page 340 :
SBPD Publications Accountancy (XII), Reserves, , 5,000, 2,000 Debtors, 8,000, Less : Provision, Cash at Bank, , Bills Payable, Creditors, , `, , 7,000, 1,000, , 6,000, 1,000, , 53,000, , 53,000, , P retires on that date on the following terms :, (1) The goodwill of the firm is to be valued at ` 7,000., (2) Stock and Buildings are to be appreciated by 10%., (3) Plant and Motor-car to be depreciated by 10%., (4) Liability for the payment of gratuity to workers ` 2,000 is not yet recorded in, the books but the same is to be provided for., (5) Provision for bad debts is no more necessary., (6) It is decided not to maintain Goodwill Account in the books., You are required to prepare : (1) Revaluation Account, and (2) Partners' Capital, Accounts., (J.A.C., 2011, 18), Solution, Dr., (1) Revaluation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Plant A/c, To Motor-car A/c, To Provision for Gratuity A/c, , `, , 1,400 By Stock A/c, 400 By Building A/c, 2,000 By Reserve for Bad and Doubtful, Debts A/c, , 1,000, 1,800, , 3,800, , 3,800, , 1,000, , (2) Partners' Capital Accounts, , Dr., Particulars, To P's Capital A/c, (Goodwill), To P's Loan A/c, To Balance c/d, , C, , P, , S, , `, , `, , `, , 1,200, —, — 15,600, 16,800, —, , 18,000 15,600, , Particulars, , C, `, , By Balance b/d, 900 By Reserve A/c, — By C's Capital A/c, (Goodwill), 10,600, By S's Capital A/c, (Goodwill), 11,500, By Balance b/d, , Working Notes :, 7,000´ 3, 1. P's Share in Goodwill =, = ` 2,100., 10, 2. Closing of Goodwill Account : In New Profit-sharing Ratio, New Profit-sharing Ratio :, C :, P, :, S, 2, 3, 3, :, :, Multiplying it by its L.C.M. 10., 5, 10, 10, 2, 3, 3, C = ´ 10 = 4; P = ´ 10 = 3; S = ´ 10 = 3, 5, 10, 10, , 326, , Cr., P, , S, , `, , `, , 16,000 12,000 10,000, 2,000, 1,500, 1,500, —, , 1,200, , —, , —, 900, —, 18,000 15,600 11,500, 16,800, , — 10,600
Page 341 :
Retirement of a Partner, Hence, C : P : S : : 4 : 3 : 3, On Retirement of P, he will be compensated for goodwill by C and S., C : S : : 4 : 3 i.e., 4/7 : 3/7, 2,100 ´ 4, 2,100 ´ 3, Therefore, C =, = ` 1,200; S =, = ` 900, 7, 7, `, `, Therefore, C's Capital A/c, Dr., 1,200, S's Capital A/c, Dr., 900, To P's Capital A/c, 2,100, (Being Goodwill A/c written off), , Illustration 16(B) (Revaluation A/c and Partner’s Capital Accounts), M/s. Agrawal Appliances, Sheopur has three partners Garg, Pradhan and Jain., They share profits in the ratio of 3 : 2 : 1. On 31st December 2018, Pradhan got retired from, the firm. On that date Partner’s Capitals were ` 6,000, ` 5,000 and ` 4,000 respectively. His, share of goodwill was valued at ` 4,500. As per revaluation Machinery and Stock were, reduced by ` 1,200 and ` 800 respectively. Provision for doubtful debt was created for ` 280., Creditors were reduced by ` 600, Patents having book value of ` 300 became valueless., Prepare Profits & Loss Adjustment Account and Partners’ Capital Account., Solution, Dr., Profit & Loss Adjustment Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To, To, To, To, , Machine A/c, Stock A/c, Prov. for Doubtful Debts A/c, Patents A/c, , `, , 1,200 By Creditors A/c, 800 By Partners’ Capital A/c :, 280, Garg, Pradhan, 300, Jain, 2,580, , 600, `, , 990, 660, 330, , 1,980, 2,580, , Partners' Capital Account, , Dr., Particulars, , Garg, , Pradhan, , `, , To P & L Adj. A/c, To Pradhan Cap. A/c, To Cash A/c, To Balance b/d, , 990, 3,375, —, 1,635, 6,000, , `, , Jain, , Particulars, , `, , 660, —, 8,840, —, 9,500, , Cr., Garg, `, , 330 By Balance b/d, 1,125 By Garg’s Capital A/c, — By Jain’s Capital A/c, 2,545, 4,000, , Pradhan, , Jain, , `, , `, , 6,000, —, —, , 5,000, 3,375, 1,125, , 4,000, —, —, , 6,000, , 9,500, , 4,000, , Working Note :, Pradhan's Share of Goodwill ` 4,500 to be compensated by Garg and Jain in gaining ratio., Calculation of Gaining Ratio :, Garg : Pradhan, :, Jain, Old Ratio, New Ratio, Gain (New Ratio – Old Ratio), , 3/6, 3/4, 3 3, =, 4 6, 9- 6, =, 12, 3, =, 12, (Gain), , 2/6, —, , 2, 6, 2, = 6, 4, = 12, (Sacrifice), , = 0-, , 1/6, 1/4, 1 1, = 4 6, 3- 2, =, 12, 1, =, 12, (Gain), , 327
Page 342 :
SBPD Publications Accountancy (XII), 3, Garg and Jain will compensate to sacrificing partner in 3 : 1 i.e., Garg will compensate = ` 4,500 × = ` 3,375, 4, 1, Jain will compensate = ` 4,500 ×, = ` 1,125, 4, Journal Entry :, `, `, Therefore, Garg's Capital A/c, Dr., 3,375, Jain's Capital A/c, Dr., 1,125, To Pradhan's Capital A/c, 4,500, (Being Goodwill A/c written off), , ❏ Retirement of a Partner on a date after the Financial Closing Date, Illustration 17, A, B and C are partners in a firm sharing profits as 4 : 3 : 2. B retires on 31.3.2018., Their Balance Sheet on 31.12.2017 was as under :, Liabilities, , Amount, , Assets, , Amount, `, , `, , Capitals :, A, B, C, General Reserve, Sundry Creditors, , `, , 65,000, 38,000, 28,000, , Land & Buildings, Plant & Machinery, Stock, 1,31,000 Sundry Debtors, 36,000 Cash, 40,000, 2,07,000, , 49,000, 50,000, 40,000, 60,000, 8,000, 2,07,000, , Goodwill is valued at ` 45,000. Estimated profit upto the date of retirement is, ` 21,000. B's share in the firm is purchased by A and C in their profit-sharing ratio,, payment to be made privately., Pass Journal entries on B’s retirement., Solution, Journal Entries, Date, 2018, Mar. 31 General Reserve A/c, To A's Capital A/c, To B's Capital A/c, To C's Capital A/c, , Dr., , Particulars, , Cr., , L.F. Amount, `, , Dr., , Amount, `, , 36,000, 16,000, 12,000, 8,000, , (Being General Reserve distributed in the profit-sharing ratio of 4 : 3 : 2, on B's retirement), , A's Capital A/c, C's Capital A/c, To B's Capital A/c, , Dr., Dr., , 10,000, 5,000, , 15,0001, , (Being B's share of goodwill adjusted to the Capital A/cs of A and C, in the gaining ratio of 2 : 1), , Profit & Loss Suspense A/c, To B's Capital A/c, , Dr., , 7,000, 7,000, , 2, , (Being B's share of profit upto the date of his retirement), , B's Capital A/c ( ` 38,000 + 12,000 + 15,000 + 7,000), To A's Capital A/c, To C's Capital A/c, , Dr., , (Being B's share acquired by A and C in their profit-sharing ratio, payment to be made privately), , 328, , 72,0003, 48,000, 24,000
Page 343 :
Retirement of a Partner, Working Notes :, 1. Only B's share of goodwill has been brought into account. As the profit-sharing ratio of A and C, remains the same after B's retirement, gaining ratio is the same as profit-sharing ratio., 2. B's share of profit upto the date of his retirement has been credited to him against Profit & Loss, Suspense Account. The balance of this account will be transferred to Profit & Loss Appropriation, Account at the end of the year., 3. Alternatively, the share of profit of B could have been credited to him, debit being given to A and C in their, profit-sharing ratio (gaining ratio, when the profit-sharing ratio of A and C in between them gets changed)., , ❏ Revaluation A/c, Partners’ Capital A/cs & Balance Sheet, Illustration 18, The following is the Balance Sheet of P, Q, R as on 31st March, 2019 :, Liabilities, Creditors, P's Capital, Q's Capital, R's Capital, , Amount, , Assets, , Amount, `, , `, , `, , 3,000, 3,000, 4,000, , 5,000 Cash, Bank, Debtors, 10,000 Bills Receivable, Stock, Machinery, 15,000, , 1,500, 1,500, 2,000, 2,000, 3,000, 5,000, 15,000, , R retires and the following adjustments are made :, (a) R's share of goodwill will be valued at ` 3,000, which is written back to, remaining Partners' Capital A/cs., (b) Stock be appreciated by 15%., (c) Machinery be depreciated by 10%., (d) 5% Reserve be made for doubtful debts., (e) Provision of ` 200 be made for outstanding expenses., Prepare Profit & Loss Adjustment Account, Partners' Capital Accounts and new, Balance Sheet., (U.S.E.B., 2013), Solution, Dr., Profit & Loss Adjustment Account, Cr., Date, Particulars, 2019, Mar. 31 To Machinery, To Reserve for Doubtful, Debts, To Provision for Outstanding Expenses, , Amount, , Amount, , `, , Date, Particulars, 2019, 500 Mar. 31 By Stock, By Loss transferred to, Capital A/cs :, 100, P, 200, Q, R, , `, , 800, , Dr., , `, , 117, 117, 116, , 350, 800, , P's Capital Account, , Date, Particulars, 2019, Mar. 31 To P. & L. Adjustment A/c, To R's Capital A/c, To Balance c/d, , 450, , Amount, , Date, Particulars, `, 2019, 117 Mar. 31 By Balance b/d, 1,500, 1,383, 3,000, April 1 By Balance b/d, , Cr., Amount, `, , 3,000, , 3,000, 1,383, , 329
Page 344 :
SBPD Publications Accountancy (XII), Q's Capital Account, , Dr., , Date, Particulars, 2019, Mar. 31 To P. & L. Adjustment A/c, To R's Capital A/c, To Balance c/d, , Amount, `, , 117, 1,500, 1,383, 3,000, , Cr., , Date, Particulars, 2019, Mar. 31 By Balance b/d, , Amount, `, , 3,000, , 3,000, April 1 By Balance b/d, , 1,383, , R's Capital Account, , Dr., , Date, Particulars, 2019, Mar. 31 To P. & L. Adjustment A/c, To Balance transferred, to R's Loan A/c, , Amount, `, , 116, 6,884, , Cr., , Date, Particulars, 2019, Mar. 31 By Balance b/d, By P's Capital A/c, By Q's Capital A/c, , Amount, `, , 4,000, 1,500, 1,500, , 7,000, , 7,000, , Note : Calculation has been made nearest rupee., , Balance Sheet of the New Firm, Liabilities, Creditors, Capital A/cs :, P, Q, R’s Loan A/c, Outstanding Expenses, , Amount, , Assets, , Amount, , `, , `, 1,383, 1,383, , 5,000 Cash, Bank, Debtors, 2,766, Less : Provision for D.D., 6,884 Bills Receivable, 200 Stock, Add : Appreciation, Machinery, Less : Depreciation, 14,850, , `, , `, , 2,000, 100, 3,000, 450, 5,000, 500, , 1,500, 1,500, 1,900, 2,000, 3,450, 4,500, 14,850, , Illustration 19 (Payment to Retiring Partner by Obtaining Bank Loan), A, B and C are partners in a firm sharing profits in the ratio of 3 : 2 : 1. A retires from, his firm. On that date the Balance Sheet of the firm was as follows :, Balance Sheet, Liabilities, , Amount, , Assets, , `, , Sundry Creditors, Bills Payable, Reserve Fund, Outstanding Wages, Capitals :, A, B, C, , 330, , 30,000, 7,000, 12,000, 3,000, `, , 50,000, 40,000, 30,000, , 1,20,000, 1,72,000, , Amount, `, , Bank, Debtors, Stock, Furniture, Building, Machinery, , 38,000, 14,000, 10,000, 25,000, 40,000, 45,000, , 1,72,000
Page 345 :
Retirement of a Partner, Retirement made on following terms :, (a) Goodwill of the firm to be valued at ` 48,000., (b) Building have appreciated by 10%; stock depreciated by 10%., (c) A will be paid through Bank. After using Bank balance if required, necessary, loan may be obtained from Bank., (d) The new profit-sharing ratio of B and C is decided to be 5 : 1., Give the necessary ledger accounts and the Balance Sheet of B and C., (J.A.C., 2010), Solution, Dr., Revaluation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Stock, To Profit transferred to Partners’, Capital A/cs :, `, A, 1,500, B, 1,000, C, 500, , `, , 1,000 By Building, , 4,000, , 3,000, 4,000, , 4,000, , Partners’ Capital Accounts, , Dr., Particulars, , A, , B, `, , To A's Capital A/c, To Bank A/c, To Balance c/d, , —, 81,500, —, 81,500, , C, , Particulars, , `, , 24,000, —, 21,000, 45,000, , Cr., A, , `, , — By Balance b/d, — By Reserve Fund, 32,500 By B's Capital A/c, By Revaluation A/c, 32,500, , 50,000, 6,000, 24,000, 1,500, 81,500, , Bank Account, , Dr., Particulars, , Amount, , C, `, , 40,000, 4,000, —, 1,000, 45,000, , `, , 30,000, 2,000, —, 500, 32,500, , Cr., Particulars, , `, , To Balance b/d, To Bank Loan A/c, , B, `, , 38,000 By A’s Capital A/c, 43,500, 81,500, , Amount, `, , 81,500, 81,500, , Balance Sheet of B and C, Liabilities, , Amount, , Assets, , `, , Sundry Creditors, Bills Payable, Bank Loan (Note 3), Outstanding Wages, Capitals :, B, C, , 30,000, 7,000, 43,500, 3,000, `, , 21,000, 32,500, , 53,500, 1,37,000, , Amount, `, , Debtors, Stock (` 10,000 – 1,000), Furniture, Building ( ` 40,000 + 4,000), Machinery, , 14,000, 9,000, 25,000, 44,000, 45,000, , 1,37,000, , 331
Page 346 :
SBPD Publications Accountancy (XII), Working Notes :, 1., 2., , 3., , 3, = ` 24,000., 6, Gaining Ratio = New Ratio – Old Ratio, 3 2 1, Old Ratio : A : B : C = 3 : 2 : 1 or : :, 6 6 6, 5 1, After Retirement : New Share of B and C = 5 : 1 or, :, 6 6, 5 2 5–2 3, B’s Gain = – =, =, 6 6, 6, 6, 1 1, C’s Gain = – = Nil, 6 6, Calculation of Bank Loan :, `, Amount payable to A = 81,500, Less : Bank Balance in Firm = 38,000, Bank Loan = 43,500, Share of A's Goodwill = 48,000 ´, , Illustration 20 (Partly Payment in the form of Asset), Ajay, Vijay and Naresh were partners sharing profits in the ratio of 3 : 2 : 1. The, Balance Sheet of the firm on 31st March, 2019 was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Sundry Creditors, Provident Fund, Workmen's Compensation Fund, Capitals :, `, Ajay, 40,000, Vijay, 30,000, Naresh, 20,000, , `, , 17,000 Cash, 13,000 Debtors, 18,000, Less : Provision, Stock, Investment, Patents, 90,000 Plant and Machinery, 1,38,000, , `, , 40,000, 1,000, , 10,000, 39,000, 15,000, 16,000, 8,000, 50,000, 1,38,000, , Naresh retired on the above date on the following terms :, (i) Goodwill of the firm was valued at ` 42,000 but it was not to remain in the, books of the new firm., (ii) Value of Patents was to be reduced by 20% and that of Plant and Machinery by, 10%., (iii) Provision for doubtful debts was to be raised to 6%., (iv) Naresh took over the investment at a value of ` 17,800., (v) Liabilities on account of Provident Fund was only ` 12,600., Show the Journal entry for the treatment of goodwill, prepare Revaluation Account, and Capital Accounts of the partners., Solution, Naresh’s Share of Goodwill = ` 42,000 × 1/6 = ` 7,000, Gaining Ratio 3 : 2, Journal Entry, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , Ajay's Capital A/c, Vijay's Capital A/c, To Naresh's Capital A/c, (Naresh's share of goodwill adjusted through Capital A/cs), , 332, , Dr., Dr., , Amount, `, , 4,200, 2,800, 7,000
Page 347 :
Retirement of a Partner, Revaluation Account, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, , To Patents, To Plant & Machinery A/c, To Provision for Doubtful Debts A/c, , `, , 1,600 By Investment, 5,000 By Provident Fund A/c, 1,400 By Loss trans. to Capital A/cs :, `, Ajay, 2,900, Vijay, 1,933, Naresh, 967, 8,000, , 1,800, 400, , 5,800, 8,000, , Partners' Capital Accounts, , Dr., Particulars, , Ajay, , Vijay, , `, , `, , To Naresh's Capital A/c, (Goodwill) (3 : 2), 4,200 2,800, To Revaluation A/c, (Loss), 2,900 1,933, To Investment A/c, —, —, To Naresh's Loan A/c, —, —, To Balance b/d, 41,900 31,267, 49,000 36,000, , Naresh, , Cr., , Particulars, , `, , Ajay, `, , Vijay, , Naresh, , `, , By Balance b/d, 40,000 30,000, — ByWorkmen's Compensation Fund A/c 9,000 6,000, 967 ByAjay's Capital A/c, —, —, 17,800 ByVijay's Capital A/c, —, —, 11,233, —, 30,000, 49,000 36,000, , `, , 20,000, 3,000, 4,200, 2,800, , 30,000, , Illustration 21 (Joint Life Insurance Policy Surrender Value), R, S and T are partners sharing profits in the ratio of 4 : 3 : 2. Their Balance Sheet as, on 31st March, 2019 was as follows :, Balance Sheet of R, S and T, (as on 31st March, 2019), Liabilities, , Amount, , Assets, , `, , Creditors, General Reserve, Capitals :, R, S, T, , `, , 70,000, 45,000, 30,000, , 33,000 Cash, 27,000 Debtors, Stock, Machinery, Land & Building, 1,45,000, 2,05,000, , Amount, `, , 10,000, 15,000, 30,000, 50,000, 1,00,000, 2,05,000, , S retires on the above date on the following conditions :, (i) Land and Building be appreciated by 20%., (ii) Goodwill is to be valued at ` 18,000., (iii) A provision for doubtful debts of 5% is to be created and machinery be written, down by 10% and stock by 5%., (iv) A provision of ` 1,500 be made in respect of legal charges., (v) Joint Life Policy of the partners surrendered and cash obtained ` 13,500., S to be paid ` 5,000 in cash and balance to be transferred to his Loan Account., Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet of R and T., (U.S.E.B., 2015), , 333
Page 348 :
SBPD Publications Accountancy (XII), Solution, Revaluation Account, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, , To Provision for Doubtful Debts A/c, To Machinery A/c, To Stock A/c, To Provision for Legal Charges A/c, To Capital A/cs :, `, R (4/9), 5,000, S (3/9), 3,750, T (2/9), 2,500, , `, , 750 By Land and Building A/c, 5,000, 1,500, 1,500, , 20,000, , 11,250, 20,000, , 20,000, , Partners' Capital Accounts, , Dr., Particulars, To S's Capital A/c, To Cash A/c, To S's Loan A/c, To Balance c/d, , R, , S, `, , T, `, , Cr., , Particulars, `, , 4,000, —, —, 89,000, , —, 5,000, 63,250, —, , 2,000, —, —, 39,500, , 93,000, , 68,250, , 41,500, , R, , By Balance b/d, By Gen. Reserve A/c, By Revaluation A/c, By R's Capital A/c, By T's Capital A/c, By J.L.P. A/c, , S, `, , 70,000, 12,000, 5,000, —, —, 6,000, 93,000, , T, `, , 45,000, 9,000, 3,750, 4,000, 2,000, 4,500, 68,250, , `, , 30,000, 6,000, 2,500, —, —, 3,000, 41,500, , Balance Sheet of R and T (After S's Retirement), Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Provision for Legal Charges, S's Loan, Capital A/cs :, R, T, , `, , 33,000 Cash, `, 1,500 Debtors, 15,000, 63,250 Less : Prov. for Doubtful Debts, 750, `, , 89,000, 39,500, , Stock, Less : Reduction, 1,28,500 Machinery, Less : Depreciation, Land and Building, Add : Appreciation, 2,26,250, , 18,5001, 14,250, , 30,000, 1,500, 28,500, 50,000, 5,000, 45,000, 1,00,000, 20,000 1,20,000, 2,26,250, , 1 ` 10,000 + 13,500 – 5,000 = ` 18,500., , Illustration 22(A) (Payment of Retiring Partner’s Loan in Instalments), X, Y and Z are partners in a business sharing profits and losses equally. On 31st, December, 2014, Y retires from the business when his Capital Account after making all, necessary adjustments showed a Credit Balance of ` 30,200. It was agreed to transfer it to, his Loan Account. Out of this he is paid ` 6,200 in cash on retirement and the balance in, three equal yearly instalments with interest at 5% per annum. Show Y’s Loan Account till, it is completely paid-up., , 334
Page 349 :
Retirement of a Partner, Solution, Dr., , Y’s Loan Account, , Date, Particulars, 2014, Dec. 31 To Cash A/c, Dec. 31 To Balance c/d, , Amount, , Date, Particulars, `, 2014, 6,200 Dec. 31 By Y’s Capital A/c, 24,000, 30,200, , Cr., Amount, `, , 30,200, 30,200, , 2015, Dec. 31 To Cash A/c (` 8,000 + 1,200), Dec. 31 To Balance c/d, , 2015, 9,200 Jan. 1 By Balance b/d, 16,000 Dec. 31 By Interest A/c, 25,200, , 24,000, 1,200, 25,200, , 2016, Dec. 31 To Cash A/c (` 8,000 + 800), Dec. 31 To Balance c/d, , 2016, 8,800 Jan. 1 By Balance b/d, 8,000 Dec. 31 By Interest A/c, 16,800, , 16,000, 800, 16,800, , 2017, Dec. 31 To Cash A/c (` 8,000 + 400), , 2017, 8,400 Jan. 1 By Balance b/d, Dec. 31 By Interest A/c, 8,400, , 8,000, 400, 8,400, , Illustration 22(B) (Settlement by Annuity), Mohan, Manoj and Manish are partners in a firm sharing profits and losses in the, ratio of 3 : 2 : 1. The partnership deed provides that in the event of retirement of any of the, partner the total amount due to the outgoing partner would be settled by an annuity. On, 31st March, 2016, Mohan retires from the firm. The amount of his share was determined, for ` 50,000. The amount was as per deed, commuted into an annuity of ` 10,000 which was, to be paid on 1st April each year. On 4th April, 2018 Mohan died. Draw up the Annuity, Suspense Account, assuming that unpaid portion thereof carried interest @ 10% p.a., Solution, Dr., Mohan’s Annuity Suspense Account, Cr., Date, Particulars, 2016, Mar. 31 To Balance c/d, 2017, Mar. 31 To Balance c/d, , 2017, Apr. 1 To Bank A/c (` 10,000 + 5,000), 2018, Mar. 31 To Balance c/d, , Amount, , Date, Particulars, `, 2016, 50,000 Mar. 31 By Mohan’s Capital A/c, 50,000, 2016, 55,000 Apr. 1 By Balance b/d, 2017, Mar. 31 By Interest A/c, (on ` 50,000 @ 10%), 55,000, 2017, 15,000 Apr. 1 By Balance b/d, 2018, 44,000 Mar. 31 By Interest A/c, (on ` 40,000 @ 10%), 59,000, , Amount, `, , 50,000, 50,000, 50,000, 5,000, 55,000, 55,000, 4,000, 59,000, , 335
Page 350 :
SBPD Publications Accountancy (XII), 2018, Apr. 1 To Bank A/c (` 10,000 + 4,000), Apr. 4 To Transfer to Capital A/cs :, Manoj (2/3), Manish (1/3), , 2018, 14,000 Apr. 1, , By Balance b/d, , 44,000, , `, , 20,000, 10,000, , 30,000, 44,000, , 44,000, , ❏ 6.2.7 Adjustment of Capital, Very often the remaining partners may decide to fix the amount of their capitals in, profit-sharing ratio. Sometimes the amount of required capital is not based on, profit-sharing ratio but fixed with mutual consent. In both these cases the amount of each, continuing partner should be adjusted or determined accordingly., As per the agreement the excess (or surplus) may be paid off (or returned) to the, concerned partner. Similarly, in case of shortage or deficiency, the amount must be, brought in by the concerned partner to make good the deficiency., Alternatively, the partners may agree that any excess or deficiency of capital should, be transferred to their Current Accounts., The capitals of the continuing partners may be adjusted in any one of the following, three ways :, Case 1. When the Total Capital of the New Firm is Given, Steps involved in adjusting the capital :, Step 1 : Find out the adjusted closing capital balances of continuing partners (i.e.,, after all adjustments)., Step 2 : Find out the new capital (or required capitals) of continuing partners. This, can be ascertained by dividing the total capital in their new profit-sharing ratio., Step 3 : Compare the new capitals of continuing partners with their adjusted old, capital and calculate surplus/deficiency of shortage., Step 4 : The partners who has surplus capital will withdraw excess amount of, capital in cash or surplus will be transferred to his Current Account., The partner whose capital falls short will bring in cash required amount or amount, of deficit/shortage will be transferred (debited) to his Current Account., Journal Entries, (i) When old partner's adjusted capital is more than the desired capital :, Partner's Capital A/c, Dr., To Cash A/c, (For excess capital withdrawn), or, To Partner's Current A/c, (Transfer of excess capital), (ii) When old partner's adjusted capital is less than the desired capital :, Cash A/c, Dr., (For Cash brought in), or, Partner's Current A/c, Dr., (For adjustment through Current A/c), To Partner's Capital A/c, Case 2. When the Total Capital of the New Firm is not Given, Steps involved in adjusting the capitals :, Step 1 : Calculate the adjusted capitals of continuing partners after all adjustments., Step 2 : Calculate the total capital of the new firm :, Total Capital of the New Firm = Aggregate of Adjusted Old Capitals of Continuing, Partners, Other Steps : Other steps should be taken as in case 1., , 336
Page 351 :
Retirement of a Partner, Case 3. When the retiring partner is to paid through cash brought in by, the continuing partners in such a way as to make their capitals, proportionate to their new profit-sharing ratio., Steps involved in adjusting the capitals of continuing partners :, Step 1 : Find out the adjusted old capitals of continuing partners after all, adjustments., Step 2 : Find out Total Capital of the new firm :, Total Capital = Aggregate adjusted old capitals of continuing partners + Shortage, of cash to be brought in by the remaining partners in order to make, payment to the retiring partner., Other Steps : Other steps to be taken as involved in case 1., Illustration 23, Chhavi, Nidhi and Meenakshi are partners sharing profits and losses in the ratio of, 1/2, 1/3 and 1/6 respectively. Nidhi retires on 31st March, 2019 when capitals of Chhavi,, Nidhi and Meenakshi after all adjustments were ` 1,50,000, ` 1,00,000 and ` 1,40,000, respectively. The capital of new firm is fixed at ` 3,00,000 between Chhavi and Meenakshi, in the proportion of 3/5 and 2/5. Pass the necessary Journal entries if the partners decide, to maintain their capitals in new profit-sharing ratio by bringing cash in or withdrawing, cash for the purpose., Solution, Chhavi, Meenakshi, New Ratio, 3, :, 2, 3, 2, (A) New Capitals, 3,00,000 ´, 3,00,000 ´, 5, 5, = ` 1,80,000, = ` 1,20,000, (B) Capital after all Adjustments, ` 1,50,000, ` 1,40,000, (C) Cash to be brought in (A – B), ` 30,000, —, Cash to be withdrawn (B – A), —, ` 20,000, Journal Entries, Dr., Cr., Date, , L. Amount Amount, F., , Particulars, , `, , Cash A/c, To Chhavi's Capital A/c, , Dr., , `, , 30,000, 30,000, , (Being cash brought in by Chhavi to make her capital proportionate to new ratio), , Meenakshi’s Capital A/c, To Cash A/c, , Dr., , 20,000, 20,000, , (Being cash withdrawn by Meenakshi to make her capital proportionate to new ratio), , Illustration 24, Jolly, Moni and Mini are partners sharing profits and losses in the ratio of 4 : 3 : 2, respectively. Moni retires on 31st March, 2019 when the capitals of Jolly, Moni and Mini, after all other adjustments stood at ` 6,00,000, ` 5,00,000 and ` 4,80,000 respectively., Partners decide to maintain their capitals proportionate to their new profit-sharing ratio, by bringing in or paying off cash as the case may be. Pass necessary Journal entries., Solution, New Ratio of Jolly and Mini, 4, :, 2, or, 2, :, 1, , 337
Page 352 :
SBPD Publications Accountancy (XII), New Capital of the Firm ( ` 6,00,000 + 4,80,000), æ, 2ö, New Capital of Jolly çç10,80,000 ´ ÷÷÷, çè, 3 ÷ø, æç, 1ö÷, New Capital of Mini ç10,80,000 ´ ÷÷, çè, 3÷ø, Cash to be brought in by Jolly, Cash to be paid off to Mini, Journal Entries, Date, , = ` 10,80,000, = ` 7,20,000, = ` 3,60,000, = ` 7,20,000 – 6,00,000 = ` 1,20,000, = ` 4,80,000 - 3,60,000 = ` 1,20,000, Dr., Cr., L., F. Amount Amount, , Particulars, Cash A/c, To Jolly's Capital A/c, , Dr., , Mini's Capital A/c, To Cash A/c, , Dr., , `, , 1,20,000, , 1,20,000, , (Being cash brought in by Jolly to make her capital proportionate to profitsharing ratio), , (Being cash paid off to Mini to make her capital proportionate to profitsharing ratio), , `, , 1,20,000, 1,20,000, , Illustration 25, Monu, Ranu and Shanu were partners sharing profits and losses in the ratio of, 5 : 3 : 2. Ranu retires on 31st March, 2019 when the capitals of Monu, Ranu and Shanu, after all adjustments stood at ` 2,00,000, ` 1,50,000 and ` 1,00,000 respectively. The Cash, and Bank balance on 31st March, 2019 amounted to ` 60,000. Ranu was to be paid through, cash brought in by Monu and Shanu in such a way that a minimum cash and Bank balance, of ` 10,000 was to be maintained and capitals of Monu and Shanu to be in proportion to, their new profit-sharing ratio of 3 : 2. Calculate the amount to be brought in by the, continuing partners., Solution, Balance of Cash and Bank = ` 60,000, Minimum Balance of Cash and Bank to be, maintained = ` 10,000, Cash available to pay off Ranu = ` 60,000 - 10,000 = ` 50,000, Cash to be brought in by Monu and Shanu = ` 1,50,000 - 50,000 = ` 1,00,000, Total Capital of New Firm = ` 2,00,000 + 1,00,000 + 1,00,000, = ` 4,00,000, 3, New Capital of Monu = 4,00,000 ´ = ` 2,40,000, 5, 2, New Capital of Shanu = 4,00,000 ´ = ` 1,60,000, 5, Cash to be brought in by Monu = ` 2,40,000 – 2,00,000 = ` 40,000, Cash to be brought in by Shanu = ` 1,60,000 – 1,00,000 = ` 60,000, ❏ Adjustments of Capital Accounts Comprehensive, , Illustration 26 (Adjustment of Capital, Goodwill appears in the Books), Following is the Balance Sheet of M/s Delhi Dresses as on 31st March, 2019. The, firm has three partners and Anand retires :, Liabilities, , Amount, `, , Creditors, , 338, , 30,000 Goodwill, , Assets, , Amount, `, , 15,000
Page 353 :
Retirement of a Partner, Capital A/cs :, Anand, Gopi, Binod, , `, , 40,000, 40,000, 30,000, , Land & Buildings, Computer, Furniture, 1,10,000 Debtors, Cash, 1,40,000, , 40,000, 28,000, 27,000, 24,000, 6,000, 1,40,000, , The, (i), (ii), (iii), (iv), (v), (vi), , following terms have been agreed upon :, Goodwill should be valued at ` 21,000., The value of land and buildings should be appreciated by ` 10,000., Computers should be reduced to ` 23,000., Create provision @ 5% for doubtful debts., Create provision of ` 700 on creditors., The entire amount payable to Anand is to be brought by Gopi and Binod in such, a manner that their Capital Accounts are in proportion to their profit-sharing, ratio which is 1 : 1., Prepare (1) Revaluation Account, (2) Partners’ Capital Accounts, and (3) Balance, Sheet after Anand’s retirement., Solution, Dr., Revaluation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Computers A/c, To Provision for Doubtful Debts, To Profit transferred to :, `, Anand’s Capital A/c, 1,500, Gopi’s Capital A/c, 1,500, Binod’s Capital A/c, 1,500, , `, , 5,000 By Land and Building A/c, 1,200 By Provision on Creditors, , 10,000, 700, , 4,500, 10,700, , Partners’ Capital Accounts, , Dr., Particulars, 31.3.2019, To Goodwill, To Anand’s Capital, A/c, To Cash A/c, To Balance c/d, (Note 2), , 10,700, , Anand, , Gopi, , Binod, , `, , `, , 5,000, , 5,000, , 5,000, , `, , —, 43,500, , 3,500, —, , 3,500, —, , —, , 49,750, , 49,750, , 48,500, , 58,250, , 58,250, , Particulars, 31.3.2019, By Balance b/d, By Revaluation A/c, (Profit), By Gopi’s Capital, A/c, By Binod’s Capital, A/c, By Cash A/c, , Cr., Anand, `, , Gopi, `, , Binod, `, , 40,000, , 40,000, , 30,000, , 1,500, , 1,500, , 1,500, , 3,500 1, , —, , —, , 3,500, —, 48,500, , —, 16,750, 58,250, , —, 26,750, 58,250, , Working Note :, 1, 1. Value of Goodwill ` 21,000, Anand’s Share in Goodwill = ` 21,000 × = ` 7,000., 3, 1, 1, Compensated by Gopi = ` 7,000 ×, = 3,500; Binod = ` 7,000 × = ` 3,500., 2, 2, , 339
Page 354 :
SBPD Publications Accountancy (XII), New Balance Sheet, (as on 31st March, 2019), Liabilities, Creditors, Less : Provision, Capital A/cs :, Gopi, Binod, , Amount, `, , 30,000, 700, 49,750, 49,750, , Assets, , Amount, , `, , `, , Land and Buildings, 29,300 Computers, Furniture, Debtors, 99,500, Less : Provision, Cash (Note 3), 1,28,800, , `, , 24,000, 1,200, , 50,000, 23,000, 27,000, 22,800, 6,000, 1,28,800, , Working Notes :, 1. Adjustment of Capital, Total Combined Capital of the Firm = Anand’s Capital + Gopi’s Capital + Binod’s Capital, ` 43,500 + 33,000 + 23,000 = 99,500 (See Below), Particulars, Anand, Gopi, Binod, `, `, `, Capital, 40,000, 40,000, 30,000, Revaluation A/c (Profit), 1,500, 1,500, 1,500, Goodwill, (5,000), (5,000), (5,000), Adjustment of Goodwill : Anand’s Share, 7,000, (3,500), (3,500), 43,500, , 3., , 33,000, , 23,000, , After Anand’s retirement capital of the firm remains unchanged, because, Gopi and Binod brings the, necessary amount to make up their capital equal to each other. Hence, the balance of Gopi’s capital is, restricted to ` 99,500 × 1/2 = ` 49,750. As his capital balance is ` 33,000, he will have to bring ` 49,750 –, 33,000 = ` 16,750. In the same way Binod will bring ` 49,750 – 23,000 = ` 26,750., Cash = ` 6,000 + 16,750 + 26,750 – 43,500 (Anand paid) = ` 6,000., , Illustration 27, The Balance Sheet of Mohit, Neeraj and Sohan, who are partners in a firm sharing, profits according to their capitals as on March 31, 2019 was as under :, Capital and Liabilities, , Amount, `, , Creditors, Capitals :, Mohit's Capital, Neeraj's Capital, Sohan's Capital, General Reserve, , `, , 80,000, 40,000, 40,000, , Assets and Properties, , Amount, `, , 21,000 Buildings, 1,00,000, Machinery, 50,000, Stock, `, 18,000, Debtors, 20,000, 1,60,000 Less : Provi. for Doubtful Debts 1,000, 19,000, 20,000 Cash at Bank, 14,000, 2,01,000, , 2,01,000, , On that date, Neeraj decided to retire from the firm and was paid for his share in the, firm subject to the following :, (1) Buildings to be appreciated by 20%., (2) Provision for Bad Debts to be increased to 15% on Debtors., (3) Machinery to be depreciated by 20%., (4) Goodwill of the firm is valued at ` 72,000 and the retiring partner's share is, adjusted through the Capital Accounts of remaining partners., (5) The capital of the new firm be fixed at ` 1,20,000., , 340
Page 355 :
Retirement of a Partner, Prepare Revaluation Account, Capital Accounts of the partners and the Balance, Sheet after retirement of Neeraj., (N.C.E.R.T.), Solution, In the Books of Mohit, Neeraj and Sohan, Dr., Revaluation Account, Cr., Particulars, , Amount, , To Provision for Doubtful Debts, To Machinery, To Profit on Revaluation transferred, to :, `, Mohit’s Capital A/c, 4,000, Neeraj’s Capital A/c, 2,000, Sohan’s Capital A/c, 2,000, , Particulars, , Amount, , `, , `, , 2,000 By Buildings, 10,000, , 20,000, , 8,000, 20,000, , 20,000, , Partners' Capital Accounts, , Dr., Particulars, , Mohit, , Neeraj, , `, , To Neeraj's Capital, A/c, To Balance c/d, , To Bank A/c 3, To Bank A/c, To Balance c/d4, , Sohan, , `, , Particulars, , `, , Cr., Mohit, `, , 12,000, 82,000, , —, 65,000, , 94,000, , 65,000, , By Balance b/d, 6,000 By Gen. Reserve A/c, 41,000 By Revaluation A/c, By Mohit's Capital 1, By Sohan's Capital1, 47,000, , —, 2,000, 80,000, 82,000, , 65,000, —, —, 65,000, , — By Balance b/d, 1,000, 40,000, 41,000, , Neeraj, , Sohan, , `, , `, , 80,000, 10,000, 4,000, —, —, 94,000, , 40,000, 5,000, 2,000, 12,000, 6,000, 65,000, , 40,000, 5,000, 2,000, —, —, 47,000, , 82,000, , 65,000, , 41,000, , 82,000, , 65,000, , 41,000, , Balance Sheet, (as on 31st March, 2019), Capital and Liabilities, Creditors, Bank Overdraft2, Capital A/cs :, Mohit, Sohan, , Amount, `, , `, , 80,000, 40,000, , Working Notes :, 1. Neeraj’s share in Goodwill =, in gaining ratio i.e., 2 : 1., , Assets and Properties, , Amount, `, , 21,000 Buildings, 1,20,000, 54,000 Machinery, 40,000, Stock, `, 18,000, Debtors, 20,000, 1,20,000 Less : Prov. for Doubtful, Debts (` 1,000 + 2,000) 3,000, 17,000, 1,95,000, 1,95,000, , 1, ´ 72, 000 = ` 18,000. Neeraj’s to be compensated by Mohit and Sohan, 4, , 341
Page 356 :
SBPD Publications Accountancy (XII), Cr., , Bank Account, , 2. Dr., Particulars, , Amount, Particulars, `, 14,000 By Mohit's Capital A/c, 54,000 By Sohan's Capital A/c, By Neeraj's Capital A/c, 68,000, , To Balance b/d, To Balance c/d (Overdraft), , Amount, `, 2,000, 1,000, 65,000, 68,000, , 3. It is assumed that Bank overdraft is taken to pay the retiring partner., 4. Cash to be brought in or withdrawn by Mohit and Sohan :, S.No., (a), (b), , Particulars, New Capitals (` 1,20,000 in the ratio of 2 : 1), Existing Capital (After adjustments) as calculated, Cash to be brought in (or paid off), , Mohit, `, 80,000, 82,000, (2,000), , Sohan, `, 40,000, 41,000, (1,000), , Illustration 28 (Adjustment of Capital, Joint Life Insurance Policy), Amar, Akbar and Anthony are partners. They share profits and losses in the ratio of, 4 : 3 : 3. On 31st March, 2019 their Balance Sheet was as under :, Liabilities, , Amount, , Assets, , `, , Creditors, Capitals :, Amar, Akbar, Anthony, , 11,000 Investments, Debtors, 60,000, Stock, 45,000, Bills Receivables, 36,000 1,41,000 Cash, `, , 1,52,000, , Amount, `, , 70,000, 20,000, 30,000, 20,000, 12,000, 1,52,000, , The firm had taken a Joint Life Policy of ` 1,00,000. Its surrender value on 31st, March, 2019 was ` 30,000. Amar retired on this date. On that date the assets were valued and, Revaluation Account showed profit of ` 24,000, Goodwill of the firm was valued at ` 60,000., After retirement of Amar, profit-sharing ratio of Akbar and Anthony became 2 : 1., The amount due to Amar was paid out of the cash, which was brought in by Akbar and, Anthony in order to make their capitals in new profit-sharing ratio. Goodwill will be, recorded in the books without raising Goodwill Account. Joint Life Policy will also not be, shown in the Balance Sheet., Prepare Amar's Capital Account and New Balance Sheet., Solution, Working Notes :, 1. Gaining Ratio = New Ratio – Old Ratio, 4 3 3, Old Ratio 4 : 3 : 3 or, :, :, 10 10 10, 2 1, New Ratio of Akbar and Anthony 2 : 1 or :, 3 3, 2 3, 20 - 9 11, Therefore, Akbar’ s Gaining Ratio = - =, =, 3 10, 30, 30, 1 3 10 – 9 1, Anthony’ s Gaining Ratio = –, =, =, 3 10, 30, 30, 11 1, 11 1, Therefore,, :, = 11 : 1 or, :, 30 30, 12 12, , 342
Page 357 :
Retirement of a Partner, 4, = ` 12,000., 10, ` 12,000 shared by Akbar and Anthony in the ratio 11 : 1, 11, 1, Therefore, Akbar = 12,000 ´, = ` 11,000, Anthony = 12,000 ´ = ` 1,000, 12, 12, 4, 3. Share of Amar in Goodwill = 60,000 ´ = ` 24,000, 10, 11, 1, Shared by Akbar = 24,000 ´, = ` 22,000; Shared by Anthony = 24,000 ´ = ` 2,000., 12, 12, 2. Share of Amar in Surrender Value = 30,000 ´, , Amar's Capital Account, , Dr., Particulars, To Cash A/c, , Amount, , Cr., , Particulars, , Amount, , `, , 1,05,600 By Balance b/d, By Akbar's Capital A/c (Surrender, Value), By Anthony's Capital A/c (Surrender, Value), By Akbar's Capital A/c (Goodwill), By Anthony’s Capital A/c (Goodwill), By Revaluation A/c (Profit), 1,05,600, , `, , 60,000, 11,000, 1,000, 22,000, 2,000, 9,600, 1,05,600, , Capitals of Akbar and Anthony on Retirement of Amar :, Investments, Debtors, Stock, Bills Receivable, Cash, Total Assets of Firm, Less : Creditors, Total Capital, , 1,65,000, , 2, = ` 1,10,000, 3, 1, Anthony's Capital = ` 1,65,000 ´ = ` 55,000, 3, Statement of Capital of Akbar and Anthony, Akbar, , Anthony, , `, , 1,00,000, 20,000, 24,000, 20,000, 12,000, 1,76,000, 11,000, , Akbar's Capital = ` 1,65,000 ´, , `, , Capital Balance, Add : Revaluation Profit, Less : Share of Surrender Value of Amar, Less : Share of Goodwill of Amar, Add : Amount to be brought in, Capital required (2 : 1), , 45,000, 7,200, 52,200, (–) 11,000, 41,200, (–) 22,000, 19,200, 90,800, 1,10,000, , `, , 36,000, 7,200, 43,200, (–) 1,000, 42,200, (–) 2,000, 40,200, 14,800, 55,000, , 343
Page 358 :
SBPD Publications Accountancy (XII), New Balance Sheet of Akbar and Anthony, Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Capitals :, Akbar, Anthony, , `, , 11,000 Investments, `, Debtors, 1,10,000, Stock, 55,000 1,65,000 Bills Receivables, Cash, , 1,00,000, 20,000, 24,000, 20,000, 12,000, 1,76,000, , 1,76,000, , Illustration 29, A, B and C were partners sharing profits in the ratio of 5 : 3 : 2 respectively. They, had a Joint Life Insurance Policy of ` 1,00,000. The surrender value of this policy was, ` 20,000 on 31.12.2017. The Balance Sheet on this date was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Sundry Creditors, Expenses due, Workmen's Compensation Reserve, Capital A/cs :, A, B, C, , `, , 26,500 Fixed Assets, 3,500 Stock, 15,000 Debtors, Cash, 1,00,000, 50,000, 40,000, 2,35,000, , 1,25,000, 55,000, 45,000, 10,000, , 2,35,000, , B retires on 31.12.2017 and for this purpose :, `, Fixed Assets were valued at, 1,50,000, Stock was considered worth, 50,000, B was to be paid in cash brought in by A and C in such a way so as to make their, capitals proportionate to their new profit-sharing ratio which is 3 : 2 respectively. Joint, Life Policy Account is to appear in the new Balance Sheet of A and C., Prepare Capital Accounts and the Balance Sheet of A and C., Solution, In the Books of A, B and C, Dr., Capital Accounts, Cr., Particulars, 31.12.2017, To Cash A/c, To Balance c/d (2), , A, , B, `, , —, 1,47,000, , 1,47,000, , 344, , C, , `, , 66,500, —, , 66,500, , Particulars, A, 31.12.2017, `, — By Balance b/d, 1,00,000, 98,000 By Workmen’s, Compensation, Reserve A/c, 7,500, By Joint Life, Policy A/c, 10,000, By Revaluation A/c :, Profit (1), 10,000, By Cash A/c, (Bal. fig.), 19,500, 98,000, 1,47,000, `, , B, , C, `, , `, , 50,000, , 40,000, , 4,500, , 3,000, , 6,000, , 4,000, , 6,000, , 4,000, , —, 66,500, , 47,000, 98,000
Page 359 :
Retirement of a Partner, Balance Sheet of A and C, (as on 31-12-2017), Liabilities, , Amount, , Assets, , Amount, , `, , Capital A/cs (2) :, A, C, Sundry Creditors, Expenses due, , 1,47,000, 98,000, 26,500, 3,500, , `, , Fixed Assets, Joint Life Policy, Stock, Debtors, Cash, , 1,50,000, 20,000, 50,000, 45,000, 10,000, , 2,75,000, , 2,75,000, , Working Notes :, (1) Profit on Revaluation :, Profit on Fixed Assets, Less : Loss on Stock, (2), , Profit, , Capital of A and C in the New Firm :, Assets as will remain :, Fixed Assets, Joint Life Policy, Stock, Debtors, Cash, `, 26,500, 3,500, Total Capital of A and C, A's Share of Capital = 3/5 ´ ` 2,45,000 = ` 1,47,000, C's Share of Capital = 2/5 ´ ` 2,45,000 = ` 98,000, Less : Sundry Creditors, Expenses due, , `, 25,000, (5,000), 20,000, `, 1,50,000, 20,000, 50,000, 45,000, 10,000, 2,75,000, 30,000, 2,45,000, , Miscellaneous and Boards’ Questions, Illustration 30, Following is the Balance Sheet of X, Y and Z as on 31st March, 2019. They shared, profits in the ratio of 3 : 3 : 2 :, Liabilities, , Amount, , Assets, , `, , Creditors, General Reserve, Partners’ Loan A/c :, X, Y, Capital A/cs :, X, Y, Z, , 2,50,000 Cash at Bank, 80,000 Bills Receivable, `, Debtors, 80,000, 50,000, Less : Prov. for Bad Debts 4,000, 40,000 Stock, Fixed Assets, 1,00,000 Advertisement Suspence A/c, 60,000 Profit & Loss A/c, 50,000, 6,30,000, , Amount, `, , 50,000, 60,000, 76,000, 1,24,000, 3,00,000, 16,000, 4,000, 6,30,000, , On 1st April, 2019, Y decided to retire from the firm on the following terms :, (i) Stock to be depreciated by ` 12,000., (ii) Advertisement Suspense Account to be written off., (iii) Provision for bad and doubtful debts to be increased to ` 6,000., (iv) Fixed Assets to be appreciated by 10%., , 345
Page 360 :
SBPD Publications Accountancy (XII), (v), , Goodwill of the firm be valued at ` 80,000 and amount due to retiring partner, be adjusted in X’s and Z’s Capital Accounts., Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet., Solution, Dr., Revaluation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Stock, , `, , 12,000 By Fixed Assets, , To Provision for Bad and Doubtful, Debts (` 6,000 – 4,000), To Profit transferred to :, `, X’s Capital, 6,000, Y’s Capital, 6,000, Z's Capital, 4,000, , 30,000, , 2,000, , 16,000, 30,000, , 30,000, , Partners’ Capital Accounts, , Dr., Particulars, , X, , Y, , Z, , `, , `, , `, , To Profit & Loss A/c, 1,500, 1,500, To Adv. Suspense A/c, 6,000, 6,000, To Y’s Capital A/c, (Goodwill 3 : 2), 18,000, —, To Y’s Loan A/c, — 1,18,500, To Balance c/d, 1,10,500, —, 1,36,000 1,26,000, , X, , Y, , `, , `, , 1,000 By Balance b/d, 1,00,000 60,000, 4,000 By General Reserve, 30,000 30,000, By Revaluation A/c, 12,000, (Profit), 6,000, 6,000, — By X’s Capital A/c, — 18,000, 57,000 By Y’s Capital A/c, — 12,000, 74,000, 1,36,000 1,26,000, , Working Notes :, (i), , Particulars, , Cr., , Y’s Share of Goodwill = ` 80,000 ´, , (ii) Gaining Ratio of X and Z is 3 : 2, , Z, `, , 50,000, 20,000, 4,000, —, —, 74,000, , 3, = ` 30,000, 8, , 3, = ` 18,000, 5, 2, (iv) Goodwill borne by Z = ` 30,000 ´ = ` 12,000, 5, (iii) Goodwill borne by X = ` 30,000 ´, , Balance Sheet of the New Firm, (as on 31st March, 2019), Liabilities, , Amount, , Assets, , `, , Creditors, X’s Loan A/c, Y’s Loan A/c, (` 40,000 + 1,18,500), Capital A/cs :, X, Z, , `, , 1,10,500, 57,000, , 2,50,000 Cash at Bank, 50,000 Bills Receivable, `, Debtors, 80,000, 1,58,500, Less : Provision for D.D., 6,000, Stock (` 1,24,000 – 12,000), Fixed Assets (` 3,00,000 + 30,000), 1,67,500, 6,26,000, , 346, , Amount, `, , 50,000, 60,000, 74,000, 1,12,000, 3,30,000, 6,26,000
Page 361 :
Retirement of a Partner, Illustration 31, A, B and C were partners in a firm whose Balance Sheet as on 31st December, 2017, was as follows :, Liabilities, Creditors, Reserve, Capital A/cs :, A, B, C, , `, , `, , 18,000, 16,000, 14,000, , Assets, , `, , 17,000 Bank Balance, 3,000 Debtors, Stock, Furniture, , 12,000, 20,000, 16,000, 20,000, , 48,000, 68,000, , 68,000, , C retired on that date and in this connection it was decided to make the following, adjustments :, (i) To reduce Stock and Furniture by 10%., (ii) To provide for doubtful debts ` 900 on debtors., (iii) Goodwill was valued at ` 15,000. Not to show goodwill in the books., (iv) To share profit and losses in 3 : 2 and new capitals readjust in the profit-sharing ratio., (v) To bring in sufficient cash to pay off C immediately and to leave a balance of, ` 4,500 in the Bank. C was paid off., Give Journal entries., Solution, Journal Entries, Dr., Cr., Date, 2017, Dec. 31 Reserve A/c, To A’s Capital A/c, To B’s Capital A/c, To C’s Capital A/c, , Particulars, , L.F., Dr., , Amount, , Amount, , `, , `, , 3,000, , 1,000, 1,000, 1,000, , (Being Reserve shared by partners in equal ratio), , Revaluation A/c, To Stock A/c, To Furniture A/c, To Provision for Doubtful Debts A/c, , Dr., , A’s Capital A/c, B’s Capital A/c, C’s Capital A/c, To Revaluation A/c, , Dr., Dr., Dr., , 4,500, 1,600, 2,000, 900, , (Being the value of stock and furniture reduced by 10% and provision, made for doubtful debts), , 1,500, 1,500, 1,500, 4,500, , (Being loss on revaluation transferred to Partners’ Capital A/cs), , A’s Capital A/c, B’s Capital A/c, To C’s Capital A/c, , Dr., Dr., , Bank A/c, To A’s Capital A/c, To B’s Capital A/c, , Dr., , 4,000, 1,000, , (Being C’s share of goodwill adjusted to the accounts of A and B in their, gaining ratio 4 : 1), , 5,000, , 11,000, 9,900, 1,100, , (Being cash brought in by A and B to make their capitals in new profitsharing ratio of 3 : 2), , 347
Page 362 :
SBPD Publications Accountancy (XII), C’s Capital A/c, To Bank A/c, , Dr., , 18,500, 18,500, , (Being the amount due to C paid off), Working Notes :, 1., Calculation of Gaining Ratio :, Gaining Ratio = New Ratio – Old Ratio, 3 1, 9- 5, 4, 2 1, 6- 5, 1, A's Gain = - =, = , B's Gain = - =, =, 5 3, 15, 15, 5 3, 15, 15, 4, 1, Gaining Ratio =, :, = 4 : 1, 15 15, So, C's share of goodwill to be adjusted to the account of A and B in the ratio of 4 : 1., Value of Goodwill ` 15,000; C's Share = 15,000 × 1/3 ` = ` 5,000, 4, 1, Adjusted : A = 5,000 ×, = ` 4,000; B = 5,000 ×, = ` 1,000, 5, 5, 2., Partners’ Capital Accounts, Dr., Particulars, , A, , B, `, , To Revaluation A/c (Loss), To C’s Capital A/c, To Balance c/d, , `, , 1,500, , To Balance c/d, , 3., , Particulars, , `, , 1,500, , 4,000, , 1,000, , 13,500, , 14,500, , 19,000, To Bank A/c, , C, , 17,000, , —, , —, , 23,400, , 15,600, , 23,400, , 15,600, , A, , B, , `, , `, , 1,500 By Balance b/d, , 18,000, , 16,000, , 14,000, , `, , — By Reserve, , 1,000, , 1,000, , 1,000, , 18,500 By A’s Capital A/c, , —, , —, , 4,000, , By B’s Capital A/c, , —, , —, , 1,000, , 20,000, , 19,000, , 17,000, , 20,000, , 18,500 By Balance b/d, , 13,500, , 14,500, , 18,500, , 9,900, , 1,100, , —, , 23,400, , 15,600, , 18,500, , — By Bank A/c (Bal. fig.), 18,500, , Calculation of Capital of the New Firm :, A's Existing Capital, B's Existing Capital, Amount payable to C, Bank Balance Required after C’s Payment, , Total Capital of the New Firm, , `, 13,500, 14,500, 18,500, 4,500, 51,000, 12,000, 39,000, , A, `, 23,400, 13,500, 9,900, , B, `, 15,600, 14,500, 1,100, , Less : Cash available as per B/S, 4., , 5., , Required Capital of A and B :, 3, A's Capital in the New Firm = 39,000 ×, = ` 23,400, 5, 2, B's Capital in the New Firm = 39,000 ×, = ` 15,600, 5, Cash to be brought in by A and B :, Required Capital, Less : Existing Capital, , Cr., C, , Cash brought, , Illustration 32, Ativ, Meha and Nupur were partners sharing profits and losses in the ratio of, 5 : 3 : 2. On 31-3-2019, their Balance Sheet was as ahead :, , 348
Page 363 :
Retirement of a Partner, Liabilities, , `, , 26,500, 23,500, 1,00,000, 50,000, 40,000, , Trade Creditors, Empolyees’ Provident Fund, Ativ’s Capital, Meha’s Capital, Nupur’s Capital, , Assets, Bank, Debtors, Stock, Fixed Assets, Advertisement Expenditure, , `, , 25,000, 30,000, 55,000, 1,20,000, 10,000, , 2,40,000, , 2,40,000, , Ativ retired on 1-4-2019. For this purpose, the following adjustments were agreed, upon :, (a) Goodwill of the firm was to be valued at 2 years’ purchase of the average profits of, 3 completed years preceding the date of retirement. The profits for previous years were :, 2016-17 ` 55,000; 2017-18 ` 65,000; 2018-19 ` 60,000., (b) Fixed assets were to be increased by ` 25,000., (c) Stock was overvalued by ` 5,000., (d) ` 20,000 were immediately paid to Ativ and the balance was transferred to his, loan account., Prepare Revaluation acount, Partners Capital Accounts and the Balance Sheet of, the reconstituted firm., (CBSE, New Delhi, 2017, Set 1/1), Solution, Working Notes :, Valuation of Goodwill : Goodwill = Average Profit × No. of years’ Purchase, Total Profit, 55, 000 + 65, 000 + 60, 000, Average Profit =, =, = ` 60,000, No. of Years, 3, Goodwill = ` 60,000 × 2 = ` 1,20,000, 5, Ativ’s Share = ` 1,20,000 ×, = ` 60,000 (To be compensated by Meha and Nupur in their, 10, gaining Ratio 3 : 2.), , Revaluation Account, , Dr., Particulars, To Profit transferred to :, Atiiv's Capital A/c, Meha's Capital A/c, Nupur's Capital A/c, , `, 15,000, 9,000, 6,000, , Cr., Particulars, , `, , `, , By Fixed Assets (Increase), By Stock, , 25,000, 5,000, , 30,000, 30,000, , 30,000, , Partners’ Capital Accounts, , Dr., Particulars, , Ativ, , `, To Advertisement, Expenditure, 5,000, To Ativ's Capital A/c, —, To Bank A/c, 20,000, To Ativ's Loan A/c, trans., 1,50,000, To Balance c/d, —, 1,75,000, , Meha, `, , Nupur, , Particulars, , Cr., Ativ, , Nupur, , `, 50,000, , `, 40,000, , 9,000, , 6,000, , —, , —, , —, 20,000, , `, By Balance b/d, 1,00,000, 2,000 By Revaluation A/c, 24,000, (Profit), 15,000, — By Meha's Capital, A/c, 36,000, — By Nupur’s Capital, 20,000, A/c, 24,000, , —, , —, , 59,000, , 46,000, , 59,000, , 46,000, , 3,000, 36,000, —, , `, , Meha, , 1,75,000, , 349
Page 364 :
SBPD Publications Accountancy (XII), Balance Sheet of the New Firm, Liabilities, , (as at April 1, 2019), Amount, , Assets, , Amount, , `, , Trade Creditors, Employees’ Provident Fund, Ativ’s Loan A/c, Meha’s Capital A/c, Nupur’s Capital A/c, , 26,500, 23,500, 1,50,000, 20,000, 20,000, , `, , Bank (` 25,000 – 20,000), Debtors, Stock, Fixed Assets, Add : Increase, , 2,40,000, , `, , 1,20,000, 25,000, , 5,000, 30,000, 60,000, 1,45,000, 2,40,000, , 6.3 FAST REVISION, l Meaning of Retirement of a Partner : When a partner cuts off his relations from the, partnership on account of various reasons, settles his account and leaves the firm, such a, situation is called retirement of a partner. The partner who leaves the firm is known as, retiring partner or outgoing partner., l Reconstitution of a Firm on Retirement of a Partner : After the retirement of a, partner, the old partnership comes to an end but the firm continues and a new partnership, comes into existence between the remaining partners. Thus, retirement of a partner results, in the reconstitution of a firm., l Matters that Need Adjustment at the Time of Retirement :, (i) Determination of New Profit-sharing Ratio, (ii) Determination of Gaining Ratio,, (iii) Valuation and Treatment of Goodwill, (iv) Revaluation of Assets and Liabilities,, (v) Adjust of Accumulated Profits and Losses, (vi) Adjustment of Capitals, if necessary,, (vii) Determination of the Amount Payable to the Retiring Partner., l New Profit-sharing Ratio of Continuing Partners :, New Share = Old Share + Profit Share/Acquired Share from the Retiring Partner., In the absence of any information regarding gaining ratio, the new ratio of the remaining, partners will be calculated by striking out the share of retiring partner., l Gaining Ratio : Gaining ratio is the ratio in which the continuing partners have acquired, the share from the retiring or deceased partner., Gaining Ratio = New Ratio – Old Ratio, l Treatment of Goodwill :, (a) Goodwill should adjusted through Partners' Capital Accounts. Adjustment is to be made, to the extent of the retiring partner's share of goodwill. Remaining (or continuing), Partners' Capital Accounts are debited in their gaining ratio and retiring Partner's, Capital Account is credited., (b) If goodwill already appears in the books, it should be written off by debiting all Partners’, Capital Accounts in their old profit-sharing ratio and crediting the Goodwill Account., l Accounting Treatment of Revaluation of Assets and Liabilities : At the time of, retirement of a partner, assets and liabilities are revalued, so that the retiring partner gets, a fair share of assets. Besides this, there may be unrecorded assets and liabilities which, have to be recorded. For this a Revaluation Account or Profit & Loss Adjustment Account is, prepared. Profit or loss arising from Revaluation Account is divided amongst all the, partners (including the retiring partner)., l Accumulated Profits or Losses/Reserves etc. : The reserves, accumulated profits or, losses appearing in the Balance Sheet belong to all partners. Hence, they should be, transferred to Capital Accounts of all partners in their old profit-sharing ratio., , 350
Page 365 :
Retirement of a Partner, l Settlement of the Amount due to the Retiring Partner : The amount due to a retiring, partner has to be paid to him over lump sum or transferred to his Loan Account. His loan, may be payable with or without interest in instalments., l Adjustment of Capital : If the continuing partners so desire, they may decide to keep, their capital in accordance with their new profit-sharing ratio., , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6/8 Marks Questions), , 1. Describe the methods of treatment of Goodwill on retirement of a partner., 2. Describe the methods of payment of amount due to a retiring partner., 3. What do you mean by Retirement of a Partner ? What are the rules relating to valuation of, Goodwill at the time of retirement ? Give necessary entries to illustrate these rules., 4. How can a partner retire ? What problems arise when a partner decides to retire ?, 5. Explain the procedure of determining the amount payable to a retiring partner when he leaves, the firm., , (B) Short Answer Type Questions, 1., 2., 3., 4., 5., 6., 7., 8., , (3/4 Marks Questions), , What do you mean by gaining ratio ? How is it calculated ?, What is Joint Life Policy ?, State the purposes for which sacrificing ratio and gaining ratio is calculated., Distinguish between sacrificing ratio and gaining ratio., How would you calculate the amount payable to the retiring partner ?, Explain the accounting treatment of ‘Goodwill’ at the time of retirement of a partner., How is a Partner’s share determined on the retirement or death ? Explain., State the effects of retirement of a partner., , (C) Very Short Answer Type Questions, , (1 Mark Questions with Answers), , 1. What is meant by retirement of a partner ?, [Ans. Retirement of a partner means leaving the firm by a partner due to any reason.], 2. Is the retirement of a partner means reconstitution of a firm ?, [Ans. Yes. On retirement of a partner, the old partnership comes to an end but the firm continues, as a new partnership comes into existence. Hence, a retirement mean reconstitution of firm.], 3. State any two modes of retirement., [Ans. A partner may retire : (i) With the consent of all the partners, (ii) As per terms of the, agreement.], 4. State any two matters (or issues) that need adjustment at the time of retirement of a, partner., [Ans. (i) Determination (calculation) of new profit-sharing ratio. (ii) Treatment of Goodwill.], 5. What is meant by new profit-sharing ratio in case of retirement of a partner ?, [Ans. New profit-sharing ratio means the ratio in which remaining partners will share the future, profits and losses of the firm.], 6. What is Gaining Ratio on retirement of a partner ?, [Ans. The ratio in which retiring partner's share is taken by the continuing partners is called the, Gaining Ratio.], 7. How is Gaining Ratio calculated ?, Or, Give the formula of calculating Gaining Ratio., [Ans. Gaining Ratio is calculated as : Gaining Ratio = New Share – Old Share.], 8. Why is Gaining Ratio calculated ?, [Ans. Gaining Ratio is calculated to ascertain the amount of goodwill payable to a retiring or, deceased partner.], 9. How is goodwill recorded at the time of retirement of a partner ?, (J.A.C., 2011), [Ans. The retiring partner's share of goodwill is credited to his account and debited to remaining, Partners' Capital Accounts in gaining ratio., , 351
Page 366 :
SBPD Publications Accountancy (XII), Remaining Partner’s Capital A/c, Dr. (in Gaining Ratio), To Retiring Partner's Capital A/c], 10. How would you deal with existing goodwill on retirement of a partner ?, [Ans. Existing goodwill is written off. The following Journal entry is passed :, All Partners' Capital A/cs, Dr. (in Old Ratio), To Goodwill A/c, (Existing Goodwill), (Being existing goodwill written off in old ratio)], , 11. Why assets and liabilities are revalued on retirement of a partner ?, [Ans. On the retirement, retiring partner must be given his share of profit and loss arising out of, change in the value of assets and liabilities. That is why assets are revalued and liabilities, are re-assessed on retirement of a partner.], 12. Which account is prepared to show the changes in the value of assets and liabilities at, the time of retirement of a partner ?, [Ans. Revaluation Account.], 13. What is Joint Life Policy ?, [Ans. Joint Life Policy is an insurance policy which is taken up by the firm on the lives of partners, jointly. Premium on J.L.P. is paid by the firm.], 14. What is Surrender Value ?, [Ans. Surrender value is the value which insurance company will pay, if the policy is, discontinued and surrendered to the company before the date of maturity.], 15. Satyam, Shivam and Sundaram are partners sharing profits in the ratio of 2 : 3 : 2. If, Satyam retires, what will be the new profit-sharing ratio of Shivam and Sundaram ?, [Ans. 3 : 2.], 16. Deepa, Shilpa and Madhumita are partners sharing profit in the ratio of 5 : 3 : 2. If, Madhumita retires, what will be the new ratio between Deepa and Shilpa., [Ans. 5 : 3.], 17. Neru, Anu and Ashu are partners sharing profit in the ratio of 4 : 3 : 2. Ashu retires., Find the new ratio of Neru and Anu if they acquire Ashu's share equally., [Ans. 10 : 8 or 5 : 4], 18. A, B and C were sharing profit in the ratio of 3 : 2 : 1. A retires. His share is taken by B, and C in the ratio of 2 : 1. What will be the new ratio of B and C ?, [Ans. 2 : 1.], 19. Ashish, Vinod and Chander are partners sharing profits and losses in the ratio of 2 : 1 : 2, respectively. Chander retires and Ashish and Vinod decide to share the profits and, losses equally in future. Calculate the gaining ratio., [Ans. 1 : 3.], 20. Give any two points of distinction between ‘Gaining Ratio’ and ‘Sacrificing Ratio’., (U.S.E.B., 2011), [Ans. (i) Sacrificing ratio is calculated at the time of admission of a new partner but gaining ratio, is calculated at the time of death/retirement of a partner., (ii) Sacrificing ratio is calculated by deducting new ratio from old ratio but gaining ratio is, calculated just reverse.], 21. What Journal entry will be made for writing off the goodwill already existing in, Balance Sheet ?, [Ans. All Partners’ Capital A/cs, Dr. (In old profit sharing ratio), To Goodwill A/c, (Being Existing Goodwill A/c written off in old ratio)], , (D) Objective Type Questions, I. Select the correct alternative :, 1. On the retirement of a partner, profit on revaluation of assets and liabilities should be credited to, the Capital Accounts of :, (a) All partners in the old profit-sharing ratio, (b) The remaining partners in their old profit-sharing ratio, , 352
Page 367 :
Retirement of a Partner, , 2., 3., , 4., 5., , II., 1., 2., 3., 4., 5., 6., , (c) The remaining partners in their new profit-sharing ratio, (d) None of these, On retirement of a partner, the retiring Partner's Capital Account will be credited with :, (a) His/her share of goodwill, (b) Goodwill of the firm, (c) Share of goodwill of remaining partners, (d) None of these., Govind, Hari and Pratap are partners. On retirement of Govind, the goodwill already appears in, the Balance Sheet at ` 24,000. The goodwill will be written off :, (a) By debiting all Partners' Capital Accounts in their old profit-sharing ratio, (b) By debiting remaining Partners' Capital Accounts in their new profit-sharing ratio, (c) By debiting retiring Partner's Capital Account from his share of goodwill, (d) None of these., The old profit-sharing ratio among Rajender, Satish and Tejpal were 2 : 2 : 1. The new profitsharing ratio after Satish's retirement is 3 : 2. The gaining ratio is :, (a) 3 : 2, (b) 2 : 1, (c) 1 : 1, (d) 2 : 3, X, Y and Z are Partners sharing profits in the ratio of 1/2, 1/3 and 1/6. Y retires new profit sharing, ratio will be :, (a) 3 : 1, (b) 1 : 2, (c) 2 : 3, (d) 1 : 3, [Ans. 1. (a), 2. (a), 3. (a), 4. (c), 5. (a).], State whether the following statements are ‘True’ or ‘False’ :, A retiring partner is entitled to have a share in the Goodwill of the firm., On the retirement of a partner, any reserve created out of profits should be transferred to the, Capital Accounts of the remaining partners in the new profits-sharing ratio., At the time of retirement, the amount due to the retiring partner must be transferred to his, Capital Account., On the retirement of a partner, profit on the adjustment in the value of assets should be credited, to the Capital Accounts of all partners in the old profit-sharing ratio., Joint Life Policy Reserve is in the nature of accumulated policy., The executors will be paid interest @ 6% p.a. on the amount due from the date of death of the, partner., [Ans.: 1. True, 2. False, 3. False, 4. True, 5.True, 6. True.], , PRACTICAL PROBLEMS, Short Practical Problems, ❏ Calculation of New Profit-sharing Ratio, 1. A, B and C were partners sharing profit in the ratio of 3/6, 2/6 and 1/6 respectively. Find out new, ratios when :, (a) A retires; (b) B retires; or (c) C retires., [Ans. (a) 2 : 1, (b) 3 : 1, (c) 3 : 2.], 2. A, B and C have been sharing profits and losses in the ratio of 5 : 3 : 2. B retires. His share is taken, over by A and C in the ratio of 2 : 1. Calculate new profit-sharing ratio., [Ans. Ratio between A and C 7 : 3], 3. A, B and C were partners in a firm sharing profits in the ratio of 5 : 4 : 3. B retired and his share, was divided equally between A and C. Calculate the new profit-sharing ratio of A and C., [Ans. 7 : 5.], ❏ Gaining Ratio, 4. A, B and C share profits in the ratio of 4 : 3 : 2. B retires. It is agreed that in future A and C shall, share in the ratio of 3 : 2. Calculate the gaining ratio., [Ans. A : C = 7 : 8.], 5. X, Y and Z are partner sharing profits in the ratio of 4 : 3 : 2. Y retires. X and Z decided to share, profits and losses in future in the ratio of 5 : 4. Calculate gaining ratio., [Ans. Gaining Ratio 1 : 2.], 6. K, M and S are three partners sharing profits in the ratio of 4 : 3 : 2. K retires. Assuming that M and S, will share profits in future in the ratio of 5 : 3, determine the gaining ratio., (U.S.E.B., 2014), [Ans. Gaining Ratio 21 : 11.], , 353
Page 368 :
SBPD Publications Accountancy (XII), 7. A, B, C and D are partners sharing profit in the ratio of 1 : 2 : 1 : 2 respectively. C retires and A, B, and D decide to share future profit-loss equally. Find gaining ratio., [Ans. A Gains 1/6th and C Sacrifices 1/6th], 8. A, B, C, D and E are partners in a firm sharing profits in the ratio of 7 : 5 : 3 : 3 : 2 respectively. C, retires from the business. The profit-sharing ratio as agreed by the partners A, B, D and E is 6 :5 : 5 : 4, respectively. Calculate the profit gaining ratio of remaining partners., 1, 2 çæ, 1 ÷ö, 2 çæ, 1 ÷ö, æ 1 ÷ö, [Ans. A’s Sacrifice, , D Gains, çor ÷, E Gains, çor ÷ or Profit Gaining Ratio = ççç ÷÷ :, è 20ø, 20, 20 çè 10 ÷ø, 20 çè 10÷ø, 2, 2, Nil :, :, ], 20 20, ❏ New Ratio and Gaining Ratio, 9A. P, Q, R and S are partners sharing profits in the ratio of 7 : 5 : 2 : 1. S retires from the firm., Calculate new ratio after S's retirement and also gaining ratio., [Ans. Both New Ratio and Gaining Ratio 7 : 5 : 2.], 2 1, 1, 9B. A, B and C were partners sharing profit and loss in the ratio of , and , A retires and, 6 2, 6, surrenders 2/3 of his share in favour of B and remaining in favour of C. Calculate new ratio and, gaining ratio., [Ans. New Ratio of A and B = 13 : 15, Gaining Ratio 2 : 1.], ❏ Accounting Treatment of Goodwill, 10A. A, B and C are partners sharing profits in the ratio of 2 : 3 : 4. C retires and for this purpose,, goodwill is valued at ` 45,000. Pass necessary Journal entry., [Ans. C Share of Goodwill (` 20,000) will be debited to A and B in the Ratio of 2 : 3], 10B. P, Q and R are partners in a firm. Goodwill has been valued at ` 36,000. On R's retirement from, the firm, P and Q agree to share profits in the ratio of 3 : 2. Pass necessary Journal entry for, treatment of R's share of goodwill., [Ans. R's share will be compensated by P & Q in their gaining ratio 4 : 1.], 11. A, B, C and D share profits in the ratio of 3 : 2 : 3 : 2. A retires and the goodwill of the firm is valued, at ` 1,20,000. The remaining partners decide to share profits as 3 : 1 : 6 among themselves. Give, necessary Journal entry for treatment of goodwill., 1, 4, 2, [Ans. Gains B, ,D, Sacrificed, C , so B and D will be debited respectively with ` 12,000, 10, 10, 10, and ` 48,000 and A and C will be credited with ` 36,000 and ` 24,000 respectively.], 12. X, Y and Z are three partners sharing profits and losses in the ratio of 2 : 2 : 1. Y retires and, goodwill of the firm is valued at ` 60,000. No Goodwill Account appears in the books of the firm., Pass necessary Journal entries for goodwill. When Goodwill Account is adjusted through, Partners’ Capital Accounts (AS-26)., [Ans. X and Z’s Capital debited respectively with ` 16,000 and ` 8,000 and Y’s Capital A/c credited, with ` 24,000 respectively (X & Z sacrificing ratio is 2 : 1)], ❏ When Goodwill already appears in the Books, 13A. A, B and C are partners in a firm sharing profit & loss in 2 : 3 : 4 ratio. Goodwill account is, appearing at a value of ` 36,000 in the books of firm. C takes retirement from the firm. Pass entry, to write off the goodwill account., [Ans. Partners' Capital Accounts will be debited in old profit-sharing ratio with the amount of, goodwill appearing in the books.], 13B. Tom, Dick and Hary are partners sharing profits in the ratio of 5 : 3 : 2. Tom wants to retire. His, share has been taken by Dick and Hary in the ratio of 1 : 4 respectively. Goodwill appears in the, books of the firm ` 50,000. However, the goodwill has now been valued at ` 1,50,000 for the, purpose of retirement of Tom., Give necessary Journal entries for treatment of goodwill on retirement of Tom., [Ans. First close Goodwill Account in the old profit-sharing ratio by debiting all Partners' Capital, Accounts and then pass adjustment entry for retiring partner's share of new goodwill by, debiting Dick with ` 15,000 and Hary ` 60,000 and crediting Tom with ` 75,000.], , 354
Page 369 :
Retirement of a Partner, 14. Arjun, Bhim and Nakul are partners sharing profits and losses in the ratio of 14 : 5 : 6. Bhim, retires and surrenders his 5/25th share in favour of Arjun. The goodwill of the firm is valued at 2, years’ purchase of super profits based on average profits of last 3 years. The profits for the last 3, years are ` 50,000, ` 55,000 and ` 60,000 respectively. The normal profits for the similar firm are, ` 30,000. Goodwill already appears in the books of the firm at` 75,000. The profit for the first year, after Bhim’s retirement was ` 1,00,000. Give the necessary Journal entries to adjust goodwill and, distribution of profits showing your workings., (C.B.S.E., 2012), [Ans. J/E, W/O goodwill, Bhim’s share of goodwill ` 10,000, Profit for the first to be shared in the, ratio of 19 : 6], ❏ Hidden Goodwill, 15. Lalit, Mohit and Nitish are partners in 4 : 3 : 3 ratio. Nitish retires from the firm. His capital was, ` 1,50,000 and his share in reserves and profit on revaluation was ` 20,000 and ` 30,000, respectively. Lalit and Mohit agreed to pay him ` 2,21,000 on retirement. Pass Journal entry for, the treatment of goodwill., [Ans. J/E, Hidden Goodwill ` 21,000.], ❏ Revaluation of Assets and Liabilities, ❏ Journal Entries, 16. A, B and C were partners sharing profits in the ratio of 5 : 3 : 2. Their Balance Sheet as on 1st, April, 2019 was as follows :, Balance Sheet of A, B and C, (as on 1st April, 2019 ), Liabilities, Amount, Assets, Amount, `, `, Creditors, 20,000 Cash, 16,000, Employees Provident Fund, 26,000 Debtors, 16,000, Capitals :, `, Stock, 80,000, A, 1,00,000, Furniture, 34,000, B, 70,000, Building, 1,20,000, C, 50,000, 2,20,000, 2,66,000, 2,66,000, C retires on the above date and it was agreed that :, (i) C’s share of Goodwill was ` 8,000., (ii) Provision for doubtful debts 5% was to be made on debtors., (iii) Sundry creditors were valued at ` 4,000 more than the book value., Pass necessary Journal entries for the above transactions on C’s retirement., [Ans. J/E, Revaluation Loss ` 4,800. Adjustment of C's share of goodwill through Capital, Accounts. C’s Capital transferred to C’s Loan Account ` 57,040], ❏ Preparation of Revaluation Account, 17. The Balance Sheet of X, Y and Z sharing profits and losses in the ratio of 5 : 3 : 2 as on 31st March,, 2019 was as follows :, Liabilities, Amount, Assets, Amount, `, , Sundry Creditors, Capital A/cs :, X, Y, Z, , `, , 46,000, 34,000, 25,000, , `, , 15,000 Cash at Bank, `, Debtors, 16,000, Less : Provision for D.D., 800, Stock, 1,05,000 Plant & Machinery, Land & Building, 1,20,000, , 27,000, 15,200, 12,800, 35,000, 30,000, 1,20,000, , 355
Page 370 :
SBPD Publications Accountancy (XII), On the same date, Y retires from the firm and X and Z decide to share future profits and losses in, the ratio of 3 : 1 respectively. Following adjustments were agreed upon that :, (i) An amount of ` 1,200 included in sundry debtors be written off as no longer receivable., (ii) A provision for doubtful debts be maintained at existing rate., (iii) Stock be written down by ` 1,260., (iv) Land and building be increased by ` 9,800., (v) Plant and machinery be reduced to ` 34,000., (vi) An amount of ` 1,600 included in the sundry creditors be written back as no longer payable., Prepare Revaluation Account., [Ans. Revaluation A/c Profit ` 8,000.], ❏ Preparation of Revaluation Account and Partner’s Capital A/cs, 18. A, B, and C are in partnership business sharing profits in the ratio of 3 : 2 : 1. Their Balance Sheet, as on 31st March, 2019 was as under :, Capital and Liabilities, , Amount, , Assets, , `, , Creditors, Bills Payable, Capital A/cs :, A, B, C, , `, 16,000, 12,000, 10,400, , 8,000 Bank, 1,600 Stock, Debtors, Machinery, Land and Building, 38,400, 48,000, , Amount, `, , 1,600, 10,400, 12,000, 9,600, 14,400, 48,000, , A retired on April 1, 2019 and on that date assets and liabilities of the given were revalued as, under :, Stock, ` 9,600, Debtors, ` 11,200, Machinery, , ` 8,800, , Land and Building, , ` 18,600, , Creditors, , ` 7,900, , Bills Payable, , ` 1,500, , Outstanding Exp., , `, , 800, , Assuming that the above adjustments are duly carried through. After A’s retirement, balance in his, capital account is transferred to his loan account. Prepare necessary accounts. (U.S.E.B., 2016), [Ans. Profit on Revaluation ` 1,200, Capital A/cs : Balance : B ` 12,400, C ` 10,600, A’s Loan A/c, ` 16,600], ❏ Distribution of Reserves and Profits and Losses, 19A. Ganesh, Mahesh and Dinesh are partners who share profits and losses in the ratio of 3 : 1 : 1., Their Balance Sheet as on 31st December, 2018 was as follows :, Liabilities, Capital A/cs :, Ganesh, Mahesh, Dinesh, General Reserve, , Amount, `, `, , 60,000, 40,000, 30,000, , 1,30,000, 30,000, 1,60,000, , Assets, Sundry Assets, Profit & Loss A/c, , Amount, `, , 1,40,000, 20,000, , 1,60,000, , On January 1, 2019 Dinesh retired. If there is any reserve, profit or loss, pass necessary Journal, entries for the same. Ganesh and Mahesh decided to distribute profits in future equally., [Ans. Total of Journal ` 50,000], , 356
Page 371 :
Retirement of a Partner, ❏ Preparation of Partners’ Capital Accounts, 19B. Sanjay, Manoj and Shekhar were partners in a firm, they share profits in the ratio of 1 : 2 : 3., Their Balance Sheet as on 31st December 2018 was as below :, , Balance Sheet, Liabilities, Capitals :, Sanjay, Manoj, Shekhar, General Reserve, Creditors, , Amount, `, , 24,000, 20,000, 16,000, , Assets, , `, , Building, Furniture, Debtors, 60,000 Cash, 18,000, 22,000, 1,00,000, , Amount, `, , 60,000, 16,000, 20,000, 4,000, , 1,00,000, , Shekhar retires on 1st January, 2019. The Goodwill of the firm was valued at ` 30,000. The, amount payable to Shekhar was transferred to his loan account., Prepare Partners’ Capital Account to give effect to above., [Ans. Tran. to Shekhar’s Loan A/c ` 40,000; Partners’ Capital Account : Sanjay ` 22,000; Manoj, ` 16,000.], 20. A, B and C are partners in a business. They share profits and losses in the ratio of 1/2, 1/3 and 1 /6, respectively. The Balance Sheet of the firm on 31st March, 2019 stood as follows :, Liabilities, Amount, Assets, Amount, `, , Creditors, Reserve Fund, Capitals :, A, B, C, , `, , 8,000, 8,000, 8,000, , `, , 1,280 Cash in hand, 4,800 Cash at Bank, Debtors, Furniture, Stock, 24,000 Business Premises, 30,080, , 480, 800, 7,200, 4,800, 5,600, 11,200, 30,080, , C retires on 31st March, 2019 from the business. It is agreed to adjust the value of the assets asfollows :, (a) A provision of 5% on Sundry Debtors be made for bad and doubtful debts., (b) Stock and furniture be depreciated by 5% and 10% respectively and business premises be, appreciated by ` 880., Pass the necessary Journal entries and prepare Profit and Loss Adjustment Account., [Ans. Loss on Revaluation ` 240; C's Loan A/c ` 8,760], Comprehensive Questions, ❏ Journal Entries, Revaluation A/c and Retiring Partner's Capital A/c, 21. The following is the Balance Sheet of X, Y and Z who are in partnership as on 31.5.2019 :, Balance Sheet, (as on 31.5.2019), Liabilities, Amount, Assets, Amount, `, , Creditors, General Reserve, Proft & Loss A/c, Capital A/cs :, X, , `, , 12,000, , 9,000 Plant and Machinery, 18,000 Furniture, 6,000 Stock, Debtors, Cash, , `, , 18,000, 12,000, 8,000, 15,000, 12,000, , 357
Page 372 :
SBPD Publications Accountancy (XII), Y, Z, , 10,000, 10,000, , 32,000, 65,000, , 65,000, , Y retires on 1.6.2019. On his retirement the assets and liabilities are revalued as below :, Plant and Machinery at ` 22,000; Stock at ` 13,000; Furniture at ` 10,000; Provision for Doubtful, Debts is required at 5% on Debtors; the Creditors are to be taken at ` 8,500., Pass the Journal entries and show the Revaluation Account and Y's Capital Account, assuming, that 20% of the amount payable to Y is paid in cash and the balance is transferred to a Loan, Account in his name., [Ans. Revaluation A/c—Profit ` 6,750; Amount Payable to Y ` 20,250.], ❏ Revaluation Account and Partners’ Capital Accounts, 22. The following was the Balance Sheet of Akash, Abhi and Anna and share profits and losses ratio, were 3 : 2 : 1 as on 31st December, 2017 :, Liabilities, , Amount, , Assets, , `, , Creditors, Capital A/cs :, Akash, Abhi, Anna, , `, , 1,50,000, 1,00,000, 50,000, , 2,10,000 Cash, Stock, Plant & Machinery, Building, 3,00,000, 5,10,000, , Amount, `, , 50,000, 1,50,000, 2,00,000, 1,10,000, 5,10,000, , Akash retires on that date on the following terms :, (a) The goodwill of the firm is to be valued at ` 12,000., (b) Stock and building are to be appreciated by 7%., (c) Plant is to be depreciated by 10%., (d) It is decided not to maintain Goodwill A/c in the books., You are required to prepare (a) Revaluation A/c and (b) Partners’ Capital A/cs. (J.A.C., 2016), [Ans. Revaluation Loss ` 1,800; Capital A/cs : Abhi ` 95,400 (Cr.); Anna ` 47,700 (Cr.), Akash’s, Loan A/c ` 1,55,100], 23. A, B and C are partners in a firm sharing profits and losses equally. The Balance Sheet of the firm, as on 30.6.2019 was as follows :, Liabilities, Amount, Assets, Amount, Sundry Creditors, General Reserve, Capital A/cs :, A, B, C, , `, , `, , 25,000, 20,000, 15,000, , 20,000 Building, 15,000 Machinery, Furniture, Stock, Debtors, 60,000 Cash, 95,000, , `, , 15,000, 18,000, 3,000, 15,000, 18,000, 26,000, 95,000, , C retires on 30th June, 2019 subject to the following adjustments :, (i) Goodwill Account is to be valued at ` 18,000., (ii) Machinery is to be depreciated by 10%., (iii) Stock is to be appreciated by 6%., (iv) Provision for doubtful debts to be made @ 5%., You are required to (i) Show the Profit & Loss Adjustment Account, and (ii) Partners' Capital Accounts., [Ans. P. & L. Adjustment A/c—Loss ` 1,800; Payment to C ` 25,400; Capital Balance : A ` 26,400, (Cr.), B. ` 21,400 (Cr.)], , 358
Page 373 :
Retirement of a Partner, 24. K, N and V were partners sharing profits and losses in the proportion of 6 : 5 : 3 respectively., Their Balance Sheet on 31st December, 2018 was as under :, Liabilities, Amount, Assets, Amount, `, , Bills Payable, Creditors, Capital :, K, N, V, , `, , 16,000, 12,000, 10,000, , `, , 7,000 Buildings, 8,000 Plant, Stock, Debtors, Cash, 38,000, , 18,000, 14,000, 14,000, 6,000, , 53,000, , 53,000, , 1,000, , K retires on that date on the following :, (i) The goodwill of the firm is to be valued at ` 6,000., (ii) Stock and Building are to be appreciated by 8%., (iii) Plant to be depreciated by 10%., (iv) It is decided not to maintain Goodwill A/c in the book., You are required to prepare (a) Revaluation A/c, and (b) Partners’ Capital A/cs. (J.A.C., 2014), [Ans. Revaluation A/c Profit ` 1,160, K ` 497; N ` 414; V ` 249; K’s Share in Goodwill ` 2,571., Balance of Capital : N ` 10,807; V ` 9,285; K transfer to K's Loan A/c ` 19,068.], 25. A, B and C are partners sharing profits and losses in the ratio of 3 : 2 : 1. Their Balance Sheet as on, 31st March, 2019 was as under :, Capital and Liabilities, Amount, Assets, Amount, `, , Creditors, Bills Payable, Bank Overdraft, Capital A/cs :, A, B, C, Bank Loan, , `, , 20,000, 15,000, 12,500, , `, , 9,500 Bank, 2,500 Debtors, 6,000, (–) Provision, Stock, Motor, Machinery, 47,500 Buildings, 34,500 Land, 1,00,000, , `, , 8,000, 250, , 1,250, 7,750, 12,500, 4,000, 17,500, 22,500, 34,500, 1,00,000, , B retires on that date subject to the following conditions :, (i) Goodwill of the firm is to be valued at ` 9,000., (ii) Machinery would be depreciated by 10% and motor by 15%., (iii) Stock would be appreciated by 20% and building by 10%., (iv) The provision for doubtful debts would be increased by ` 975., (v) Liabilities for workmen’s compensation to the extent of ` 825 would be created., Prepare Profit and Loss Adjustment Account and Capital Account of the partners. (U.S.E.B., 2014), [Ans. P/L Adj. A/c Profit ` 600, Capital A/c Balance : A ` 18,050, C ` 11,850; Transfer to B’s Loan, A/c ` 18,200], ❏ Journal Entries and Balance Sheet of the New Firm, 26. Durga, Ravi and Manoj are carrying on business in partnership sharing profits and losses in the, ratio 4 : 3 : 2. On 31st March, 2019 the Balance Sheet of the firm stood as under :, Liabilities, , Amount, `, , Sundry Creditors, , 15,000 Building, , Assets, , Amount, `, , 25,000, , 359
Page 374 :
SBPD Publications Accountancy (XII), Capital A/cs :, Durga, Ravi, Manoj, , `, , 20,000, 18,000, 17,000, , Stock, Debtors, Furniture, 55,000 Cash, 70,000, , 10,000, 20,000, 5,000, 10,000, 70,000, , Ravi retired on the above mentioned date on the following terms :, (i) Building to be appreciated by ` 5,500., (ii) Provision for Bad Debts to be made at 5% on Debtors., (iii) Goodwill of the firm be valued at ` 9,000 and adjustment in this respect to be made without, raising Goodwill Account., (iv) ` 8,000 be paid to Ravi immediately and the balance due to him be treated as a loan carrying, interest @ 10% p.a., Pass Journal entries to record the above mentioned transactions and show the Balance Sheet of, the firm as it would appear immediately after Ravi's retirement., [Ans. P. & L. Adjustment—Profit ` 4,500; Ravi's Loan A/c ` 14,500; B/S Total ` 66,500.], ❏ Revaluation Account, Partners’ Capital Accounts and Balance Sheet, 27. X, Y and Z are partners in a firm sharing profits in the ratio of 2 : 2 : 1. Their Balance sheet as at, 31st March, 2019 was as follows :, Liabilities, Amount, Assets, Amount, `, , Creditors, Reserve, Capital A/cs :, X, Y, Z, , `, , 82,000, 60,000, 75,500, , `, , 49,000 Cash, 18,500 Debtors, Stock, Building, Patents, 2,17,500, , 8,000, 19,000, 42,000, 2,07,000, 9,000, , 2,85,000, , 2,85,000, , Y retired on 1st April, 2019 on the following terms :, (i) Goodwill of the firm was valued at ` 75,000 and was not to appear in the books., (ii) Bad debts amounted to ` 2,000 were to be written off., (iii) Patents were considered value less., Prepare Revaluation Account Partners' Capital Accounts and the Balance Sheet of the new firm., [Ans. Loss on Realisation ` 11,000, X's Capital A/c ` 65,000 Z's Capital A/c ` 67,000 Y's Loan A/c, ` 93,000, Balance Sheet Total ` 2,74,000.], 28. X, Y and Z are in partnership sharing profits in the ratio of 5 : 3 : 2. Their Balance Sheet on, 1.1.2019, the day Y decided to retire was as follows :, Liabilities, , Amount, , Assets, , `, , X's Capital, Y's Capital, Z's Capital, General Reserve, Sundry Creditors, Bills Payable, , 30,000, 20,000, 20,000, 10,000, 7,000, 3,000, 90,000, , 360, , Amount, `, , Buildings, Plant & Machinery, Investments, Joint Life Insurance Policy, Debtors, Stock, Cash, , 25,000, 15,000, 10,000, 15,000, 10,000, 5,000, 10,000, 90,000
Page 375 :
Retirement of a Partner, The terms of retirement were :, (a) Y sells his share of goodwill to X for ` 8,000 and to Z for ` 4,000., (b) Stock to be appreciated by 20% and buildings by ` 5,000., (c) Joint Life Insurance Policy was surrendered to the Insurance Co. for ` 7,000 and, investments were sold for ` 22,000., (d) Y is paid off in cash., Prepare Revaluation Account, Capital Accounts of Partners and the Balance Sheet of the new firm., [Ans. Revaluation Profit ` 10,000; Capital Balance : X's Capital ` 32,000, Z's Capital ` 20,000, Y is, paid ` 38,000, Total of Balance Sheet ` 62,000, Total of Cash A/c ` 39,000], 29. Pankaj, Naresh and Saurav are partners sharing profits in the ratio of 3 : 2 : 1. Naresh retired, from the firm due to his illness. On that date the Balance Sheet of the firm was as follows :, Balance Sheet, (as on March 31, 2019), Liabilities, Amount, Assets, Amount, `, , General Reserve, Sundry Creditors, Bills Payable, Outstanding Salary, Provision for Legal Damages, Capitals :, `, Pankaj, 46,000, Naresh, 30,000, Saurav, 20,000, , `, , 12,000 Bank, `, 15,000 Debtors, 6,000, 12,000, Less : Provi. for Doubt2,200, ful Debts, 400, 6,000 Stock, Furniture, Premises, , 7,600, , 5,600, 9,000, 41,000, 80,000, , 96,000, 1,43,200, , 1,43,200, , Additional Informations :, (i) Premises have appreciated by 20%, Stock depreciated by 10% and provision for doubtful, debts was to be made 5% on debtors. Further, provision for legal damages is to be made for, ` 1,200 and furniture to be brought upto ` 45,000., (ii) Goodwill of the firm be valued at ` 42,000., (iii) ` 26,000 from Naresh's Capital Account be transferred to his Loan Account and balance be, paid through Bank; if required, necessary loan may be obtained from Bank., (iv) New profit-sharing ratio of Pankaj and Saurav is decided to be 5 : 1., Give the necessary ledger accounts and Balance Sheet of the firm after Naresh's retirement., [Ans. Profit on Revaluation ` 18,000, Balance of Capital Account of Pankaj ` 47,000 and of Saurav, ` 25,000, Payment to Naresh ` 28,000, B/S Total ` 1,54,800.], ❏ When Goodwill appears in the Books, 30. A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. B retires. On 31st March, 2019, the, Balance Sheet of the firm was as follows :, Liabilities, Creditors, Workmen’s Compensation Fund, Provident Fund, Capitals :, `, A, 80,000, B, 60,000, C, 60,000, , `, Assets, 50,000 Bank, 18,000 Debtors, 12,000, Less : Provision, Stock, Furniture, Computer, 2,00,000 Land and Building, Goodwill, 2,80,000, , `, `, , 20,000, 800, , 20,000, 19,200, 32,000, 40,000, 74,000, 82,800, 12,000, 2,80,000, , 361
Page 376 :
SBPD Publications Accountancy (XII), The terms were :, (i) Land and Buildings have appreciated by ` 9,200, stock depreciation by ` 2,000 and the provision, for doubtful debts was to be made by 5% on debtors. Furniture to be brought upto ` 36,000., (ii) Goodwill of the firm be valued at ` 90,000., (iii) B is paid through Bank, if required, necessary loan may be obtained from Bank., (iv) New profit-sharing ratio of A and C as agreed in 5 : 1., Prepare necessary ledger accounts and the Balance Sheet of the new firm., [Ans. Revaluation A/c Profit ` 3,000; Capital A/cs Bal. A ` 54,500, C ` 61,500 B Paid off ` 93,000;, B/S Total ` 2,51,000. ], 31. Sun, Moon and Star are partners sharing profits and losses in the ratio of 5 : 3 : 2. Their Balance, Sheet as on 31st March, 2019 was as under :, Liabilities, , Amount, , Assets, , `, , Creditors, Bills Payable, General Reserve, Capitals :, Sun, Moon, Star, , 8,000 Bank, 7,000 Stock, 5,000 Bills Receivable, Debtors, 25,000 Investment, 15,000 Machinery, 10,000, 70,000, , Amount, `, , 6,000, 10,000, 4,000, 20,000, 12,000, 18,000, 70,000, , On above date Moon was retired and goodwill was valued at ` 30,000. Following adjustment are, made in above Balance Sheet :, (a) Stock was increased by 10%. (b) Make provision for doubtful debts @ 5%. (c) Outstanding, wages ` 1,000. (d) Investment was found over-valued by ` 3,000., Prepare Revaluation Account and Balance Sheet after retirement of Moon., [Ans. Revaluation A/c—Loss ` 4,000; Total of Balance Sheet ` 67,000; Moon's Loan A/c ` 24,300,, Capital Balance : Sun ` 19,071; Star ` 7,629], ❏ Retirement and Settlement of Loan in Instalments, 32. X, Y and Z are partners in a firm. On 1st January, 2015 X retires. On the date of retirement,, ` 82,500 is due to him in all after necessary adjustments.` 22,500 is paid in cash immediately and, the balance in three equal instalments at the end of the year together with interest @ 10% p.a., Prepare X’s Loan Account., [Ans. Int. 2015 ` 6,000, 2016 ` 4,000, 2017 ` 2,000 Payment 2015 ` 22,500 + 26,000, 2016 ` 24,000,, 2017 ` 22,000], 33. P, Q and R are partners sharing profits and losses in the ratio of 1/2, 1/3 and 1/6 respectively. On 31, March, 2015 P decided to retire from the firm. On this date, following balances were found : `, Capital of P, 40,000, Loss on Revaluation, 8,400, General Reserve, 4,500, Value of Goodwill of the Firm, 6,000, P is to be paid ` 11,050 in cash on retirement and the balance amount in three equal yearly, instalments together with interest @ 5% p.a. on the outstanding balance., Prepare P’s Capital Account and his Loan Account till it is finally closed., [Ans. Interest : 2016 ` 1,500, 2017 ` 1,000, 2018 ` 500 : Payment 2016 ` 11,500, 2017 ` 11,000,, 2018 ` 10,500], 34. R, S and T were partners in a firm sharing profit in 2 : 2 : 1 ratio. On 31.3.2017 their Balance, Sheet was as follows :, Liabilities, Amount, Assets, Amount, Bank Loan, , 362, , `, , 12,800 Cash, , `, , 51,300
Page 377 :
Retirement of a Partner, Sundry Creditors, Capitals :, R, S, T, Profit and Loss A/c, , `, , 80,000, 50,000, 40,000, , 25,000 Bills Receivable, Debtors, Stock, Furniture, 1,70,000 Plant and Machinery, 9,000 Building, 2,16,800, , 10,800, 35,600, 44,600, 7,000, 19,500, 48,000, 2,16,800, , S retired from the firm on 1.4.2017 and his share was ascertained on the revaluation of assets as, follows :, Stock ` 40,000, Furniture ` 6,000, Plant and Machinery ` 18,000, Building ` 40,000, ` 1,700 were, to be provided for doubtful debts. The goodwill of the firm was valued at ` 12,000., S was to be paid ` 18,080 in cash on retirement and the balance in three equal yearly instalments, with interest 6% p.a., Prepare Revaluation Account, Partners' Capital Accounts, S's Loan Account till it is finally closed., [Ans. Revaluation A/c Loss ` 16,800, Capital Balance : R ` 73,680, T ` 36,840; S's Loan A/c, (transfer) ` 33,600, Interest 2018 ` 2,016, 2019 ` 1,344, 2020 ` 672.], ❏ Adjustment of Capital Accounts, 35. X, Y and Z are partners in a firm sharing profit in the ratio of 5 : 2 : 3. On 1st April, 2019, Y r etires, from the firm. X and Z agree that the capital of new firm shall be fixed at ` 4,00,000 in the profitsharing ratio. The Capital Accounts of X and Z after all adjustments on the date of retirement, showed balances of ` 2,90,000 and ` 1,26,000 respectively. State the amount of actual cash to be, brought in or to be paid off to the partners and make Journal entries., [Ans. Amount of Cash to be brought in by Z ` 24,000; Amount of Cash to be paid off to X ` 40,000.], 36. A, B and C are partners sharing profits and losses in the ratio of 4 : 3 : 2 respectively. A retired, from the firm on 1st April, 2017 when the capital of A, B and C after all necessary adjustments, stood at ` 65,000, ` 55,000 and ` 30,000 respectively. B and C decided to share profits in the ratio, of 3 : 2 in future and also decided to have their capitals in this ratio by making necessary, adjustments. Calculate the amount of actual cash to be brought in or to be paid off to the partners, and make Journal entries., [Ans. Cash brought in by B ` 4,000; Amount withdrawn by C ` 4,000.], 37. The Balance Sheet of X, Y and Z who share profits in the ratio of 4 : 3 : 2 on 31st March, 2019 was, as follows :, Liabilities, Amount, Assets, Amount, Sundry Creditors, General Reserve, Capitals :, X, Y, Z, , `, , `, , 19,000, 14,000, 12,000, , 7,700 Cash at Bank, 1,800 Debtors, Less : Provision for, Bad Debt, Stock, 45,000 Plant & Machinery, Building, 54,500, , `, , `, , 6,000, 300, , 6,300, 5,700, 7,000, 10,500, 25,000, 54,500, , Y retired on the above date and it was agreed that :, (i) Stock be depreciated by 5%., (ii) Building be appreciated by 5%., (iii) A provision for ` 320 be made for legal charges., (iv) Goodwill of the firm is valued at ` 14,400 (but no Goodwill Account is raised)., (v) X and Z to share the future profits in the ratio of 5 : 3., (vi) Y is to be paid ` 5,000 in cash and the balance to be transferred to his Loan Account., (vii) X and Z to maintain their capitals in the new profit-sharing ratio and to bring in or withdraw, cash for the purpose. Capital of the new firm be fixed at ` 28,000., , 363
Page 378 :
SBPD Publications Accountancy (XII), Prepare Revaluation Account and Capital Accounts., [Ans. Profit on Revaluation ` 580; Capital X ` 17,500; Y's Loan ` 14,593; Capital Z ` 10,500.], [Hint : Goodwill to be debited to X and Z in the gaining ratio. Gaining Ratio 13 : 11.], 38. Kushal, Kumar and Kavita were partners in a firm sharing profits in the ratio of 3 : 1 : 1. On 1st, April, 2019 their Balance Sheet was as follows :, Liabilities, Creditors, Bills Payable, General Reserve, Capitals :, Kushal, Kumar, Kavita, , Amount, , Assets, , Amount, , `, , `, , 3,00,000, 2,80,000, 3,00,000, , 1,20,000 Cash, 1,80,000 Debtors, 1,20,000, Less : Provision, Stock, Furniture, Building, 8,80,000 Land, , `, , `, , 2,00,000, 10,000, , 13,00,000, , 70,000, 1,90,000, 2,20,000, 1,20,000, 3,00,000, 4,00,000, 13,00,000, , On the above date Kavita retired and the following was agreed :, (i) Goodwill of the firm was valued at ` 40,000., (ii) Land was to be appreciated by 30% and building was depreciated by ` 1,00,000., (iii) Value of furniture was to be reduced by ` 20,000., (iv) Bad debts reserve is to be increased to ` 15,000., (v) 10% of the amount payable to Kavita was paid in cash and the balance was transferred to, her Loan Account., (vi) Capitals of Kushal and Kumar will be in proportion to their new profit-sharing ratio. The, surplus/deficit, if any in their Capital Accounts, will be adjusted through Current Accounts., Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet of Kushal and, Kumar after Kavita's retirement., [Ans. Revaluation Loss ` 5,000; Capital Required : Kushal ` 4,98,000, Kumar ` 1,66,000, Cash, paid to Kavita ` 33,100, Kavita's Loan A/c ` 2,97,900, Deficit of Kushal ` 1,35,000, Surplus, of Kumar ` 1,35,000.], 39. The Balance Sheet of A, B and C who were sharing profits in proportion to their capitals stood as, follows on 31st March, 2016 :, Liabilities, Sundry Creditors, Investments Fluctuation Fund, Capital Accounts :, `, A, 18,000, B, 13,500, C, 9,000, , Amount, , Assets, , Amount, , `, , 6,900 Cash at Bank, 7,500 Sundry Debtors, Less : Provision, Stock, Investments, 40,500 Land and Buildings, , `, , `, , 5,000, 100, , 54,900, B retired on the above date and the following was agreed upon :, (i) That stock be depreciated by 6%., (ii) That the Provision for Doubtful Debts be brought up to 5% on Debtors., (iii) That Land and Buildings be appreciated by 20%., (iv) That a provision of ` 770 be made in respect of outstanding legal charges., (v) Investments are brought down to ` 8,500., , 364, , 5,500, 4,900, 8,000, 11,500, 25,000, 54,900
Page 379 :
Retirement of a Partner, (vi) That the Goodwill of the entire firm be fixed at ` 10,800 and B’s share of goodwill be adjusted, into the accounts of A and C who are going to share future profits in the ratio of 5 : 3 (No, Goodwill Account is to be raised)., (vii) That the entire capital of the firm as newly constituted be fixed at ` 28,000 between A and C, in the proportion of 5 : 3 (actual cash to be brought in or paid off, as the case may be)., Pass journal entries and show the Balance Sheet after transferring B’s share to a Separate, Account in his name., [Ans. J/E, B’s Loan ` 19,800. Total of B/S ` 55,470.], ❏ Adjustment of Capital, Hidden Goodwill and Preparation of New B/S, 40. A, B and C were partners sharing profits in the ratio 5 : 3 : 2 respectively. Their Summarised, Balance Sheet was as follows :, `, Liabilities, `, Assets, Goodwill, Capital A/cs :, `, 80,000, A, 2,80,000, Machinery, 3,60,000, B, 2,00,000, Debtors, 1,40,000, C, 1,20,000 6,00,000 Stock, 1,80,000, Current Liabilities, 1,84,000 Cash, 24,000, 7,84,000, 7,84,000, C retired on 1-4-2019. It was agreed that :, (a) Machinery be valued at ` 4,80,000., (b) C’s interest in the firm is valued at ` 1,88,000 after taking into consideration revaluation of, assets, liabilities and accumulated profits/losses etc., (c) The entire sum payable to C is to be brought in by A and B in such a way that their capital, should be in their new profit-sharing ratio of 2 : 1., (d) A cash balance of ` 17,000 should be kept in the firm as minimum balance., Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of new firm., [ Ans. Revaluation Profit ` 1,20,000, Payment to C ` 1,88,000, Capital Balance : A ` 4,22,000, B, ` 2,11,000, Cash brought A ` 1,72,000, B ` 9,000.], [Hint : Gaining Ratio 5 : 1, C’s Share of Goodwill (Hidden) ` 60,000.], ❏ Miscellaneous and Boards' Questions, 41. A, B and C are partners sharing profits in the ratio of 1 : 2 : 3. C retires, his capital after making, adjustment of reserves and profit on revaluation exists at ` 20,000. A and B have agreed to pay, him ` 26,000 in full settlement of his claim. Record necessary Journal entries for goodwill, if new, ratio of A and B is 1 : 3., (U.S.E.B., 2010), [Ans. A and B’s capital debited respectively with ` 1,000 and ` 5,000 and C’s Capital A/c credited, with ` 6,000 respectively.], 42. A, B and C are equal partners in a firm. Their Balance Sheet on 31st December, 2016 is given below :, Liabilities, , Amount, `, , Creditors, Reserve Fund, Capitals :, A, B, C, , 10,000, , 18,000 Machinery, 3,000 Furniture, Debtors, Stock, , 8,000, 12,000, , 30,000, , `, , 51,000, , Assets, , Amount, `, , 20,000, 1,000, 20,000, 10,000, , 51,000, , C retired on 31st December, 2016 and assets were revalued as : Machinery ` 25,000;, Furniture ` 800; Debtors ` 18,000; Stock ` 9,800; Goodwill is valued at ` 6,000., , 365
Page 380 :
SBPD Publications Accountancy (XII), Pass necessary Journal entries and prepare the necessary accounts and new Balance Sheet., [Ans. Revaluation A/c Profit ` 2,600; C’s Loan A/c ` 15,866; B/S Total ` 53,600.] (U.S.E.B., 2012), 43. Kanika, Disha and Kabir were partners sharing profits in the ratio of 2 : 1 : 1. On 31.3.2019 their, Balance Sheet was as under :, Liabilities, Amount, Assets, Amount, `, , Trade Creditors, Employees' Provident Fund, Kanika's Capital, Disha's Capital, Kabir's Capital, , `, , 53,000, 47,000, 2,00,000, 1,00,000, 80,000, , Bank, Debtors, Stock, Fixed Assets, Profit & Loss A/c, , 60,000, 60,000, 1,00,000, 2,40,000, 20,000, , 4,80,000, , 4,80,000, , Kanika retired on 1-4-2019. For this purpose, the following adjustments were agreed upon :, (a) Goodwill of the firm was valued at 2 years' purchase of average profits of three completed, years preceding the date of retirement. The profits for the year :, 2016-17 were ` 1,00,000 and for 2017-18 were ` 1,30,000., (b) Fixed assets were to be increased to ` 3,00,000., (c) Stock was to be valued at 120%., (d) The amount payable to Kanika was transferred to her loan account., Prepare Revaluation Account Capital Accounts of the partners and the Balance Sheet of the, reconstituted firm., (C.B.S.E., A.I., 2017, Set 2), [ Ans. Revaluation A/c Profit ` 80,000, Capital Balance (Cr.) Disha ` 80,000, Kabir ` 60,000,, Kanika's Loan A/c ` 3,00,000, Balance Sheet Total ` 5,40,000.], 44. Akul, Bakul and Chandan were partners in a firm sharing profits in the ratio of 2 : 2 : 1. On 31st, March, 2018, their Balance Sheet was as follows :, Balance Sheet of Akul, Bakul and Chandan, (as on 31-3-2018), Liabilities, Sundry Creditors, Employee’s Provident Fund, General Reserve, Capitals :, Akul, Bakul, Chandan, , `, , `, , 1,60,000, 1,20,000, 92,000, , Assets, , 45,000 Cash at Bank, `, 13,000 Debtors, 60,000, 20,000 Less : Provision for, Doubtful Debts 2,000, Stock, Furniture, 3,72,000 Plant and Machinery, 4,50,000, , `, , 42,000, , 58,000, 80,000, 90,000, 1,80,000, 4,50,000, , Bakul retired on the above date and it was agreed that :, (i) Plant and Machinery was under valued by 10%., (ii) Provision for doubtful debts was to be increased to 15% on debtors., (iii) Furniture was to be decreased to ` 87,000., (iv) Goodwill of the firm was valued at ` 3,00,000 and Bakul’s share was to be adjusted through, the capital accounts of Akul and Chandan., (v) Capital of the new firm was to be in the new profit sharing ratio of the continuing partners., Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the, reconstituted firm., [Ans. Revaluation Profit ` 10,000, Bakul’s Loan A/c (Transfer) ` 2,52,000 Revised Capital : Akul, ` 1,00,000, Chandan ` 50,000 New B/S total ` 4,60,000], , l, , 366
Page 381 :
7, DEATH OF A PARTNER, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 7.1 Death of a Partner, , 368, , 7.2 Effects of the Death of a Partner, , 368, , 7.3 Adjustments at the Time of Death of a Partner, , 370, , l Change in the Profit-sharing Ratio of Existing Partners l Calculation of, Profit till the Date of Death of a Partner : (I) On the basis of Time, (II) On, the basis of Turnover or Sales l Accounting, l, , Treatment, , of, , Goodwill, , Revaluation of Assets and Re-assessment of Liabilities l Adjustments, , for Reserves, Accumulated Profits of Losses l Joint Life Insurance Policy, l Settlement of Executor’s Account of Deceased Partner’s, 7.4 Fast Revision, , 397, , ❑ Useful Questions, , 397, , ❑ Practical Problems, , 399, , 367
Page 382 :
SBPD Publications Accountancy (XII), , 7.1 Death of a Partner, Generally a partner retires on a mutually decided date which is usually the date on, which the final accounts of the firm are prepared whereas time of death is uncertain as it, can happen on any date., Normally the firm is automatically dissolved on the death of a partner. The partners, may enter into an agreement to the contrary providing that partnership will not be, dissolved on the death of a partner. In case of death of a partner the estate of the deceased, partner is not liable for any act of the firm done after his death. No public notice is, required to be given about the death of a partner. When a partner dies, it means, compulsory retirement. Hence, accounting treatment of death of a partner is similar to, that of retirement of a partner. The executors of the deceased partner are entitled to all, the rights which would have been claimed by a retiring partner., The executors of a deceased partner are entitled to the following :, Items to be Credited, (i) Opening Capital of deceased partner's., (ii) His share of reserves and accumulated profits., (iii) His share in the goodwill of the firm., (iv) His share of profit on revaluation of assets and liabilities., (v) His share of profits earned by the firm from the beginning of the accounting, year to the date of death., (vi) His share of proceeds of the joint life policy., (vii) Other claims of the deceased partner viz., interest on capital, salary,, commission etc., if due and partnership deed so provides., The total of above items will be reduced by the following items :, Items to be deducted (i.e., debited) :, (i) His drawings, (till date of death), (ii) Interest on drawings (till date of death),, (iii) Share of loss, if any,, (iv) Reduction in the value of goodwill or share in goodwill written off,, (v) Loss on revaluation of assets and liabilities., Following entry is passed to transfer the balance of deceased Partner's Capital, Account (after all adjustments) to his Executor's Account or Legal Representatives Account., Deceased Partner's Capital A/c, Dr., To Deceased Partner's Executors A/c, Executor's Account, l The Executor Account is a temporary Account which is opened on the death of a, partner., l This account is the account of legal representative of the deceased partner., l All amount due to deceased partner is transferred to the Capital Account of the, deceased partners. The final balance of the deceased partner's capital A/c is, transferred to Executor's Account., Journal Entry :, Deceased Partner's Capital A/c, Dr., To Executor's A/c, l When payment is made, Executor's A/c is debited and Cash/Bank A/c is credited, l The balance of this account is shown on the liability side of the Balance Sheet of the, reconstituted firm till paid-off fully., , 7.2 Effects of the Death of a Partner, Death of a partner has the following effects :, (1) The death of a partner will terminate the old partnership and a new, partnership will be created., , 368
Page 383 :
Death of a Partner, (2), (3), (4), (5), , The combined shares of the remaining or surviving partners will be increased., Profit-sharing ratio of the surviving or existing partners will change., The claims of the deceased partner is to be determined., For determination of claims of the deceased partner adjustments have to be, made for the following :, (i) An adjustment has to be made in regard to reserves and accumulated profit, or losses., (ii) The goodwill of the firm has to be valued and necessary adjustments are to, be made., (iii) The assets and liabilities are revalued and proper adjustments are to be, made., (iv) If there is any life insurance policy it is to be realised., (6) Due to the payment of claims of the deceased partner, capital and assets of the, firm get reduced. If the claim is not met due to financial difficulties, liability of, the firm will increase because the amount payable to the executors of the, deceased partner will have to be transferred to Loan Account., , Payment of Deceased Partner’s Share, Payment of the deceased partner’s share is made as per the provisions of, Partnership Deed or as per the agreements between the surviving partners on the one, hand and that of the Executors or Legal Representatives of the deceased partner on the, other hand. In fact the mode of payment is similar to that of ‘Retirement of a Partner’., To recapitulate in brief :, Payment/Settlement of Amount, , Payment in One, Lump-sum, , Payment in Instalments, , Payment by Way of an Annuity, , 1. Payment in One Lump-sum :, Journal : Deceased Partner’s Executors A/c, Dr., To Cash/Bank A/c, 2. Payment in Instalments :, Journal : 1. For Transferring Amount Payable to the Deceased Partner to the, Executor’s Loan A/c :, Deceased Partner’s Capital A/c, Dr., To Deceased Partner’s Executor’s Loan A/c, 2. For Interest on amount due :, Interest A/c, Dr., To Executor’s Loan A/c, 3. For Payment of Instalment :, Executor’s Loan A/c, Dr., To Cash/Bank A/c (Instalment + Interest), , 369
Page 384 :
SBPD Publications Accountancy (XII), Remember : Two Options, l If the executors of deceased partners are to be paid in instalments, his legal, heirs are entitled to interest @ 6% p.a. unless agreed otherwise., Or, l Proportionate share of profit earned by using deceased partner’s capital., The executors may opt any of these options as per Section 37 of the Indian, Partnership Act, 1932., 3. Payment by Way of an Annuity :, Transaction, (1) For transfer of capital balance of the, deceased partner into Annuity Suspense A/c, , Journal Entries, Deceased Partner’s Capital A/c, To Annuity Suspense A/c, , Dr., , (Being amount payable transferred to, Annuity Suspense A/c), , (2) For Interest on unpaid balance at specified, rate, , Interest A/c, To Annuity Suspense A/c, , Dr., , (Being interest credited on unpaid balance), , (3), , For payment of annuity at the end of (each), year, , Annuity Suspense A/c, To Cash/Bank A/c, , Dr., , (Being amount of annuity paid), , Dr., , The format of Deceased Partner's Capital Account is as under :, Deceased Partner's Capital Account, , Particulars, To Drawings A/c, To Interest on Drawings A/c, To Profit and Loss A/c (Loss), To Profit and Loss Suspense A/c, (Share in Loss till death), To Revaluation A/c (Share in Loss), To Goodwill A/c (Share in Goodwill w/o), To Deceased Partner's Executors A/c, (Bal. fig.), , `, Particulars, ............. By Balance b/d, ............. By Revaluation A/c (share in Profit), ............. By Interest on Capital A/c, By Salary A/c/Commission A/c, ............. By Reserves/Profit and Loss A/c, ............., (Share in such profits), ............. By Gaining Partner's Capital A/c, (Share of Goodwill), ............. By Profit and Loss Suspense A/c, (Share in Profits till death), By Joint Life Policy A/c, (Share of J.L.P.), ............., , Cr., `, , ............., ............., ............., ............., ............., ............., ............., ............., ............., , 7.3 Adjustments at the Time of Death of a Partner, Following are the various matters that need adjustment at the time of death of a, partner :, (1) Change in profit-sharing ratio of existing partners., (2) Calculation of profit till the death of a partner., (3) Goodwill., (4) Revaluation of assets and liabilities., (5) Adjustment of reserve, accumulated profits or losses., (6) Joint Life Policy., (7) Adjustment of capitals of continuing partners., , 370
Page 385 :
Death of a Partner, (8) Ascertaining the amount payable to the executors of deceased partner., (9) Settlement of executors of deceased partner's account., Most of the above adjustments are similar to what we have already studied earlier, in case of retirement of a partner. Hence, we shall study here only the points which are, special to death of a partner., 7.3.1 Change in the Profit-sharing Ratio of Existing Partners, There may be change in the profit-sharing ratio of the existing partners due to death, of a partner., Effects :, l When a partner dies, the combined share of the continuing partners will increase., l Deceased partner's share of profit may be taken over by any one partner or by all the, continuing partners in the agreed ratio., l Unless otherwise stated, the deceased partner's share of profit will be taken by all, the continuing partners in their old profit-sharing ratio. It means that the profit, sharing ratio between the continuing partners will remain the same., Calculation of New Profit-sharing Ratio and Gaining Ratio, New profit-sharing ratio and the gaining ratio will be calculated in the same way as, they are calculated in the case of retirement of a partner., 7.3.2 Calculation of Profit till the Date of Death of a Partner, Since the executors of the deceased partner have the right to receive share in the, profits of the firm from the beginning of the year to the date of death, therefore, it is, necessary to ascertain the profit for the aforesaid period. For ascertaining profits any of, the following two methods can be adopted :, (I) On the basis of time, (II) On the basis of turnover or sales., ❏ (I) On the basis of Time, Usually share of profit of a deceased partner is calculated on the basis of time. If the, time basis is used, the profit will be assumed to have arisen uniformly over the year. As, such the period is compared to the remaining period (after death till the accounting date)., The ratio of this time to the remaining period time shall be the basis for calculating the, share of profit to be paid. Let us make this point clear by taking an example., Deceased Partner's Share in Profit, Amount of Profit´ Share in Profit´ Alive Perio d, =, 12 or 365, Calculation of Profit based on Time, The following steps should be followed for calculating the share of deceased partner, on the basis of time :, Step 1 : Calculate average profit per annum based on last years' profits., Step 2 : Calculate average profit upto the date of death from the beginning of the, accounting period., Step 3 : Calculate share of profit of the deceased partner based on profit-sharing, ratio., ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., , Details, , Practical Problem No., , 1(A), 2, , Calculation of Share of Profit of the Deceased Partner, , 1 to 4, , 3(A) to 3(D), , Accounting Treatment of Goodwill and Calculation of, Profit, , 5 to 10, , 371
Page 386 :
SBPD Publications Accountancy (XII), 4, , Revaluation of Assets and Liabilities, , 5, , Adjustment for Reserves and Goodwill, , 6 to 11, 12 to 16, , 11, 12, —, 13(A) to 15, , Joint Life Policy, Preparation of Deceased Partner's Capital A/c,, Executors' A/c, , 16 to 20, , 17, , Revaluation A/c and Partners' Capital A/cs, , 18, , Partners’ Capital A/cs, Executors’ Account and B/S of, the Surviving Partners, , 22, 23, , Payment to Executor in Instalments alongwith, Interest, , 24, 25, , 19 to 21, —, , 21, , 26 to 28, , Miscellaneous and Boards’ Questions, , 21, , Total, , 28, , Illustration 1(A) (Share of Profit on the basis of Average Profit), Ram, Manohar and Joshi were partners in a firm. Joshi died on 28th February,, 2017. His share of profit from the closure of the last accounting year till death was to be, calculated on the basis of average of three completed years of profits before death. Profit, for 2014, 2015 and 2016 were ` 7,000, ` 8,000 and ` 9,000 respectively., Calculate Joshi's share of profit till his death and pass the necessary Journal entry, for the same., Solution, Total Profits for 3 years = (` 7,000 + 8,000 + 9,000) = ` 24,000, 24,000, Average Profits =, = ` 8,000, 3, Two months' profit, that is, from 1st Jan., 2017 to 28th February, 2017, 2, = ` 8,000 ´, = ` 1,333.33, 12, 1, Therefore, Share of Joshi till his death = ` 1,333.33´ = ` 444.44 or say ` 444, 3, Journal Entry, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , Profit & Loss Suspense A/c, To Joshi's (Deceased) Capital A/c, , Dr., , Amount, `, , 444, 444, , (Being share of profit credited to Joshi's Capital A/c), , Illustration 1(B) (Share of Profit on the basis of Last year's Profit), A, B and C are partners in a firm sharing profits in 3 : 2 : 1 ratio. The firm closes its, books on 31st March every year. A died on 12-6-2019. On A’s death, his share in the profits, of the firm till the time of his death was to be calculated on the basis of previous years, profit which was ` 3,00,000. Calculate A’s share in the profit of the firm and pass necessary, Journal entry., Solution, Profit (Previous year) = ` 3,00,000, Time from 1st April to 12th June, 2019 = 30 + 31 + 12 = 73 days., 73, 3, A’s Share of Profit = ` 3,00,000 ×, × = ` 30,000, 365 6, , 372
Page 387 :
Death of a Partner, Journal Entry, Date, , Dr., , Particulars, Profit & Loss Suspense A/c, To A's Capital A/c, , L.F., Dr., , Cr., , Amount, , Amount, , `, , `, , 30,000, 30,000, , (Being A's share of profit till his death), , ❏ (II) On the basis of Turnover or Sales, Sometimes partners may decide to calculate share of profit on the basis of turnover, or sales. Under this method, we should know two things : (a) the sales of the last, (accounting) year, and (b) sales upto the death of the partner. The share of profit is, calculated on the basis of current year's sale or turnover to the date of death of the partner, based on the rate of profit on last year's total sales (turnover). The following steps are, taken to find out the share of deceased partner., Calculation of Profit based on Sales, Step 1 : Find out the total sales of the last year., Step 2 : Find out total profit of the last year. (Sometimes average sales and, average profit of last few years are taken), Step 3 : Calculate the amount of Sales of the interim period i.e. sales from the, beginning of the accounting period upto the date of death., Step 4 : Calculate profit upto the date of death on proportionate basis., Profit (Step 2), Formula :, ´ Sales up to the date of death, Sales (Step 1), Step 5 : Calculate the share of deceased partner in profit calculated in step 4 on, the basis of his profit-sharing ratio., or, Deceased Partner's Share in Profit =, Sales upto the date of death ´ Rate of Profit ´ Profit-sharing Ratio of Deceased, 100, Share of Profit of the deceased partner in the profit earned by the firm upto the date, of death is debited to profit & loss Suspense A/c and credited to the deceased partner's, Capital A/c, ❏ Journal Entry for both the Methods, Profit and Loss Suspense A/c, Dr., To Deceased Partner's Capital A/c, Profit and Loss Suspense Account, l Profit and Loss Suspense Account is a temporary Nominal A/c, l It is opened for the purpose of giving a share of profit, earned upto the date of death of, a partner from the beginning of the accounting period., l At the end of the year, it is closed by transferring to Profit & Loss Appropriation A/c., Journal Entry :, Profit and Loss Appropriation Account, Dr., To Profit and Loss Suspense Account, Illustration 2, X, Y and Z are in the partnership sharing profits in the ratio 5 : 3 : 2 respectively., Accounts are closed on 31st March. Sales for the year 2016-17 amounted to ` 15,00,000. Y, , 373
Page 388 :
SBPD Publications Accountancy (XII), died on 30th June, 2017 and upto this date the firm's sales were ` 5,00,000. The profit for, the year 2016-17 amounted to ` 3,00,000., Calculate the deceased partner's share in the profits of the firm., Solution, Total Sales = ` 15,00,000, Profit of the last year (2016-17) = ` 3,00,000, 3,00,000, Percentage of Profit on Sales =, ´ 100 = 20%, 15,00,000, Sales upto the death of Y = ` 5,00,000, 5,00,000 ´ 20, Total Profit upto 30th June @ 20% =, = ` 1,00,000, 100, 3, Therefore,, Y's Share = 1,00,000 ´, = ` 30,000, 10, 7.3.3 Accounting Treatment of Goodwill, (1) When a partner dies, the remaining partners acquire his share of profit. For this, gain, remaining partners are required to compensate the deceased partner in the form of, goodwill. Hence, value of goodwill of the firm is valued as per the provisions of the, Partnership Deed and deceased partner's share is calculated and credited to his Capital, Account. Following Journal entry is passed to record goodwill :, Gaining Partners' Capital A/cs, Dr. (In Gaining Ratio), To Deceased Partner's Capital A/c, (2) Write off the goodwill, if any, appearing in the books of the firm (i.e., Balance, Sheet) on the date of death of a partner., Journal Entry :, All Partner's Capital A/cs, Dr. (In Old Ratio), To Goodwill A/c, (Being goodwill written off in old ratio), , Illustration 3(A) (Accounting Treatment of Goodwill), Chander, Tara and Ravi were partners in a firm sharing profits in the ratio 2 : 1 : 2. On, 15.2.2019 Chander died and the new profit-sharing ratio between Tara and Ravi was, 4 : 11. On Chander's death the goodwill of the firm was valued at ` 90,000., Calculate gaining ratio and give necessary Journal entry for the treatment of, goodwill on Chander's death without opening Goodwill Account., Solution, Calculation of Gaining Ratio = New Ratio – Old Ratio, 4 1 4–3 1, Gaining Ratio of Tara =, – =, =, Chander : Tara : Ravi, 15 5, 15, 15, 2, : 1, : 2, 11 2 11 – 6, 5, Gaining Ratio of Ravi =, – =, =, — : 4, : 11, 15 5, 15, 15, ∴ Gaining Ratio = 1 : 5, Value of Goodwill = ` 90,000, 2, Chander' s Share of Goodwill = 90,000 ´ = ` 36,000, 5, Journal Entry, Dr., Cr., Date, , Particulars, Tara's Capital A/c, Ravi's Capital A/c, To Chander's Capital A/c, , L.F. Amount, Dr., Dr., , (Being Chander's share of goodwill` 36,000 i.e., 2 / 5´ 90,000 adjusted to, the accounts of Tara and Ravi in their Gaining Ratio 1 : 5), , 374, , `, , 6,000, 30,000, , Amount, `, , 36,000
Page 389 :
Death of a Partner, Illustration 3(B), S, T and U are partners in a firm sharing profits in the ratio of 1 : 2 : 2. On 15.2.2019, S died and the new profit-sharing ratio of T and U was 3 : 2. On S's death the goodwill of, the firm was valued at ` 60,000., Calculate the gaining ratio and pass necessary Journal entry on S's death for the, treatment of goodwill without opening Goodwill Account., Solution, Calculation of Gaining Ratio :, Gaining Ratio = New Ratio – Old Ratio, 3 2 1, 2 2, Gaining Ratio of T = – = ; Gaining Ratio of U = – = 0, 5 5 5, 5 5, Value of Goodwill = ` 60,000, 1, Share of S in Goodwill = 60,000´ = ` 12,000, 5, Journal Entry, Dr., Cr., Date, , Particulars, T's Capital A/c, To S's Capital A/c, , L.F. Amount, Dr., , Amount, , `, , `, , 12,000, , 12,000, , (Being T's Capital A/c debited with the share of goodwill of S in gaining, ratio), , Illustration 3(C) (Treatment of Goodwill), Priya, Riya and Siya are partners sharing profits in the ratio of 4 : 3 : 1 respectively., It is provided in the Partnership Deed that on the death of any partner, her share of, goodwill was to be valued at half of the profits credited to her account during the four, previous completed years., Riya died on 1st January, 2019. The firm’s profits for the last four years were :, 2015—` 1,20,000; 2016—` 80,000, 2017—` 40,000 and 2018—` 80,000., (i) Determine the amount that should be credited to Riya in respect of her share of, goodwill., (ii) Pass a Journal entry for adjustment of goodwill., Solution., (i) Calculation of Riya’s Share of Goodwill :, (a) Total profits for last 4 years = ` 1,20,000 + 80,000 + 40,000 + 80,000, = ` 3,20,000, (b) Net profit credited to Riya’s account during the last 4 years, (i.e., her share, of profit), = ` 3,20,000 × 3/8 = ` 1,20,000, (c), Riya’s Share of Goodwill = ` 1,20,000 × 1/2 = ` 60,000, (ii), Gaining Ratio : Priya : Siya = 4 : 1 [4 : 3 : 1], Journal Entry, Dr., Cr., Date, , Particulars, Priya's Capital A/c, Siya's Capital A/c, To Riya's Capital A/c, , L.F., Dr., Dr., , Amount, , Amount, , `, , `, , 48,0001, 12,0002, 60,000, , (Being Riya's share of goodwill adjusted in gaining ratio 4 : 1), 1., , ` 60,000 × 4/5 = ` 48,000,, , 2. ` 60,000 × 1/5 = ` 12,000 ., , 375
Page 390 :
SBPD Publications Accountancy (XII), Illustration 3(D) (Calculation of Profit and Treatment of Goodwill), A, B and C were partners in a firm sharing profits in 3 : 2 : 1 ratio. The firm closes its, books on 31st March every year. B died on 12-6-2019. On B’s death, the goodwill of the firm, was valued at ` 60,000. On B’s death, his share in the profits of the firm till the time of his, death was to be calculated on the basis of previous year's profit which was ` 1,50,000., Calculate B’s share in the profits of the firm., Pass necessary Journal entries for treatment of goodwill and B’s share of profit at, the time of his death., Solution, (i), Previous year’s Profit = ` 1,50,000, Number of days from 1st April to 12th March = 30 + 31 + 12 = 73 days, B’s Share of Profit = ` 1,50,000 × 73/365 × 2/6, = ` 10,000, (ii), B’s Share of Goodwill = ` 60,000 × 2/6 = ` 20,000, (iii), Gaining Ratio = 3 : 1 ( 3 : 2 : 1), B’s share of goodwill will be adjusted in 3 : 1 ratio., Journal Entries, Dr., Cr., S. No., (1), , Particulars, , L.F., , Profit and Loss Suspense A/c, , Dr., , Amount, , Amount, , `, , `, , 10,000, , To B's Capital A/c, , 10,000, , (Being share of profit till death credited to B's Capital A/c), , (2), , A's Capital A/c, , Dr., , 15,000, , C's Capital A/c, To B's Capital A/c, , Dr., , 5,000, 20,000, , (Being B's share of goodwill adjusted between A and C in gaining, ratio 3 : 1), , 7.3.4 Revaluation of Assets and Re-assessment of Liabilities, l The revaluation of assets and re-assessment of liabilities at the time of retirement, and death of a partner is alike., l The profit or loss on revaluation is divided among all partners (including retired/, deceased partner) in their old profit-sharing ratio., Illustration 4, P, Q and R were partners in a firm sharing profit and loss in the ratio of 3 : 3 : 2., Their Balance Sheet as at 31.12.2017 was as under :, Liabilities, , Amount, `, , Creditors, Outstanding Expenses, Capital A/cs :, P, Q, R, , `, , 60,000, 50,000, 40,000, , 40,000 Cash, 10,000 Stock, Computers, Machinery, , Amount, `, , 20,000, 60,000, 50,000, 70,000, , 1,50,000, 2,00,000, , 376, , Assets, , 2,00,000
Page 391 :
Death of a Partner, Q died on 31.3.2018. It was agreed that :, (i) Goodwill of the firm be valued at ` 80,000., (ii) Machinery and Computers be depreciated by 10% and 20% respectively., (iii) Stock to be appreciated by 20%., Prepare Revaluation Account., Solution, Dr., Revaluation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Machinery A/c, To Computers A/c, , `, , 7,000 By Stock A/c, 10,000 By Loss transferred to :, P's Capital A/c, Q's Capital A/c, R's Capital A/c, , 12,000, `, , 2,500, 1,500, 1,000, , 5,000, 17,000, , 17,000, , 7.3.5 Adjustments for Reserves, Accumulated Profits or Losses, l Accumulated or undistributed Profits, Reserve or General Reserve or Contingency, Reserve etc. appear on the liabilities side of the balance sheet., l These reserves and profits belong represent retained earnings and belong to all, partners. So these should be distributed in their profit sharing ratio and shall be, credited to their capital accounts., Journal Entry :, Reserve/General Reserve A/c, Dr., Contingency Reserve A/c, Dr., Profit & Loss A/c, Dr., To All Partner's Capital A/cs, For loss, if any the reverse entry will be made, i.e., All partners capital A/cs will be, debited and profit & loss will be credited., Illustration 5, X, Y and Z were partners in a firm sharing profits equally. On 1.4.2018 Y died. On, that date goodwill of the firm was valued at ` 1,80,000. There was a balance of ` 2,70,000 in, general reserve. Pass necessary Journal entries on Y's death., Solution, Journal Entries, Dr., Cr., Date, 2018, April 1 General Reserve A/c, To X's Capital A/c, To Y's Capital A/c, To Z's Capital A/c, , Particulars, , L.F., Dr., , Amount, , Amount, , `, , `, , 2,70,000, 90,000, 90,000, 90,000, , (Being general reserve distributed), , X's Capital A/c, Z's Capital A/c, To Y's Capital A/c, , Dr., Dr., , 30,000, 30,000, 60,000, , (Being Goodwill adjusted), , 377
Page 392 :
SBPD Publications Accountancy (XII), 7.3.6 Joint Life Insurance Policy, A firm may take a policy covering the lives of the partners jointly or individually., Thus, there are two types of policies :, (i) Joint Life Policy., (ii) Individual Life Policy., Joint Life Policy. Joint Life Policy means an insurance policy which is taken up by, the firm on the lives of all the partners collectively. The amount of Joint Life Policy is, payable by the insurance company on the death of any of the partners or on the expiry of, the term of the policy, whichever is earlier., Accounting Treatment of Joint Life Policy :, Case I : When premium paid is treated as Revenue Expenditure or When Joint, Life Policy does not appear in the books (i.e., in Balance Sheet)., Case II : When premium paid is treated as Capital Expenditure, i.e., as an asset,, or When Joint Life Policy appears in the books at surrender value., Case III : When Joint Life Policy and Joint Life Policy Reserve appear in the books., Case I : When premium paid is treated as Revenue or Business Expense or, when Joint Life Policy does not appear in the books :, (i) For making claim with the insurance company on the death of a partner :, Insurance Company A/c, Dr., (With Total Claim), To Joint Life Policy A/c, (ii) Closing the Joint Life Policy A/c :, Joint Life Policy A/c, Dr., To All Partners' Capital A/cs, (In Profit-sharing Ratio), (iii) For receiving the claim from insurance company :, Bank A/c, Dr., To Insurance Company A/c, (Being claim received), , Case II : When premium paid is treated as Capital Expenditure, i.e., as an, asset, or When J.L.P. is appearing in the books at its surrender value :, 1. For Claim, , Insurance Company A/c, , Dr., , (with Total Claim), 2. For transfer of the amount of J.L.P. less, surrender value, , To Joint Life Policy A/c, Joint Life Policy A/c, , Dr., , (with Balance), To All Partners Capital A/c, (in Old Ratio), , 3. For Claim received, , as in case I (iii), , Case III : When Joint Life Policy and Joint Life Policy Reserve are, appearing in the books :, 1. For Claim :, Insurance Company A/c, Dr., (With Total Claim), To Joint Life Policy A/c, (Being claim made), , 2. For Transfer of J.L.P. Reserve :, Joint Life Policy Reserve A/c, To Joint Life Policy A/c, (Being transfer of J.L.P. Reserve to J.L.P. A/c), , 378, , Dr., , (With Balances)
Page 393 :
Death of a Partner, 3. For Distribution of Balance of J.L.P. A/c :, Joint Life Policy A/c, Dr. (With Balance), To All Partners’ Capital A/cs, (In Profit-sharing Ratio), (Being Partners’ Capital A/cs credited in their, profit-sharing ratio), , ❏ Joint Life Insurance Policy, Type 1. When Premium paid is treated as Revenue Expenditure, Illustration 6, Mohan, Ram and Sohan are partners sharing profits in the ratio of 3 : 2 : 1. The firm, has a Joint Life Policy for ` 30,000. The annual premium of ` 1,800 is treated as business, expenses. Ram dies on 1-10-2017 and the claim is realised on 1-12-2017. Pass Journal, entries., Solution, Journal Entries, Dr., Cr., Date, Particulars, 2017, Oct. 1 Insurance Company A/c, To Joint Life Policy A/c, , L.F., Dr., , Amount, , Amount, , `, , `, , 30,000, 30,000, , (Being claim made on death of a partner), , Joint Life Policy A/c, To Mohan's Capital A/c, To Ram's Capital A/c, To Sohan's Capital A/c, , Dr., , 30,000, 15,000, 10,000, 5,000, , (Being Joint Life Policy transferred to Partners' Capital A/cs in old, ratio), , Bank A/c, To Insurance Company A/c, , Dr., , 30,000, 30,000, , (Being claim of policy received), , Illustration 7 (Joint Life Policy), X, Y and Z were partners in a firm sharing profits with ratio of 4 : 3 : 3. They had a, Joint Life Policy of ` 1,00,000. The annual premium paid was ` 1,000 and was considered, as an investment (asset). Y died on 15th March, 2017. On that date the surrender value of, the policy was ` 15,000. Pass necessary Journal entries on Y's death related to Joint Life, Policy transactions., (U.S.E.B., 2015), Solution, In the Books of X, Y and Z, Journal Entries, Dr., Cr., Date, , Particulars, , 2017, Mar. 15 Life Insurance Corporation A/c, To Joint Life Policy A/c, , L.F. Amount, `, , Dr., , Amount, `, , 1,00,000, 1,00,000, , (Being amount of Joint Life Policy due), , Bank A/c, To Life Insurance Corporation A/c, , Dr., , 1,00,000, 1,00,000, , (Being amount of Joint Life Policy received), , 379
Page 394 :
SBPD Publications Accountancy (XII), Joint Life Policy A/c, To X's Capital A/c, To Y's Capital A/c, To Z's Capital A/c, , Dr., , 85,000, 34,000, 25,500, 25,500, , (Being balance of Joint Life Policy A/c credited to all Partners' Capital, A/cs in their profit-sharing ratio i.e., 4 : 3 : 3), , Joint Life Policy Account, , Dr., Particulars, , Amount, , Cr., , Particulars, , Amount, , `, , To, To, To, To, , Balance b/d, X's Capital A/c, Y's Capital A/c, Z's Capital A/c, , `, , 15,000 By Life Insurance Corporation A/c, 34,000, 25,500, 25,500, , 1,00,000, , 1,00,000, , 1,00,000, , Illustration 8 (J.L.P. and J.L.P. Reserve), X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 2 : 1. The firm had, taken a Joint Life Policy for ` 1,50,000 at an annual premium of ` 12,000 payable on 1st April, each year. ‘Z’ dies on 31st March, 2019. The surrender value of Joint Life Policy on 31st March,, 2019 is ` 42,000. Give the necessary Journal entries if the Joint Life Policy and Joint Life Policy, Reserve ` 42,000 are appearing in the books at surrender value of that date., Solution, Journal Entries, Dr., Cr., Date, Particulars, 2019, Mar. 31 Insurance Company A/c, To Joint Life Policy A/c, , L.F., Dr., , Amount, , Amount, , `, , `, , 1,50,000, 1,50,000, , (Being the claim due on Z's death), , Joint Life Policy Reserve A/c, , Dr., , 42,000, 42,000, , To Joint Life Policy A/c, (Being the transfer of the balance of J.L.P. Reserve to J.L.P. A/c), , Joint Life Policy A/c, To X's Capital A/c, To Y's Capital A/c, To Z's Capital A/c, , Dr., , 1,50,000, 75,000, 50,000, 25,000, , (Being the transfer of balance in J.L.P. A/c in old ratio), , (2) Individual Insurance Life Policy : Individual life policy is a life insurance, policy taken by the firm in the name of an individual partner of the firm. Individual life, policy matures only after the expiry of period or in the event of death of insured partner (in, whose name the policy is taken). The executors of the deceased partner is entitled to, deceased partner's share in the maturity value of his individual policy and surrender, value of the individual policies of other partners. For this purpose, amount received, in the policy of deceased partner is credited to all Partner's Capital Accounts in their, profit-sharing ratio while deceased partner's share in the surrender value of the, individual policies of other partners is credited to his Capital Account and debited to, remaining partners in their gaining ratio., , 380
Page 395 :
Death of a Partner, Illustration 9, P, Q and R are partners in a firm sharing profits in the ratio of 2 : 2 : 1. Q dies on, 15th March, 2019. The policy amount and surrender value of the partners are :, Policy Amount, Surrender Value, `, , `, , P, 70,000, Q, 70,000, R, 60,000, Calculate Q’s share out of the Life Policies., Solution, Total Amount realised from policies :, Amount of Q’s Policy, Surrender Value of P’s Policy, Surrender Value of R’s Policy, Q's Share in Policies = ` 1,25,000 ´, , 30,000, 30,000, 25,000, , `, , 70,000, 30,000, 25,000, 1,25,000, , 2, = ` 50,000., 5, , Illustration 10 (Individual Life Policy), A, B and C were partners in a firm sharing profits in the ratio of 2 : 2 : 1. Firm had, taken individual policies of ` 2,00,000, ` 1,60,000 and ` 3,20,000 on the lives of A, B and C, respectively. The premium on such policies was charged to Profit and Loss Account. C died, in 31st Dec. 2018. The surrender values were 50% of the amount of policies on that date., Pass necessary Journal entries., Solution, (i) Amount received from Insurance Company on C’s death ` 3,20,000. This will be, distributed in their profit-sharing ratio., (ii) C has right to receive his share in surrender value of A and B’s policies., `, , Surrender Value of A's Life Policy = ` 2,00,000 × 50/100, Surrender Value of B's Life Policy = ` 1,60,000 × 50/100, Total, , C's Share in Surrender Value = ` 1,80,000 × 1/5 = ` 36,000, Journal Entries, Date, 2018, Dec. 31, , Particulars, Insurance Company A/c, To Life Policy A/c, , L.F., Dr., , 1,00,000, 80,000, 1,80,000, , Dr., , Cr., , Amount, , Amount, , `, , `, , 3,20,000, 3,20,000, , (Being claim due on C's policy on C's death), , Life Policy A/c, To A's Capital A/c, To B's Capital A/c, To C's Capital A/c, , Dr., , 3,20,000, 1,28,000, 1,28,000, 64,000, , (Being amount due on C's policy credited to all Partners' Capital A/cs, in old ratio), , A's Capital A/c, B's Capital A/c, To C's Capital A/c, , Dr., Dr., , 18,000, 18,000, 36,000, , (Being C's share in the surrender value of A and C), , 381
Page 396 :
SBPD Publications Accountancy (XII), Illustration 11 (When Surrender Values are given in the Balance Sheet), P, Q and R were partners sharing profits and losses in the ratio of 3 : 1 : 1. The firm had, take individual life policies in the name of partners. The surrender values given in the Balance, Sheet as on 31.3.2019 were as follows :, P ` 1,20,000, Q ` 1,50,000 and R ` 1,84,000, The surrender values are 30% of the sum assured in each case. P died on this date. Give, the necessary Journal entries., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , 2019, Mar. 31 Insurance Company A/c, To Life Policy A/c, , L.F., Dr., , Amount, , Amount, , `, , `, , 4,00,0001, 4,00,000, , (Being claim due on P's policy), , Life Policy A/c, To P's Capital A/c, To Q's Capital A/c, To R's Capital A/c, , Dr., , 2,80,0002, 1,68,000, 56,000, 56,000, , (Being amount received less surrender value credited to all, Partners' Capital A/cs), Working Notes :, 1., Surrender value of P’s policy is ` 1,20,000, being 30% of the sum assured., Hence, the sum assured = ` 1,20,000 × 100/30 = ` 4,00,000, 2., Amount receivable from Insurance Company, Less : Surrender Value appearing in the B/S, Amount to be credited to Partners in 3 : 1 : 1 Ratio, 3., , `, 4,00,000, 1,20,000, 2,80,000, , Surrender values of Q and R’s policies are already appearing in the books. As such no further, treatment is required for this at the time of death of a partner., , ❏ Preparation of Deceased Partner's Capital Account, Illustration 12, Brown and Smith are partners. The partnership deed provides, inter alia :, (1) That the accounts be balanced on 31st March each year., (2) That the profits be divided as follows : Brown one-half, Smith one-third, carried, to a Reserve Account one-sixth., (3) That in the event of death of a partner, his executors be entitled to be paid out :, (a) The capital to his credit to the date of death,, (b) His proportion of reserve at the date of last Balance Sheet,, (c) His proportion of profits to the date of death based on the average profit of, the last three completed years,, (d) By way of goodwill his proportion of the total profits for three preceding years., On 31st March, 2019 the ledger balances were :, Dr., Cr., Particulars, , Amount, `, , Brown's Capital, Smith's Capital, Reserve, , 382, , Amount, `, , 90,000, 60,000, 30,000
Page 397 :
Death of a Partner, Creditors, Bills Receivable, Investments, Cash, , 30,000, 20,000, 50,000, 1,40,000, 2,10,000 2,10,000, , The profits for three years were : 2016-17 ` 42,000; 2017-18 ` 39,000 and 2018-19, , ` 45,000., , Smith dies on 1st Aug., 2019., Prepare Smith's Capital Account to be presented to his executors., Solution, Working Notes :, Profit-sharing Ratio between Brown and Smith : 3 : 2, (1) Share of Reserve = 30,000 ´ 2/ 5 = ` 12,000, ....(1), (2) Share of Profit :, Total Profit of the firm 2016-17 to 2018-19 = (` 42,000 + 39,000 + 45,000) = ` 1,26,000, ` 1,26,000, Therefore,, Average Profit =, = ` 42,000, 3, Therefore, Smith's Profit for 4 months (April to July) = 42,000 ´ 4/12 ´ 2/ 5 = ` 5,600, ....(2), (3) Share of Goodwill :, Total Profits for 3 years = ` 1,26,000 (see above), , Dr., , Therefore, Smith's Share = ` 1,26,000´ 2/ 5 = ` 50,400 (to be compensated by Brown), , ....(3), , Smith's Capital Account, , Particulars, , Amount, , Particulars, , Cr., , Amount, , `, , To Smith’s Executor’s A/c (Bal. fig.), , `, , 1,28,000 By Balance b/d, By Reserve A/c (Note 1), By Profits & Loss Suspense A/c (Note 2), By Brown's Capital A/c, (Goodwill) (Note 3), 1,28,000, , 60,000, 12,000, 5,600, 50,400, 1,28,000, , Illustration 13 (J/E and Deceased Partner’s Capital A/c), A, B and C share profit in the ratio of 5 : 3 : 2. Their Balance Sheet as on 31st March,, 2019 was as follows :, Balance Sheet, Liabilities, , Amount, `, , Sundry Creditors, Reserve Fund, Capitals :, A's Capital, B's Capital, C's Capital, , `, , 1,00,000, 50,000, 50,000, , 30,000 Furniture, 32,000 Tools, Stock, Sundry Debtors, Cash in hand, 2,00,000, 2,62,000, , Assets, , Amount, `, , 80,000, 10,000, 60,000, 60,000, 52,000, 2,62,000, , 383
Page 398 :
SBPD Publications Accountancy (XII), B died on June 30, 2019. As per partnership agreement the executor of B's estate, was entitled to :, (a) Amount standing to the credit of the Partner's Capital Account,, (b) Interest on capital at 5%,, (c) Share of profit on the basis of the last year's profit from the date of the last, Balance Sheet to the date of death, and, (d) Share of goodwill on the basis of two years’ purchase of 3 years average profits., Profits for 2016-17, 2017-18 and 2018-19 were ` 60,000, ` 80,000 and ` 70,000., Pass the necessary Journal entries and show B's Account to be rendered to his, executor., Solution, Journal Entries, Dr., Cr., Date, 2019, July 1 Reserve Fund A/c, To B's Capital A/c, , Particulars, , L.F. Amount, , Amount, , `, , `, , Dr., , 9,600, , Interest on Capital A/c, To B's Capital A/c, , Dr., , 2,500, , A's Capital A/c, C's Capital A/c, To B's Capital A/c (Note 1), , Dr., Dr., , 30,000, 12,000, , Profit & Loss Suspense A/c, To B's Capital A/c (Note 2), , Dr., , 5,250, , B's Capital A/c, To B's Executor's A/c, , Dr., , 1,09,350, , (Being Reserve Fund transferred to B’s Capital A/c), , (Being interest due on B's capital), , (Being share of goodwill transferred to B's Capital A/c), , (Being share of profit transferred to B's Capital A/c), , (Being balance of B's capital transferred to his Executor's A/c), , B's Capital Account, , Dr., Particulars, , Amount, , Particulars, , By Balance b/d, 1,09,350 By Reserve Fund A/c, By Interest A/c, By A's Capital A/c (Note 1), By C's Capital A/c (Note 1), By Profit & Loss Suspense A/c, (Note 2), 1,09,350, , 2,500, , 42,000, 5,250, 1,09,350, , Cr., , `, , To Balance transferred to :, B's Executor's A/c, , 9,600, , Amount, `, , 50,000, 9,600, 2,500, 30,000, 12,000, 5,250, 1,09,350, , Working Notes :, 1. Calculation of Goodwill :, Total Profit = ` 60,000 + 80,000 + 70,000 = ` 2,10,000, Average Profit = ` 2,10,000 ¸ 3 = ` 70,000, Goodwill at 2 years' Purchase = ` 70,000´ 2 = ` 1,40,000, 3, B's Share in Goodwill = ` 1,40,000´ = ` 42,000, 10, B’s share of goodwill to be debited to A = 42,000´ 5 / 7 = ` 30,000 and to C = 42,000´ 2 / 7 = ` 12,000, , 384
Page 399 :
Death of a Partner, 2. Calculation of Profit :, Last Year's Profit = ` 70,000, \ 3 Months' Profit (upto 30th June) = 70,000´, B's Share = ` 17,500´, , 3, = ` 5,250, 10, , 3, = ` 17,500, 12, , 3. Since the rate of interest does not relate to p.a., interest has been calculated as 50,000´, , 5, = ` 2,500, 100, , for full one year., , Illustration 14 (Preparation of Deceased Partner's Capital Account), Arun, Varun and Karan were partners in a firm sharing profits in the ratio of 4 : 3 : 3., On 31.3.2019, their Balance Sheet was as follows :, Liabilities, , Amount, , Assets, , `, , Creditors, Bills Payable, Karan's Loan, Capitals :, Arun, Varun, , `, , 70,000, 68,000, , Amount, `, , 17,000 Cash, 12,000 Debtors, 28,000 Bills Receivables, Furniture, Machinery, 1,38,000 Karan's Capital, , 8,000, 13,000, 9,000, 27,000, 1,25,000, 13,000, , 1,95,000, , 1,95,000, , On 30.9.2019 Karan died. The partnership Deed provided for the following to the, executors of the deceased partner :, (a) His share in the goodwill of the firm calculated on the basis of three years', purchase of the average profits of the last four years. The profits of the last four, years were ` 1,90,000; ` 1,70,000; ` 1,80,000 and ` 1,60,000 respectively., (b) His share in the profits of the firm till the date of his death calculated on the, basis of the average profits of the last four years., (c) Interest @ 8% p.a. on the credit balance, if any, in his Capital Account., (d) Interest on his loan @ 12% p.a., Prepare Karan's Capital Account to be presented to his executors, assuming that his, loan and interest on loan were transferred to his Capital Account., [C.B.S.E. A.I., 2015 (Set I)], Solution, Dr., Karan's Capital Account, Cr., Particulars, , Amount, , Particulars, , `, , To Balance b/d, To Karan's Executors' A/c (Bal. fig.), , Working Notes :, (a) Share in Goodwill :, Average Profit =, , 13,000 By Arun's Capital A/c, 2,00,430 By Varun's Capital A/c, By Profit and Loss Suspense A/c, By Karan’s Loan A/c, By Interest on Karan's Loan A/c, 2,13,430, , Amount, `, , 90,000, 67,500, 26,250, 28,000, 1,680, 2,13,430, , ` 1,90,000 +1,70,000 + 1,80,000+ 1, 60, 000, = ` 7,00,000, 4, , 385
Page 400 :
SBPD Publications Accountancy (XII), ` 7 ,00 ,000, = ` 1 ,75 ,000, 4, Goodwill = ` 1,75,000 ´ 3 = ` 5,25,000, 3, Karan’s Share in Goodwill = ` 5,25,000 ´, = ` 1,57,500, 10, (b) Share in Profit :, Average Profit of the last four years = ` 1,75,000, 6, Profit up to 30-9-2019 = ` 1,75,000 ´, = ` 87,500, 12, 3, Karan's Share = ` 87,500 ´, = ` 26,250, 10, (c), Interest on Capital = Nil (Since he has debit balance), 12, 6, (d), Interest on Loan = 28,000 ´, ´, = ` 1,680., 100 12, =, , Illustration 15 (Joint Life Policy), The Balance Sheet of Mohit, Sohan and Rahul who are partners, sharing profits in, the ratio of 2 : 2 : 1 as on March 31, 2019 is as follows :, Liabilities, , Amount, , Assets, , `, , Sundry Creditors, Reserve Fund, Capital A/cs :, Mohit, Sohan, Rahul, , `, , 30,000, 25,000, 15,000, , Amount, `, , 40,000 Goodwill, 25,000 Fixed Assets, Stock, Sundry Debtors, Cash at Bank, 70,000, 1,35,000, , 30,000, 60,000, 10,000, 20,000, 15,000, 1,35,000, , Sohan died on June 15, 2019. According to the Partnership Deed, his legal, representatives are entitled to :, (a) Balance in Capital Account., (b) Share of goodwill valued on the basis of thrice the average of the past 4 years’, profits., (c) Share in profits up to the date of death on the basis of average profits for the, past 4 years., (d) Interest on capital @ 12% p.a., (e) Profits for the years ending on March 31 of 2016, 2017, 2018, 2019 respectively, were ` 15,000, ` 17,000, ` 19,000 and ` 13,000., (f) The firm had taken a Joint Life Policy of ` 1,25,000, the annual premium being, charged to Profit & Loss Account every year., (g) Sohan's legal representatives were to be paid the amount due., (h) Mohit and Rahul continued as partner by taking over Sohan's share equally., Work out the amount payable to Sohan's legal representatives., Solution, In the Books of Mohit and Rahul, Dr., Sohan's Capital Account, Cr., Date, Particulars, 2019, June 15 To Goodwill A/c, æç30,000 ´ 2ö÷, ÷÷, çç, è, ø, 5, , 386, , Amount, , Date, Particulars, 2019, April 1 By Balance b/d, 12,000 June 15 By Reserve Fund A/c, By Mohit's Capital A/c, `, , Amount, `, , 25,000, 10,000, 9,600
Page 401 :
Death of a Partner, To Sohan's Executor’s, (Bal. fig.), , 94,158, , By Rahul's Capital A/c, By Profit & Loss Suspense A/c, By Joint Life Policy, æç1, 25,000 ´ 2ö÷, ÷÷, çç, è, ø, 5, By Interest on Capital A/c, , 1,06,158, , 9,600, 1,333, 50,000, 625, 1,06,158, , Working Notes :, (1) Calculation of Goodwill of the Firm :, 15, 000 + 17, 000 + 19, 000 + 13, 000, Average Profit =, = ` 16,000, 4, Goodwill of the Firm = Thrice the average of past 4 years’ profits = ` 16,000 × 3 = ` 48,000, (2) Calculation of Sohan’s share in goodwill and its division :, 2, Sohan’s share in goodwill = Goodwill of the firm ´, 5, 2, = ` 48, 000 ´ = ` 19,200, 5, As Mohit and Rahul takes Sohan’s share equally, hence both will divide Sohan’s share in equal, ratio i.e., ` 9,600 each to Mohit and Rahul., (3) Calculation of Profit from the date of last Balance Sheet to date of death :, Period = March 31, 2019 to June 15, 2019 = 2.5 months, 64,000 2 2.5, Profit for 2.5 months =, ´ ´, = ` 1,333, 4, 5 12, (4), Calculation of Sohan’s Share in Joint Life Policy :, 2, Sohan’s share in Joint Life Policy = 1,25,000 ´ = ` 50,000, 5, (5) Calculation of Interest on Capital :, Period = March 31, 2019 to June 15, 2019 = 2.5 months, 12, 2.5, Interest on Capital = ` 25,000 ´, ´, = ` 625, 100 12, , Illustration 16 (Partner's Lives Severally Insured by the Firm), A, B and C carried on business in partnership, profits being divisible in the ratio of, 3 : 2 : 1. The Balance Sheet on 31st March, 2019 showed their capitals to be ` 54,000; ` 25,000, and ` 15,000., On 31st May, 2019, A died and you are instructed to prepare an account for, presentation to his legal representatives having regard to the following facts :, (a) The firm had insured the partner's lives severally : A's for ` 45,000, B's for, ` 24,000 and C's for ` 12,000; the premiums had been charged to Profit & Loss Account and, surrender value on 31st May, 2019 was amounted in each case to one-fourth of the sum assured., (b) Capital carried interest at 5 percent per annum., (c) A's drawings from April, 2019 to the date of his death amounted to ` 6,000., (d) A's share of profits for the portion of the current financial year for which he lived, was to be taken at sum calculated on the average of the last three completed years and, goodwill was to be raised on the basis of two years' purchase of average profits of those, three years, the annual profits were ` 46,000, ` 37,000 and ` 43,000 respectively., Show the account of A and Journalise the entries affecting it., Solution, Dr., A's Capital Account, Cr., Particulars, , Amount, , Particulars, , `, , To Drawings A/c, , 6,000 By Balance b/d, , Amount, `, , 54,000, , 387
Page 402 :
SBPD Publications Accountancy (XII), To A's Executor's A/c—Transfer, , 1,20,950 By Interest on Capital A/c, (for 2 months at 5%), By Insurance Policies A/c (Surrender, Value) (` 22,500 + 4,500), By P. & L. Suspense A/c (Profit to date, of death), By B's Capital A/c (Goodwill), By C's Capital A/c (Goodwill), 1,26,950, , Dr., , Particulars, , 3,500, 28,000, 14,000, , Cr., , L.F. Amount, `, , Interest A/c, To A's Capital A/c, , 27,000, , 1,26,950, , Journal Entries, Date, , 450, , Dr., , Amount, `, , 450, 450, , (Being interest on A's capital for two months @ 5% p.a.), , Insurance Policy A/c, To A's Capital A/c, To B's Capital A/c, To C's Capital A/c, , Dr., , 45,000, 22,500, 15,000, 7,500, , (Being distribution of policies money due on A's death), , Insurance Policy A/c, To A's Capital A/c, , Dr., , 4,500 1, 4,500, , (Being A's share in the surrender value of policies on the lives of B and C), , Profit & Loss Suspense A/c, To A's Capital A/c, , Dr., , 3,500 2, 3,500, , (Being 2 month's profit credited to A), , B's Capital A/c, C's Capital A/c, , Dr., Dr., , 28,000, 14,000, , To A's Capital A/c, , 42,0003, , (Being Goodwill A/c written off in the new ratio of 2 : 1), Working Notes :, (1) A's Share in surrender values of Life Insurance Policies of B and C :, ö, æ1, Surrender Value of B's Policy = çç ´ 24,000÷÷÷, çè 4, ø, æç1, ö, ÷, Surrender Value of C's Policy = ç ´ 12, 000÷, ÷ø, çè 4, Total of Surrender Value, ö, æ3, A's Share in Surrender Values = çç ´ 9,000÷÷÷ = ` 4,500, çè 6, ø, Claim of A’s Policy = ` 45,000, 3, Share in A's Claim = 45,000 ´ = ` 22,500, 6, Total Share of A (in Insurance Policy) = ` 22,500 + 4,500 = ` 27,000, (2) A's Share in Profits for 2 months :, Total Profits = ` 46,000 + 37,000 + 43,000 = ` 1,26,000, , 388, , `, 6,000, 3,000, 9,000
Page 403 :
Death of a Partner, 1,26,000, = ` 42,000, 3, 2, Profit for 2 months = ` 42,000 ´ = ` 7,000, 12, 3, A's Share in Profits (for 2 months) = ` 7,000´ = ` 3,500, 6, (3) A's Share in Goodwill of Firm :, Average Profit =, , Average Profit = ` 42,000, , Goodwill = ` 42,000 ´ 2 = ` 84,000, 3, A's Share in Goodwill = ` 84,000´ = ` 42,000, 6, , Illustration 17 (Revaluation A/c, Deceased Partner’s Capital A/c and Executor’s A/c), Anil, Bhanu and Chandu were partners in a firm sharing profits in the ratio of, 5 : 3 : 2 on March 31, 2019. Their Balance Sheet was as under :, Liabilities, , Amount, , Assets, , `, , Sundry Creditors, Reserve Fund, Capital A/cs :, Anil, Bhanu, Chandu, , `, , 30,000, 25,000, 15,000, , Amount, `, , 11,000 Buildings, 6,000 Machinery, Stock, Patents, Sundry Debtors, 70,000 Cash, , 20,000, 30,000, 10,000, 11,000, 8,000, 8,000, , 87,000, , 87,000, , Anil died on October 1, 2019. It was agreed between his executors and the remaining, partners that :, (a) Goodwill to be valued at 2.5 years’ purchase of the average profits of the, previous four years which were :, Year 2015-16—` 13,000,, Year 2016-17—` 12,000,, Year 2017-18—` 20,000,, Year 2018-19—` 15,000, (b) Patents are to be valued at ` 8,000; Machinery at ` 28,000 and Building at, ` 25,000., (c) Profit for the year 2019-20 to be taken as having accrued at the same rate as, that of the previous year., (d) Interest on capital be provided at 10% p.a., (e) Half of the amount due to Anil to be paid immediately., Prepare Revaluation Account, Anil's Capital Account and Anil's Executor's Account, as on October 1, 2019., (N.C.E.R.T.), Solution, In the Books of Bhanu and Chandu, Dr., Revaluation Account, Cr., Date, , Particulars, , 2019, , Amount, `, , Oct. 1 To Patents, To Machinery, , Date, , Particulars, , 2019, , 3,000 Oct. 1 By Buildings, , Amount, `, , 5,000, , 2,000, 5,000, , 5,000, , 389
Page 404 :
SBPD Publications Accountancy (XII), Anil's Capital Account, , Dr., Date, Particulars, 2019, Oct. 1 To Anil's Executor's A/c, , Cr., , Amount, , Date, Particulars, 2019, 57,000 Oct. 1 By Balance b/d, By Reserve Fund, By Bhanu's Capital A/c (a), By Chandu's Capital A/c (b), By Profit & Loss Suspense, A/c (c), By Interest on Capital A/c (d), 57,000, , Amount, , `, , `, , 30,000, 3,000, 11,250, 7,500, 3,750, 1,500, 57,000, , Anil's Executor's Account, , Dr., Date, Particulars, 2019, Oct. 1 To Bank A/c, To Balance c/d, , Cr., , Amount, , Date, Particulars, 2019, 28,500 Oct. 1 By Anil's Capital A/c, 28,500, , Amount, , `, , 57,000, , `, , 57,000, 57,000, , Working Notes :, (a) Calculation of Goodwill of the Firm :, ` 13, 000 + 12, 000 + 20, 000 + 15, 000 60, 000, Average Profit of 4 years =, =, = ` 15,000, 4, 4, Value of Goodwill of the Firm = ` 15,000 × 2.5 = ` 37,500, (b) Calculation of Share of Anil in Goodwill of the Firm :, 37,500 ´ 5, Anil’s Share in Total Goodwill =, = ` 18,750, 10, 18,750 ´ 3, Share of Bhanu in Anil’s Goodwill =, = ` 11,250, 5, 18,750 ´ 2, Share of Chandu in Anil’s Goodwill =, = ` 7,500, 5, (c) Calculation of Profit from the date of last Balance Sheet to date of death :, Period = April 1, 2019 to October 1, 2019 = ` 6 months, 15, 000 ´ 6, Profit for 6 months =, = ` 7,500, 12, 7,500 ´ 5, Anil’s Share in Profit =, = ` 3,750, 10, (d) Calculation of Interest on Capital @ 10% p.a. :, Period = April 1, 2019 to October 1, 2019 = 6 months, 10, 6, Interest on Capital = 30, 000 ´, ´, = ` 1,500, 100 12, , Illustration 18 (Partners’ Capital Accounts, Executors’ Account and Balance, Sheet of Surviving Partners), On 31st December, 2017, the Balance Sheet of P, Q and R, who were partner in a, firm, was as under :, Liabilities, , Amount, `, , Creditors, Reserve Fund, , 390, , 25,000 Building, 20,000 Investment, , Assets, , Amount, `, , 26,000, 15,000
Page 405 :
Death of a Partner, Capitals :, P, Q, R, , `, , 15,000, 10,000, 10,000, , Debtors, Bills Receivable, Stock, 35,000 Cash, , 15,000, 6,000, 12,000, 6,000, , 80,000, , 80,000, , The Partnership Deed provides that the profits be shared in the ratio of 2 : 1 : 1 and, that in the event of death of the partner, his executors will be entitled to be paid out :, (i) The capitals to his credit at the date of Balance Sheet., (ii) His proportion of Reserve at the date of last Balance Sheet., (iii) His proportion of profits to the date of death based on the average profits of the, last 3 completed years plus 10%., (iv) By way of goodwill, his proportion of the total profits for the three preceding, years., (v) The net profit for the last 3 years was : 2015—` 16,000; 2016—` 16,000;, 2017—` 15,400., R died on 1st April, 2018. He had withdrawn ` 5,000 to the date of his death. The, investment were sold at par and R’s executors were paid off., Prepare Partners’ Capital Accounts, R’s Executors Account and Balance Sheet of, surviving partners P and Q., Solution, Dr., Partners' Capital Accounts, Cr., Particulars, To R's Capital A/c, (Goodwill) 2 : 1, To Cash A/c (Drawings), To R's Executor's A/c, To Balance b/d, , P, , Q, , R, , `, , `, , `, , Particulars, By Balance b/d, , P, , Q, , R, , `, , `, , `, , 15,000 10,000 10,000, , — By Reserve Fund, 5,000 By P. & L. Suspense A/c, , 7,900, , 3,950, , —, , —, , —, , — 22,936 By P's Capital A/c, (Goodwill), —, , 17,100 11,050, , 10,000, , 5,000, , 5,000, , —, , —, , 1,0861, , —, , —, , 7,9002, , —, , —, , 3,9502, , By Q's Capital A/c, (Goodwill), 25,000 15,000 27,936, , 25,000 15,000 27,936, , R’s Executor’s Account, , Dr., Particulars, , Amount, , Cr., , Particulars, , `, , To Bank A/c, , Amount, `, , 22,936 By R's Capital A/c, , 22,936, , 22,936, , 22,936, , Balance Sheet of P and Q, (as at 1st April, 2018), Liabilities, , Amount, `, , Creditors, Bank Loan, , 25,000 Building, 6,936 3 Debtors, , Assets, , Amount, `, , 26,000, 15,000, , 391
Page 406 :
SBPD Publications Accountancy (XII), Capital A/cs :, P, Q, , `, , 17,100, 11,050, , Bills Receivable, Stock, 28,150 P. & L. Suspense A/c, , 6,000, 12,000, 1,086, , 60,086, , 60,086, , Working Notes :, 1., R’s Share of Profit :, , ` 16, 000 + 16, 000 + 15, 400 47, 400, =, = ` 15, 800, 3, 3, Add : (15,800 × 10/100), 1,580, 17,380, 3, Profits for 3 months (From January to March) = ` 17,380 ×, = ` 4,345, 12, R’s Share = ` 4,345 × 1/4 = ` 1,086 (Approx.), R’s Share of Goodwill :, Total Profits for 3 years = ` 16,000 + 16,000 + 15,400 = ` 47,400, 1, R’s Share = ` 47,400 × = ` 11,850, 4, It will be compensated by P and Q in gaining ratio, i.e., 2 : 1, P = ` 11,850 × 2/3 = ` 7,900, Q = 11,850 × 1/3 = ` 3,950, Calculation of Loan required from Bank :, `, Cash in hand, 6,000, Less : R’s Drawings, (5,000), 1,000, Add : Cash received from Sale of Investments, 15,000, 16,000, Less : Amount required to pay off R’s Executor (see Capital A/c), (22,936), Bank Loan Required, 6,936, It is assumed that loan will be arranged from Bank., Average Profit =, , 2., , 3., , 7.3.7 Settlement of Executor's Account of Deceased Partner’s, Illustration 19 (Payment to Executor in Instalments), Following is the Balance Sheet of Hari, Ram and Shyam as on 31st December, 2013 :, Liabilities, Sundry Creditors, Reserve Fund, Capital A/cs :, Hari, Ram, Shyam, , Amount, `, , `, , 10,000, 5,000, 5,000, , 3,000 Furniture, 3,200 Tools, Stock, Debtors, Cash at Bank, 20,000 Cash in hand, 26,200, , Assets, , Amount, `, , 8,000, 1,000, 6,000, 6,000, 5,000, 200, 26,200, , Ram died on 31st March, 2014. Under the partnership agreement, the executor of, Ram was entitled to :, (a) Amount standing to the credit of his Capital Account;, (b) Interest on capital which amounted to ` 63;, (c) His share of goodwill ` 3,500; and, (d) His share of profit from the closing of the financial year to the date of death, which amounted to ` 437., Ram's executor was paid ` 1,800 on 1st April, 2014 and the balance in four equal, yearly instalments starting from 31.3.2015 with interest @ 6% p.a., , 392
Page 407 :
Death of a Partner, Pass the necessary Journal entries and draw up Ram's Account to be rendered to his, executor and Ram's Executor's Account till it is finally paid., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount Amount, `, , Reserve Fund A/c, To Hari's Capital A/c, To Ram's Capital A/c, To Shyam's Capital A/c, , Dr., , `, , 3,200, 1,067, 1,067, 1,066, , (Being distribution of reserve fund among all partners), , Interest on Capital A/c, To Ram's Capital A/c, , Dr., , 63, 63, , (Being interest on capital credited to Ram), , Hari's Capital A/c, Shyam's Capital A/c, To Ram's Capital A/c, , Dr., Dr., , 1,750, 1,750, 3,500, , (Being goodwill credited to Ram), , Profit and Loss Suspense A/c, To Ram's Capital A/c, , Dr., , 437, 437, , (Being Ram's share of profit credited to his Capital A/c), , Ram's Capital A/c, To Ram's Executor's A/c, , Dr., , 10,067, 10,067, , (Being transfer of Ram's Capital to Ram's Executor's A/c), , Ram's Executor's A/c, To Bank A/c, , Dr., , 1,800, 1,800, , (Being cash paid to Ram's Executor), , Ram's Capital Account, , Dr., Particulars, , Amount, , Cr., Particulars, , `, , To Ram's Executor's A/c, , 10,067 By Balance b/d, By Interest on Capital A/c, By Profit and Loss Suspense A/c, By Hari's Capital A/c, By Shyam's Capital A/c, By Reserve Fund A/c, 10,067, , Dr., , Ram's Executor’s Loan Account, , Date, Particulars, 2014, Apr. 1 To Bank A/c, 2015, Mar. 31 To Bank A/c ( ` 2,067 + 496), To Balance c/d, , Amount, , Date, Particulars, `, 2014, 1,800 Apr. 1 By Ram's Capital A/c, 2015, 2,563 Mar. 31 By Interest A/c, 6,200, , 10,563, , Amount, `, , 5,000, 63, 437, 1,750, 1,750, 1,067, 10,067, , Cr., Amount, `, , 10,067, 496, 10,563, , 393
Page 408 :
SBPD Publications Accountancy (XII), 2016, Mar. 31 To Bank A/c ( ` 2,067 + 372), To Balance c/d, , 2,439, 4,133, , 2015, Apr. 1 By Balance b/d, 2016, Mar. 31 By Interest A/c, , 6,572, 2017, Mar. 31 To Bank A/c (` 2,067 + 248), To Balance c/d, , 2,315, 2,066, , 2,190, , 2016, Apr. 1 By Balance b/d, 2017, Mar. 31 By Interest A/c, , 2017, Apr. 1 By Balance b/d, 2018, Mar. 31 By Interest A/c, , 2,190, Working Note :, Amount payable to Ram's Executor, Amount paid on 1st April, 2014, , 372, 6,572, , 4,381, 2018, Mar. 31 To Bank A/c, , 6,200, , Amount payable in instalments, , Amount payable excluding interest in one instalment =, , 4,133, 248, 4,381, , 2,066, 124, 2,190, `, 10,067, 1,800, 8,267, , 8, 267, = ` 2,067., 4, , Illustration 20 (Payment in Instalments), Hopeless and Homeless were partners. The Partnership Deed provides, inter alia :, (i) That the accounts be closed on 31st December each year., (ii) That profits be divided as follows :, Hopeless 45%, Homeless 30% and carried to Reserve Account 25%., (iii) That in the event of death of a partner his executor will be entitled to the, following : (a) The capital to the credit at the date of death. (b) His share of, profit to the date of death based on the average profits of last 3 years. (c) His, share in Insurance Policy. (d) His share in Reserve. (e) His share of goodwill, based on two years’ purchase of the average profit of three years preceding to, the year of death., Balance Sheet, (as on 31-12-2015), Liabilities, Creditors, Capitals :, Hopeless, Homeless, Reserves, , Amount, `, , `, , 1,20,000, 70,000, , 30,000 Cash, Debtors, Loan to Hopeless, 1,90,000 Investments, 40,000 Goodwill, Premises, Joint Life Policy (Sum assured, ` 1,50,000), 2,60,000, , 394, , Assets, , Amount, `, , 65,000, 50,000, 9,000, 26,000, 20,000, 60,000, 30,000, 2,60,000
Page 409 :
Death of a Partner, The profit for the three years were 2013 : ` 48,000, 2014 : ` 72,000, 2015 : ` 60,000., Hopeless died on 30th April, 2016., (i) Prepare Hopeless's Capital Account and transferring the amount to his Executor's, Loan Account., (ii) Also prepare Hopeless's Executor's Loan Account till closed assuming that, ` 79,000 are to be paid immediately to the executors of Hopeless and balance to be paid in, four equal half-yearly instalments together with interest @ 10% p.a., Solution, , Hopeless's Capital Account, , Dr., Date, , Particulars, , Amount, , 2016, , `, , April 30 To Loan to Hopeless’s A/c, April 30 To Hopeless's Executor’s, Loan A/c (Transfer), , Date, , Cr., Particulars, , 2016, , 9,000 Jan., , Amount, `, , 1 By Balance b/d, , April 30 By Reserve A/c, 2,79,000 April 30 By Homeless’s Capital, (Goodwill) A/c, April 30 By Joint Life Policy, [(1,50,000 – 30,000)´3/5], , 1,20,000, 24,000, 60,000, 72,000, , April 30 By Profit & Loss Suspense, A/c (Share of Profit of, 4 months), 2,88,000, , 12,000, 2,88,000, , Working Notes :, Hopeless, Homeless, Reserve A/c, (i) Basis of division of Profit, 45%, 30%, 25%, Effective Ratio of Hopeless and Homeless for all purpose since Reserve is not a Partner, it is the, Reserve A/c, 45 : 30 or 3 : 2, (ii) Total Value of Goodwill of Firm, é 48,000 + 72,000 + 60,000 ù, on the Date of Death of Hopeless = 2´ ê, ú = ` 1,20,000, êë, 3, úû, 3, Share of Hopeless in Goodwill = ` (1,20,000 – 20,000)´ = ` 60,000, 5, (iii) Hopeless's Share of Profit for 4 months, 3 4 é 48,000 + 72,000 + 60,000ù, (i.e., from 1.1.2016 till 30.4.2016) = ´ ê, ú = ` 12,000, 5 12 ëê, 3, ûú, , Dr., , Hopeless's Executor's Loan Account, , Date, Particulars, 2016, April 30 To Cash A/c, Oct. 31 To Cash A/c, ( ` 50,000 + 10,000), Dec. 31 To Balance c/d, , Cr., , Amount, , Date, Particulars, Amount, 2016, `, 79,000 April 30 By Hopeless’s Capital A/c, 2,79,000, Oct. 31 By Interest A/c, 60,000, (2,00,000 × 10/100 × 6/12), 10,000, 1,50,000, `, , 2,89,000, , 2,89,000, , 395
Page 410 :
SBPD Publications Accountancy (XII), 2017, April 30 To Cash A/c (50,000 + 7,500), Oct. 31 To Cash A/c (50,000 + 5,000), Dec. 31 To Balance b/d, , 2017, 57,500 Jan. 1 By Balance b/d, 55,000 April 30 By Interest A/c, 50,000 Oct. 31 By Interest A/c, 1,62,500, , 2018, April 30 To Cash A/c, , 52,500, , 1,50,000, 7,500, 5,000, 1,62,500, , 2018, Jan. 1 By Balance b/d, April 30 By Interest A/c, , 52,500, , 50,000, 2,500, 52,500, , Illustration 21 (Payment by Way of Annuity), White, Lily and Marigold were in partnership sharing profits and losses in the, ratio of 2 : 2 : 1. White died on 1st June, 2014. The Partnership Deed provided for the, payment of an annuity of ` 4,000 p.a. together with interest @ 6% p.a. on yearly balances to, the widow of the deceased partner. When White died, total amount payable was ` 40,000., First annuity was paid on 31st December, 2014. After securing the fourth instalment on, 31st Dec., 2017, White’s widow also died., Prepare White’s Widow’s Annuity Suspense Account., Solution, Dr., White's Widow's Annuity Suspense Account, Cr., Date, , Particulars, , 2014, Dec. 31 To Bank A/c (` 4,000 + 1,200), To Balance c/d, , 2015, Dec. 31 To Bank A/c (` 4,000 + 2,160), To Balance c/d, , 2016, Dec. 31 To Bank A/c (` 4,000 + 1,920), To Balance c/d, , 2017, Dec. 31 To Bank A/c (` 4,000 + 1,680), To Balance transferred to, Capital A/cs :, `, Lily (2/3), 16,000, Marigold (1/3), 8,000, , Amount, , Particulars, , `, 2014, 5,200 June 1 By White's Capital A/c, 36,000 Dec. 31 By Interest A/c (on ` 40,000, @ 6% for 6 months), , Amount, `, , 40,000, 1,200, , 41,200, , 41,200, , 2015, 6,160 Jan. 1 By Balance b/d, 32,000 Dec. 31 By Interest A/c, , 36,000, 2,160, , 38,160, , 38,160, , 2016, 5,920 Jan. 1 By Balance b/d, 28,000 Dec. 31 By Interest A/c, , 32,000, 1,920, , 33,920, , 33,920, , 2017, 5,680 Jan. 1 By Balance b/d, Dec. 31 By Interest A/c, , 28,000, 1,680, , 24,000, 29,680, , 396, , Date, , 29,680
Page 411 :
Death of a Partner, , 7.4 FAST REVISION, l Reconstitution of a Firm on Death of a Partner : After the death of a partner, the old, partnership comes to an end but the firm continues and a new partnership comes into, existence between the remaining partners. Thus, death of a partner results in the, reconstitution of a firm., l Matters that need adjustment at the time of Death :, (i) Determination of New Profit-sharing Ratio, (ii) Determination of Gaining Ratio,, (iii) Valuation and Treatment of Goodwill, (iv) Revaluation of Assets and Liabilities,, (v) Adjustment of Accumulated Profits and Losses, (vi) Determination of the Amount, Payable to the Deceased Partner., l Gaining Ratio : Gaining ratio is the ratio in which the continuing partners have acquired, the share from the deceased partner., Gaining Ratio = New Ratio – Old Ratio, l Treatment of Goodwill :, (a) Goodwill should be adjusted through Partners' Capital Accounts. Adjustment is to be made, to the extent of the deceased partner's share of goodwill. Remaining (or continuing), Partners' Capital Accounts are debited in their gaining ratio and deceased Partner's, Capital Account is credited., (b) If goodwill already appears in the books, it should be written off by debiting all Partners’, Capital Accounts in their old profit-sharing ratio and crediting the Goodwill Account., l Accounting Treatment of Revaluation of Assets and Liabilities : At the time of death, of a partner, assets and liabilities are revalued, so that the deceased partner gets a fair, share of assets. Besides this, there may be unrecorded assets and liabilities which have to, be recorded. For this a Revaluation Account or Profit & Loss Adjustment Account is, prepared. Profit or loss arising from Revaluation Account is divided amongst all the, partners (including the deceased partner)., l Accumulated Profits or Losses/Reserves etc. : The reserves, accumulated profits or, losses appearing in the Balance Sheet belong to all partners. Hence, they should be, transferred to Capital Accounts of all partners in their old profit-sharing ratio., l Settlement of the Amount due to the Deceased Partner : The amount due to deceased, partner has to be paid to his legal representative or executor in lump-sum at a time or, transferred to Loan Account. Executor’s loan may be payable with or without interest in, instalments; settlement of account may be made partially in cash and partially in loan, which is payable in instalments., , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6/8 Marks Questions), , 1. How is the amount payable to the deceased partner determined ?, 2. How will you calculate the amount payable to the executors of deceased partner ?, , (B) Short Answer Type Questions, , (3/4 Marks Questions), , 1. What problems do arise on retirement or death of a partner ? Write two points only., (U.S.E.B., 2016), 2. How would you calculate the amount payable to the representative of a deceased partner ?, Or, How would you calculate the due amount payable to the success or (Executar) or deceased, partner ?, 3. If a partner dies during the year, how will you find out the share of profit of the deceased partner ?, 4. Explain the accounting treatment of ‘Goodwill’ at the time of death of a partner., 5. What are the different methods of dealing with goodwill on the death of a partner ?, 6. How is a partner’s share determined on the retirement or death ? Explain., , 397
Page 412 :
SBPD Publications Accountancy (XII), (C) Very Short Answer Type Questions, , (1 Mark Questions with Answers), , 1. What are the methods of calculating deceased partner’s share in profit of the firm upto, the date of death ?, [Ans. : (i) On the basis of time, (ii) On the basis of sales.], 2. Name two items which are credited to the Capital Account of the deceased partner., [Ans. : (i) His share in Goodwill of firm, (ii) His share in Joint Life Policy.], 3. When a partner dies, to whom the amount payable to him is paid ?, [Ans. : To his legal representatives.], 4. Why assets and liabilities are revalued on death of a partner ?, [Ans. : Assets and liabilities are revalued because on death of a partner, the value of assets may, fall or increase and the value of liabilities may also change and there may be some, unrecorded asset or liability to be recorded. This revaluation may result in loss or profit,, which includes share of the deceased partner.], 5. Which account is prepared to show the changes in the value of assets and liabilities at, the time of death of a partner., [Ans. : Revaluation Account], 6. Satyam, Shivam and Sundaram are partners sharing profits in the ratio of 2 : 3 : 2., Satyam dies, what will be the new profit-sharing ratio of Shivam and Sundaram ?, [Ans. : 3 : 2], 7. How is goodwill recorded on the death of partner ?, [Ans. : Remaining Partners’ Capital A/cs, Dr. (In Gaining Ratio), To Deceased Partner’s Capital A/c], 8. What Journal entry will be recorded for deceased partner’s share in profit from the, closure of last Balance Sheet till the date of his death ?, [Ans. : Profit and Loss Suspense A/c, Dr., To Deceased Partner’s Capital A/c, (Deceased Partner’s Capital A/c credited with his share in profit) ], 9. What Journal entry will be made on death of a partner for writing off the goodwill, already existing in Balance Sheet ?, [Ans. : All Partners’ Capital A/cs, Dr. (In old profit-sharing ratio), To Goodwill A/c, (Existing Goodwill A/c written off in old ratio)], , 10. When is Partner's Executor’s Account prepared ?, [Ans. : When a partner dies, amount payable to the deceased partner is transferred to his, Executor’s A/c. So Partner's Executor’s A/c is opened in case of death of a parter.], 11. Mention the items which are debited to deceased Partner's Capital Account., [Ans. : (i) Share of loss, (ii) Loss on Revaluation of assets and liabilities, (iii) Interest on, drawings, if any, (iv) Share in Goodwill appearing in the Balance Sheet.], 12. What Journal entry will be recorded for the amount payable to deceased partner ?, [Ans. Deceased Partner's Capital A/c, Dr., To Executor's A/c], , (D) Objective Type Questions, I. Select the correct alternative :, 1. In the event of death of a partner, the accumulated profits and losses are shared by the partners in, their :, (a) Old Profit-sharing Ratio, (b) New Profit-sharing Ratio, (c) Capital Ratio, (d) None of these, 2. On the death of a partner, the amount of Joint Life Insurance Policy is credited to the Capital, Accounts of :, (a) Only the deceased partner, , 398
Page 413 :
Death of a Partner, , 3., 4., , II., 1., 2., 3., 4., 5., , (b) All partners including the deceased partner, (c) Remaining partners, in the new profit-sharing ratio, (d) Remaining partners, in their old profit-sharing ratio, The executors will be paid interest on the amount due from the date of death of the partner @ :, (a) 4% p.a., (b) 5% p.a., (c) 6% p.a, (d) 7% p.a., On death of a partner, the remaining partner(s) who have gained due to change in profit-sharing, ratio should compensate the :, (a) Deceased partner only, (b) Remaining partners (who have sacrificed) as well as deceased partner, (c) Remaining partners only (who have sacrificed), (d) None of these, [Ans. 1. (a), 2. (b), 3. (c), 4. (b)], State whether the following statements are ‘True’ or ‘False’ :, In the event of death of a partner, the amount of General Reserve is transferred to Partners’, Capital Accounts in the old profit-sharing ratio., In the event of death, the combined share of profits of the continuing partners will decrease., According to the Partnership Act, the interest payable to the deceased partner on the amount due, to him will be 6% p.a. from the date of his death., In the event of death, profit or loss on the Revaluation Account is transferred to the continuing, parnters in their old profit-sharing ratio., The decease partner’s executors are entitled to his share of profit till the date of death., [Ans. : 1. True, 2. False, 3. True, 4. False, 5. True.], , PRACTICAL PROBLEMS, Short Practical Problems, ❏ Calculation of Profit, 1. A, B and C are equal partners in a firm whose books are closed on 31st December every year. A, died on 31st March, 2017 and according to the agreement, his share of profit up to the date of, death is to be calculated on the basis of the average profits of the last three years. Net profits of, the last three years were ` 8,000, ` 11,000 and ` 17,000. Calculate A's share of profits and pass the, necessary Journal entry., [Ans. A's Share of Profit ` 1,000], 2. Ram, Murli and Shyam were partners in a firm. Shyam died on 28th February, 2017. His share of, profit from the closure of the last accounting year till date of death was to be calculated on the, basis of the average of three completed years of profits before death. Profits for 2014, 2015 and, 2016 were ` 17,000, ` 18,000 and ` 19,000 respectively., Calculate Shyam's share of profit till his death and pass the necessary Journal entry for the same., [Ans. Shyam's Share in Profit ` 1,000], 3. A, B and C are sharing profits in the ratio of 3 : 2 : 1. B dies on 31st March, 2017. Accounts are, closed on 31st December. Sales for the year 2016 amounted to ` 4,00,000. Sales of ` 1,20,000, amounted between the period from 1st January, 2017 to 31st March, 2017. The profit for the year, 2016 amounted to ` 40,000., Calculate the deceased partner's share in profits of the firm and pass Journal entry for the same., [Ans. B's Share of Profit ` 4,000], 4. A, B and C were partners sharing profit in the ratio of 2 : 2 : 1. B dies on 31st March, 2017., Accounts were closed on 31st December. Total sales for the year 2016 amounted to ` 6,00,000 and, net profit was ` 60,000. Total sales from 1st January, 2017 to 31st March, 2017 were ` 2,00,000., Calculate deceased partner’s share of profit., [Ans. ` ` 8,000.], ❏ Calculation of Deceased Partner’s Share of Goodwill, 5. P, R and S are in partnership sharing profits in the ratio of 4 : 3 : 1 respectively. It is provided in, the Partnership Deed that, on the death of any partner, his share of goodwill is to be valued at, half of the profits credited to his account during the previous four completed years., R dies on 1st January, 2017. The firm's profits for the last four years 2013 : ` 1,20,000, 2014 :, ` 80,000, 2015 : ` 40,000, 2016 : ` 80,000., , 399
Page 414 :
SBPD Publications Accountancy (XII), Determine the amount that should be credited to R in respect of his share of goodwill., [Ans. ` 60,000], 6. A and B were partners who share profits and losses in the ratio of 3 : 2. On July 1, 2017 B died., According to the Partnership Deed, in the event of the death of a partner his legal heirs were, entitled to his share of goodwill based on one year's purchase of the average profits of the last, three completed years. The profits of the last three years were ` 16,400, ` 19,500 and ` 21,700, respectively. At the time of death of B, goodwill appeared in the books of the firm at ` 7,200., Determine the share of B in the amount of goodwill., [Ans. ` 7,680], ❏ Accounting Treatment of Goodwill, 7. X, Y and Z were partners in a firm sharing profits in the ratio of 5 : 3 : 2. On 15.2.2017 X died a nd, the new profit-sharing ratio of Y and Z was equal. On X's death the goodwill of the firm was, valued at ` 50,000., Calculate the Gaining Ratio and pass necessary Journal entry on X's death for the treatment of, goodwill without opening Goodwill Account., [Ans. Gaining Ratio 2 : 3. Debit Y and Z with ` 10,000 and ` 15,000 respectively and Credit X with, ` 25,000.], 8. Ram, Mohan and Sohan were partners in a firm sharing profits in the ratio of 2 : 2 : 1. On, 28.2.2017 Mohan died and the new profit-sharing ratio of Ram and Sohan was equal. On Mohan's, death the goodwill of the firm was valued at ` 1,50,000., Calculate the Gaining Ratio and pass necessary Journal entry on Mohan's death for the, treatment of goodwill without opening Goodwill Account., [Ans. Gaining Ratio 1 : 3. Debit Ram and Sohan with ` 15,000 and ` 45,000 respectively and, Credit Mohan with ` 60,000.], 9. S, T and U were partners in a firm sharing profits in the ratio of 5 : 4 : 3. On 28.2.2017 T died a nd, the new profit-sharing ratio between S and U was 3 : 2. On T's death the goodwill of the firm was, valued at ` 2,40,000., Calculate Gaining Ratio and pass necessary Journal entries for the treatment of goodwill on T's, death without opening Goodwill Account., [Ans. Gaining Ratio 11 : 9; Debit S and U with ` 44,000 and ` 36,000 respectively and Credit T, with ` 80,000], ❏ Accounting Treatment of Goodwill and Calculation of Profit, 10. P, Q and R were partners in a firm sharing profits in 2 : 2 : 1 ratio. The firm closes its books on 31st, March every year. P died three months after the last accounts were prepared. On that date the, goodwill of the firm was valued at ` 90,000. On the death of a partner his share of profit in the, year of death was to be calculated on the basis of the average profits of the last four years. The, profits of last four years were :, Year ended 31.3.2017, ` 2,00,000, Year ended 31.3.2016, ` 1,80,000, Year ended 31.3.2015, ` 2,10,000, Year ended 31.3.2014, ` 1,70,000 (Loss), Pass necessary Journal entries for the treatment of goodwill and P's share of profit on his death., Show clearly the calculation of P's share of profit., [Ans. P's Share of Goodwill ` 36,000; P's Share in Profit ` 10,500], ❏ Adjustment Journal Entries for Goodwill and Revaluation of Asset, 11. Sita, Reeta and Geeta are partners in a firm sharing profits and losses in the ratio of 4 : 3 : 1. As, per terms of Partnership Deed on the death of a partner, goodwill was to be valued at 50% of the, net profit credited to that Partner’s Capital Account during the 3 completed years before her, death. Sita died on 28th February 2015. The profits for the last 5 years were 2010—` 60,000;, 2011—` 97,000; 2012— ` 1,05,000; 2013— ` 30,000 and 2014— ` 84,000., On the date of Sita’s death, building was found under-valued by ` 80,000 which was to be, considered. Calculate the amount of Sita’s share of goodwill in the firm and record the, adjustment Journal entries of goodwill and revaluation of building. The profit-sharing ratio, between Reeta and Geeta will be equal., (C.B.S.E., 2012 C), [Ans. J/E, Value of Goodwill ` 1,09,500, Sita’s Share of Goodwill ` 54,750, Revaluation Loss, ` 80,000.], , 400
Page 415 :
Death of a Partner, ❏ Journal Entries for Treatment of Goodwill P & L A/c and P & L Suspense A/c, 12. Manav, Nath and Narayan were partners in a firm sharing profits in the ratio of 1 : 2 : 1. The firm, closes its books on 31st March every year. On 30th September, 2015 Nath died. On that, date his, capital account showed a debit balance of ` 5,000. There was a debit balance of ` 30,000 in the profit, and loss account. The goodwill of the firm was valued at` 3,80,000. Nath’s share of profit in the year, of his death was to be calculated on the basis of average profit of last 5 years which was` 90,000., Pass necessary journal entries in the books of the firm on Nath’s death., (C.B.S.E, 2016), [Ans. Nath’s Share of Goodwill ` 1,90,000, Profit and Loss Suspense A/c to be credited to Nath, ` 22,500, Nath’s Capital A/c Balance trans. to Executor’s A/c ` 1,92,500], ❏ Joint Life Policy when Premium is treated as Business Expenses, 13A. A, B and C are partners sharing profits in the ratio of 5 : 3 : 2. The firm has a Joint Life Policy for, ` 40,000. The annual premium of ` 2,400 regarded as an ordinary business expense. C dies on, 1.9.2016 and the claim is realised on 1.1.2017. Pass Journal entries., [Ans. J/E, (i) Entry for Claim, (ii) For transfer of J.L.P. into Partner’s Capital A/c in the ratio of, 5 : 3 : 2, (iii) For Cash received from Insurance Co.], ❏ When J.L.P. appears in the Books at it Surrender Value, 13B. A, B and C are partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. The firm took a, Joint Life Policy of ` 1,50,000. B died. The surrender value of the policy was ` 50,000 in the books, at the time of death., Pass a Journal entry for adjustment of Joint Life Policy., [Ans. J/E, J.L.P. A/c to be debited with ` 1,00,000 and Partners’ Capital Accounts to be credited in, the ratio of 5 : 3 : 2.], ❏ Joint Life Policy : When Premium paid is considered as Capital Expenditure, 13C. X, Y and Z were partners in a firm sharing profits in the ratio of 4 : 3 : 3. They had a Joint Life, Policy of ` 2,00,000. The annual premium paid was ` 2,000 and was considered as an asset. Y died, on 15.3.2017. On that date, the surrender value of the policy was ` 30,000. Pass necessary entries, on Y’s death related to Joint Life Policy transactions., [Ans. J/E. (i) For Claim, (ii) For adjustment of J.L.P. ( ` 2,00,000 – 30,000) in Partners' Accounts,, (iii) For receipt of cash from insurance.], ❏ Accounting Treatment of Individual Life Policy, 14. X, Y and Z are partners sharing profits and losses in the ratio of 3 : 2 : 1 respectively. The firm had, insured the partners’ lives severally, X for ` 10,000, Y for ` 7,500 and Z for ` 5,000. The premiums, were charged to Profit and Loss Account. The surrender value of each such policy as on 31st March,, 2017 is 50% of the sum assured. Y and Z decide to share the profits and losses equally in future., Give the necessary Journal entries assuming (a) If X retires on 31.3.2017, (b) If X dies on 31.3.2017., [Ans. (a) Share of X in S.V. ` 5,625 (b) Share in Own Policy ` 5,000, Share in S.V. of Y’s and, , Z’s Policy ` 3,125], , ❏ When Joint Life Policy and Joint Life Policy Reserve appear in Balance Sheet, 15. L, M and N are partners sharing profits in the ratio of 2 : 1 : 1. In their Balance Sheet as on 31st, December, 2016 Joint Life Policy Reserve ` 36,000 appears on the liabilities side and Joint Life, Policy ` 36,000 on the assets side. The firm had taken a Joint Life Policy (with profit) of ` 1,00,000., On 28th February, 2017, L died. The insurance company admitted a claim of ` 1,26,000 including, bonus. Prepare Joint Life Policy Account and Joint Life Policy Reserve Account., [Ans. Profit on J.L.P. A/c ` 1,26,000 J.L.P. Reserve A/c ` 36,000], ❏ Preparation of Deceased Partner's Capital A/c, 16. A, B and C were partners in a firm sharing profits in proportion of their capitals. On 31.3.2019, their Balance Sheet was as follows :, Liabilities, Creditors, Reserve, Capitals :, A, , Amount, `, , `, , 40,000, , 16,000 Building, 12,000 Machinery, Stock, Debtors, , Assets, , Amount, `, , 1,40,000, 60,000, 8,000, 12,000, , 401
Page 416 :
SBPD Publications Accountancy (XII), B, C, , 60,000, 1,00,000, , Cash, 2,00,000, 2,28,000, , 8,000, 2,28,000, , B died on 30.6.2019. Under the partnership agreement the executors of a deceased partner were, entitled to :, (i) Amount standing to the credit of Partner's Capital Account., (ii) Interest on capital at 12% per annum., (iii) Share of goodwill of the firm on B's death was valued at ` 2,40,000., (iv) Share of profit from the closing of last financial year to the date of death on the basis of last, year's profit. Profit for the year ended 31.3.2017 was ` 15,000., Prepare B's Capital Account to be rendered to his executors., [Ans. B's Executor's A/c ` 1,38,525 (transfer)], 17. On 31st March, 2019 the Balance Sheet of Aman, Suman and Rakhi, who are sharing profits in, the ratio of 2 : 1 : 2 was as follows :, Liabilities, Amount, Assets, Amount, `, , Creditors, Profit & Loss A/c, Capitals :, Aman, Suman, Rakhi, , `, , 1,20,000, 80,000, 1,00,000, , 40,000 Goodwill, 60,000 Land & Building, Stock, Debtors, Cash, 3,00,000, 4,00,000, , `, , 50,000, 2,00,000, 50,000, 50,000, 50,000, 4,00,000, , Aman died on 12th June, 2019. According to Partnership Deed the executors of the deceased, partner are entitled to :, (i) Amount standing to the credit of Partner's Capital Account., (ii) Interest on capital @ 8% per annum., (iii) Share of goodwill on the basis of twice the average of past three years profits., (iv) Share of profit from the closing of last financial year to the date of death on the basis of last, year's profit., The profits of the last three years were as follows :, Year, :, 2016-17, 2017-18, 2018-19, Profit (` ) :, 30,000, 70,000, 80,000, The firm closes its books on 31st March every year., Suman and Rakhi acquired Aman's share in the ratio of 1 : 5. Prepare Aman's Capital Account to, be presented to his executors., [Ans. Interest on Aman's Capital ` 1,920, Aman's Share in Goodwill ` 48,000, Aman's Share in, Profit upto the death ` 4,800; Balance of Capital A/c trans. to Executor's A/c ` 1,78,720.], ❏ Journal Entries and Deceased Partner’s Capital A/c, 18. Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2019 :, Balance Sheet, (as on 31st March, 2019), Liabilities, Amount, Assets, Amount, `, , Sundry Creditors, General Reserve, Capital A/cs :, Prateek, Rockey, Kushal, , `, , 30,000, 20,000, 20,000, , 16,000 Furniture, 16,000 Stock, Sundry Debtors, Bills Receivable, Cash at Bank, 70,000 Cash in hand, 1,02,000, , 402, , `, , 22,600, 20,400, 22,000, 16,000, 18,000, 3,000, 1,02,000
Page 417 :
Death of a Partner, Rockey died on June 30, 2019. Under the terms of the Partnership Deed, the executors of a, deceased partner were entitled to :, (a) Amount standing to the credit of the Partner's Capital Account,, (b) Interest on capital at 5% per annum,, (c) Share of goodwill on the basis of twice the average of the past three years' profit, and, (d) Share of profit from the closing date of the last financial year to the date of death on the basis, of last year's profit., Profits for the year ending on March 31, 2017, March 31, 2018 and March 31, 2019 were ` 12,000,, ` 16,000 and ` 14,000 respectively. Profits were shared in the ratio of capitals., Pass the necessary Journal entries and draw up Rockey's Capital Account to be rendered to his, executor., (N.C.E.R.T.), [Ans. Rockey's Executor’s Account is ` 33,821.], ❏ Journal Entries and Partners’ Capital Accounts, 19. X, Y and Z were partners sharing in the proportion of one-half, one-fourth and one-fourth, respectively. Their Balance Sheet on 31st March, 2017 was as follows :, Liabilities, Amount, Assets, Amount, `, , Sundry Creditors, X's Capital, Y's Capital, Z's Capital, , 40,000, 1,00,000, 60,000, 40,000, , `, , Cash, Sundry Debtors, Stock, Loan to X, Freehold Property, , 2,40,000, , 10,000, 45,000, 55,000, 30,000, 1,00,000, 2,40,000, , X died on 1st April, 2017. According to the Partnership Deed, the goodwill was to be calculated attwo, years' purchase of average profits of three completed years preceding the death of a partner. The, deceased partner's share of goodwill, etc., was paid out in cash on 1st July, the available cash balance, being supplemented by a loan from firm's banker on the security of the freehold property. The net, profits of the years 2014-15, 2015-16 and 2016-17 were ` 55,000, ` 48,000 and ` 65,000 respectively., You are required to show the Journal entries and the Capital Accounts of the partners., [Ans. Value of Goodwill ` 1,12,000, Capital Balance Y : ` 32,000, Z : ` 12,000, Payment to X's, Executor ` 1,26,000 (Cash ` 10,000 + Bank A/c ` 1,16,000).], 20. X and Y are partners. The Partnership Deed provides inter alia :, (a) That the accounts be balanced on 31st December in each year., (b) That the profits be divided as follows :, X one-half, Y one-third and carried to a Reserve Account one-sixth., (c) That in the event of the death of a partner, his executors be entitled to be paid out :, (i) The capital to his credit at the date of death., (ii) His proportion of profits to date of death based on average profits of the last three completed years., (iii) By way of goodwill, his proportion of the total profits for the three preceding years., The Balance Sheet as on 31st December, 2016 :, Liabilities, Amount, Assets, Amount, `, , X's Capital A/c, Y's Capital A/c, Contingency Reserve, Creditors, Employee's Provident Fund, , 9,000 Sundry Assets, 6,000, 3,000, 2,000, 1,000, 21,000, , `, , 21,000, , 21,000, , The profits for three years were : 2014— ` 4,200; 2015— ` 3,900; 2016— ` 4,500. Y died on 1st May,, 2017. Required. Prepare necessary accounts., [Ans. Capital Balance of Y trans. to Y's Executor's A/c ` 12,800; Capital A/c : X ` 5,200 Cr.], , 403
Page 418 :
SBPD Publications Accountancy (XII), ❏ Revaluation Account and Deceased Partner's Capital Account, 21. A, B and C were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2 respectively. A, died on 28th Feb., 2018. The Balance Sheet on that date was of follows :, Liabilities, Amount, Assets, Amount, `, , Capital A/cs :, `, A, 24,000, B, 32,000, C, 24,000, Workmen's Compensation Reserve, Creditors, , Goodwill, Machinery, Furniture, 80,000 Stock, 24,000 Debtors, 44,000 Cash, 1,48,000, , `, , 12,000, 70,000, 12,000, 18,000, 30,000, 6,000, 1,48,000, , The firm had a Joint Life Policy in the names of the partners, for insured value of ` 1,20,000. The, premium paid on the policy was debited to Profit and Loss Account., The assets and liabilities were revalued as follows :, (i) Machinery ` 90,000 and furniture ` 14,000., (ii) A provision of 10% was created for doubtful debts., (iii) A provision of ` 30,000 was made for taxation., (iv) The goodwill of the firm was valued at ` 30,000., (v) Death claim for policy was realised in full., Prepare (1) Revaluation Account and (2) Partner's Capital Accounts., [Ans. Revaluation A/c Loss ` 11,000, A's Executor's A/c (trans.) ` 99,500, B's Capital A/c Balance, (Cr.) ` 59,500, C's Capital A/c Balance (Cr.) ` 42,200.], 22. X, Y and Z were partners in a firm sharing profits and losses in the ratio 5 : 3 : 2 respectively., X died on 28th February, 2017. The Balance Sheet on that date was as follows :, Liabilities, Amount, Assets, Amount, Capital A/cs :, X, Y, Z, General Reserve, Creditors, , `, , 12,000, 16,000, 12,000, , `, , `, , Machinery, Furniture, Stock, 40,000 Debtors, 12,000 Cash, 22,000, , 35,000, 6,000, 15,000, 15,000, 3,000, , 74,000, , 74,000, , The firm had a Joint Life Policy in the name of the all partners, for insured valued ` 60,000. The, premium paid on the policy was debited to Profit and Loss Account. The Partnership Deed, provided on the death of a partner the assets and liabilities are to be revalued., (a) Machinery ` 45,000 and Furniture ` 7,000., (b) A provision of 10% was created for doubtful debts., (c) A provision of ` 15,000 was made for taxation., (d) The goodwill of the firm was valued at ` 15,000 on X's death., (e) Death claim for policy was realised in full., The amount payable to X was transferred to his Executor's Account. You are requested to, prepare Revaluation Account and Capital Account of deceased partner., (J.A.C., 2009 A), [Ans. Revaluation A/c Loss ` 5,500; X's Executor's A/c (Cr.) ` 52,750], ❏ Revaluation A/c, Partners’ Capital A/cs and New Balance Sheet, 23. A, B and C are partners sharing profits in the ratio of 2 : 1 : 1. They closed their books on 31st, December each year. A died on 28th February, 2019 when their Balance Sheet was as follows :, Liabilities, Amount, Assets, Amount, `, , Creditors, , 404, , 3,790 Cash, , `, , 20,000
Page 419 :
Death of a Partner, General Reserve, Profit for Two Months, (i.e., Jan. & Feb., 2019), Before Interest & Salaries, Capital A/cs :, `, A, 10,000, B, 6,000, C, 5,000, , 3,600 Sundry Debtors, 3,110 Loan to A, , 7,500, 4,000, , 21,000, 31,500, , 31,500, , According to Partnership Deed :, (a) Interest on Capital is allowed @ 6% per annum. A and B are entitled to salaries at ` 300 and, ` 250 per month., (b) In the event of death of a partner goodwill was to be valued at 2 years purchase of the average, net profits of 3 completed years treeding preceding death. Net Profit : 2016 ` 5,500, 2017, ` 4,800, 2018 ` 6,500., A's share was paid to his executors. B and C continued the firm. Prepare Profit and Loss, Appropriation Account, Partners' Capital Accounts and Balance Sheet of B and C., [Ans. Net Profit A ` 900, B ` 450, C ` 450. A's Executor's Account credited ` 15,000 Capital, Balance ` 5,110, C ` 3,600, Total of Balance Sheet ` 12,500.], ❏ Payment to Executor’s in Instalments, 24. Rao and Majumdar are partners sharing profits and losses in the ratio of 3 : 2. Rao died on 31st, December, 2014. The following was the Balance Sheet on that date :, Liabilities, Amount, Assets, Amount, `, , Creditors, Reserve, Rao's Capital, Majumdar's Capital, , 24,000, 15,000, 25,000, 18,000, 82,000, , `, , Cash at Bank, Stock, Debtors, Furniture, , 18,000, 40,000, 20,000, 4,000, 82,000, , The share of Rao in firm's goodwill was agreed at ` 36,000., Assets and liabilities were valued reasonably. Assuming that ` 10,000 was paid immediately on, January 1, 2015 and the balance was payable in three equal instalments on 31st December every, year and interest was payable @ 12% per annum on unpaid balance. Prepare Rao's Executor's, Account., [Ans. Total amount payable to Rao's Executor's transfer from Rao's Capital Account ` 70,000;, Interest Payable for 2015 : ` 7,200; 2016 : ` 4,800; 2017 : ` 2,400.], ❏ Payment by Way of Annuity, 25. Amar, Akbar and Jony are partners sharing profits and losses equally. Jony retires on 1st April, 2014, and his total claim on the firm is calculated at ` 40,000. He agreed to receive an annuity of ` 9,200 per, year. You are required to prepare Jony’s Annuity Suspense Account assuming that unpaid balance, carried interest @ 5% p.a. The annuity is paid on 31st March each year and Jony dies on 25th April, 2017., [Ans. Interest : 31.3.2015 ` 2,000, 31.3.2016 ` 1,640, 31.3.2017 ` 1,262., 24.4.2014 : Balance of Jony’s Annuity Suspense A/c ` 17,302 transferred to Amar’s Capital, A/c and Akbar Capital A/c in equal ratio.], ❏ Miscellaneous and Boards' Questions, 26. Girija, Yatin and Zubin were partners sharing profits in the ratio 5 : 3 : 2. Zubin died on 1st, August, 2015. Amount due to Zubin’s executor after all adjustments was ` 90,300. The executor, was paid ` 10,300 in cash immediately and the balance in two equal annual instalments with, interest @ 6% p.a. starting from 31st March, 2017. Accounts are closed on 31st March each year., Prepare Zubin’s Executors Account till he is finally paid., , 405
Page 420 :
SBPD Publications Accountancy (XII), [Ans. Interest 2015-16 ` 3,200, 2016-17 ` 4,800, 2017-18 ` 2,400 Payment : 31.3.2017 ` 48,000,, 31.3.2018 ` 42,400.], 27. Pranav, Karan and Rahim were partners in a firm sharing profits and losses in the ratio of, 2 : 2 : 1. On 31st March, 2017 their Balance Sheet was as follows :, Balance Sheet of Pranav, Karan and Rahim as on 31.3.2017, Liabilities, , Amount, `, , Creditors, General Reserve, Capitals :, Pranav, Karan, Rahim, , `, , 2,00,000, 2,00,000, 1,00,000, , Assets, , Amount, `, , 3,00,000 Fixed Assets, 1,50,000 Stock, Debtors, Bank, , 4,50,000, 1,50,000, 2,00,000, 1,50,000, , 5,00,000, 9,50,000, , 9,50,000, , Karan died on 12.6.2017. According to the partnership deed, the legal representatives of the, deceased partner were entitled to the following :, (i) Balance in his Capital Account., (ii) Interest on Capital @ 12% p.a., (iii) Share of goodwill. Goodwill of the firm on Karan’s death was valued at ` 60,000., (iv) Share in the profits of the firm till the date of his death, calculated on the basis of last year’s, profit. The profit of the firm for the year ended 31.3.2017 was ` 5,00,000., Prepare Karan’s Capital Account to be presented to his representatives. (C.B.S.E., A.I., 2018), [Ans. Karan’s Executors A/c ` 3,68,800 (Cr.)], 28. Heera, Panna and Moti were partners in a firm sharing profits in the ratio of 3 : 2 : 1. On, 31.3.2019 their Balance Sheet was as follows :, Liabilities, Amount, Assets, Amount, `, , Sundry Creditors, Long-term Loan, General Reserve, Capital Accounts :, Heera, Panna, Moti, , `, , 40,000, 40,000, 40,000, , 2,87,000 Cash, 3,00,000 Debtors, 54,000 Stock, Investments, Furniture, Computers, 1,20,000 Patents, Buildings, 7,61,000, , `, , 79,000, 67,500, 75,000, 1,50,000, 81,000, 90,000, 38,500, 1,80,000, 7,61,000, , Panna died on 1.10.2019 and the following adjustments were to be made :, (i) Goodwill of the firm is valued at ` 30,000., (ii) Building and Furniture were found to be under valued by 10%., (iii) Investments are valued at ` 2,98,000., (iv) Stock was found over valued by ` 21,500. Patents were valueless., Prepare Revaluation Account, Capital Accounts and Balance Sheet of the new firm., [Ans. Revaluation A/c Profit ` 1,17,000. Panna’s Executors A/c (Credited) ` 1,07,000, Capital A/cs, Balance : Heera ` 1,18,000, Moti ` 66,000, B/S Total ` 8,78,000.], , l, , 406
Page 421 :
8, DISSOLUTION OF, PARTNERSHIP FIRM, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 8.1 Meaning of Dissolution of Partnership, , 408, , 8.2 Meaning of Dissolution of Firm, , 408, , 8.3 Difference between Dissolution of Partnership and Dissolution of, Firm, , 408, , 8.4 Circumstances or Grounds of Dissolution of Partnership, , 408, , 8.5 Types or Modes of Dissolution of Partnership Firm, , 409, , 8.6 Settlement of Accounts on Dissolution, , 409, , 8.7 Accounting Treatment on Dissolution of Partnership Firm, , 410, , l Treatment of Goodwill l Guidelines for Treatment of Different Reserves, l Necessary Accounts on Dissolution, 8.8 When Balance Sheet of the Firm is Not Given, , 449, , 8.9 Fast Revision, , 456, , ❑ Useful Questions, , 457, , ❑ Practical Problems, , 460, , 407
Page 422 :
SBPD Pub li ca tions Accountancy (XII), , 8.1 Meaning of Dissolution of Partnership, Any change in the relations of the partners is called the dissolution of partnership. Thus,, whenever a new partner is admitted or an old partner retires or dies, a partner is declared, insolvent a partnership is reconstituted. In all those cases where a partnership is reconstituted,, there is a dissolution of the partnership. The dissolution of partnership does not necessarily mean, that the partnership should stop doing business, close its door and liquidate. The firm will carry, on its normal day-to-day transactions in the usual manner. In case of dissolution of partnership,, the firm continues in a reconstituted form., , 8.2 Meaning of Dissolution of Firm, ‘‘Dissolution of a firm means, termination of business of the firm where all the partners, severe their relations with the firm.’’ It simply means putting an end to partnership between, all the partners. On the dissolution of the firm, the assets of the firm are sold and liabilities, are paid off., As per Sec. 39 of the Indian Partnership Act, 1932, ‘ The dissolution of partnership, between all the partners of a firm is called the dissolution of the firm.’’, Thus, the dissolution of firm means :, (a) The termination of firm's business, (b) The disposal of partnership assets and settlement of liabilities of the third parties., (c) The distribution of remaining cash between the partners., , 8.3 Difference between Dissolution of Partnership, and Dissolution of Firm, Basis of Difference, 1. Meaning, , 2. Continuance of, Business, 3. Closure of Books, , Dissolution of Partnership, , Dissolution of Firm, , Dissolution of the partnership Dissolution of the firm implies a, implies change in relationship complete, break, down, of, among the partners., relationship among the partners., The business is not terminated Business of the firm comes to an, rather it continues., end., Books of account need not be closed All Books of accounts of the firm are, because the business is not closed., terminated., , 4. Court's Intervention, , Court does not intervene because, partnership is dissolved by mutual, agreement., 5. Settlement of Assets Assets and Liabilities are revalued, and Liabilities, and new balance sheet is drawn., 6. Effect, Dissolution of partnership may or, may not involve dissolution of the, firm., 7. Nature, , Dissolution, voluntary., , of, , partnership, , It can be dissolved either, voluntarily or compulsorily by the, order of the court., Assets are realised and liabilities, are paid-off., Dissolution of firm also means the, dissolution of partnership., , is Dissolution of firm may, voluntary or compulsory., , be, , 8.4 Circumstances of Dissolution of Partnership, Dissolution of a firm may take place on : (i) Retirement of any of the partner; (ii) Death, of any of the partner; (iii) Any of the partner declared as insolvent; (iv) Incapability of any, partner; (v) Completion of the venture (for which partnership was formed); (vi) At the expiry, , 408
Page 423 :
Dis so lu tion of Part ner ship Firm, of the term of partnership. (For other circumstances of dissolution see Sections 41 to 44 as, noted below.), , 8.5 Types or Modes of Dissolution of Partnership Firm, A firm may be dissolved in any one of the following ways :, (1) By Mutual Agreement : A firm may be dissolved at any time when :, all the partners, agree for its dissolution., [Sec. 40], (2) Compulsory Dissolution : Under following conditions a firm is compulsorily, dissolved :, (a) when all the partners or all the partners except one, become insolvent. [Sec. 41], (b) when business of the firm becomes unlawful., (3) Dissolution by Notice : In case of partnership at will, partnership can be, dissolved by a partner by giving notice inwriting to other partners of his intention to, dissolve the firm., [Sec. 43], (4) On Happening of certain Contingencies (or events) :, [Sec. 42], (a) on death of any partner;, (b) on a partner is declared as insolvent;, (c) on expiry of the term or duration of the firm;, (d) on completion of the venture., (5) Dissolution by the Court [Section 44] : On filing of the petition or suit of a, partner, the Court may order for dissolution of the firm on any of the following grounds :, (i) when a partner becomes of unsound mind;, (ii) when a partner has become permanently incapable to perform his duties as a, partner;, (iii) when a partner is formal guilty of misconduct;, (iv) wilful or persistent breaches of agreement by a partner;, (v) transfer or sale of interest by a partner;, (vi) business running in losses continuously;, (vii) the Court being satisfied on other equitable and justified grounds that the firm, should be dissolved., , 8.6 Settlement of Accounts on Dissolution, 8.6.1 Settlement of Accounts, [Sec. 48], Section 48 of the Indian Partnership Act, 1932 states that :, In settling the accounts of a firm after dissolution, the following rules, shall, subject to, agreement by the partners, be observed :, (1) Losses including deficiencies of capital shall be paid :, (i) Firstly out of profits, then, (ii) Out of capital, and, (iii) Lastly, if necessary, by the partners individually in the proportions in which they, were entitled to share profits., (2) The amount realised from the sale of assets of the firm, including any sums, contributed by the partners to make up deficiencies of capital, must be applied in the, following manner and order :, (i) For payment of Realisation Expenses, (ii) In paying the debts of third parties;, (iii) In paying the amounts due to each partner advanced as loan to the firm;, , 409
Page 424 :
SBPD Pub li ca tions Accountancy (XII), (iv) Out of the remaining amount, the balance of Partners' Capital Accounts will be, returned; and, (v) The residue, that is surplus if any, shall be divided among the partners in their, profit-sharing ratio., [Sec. 48(2)], 8.6.2 Firm's Debts Vs. Private Debts, [Sec. 49], According to Section 49 of Partnership Act, where both debts due from firm and partner, in his individual capacity exist, the legal position as to settlement of such debts is as follows :, (i) Debts of the firm shall be paid first out of the amount realised from the sale of assets of, the firm. If there is any surplus available, it will be utilised in paying off partner's debts., (ii) Private debts of the partners would be paid first out of the amount realised from the, sale of private estate of partners. If there is any surplus available, it would be utilised in, paying off the firm's liabilities., 8.6.3 Difference between Firm's Debts and Private Debts, Basis of Difference, , Firm's Debts, , 1. Meaning, , Firm's debt means debts owed by, the firm., 2. Liability of Partners, Partner's liability is joint and, several., 3. Use of Firm's Property Firm's property is to be used first to, and Private estate of repay firm's debt and then, if need, Partners, be, partner's personal property can, be used., , Private Debts, Private debt means debt owed by a, person/partner personally., It is personal and private only., , First partner's personal property is, to be used to repay private debt., Firm's property can be used only in, case of excess of firm's assets over, firm's liabilities., 4. Use of Private Property Only excess of partner's property First partner's property is to be, over private debt can be used used to repay his personal liability,, towards payment of firm's debt., surplus, if any, would then be, applied towards the payment of, firm's debts., , 8.7 Accounting Treatment on Dissolution of Partnership Firm, On dissolution, the books of the firm are closed. For closing books of the firm following, accounting procedures are followed :, (1) Passing of necessary Journal entries in the books of the firm., (2) Opening of the following accounts in the firm's book., (i) Realisation Account., (ii) Partner's Loan Account if any., (iii) Partners' Capital Accounts., (iv) Partners' Current Accounts, if required., (v) Bank or Cash Account., ❏ Journal Entries to Close the Books of Account, (1) For Closing the Accounts of Various Assets : All the assets except Cash and, Bank Balance will be transferred to the Realisation Account at their book values., Realisation A/c, Dr., To Sundry Asset A/c (By Name), (For transfer of sundry assets to Realisation A/c), , For example, Building, Plant and Machinery, Land and Furniture, Investments,, Debtors, Stock, Goodwill will be credited (at Book Value)., , 410
Page 425 :
Dis so lu tion of Part ner ship Firm, l The balance of fictitious assets such as accumulated losses, deferred revenue expenditure, etc., , are not transferred to the Realisation Account. They are directly transferred to the Capital, Accounts of partners in their profit-sharing ratio., l It should be noted that the assets in respect of which provision or reserve has been made, such, assets, for example, debtors should be transferred at Gross Value and not at Net Value., Provision or Reserve for doubtful debts is transferred with other liabilities., l For example, if Debtors of ` 16,000 are given in the Balance Sheet and ` 1,000 has been, reduced from it as provision and ` 15,000 has been shown in the amount column then Debtors, will be transferred at ` 16,000 and ` 1,000 will be transferred on the credit side of the, Realisation Account alongwith the other liabilities., , (2) For Closing Accounts of Various Liabilities : For closing the accounts related, to third parties and outside liabilities, they will be transferred to Realisation Account at, their book values., Sundry Liabilities A/c (Individually), Dr., To Realisation A/c, (For various liabilities transferred to Realisation A/c), , For example, Sundry Creditors A/c, Bills Payable A/c, Employee’s Provident Fund A/c,, Loan A/c, Partner's Wife Loan A/c., Bank Overdraft, Outstanding Exps. etc., Note : (i) Capital, (ii) Reserve Fund, (iii) P. & L. Balance (Credit), (iv) Undistributed Profit, existing on the liability, side of the Balance Sheet will not be transferred to the Realisation Account., , (3) For Transfer of Provisions and Reserves against Assets to Realisation, Account : If such items exist in the Balance Sheet., Provision for Doubtful Debts A/c, Dr., Provision for Depreciation A/c, Dr., Machinery Replacement Reserve A/c, Dr., At Book Value, Investment Fluctuation Fund A/c, Dr., Joint Life Policy Fund/Reserve A/c, Dr., Provision for Discount on Debtors, Dr., To Realisation A/c, (For various specific reserves and funds transferred), Note : Investment Fluctuation Fund and Joint Life Policy Fund can be directly written off by crediting them to, Partners' Capital Accounts in their profit-sharing ratio (without transferring them to the Realisation, Account if there are no investments and Joint Life Policy on assets side of the Balance Sheet., , (4) For Realising Assets/Disposal of Assets (Whether Recorded or Unrecorded) :, Mode of Realisation, (i) When Sold for Cash :, (ii) When Assets are taken over by Partner(s) :, (iii) When asset is given to a creditor towards, payment of dues :, , Accounting Entry, Cash or Bank A/c, To Realisation A/c, (For sundry assets realised), , Partner's Capital (or Current) A/c, To Realisation A/c, , Dr., Dr., , [For taking over of assets by partner], , No entry is required, , Notes : (a) Entry will be made with the amount realised or sale price or by the amount on which partner(s) agree, to take over the asset., (b) In both cases where the assets are sold or taken over by partner(s), Realisation Account will be credited, and not Assets Accounts as the Assets Accounts have already been closed., (c) If realised value of tangible asset like plant, furniture, debtors etc. is not given, it is assumed that there, are realised at their book value ., Unless otherwise stated specifically intangible assets like goodwill is assumed to be realised at zero., , 411
Page 426 :
SBPD Pub li ca tions Accountancy (XII), (5) For Payment of Liabilities in Cash : Cash received on sale of assets will be, utilised for payment to third parties/outside liabilities., Realisation A/c, Dr. (with the actual amount), To Bank or Cash A/c, (For payment of liabilities), , ‘With actual amount’ means that amount which is paid to meet the liabilities., Therefore : (i) If creditors are paid at 5% (reduced amount), this amount will be reduced from, the amount of creditors. (ii) In the same way outstanding expenses will be paid off., Note : If nothing is mentioned in the question as to the payment of creditors or any liability it will beassumed that, payment has to be made in full., , (6) Payment of Liabilities by the Partner(s) or Liability taken over or, Discharged by Partner :, Realisation A/c, Dr., To Partner's Capital A/c, (For taking over of liability by partner), , (7) For Payment of Realisation Expenses or Cost of Dissolution :, (i) When realisation expenses are paid by the firm : Realisation A/c, To Cash/Bank A/c, (ii) When realisation expenses are paid by the, partner on behalf of the firm :, , Dr., , (Being the realisation expenses paid by the firm), , Realisation A/c, To Partner’s Capital A/c, , Dr., , (Being the realisation expenses paid by the partner), , (iii) When the firm has agreed to pay a fixed, For amount payable to the partner, amount to the partner as his remuneration for Realisation A/c, undertaking dissolution of the firm, To Partner's Capital A/c, dissolution expenses are paid by the firm., (Being the remuneration due to partner), For Realisation Expenses :, Realisation A/c, To Cash/Bank A/c, , Dr., , Dr., , (Being the expenses of dissolution paid), , (iv) When realisation expenses are to be borne by Concerned Partner’s Capital A/c, the partner and expenses are paid by the firm :, To Cash/Bank A/c, , Dr, , (v) When any of the partner agrees to do Realisation A/c, dissolution work for an agreed remuneration., To Partner's Capital A/c, , Dr., , (Being the realisation expenses paid on behalf of, the partner), , (Being remuneration payable to a partner), , (vi) When realisation expenses are to be borne by A's Capital A/c, Dr., one partner (say A) and paid by another, To B's Capital A/c, partner (say B), (Being realisation expenses to be formed by A, paid by B.), (vii) If the realisation expenses are borne and paid No entry in the books of the firm, by the partner himself :, Notes :, 1. Generally, in such a situation no entry is made for payment of realisation expenses by the partner because, these expenses are paid by the partner from his personal sources. Therefore, no entry will be made in the, books. Even then if entry is to be passed, such expenses will be treated as drawings and the entry will be, made as under :, Partner's Capital A/c, Dr., To Bank or Cash A/c, (For realisation expenses incurred by partner treated as drawings), , 2. If the question is silent about the treatment of realisation expenses it is assumed that the firm has met the, expenses., , 412
Page 427 :
Dis so lu tion of Part ner ship Firm, (8) For Closing Realisation Account : Now Realisation Account will be closed., Realisation Account depicts the profit or loss arising on dissolution of a firm., (i) If the credit side of the Realisation Account exceeds the debit side, such excess shall, be treated as profit. Such profits will be shown as distribution on the debit side among the, partners in their profit-sharing ratio. Entry will be made in the following manner :, In case of Profit on Realisation :, Realisation A/c, Dr., To Partners' Capital/Current A/cs, (For profit on realisation transferred to Partners', Capital/Current A/cs in profit-sharing ratio), , (ii) If the debit side of the Realisation Account exceeds the credit side, such excess shall, be treated as loss. Such loss will be distributed among partners in their profit-sharing ratio., For this Journal entry will be made in the following manner :, In case of Loss on Realisation :, Partners' Capital/Current A/cs, Dr., To Realisation A/c, (For loss on realisation transferred to Partners' Capital/Current A/cs), , (9) For Payment of Partner's Loan : If firm has taken loan from any of the partner, it, will have to be repaid :, Partner's Loan A/c, Dr., To Bank A/c, (For partner's loan paid off), , (10) For transfer of Free Reserves/Reserve Funds/Accumulated Profits, etc. :, Reserves/Reserve Fund/Undistributed Profit or Profit & Loss Account (credit balances) etc., will not be transferred to Realisation Account. They are transferred to Partners' Capital, Accounts or Current Accounts, as the case may be, in their profit-sharing ratio :, General Reserve A/c, Dr., Reserve Fund A/c, Dr., Contingency Reserve A/c, Dr., Profit & Loss A/c (Credit Balance), Dr., Join Life Policy Reserve A/c, Dr., Workmen's Compensation Fund A/c, Dr., Investment Fluctuation Reserve A/c, Dr., To Partners' Capital/Current A/cs, (For transfer of reserve and accumulated profits to Partners' Capital/Current A/cs), , (11) For Closing Accumulated Losses or Fictitious Assets : If debit balance of Profit, & Loss Account or Undistributed Losses, Advertisement Suspense A/c etc. exist in the assets, side of the Balance Sheet, they will be transferred to Partners' Capital or Current Accounts., Partners' Capital/Current A/cs, Dr., To Profit & Loss A/c, To Advertisement Suspense A/c, (For transfer of undistributed loss etc.), , (12) For Closing Capital Account : Lastly, Partners' Capital Accounts will be closed., If there is credit balance in the Capital Account, i.e., total of credit side is more than that of, debit side, such excess shall be paid to partners in cash., (i) In case of Credit Balance on Payment of Cash :, Partners' Capital A/cs, Dr., To Bank or Cash A/c, (For payment of the amount finally due to the partners), , 413
Page 428 :
SBPD Pub li ca tions Accountancy (XII), On the other hand, if there is debit balance, i.e., total of debit side is more than total of, credit side, such partners will bring in cash upto the extent of their debit balances. Such, situation is called simple dissolution of the firm., (ii) In case of Debit Balance for bringing in Cash :, Bank A/c, Dr., To Partners' Capital A/cs, (For amount brought in by partner to meet capital deficiency), , Workmen's Compensation Reserve/Fund (W.C.R.), Meaning : Workmen's compensation reserve is a reserve created out of profits of the, firm to meat the claims for compensation by workers., Treatment at the time of Dissolution : At the time of dissolution, Workmen, Compensation Reserve is dealt with as follows :, Situation 1 : When there is no liability against Workmen :, Compensation Reserve : In such a case, the Workmen’s Compensation Reserve is entire amount of distributed among the partners in, their profit-sharing ratio., Journal Entry : Workmen’s Compensation Reserve A/c, Dr., To Partners’ Capital A/cs., Situation 2 : When the amount of liability is more than the amount of, Workmen’s Compensation Reserve :, The entire amount of W.C.R. is transferred to Realisation Account, (Treating it just like outside liability), Journal Entry : (a) For Transfering to WCR :, Workmen’s Compensation Reserve A/c Dr., To Realisation A/c, (b) For Payment of Liability :, Realisation A/c, Dr., To Cash/Bank A/c, (With amount of Liabilities), Situation 3 : When the amount of liability is less than the amount of Workmen Compensation Reserve :, Amount equal to liability is credited to Realisation A/c and the, balance amount is credited to Capital Accounts of Partners in their, profit sharing Ratio :, Journal Entry : Workmen’s Compensation Reserve A/c, Dr., To Realisation A/c (with amount of Liability), To Partner’s Capital A/c, Situation 4 : When, the amount of Liability is equal to the amount of Workmen Compensation Reserve :, The amount of Workmen Compensation Reserve is credited, (transferred) to Realisation Account., Journal Entry : Workmen’s Compensation Reserve A/c, Dr., To Realisation A/c, Situation 5 : When there is no Compensation Reserve in the Balance Sheet, and firm has to pay Compensation to the Workers., In this case, the amount paid for Compensation to the workers will, be debited to Realisation A/c, Journal Entry : Realisation A/c, Dr., To Cash/Bank A/c, (Being the liability on account of Workmen Compensation paid), , 414
Page 429 :
Dis so lu tion of Part ner ship Firm, 8.7.1 Treatment of Goodwill, (1) If it appears in the Balance Sheet, it is treated like any other asset and therefore, it, is transferred to Realisation Account at its book value., (2) If it does not appear in the Balance Sheet, it is not calculated., (3) If some thing is realised in cash from goodwill, then it is recorded by debiting, Cash/Bank Account and crediting Realisation Account., (4) If any partner agrees to take over or to pay for goodwill, then it is recorded by, debiting concerned Partner's Capital Account and crediting Realisation Account., , Note : If a question is silent about the realisation of goodwill it may be assumed that the goodwill is valueless. As, such, no entry will be made for realisation., , TUTORIAL NOTES, , 1 If nothing is mentioned regarding the sale value of Tangible Assets in the question, it is, assumed that these are realised at their book value shown in the Balance Sheet., 2. If nothing is mentioned regarding the sale or realisation value of intangible assets like, goodwill etc., it is assumed that these are valueless., 3. If nothing is mentioned regarding payment of any outside liability, e.g., creditors, loan, etc. It will have to be paid at its book value. The payment should be shown on the debit, side of Realisation A/c [To Bank A/c (Payment of Liab.)]., 8.7.2 Guidelines for Treatment of Different Reserves, Name of Reserve, , Transfer to Realisation A/c, , If there is any claim by the workers, for compensation., If there are corresponding investments on the assets side of the, Balance Sheet., Policy If there is corresponding Joint Life, Policy on the assets side of the, Balance Sheet., , Transfer direct to Partner's A/c, , 1. Workmen's Compensation Fund, 2. Investment, Fluctuation Fund, , If there is no claim for compensation, for whatsoever., If there is no investments on the, assets side of the Balance Sheet., , 3. Joint, Life, Reserve, , If there is no Joint Life Policy on the, assets side., , Note : J.L.P. is also transferred to, Realisation Account., , 4. Machinery/Plant, Replacement Fund, 5. General Reserve/, Reserve Fund, 6. Contingency Fund, , When there is machinery/plant on When there is no machinery/plant on, the assets side of the Balance Sheet. the assets side of the Balance Sheet., —, Always transferred to Partners', Capital Accounts or Current Accounts., —, –Do –, , Accounting Technique in Brief, 1. Transfer all assets (except Cash and Cash at Bank) and outside liabilities to, Realisation Account., 2. Realise all the assets., 3. Pay or discharge the liabilities and realisation expenses through Realisation, Account., 4. Transfer general reserve, profit and loss balance etc. to Partners' Capital Accounts., 5. Show the realised value of unrecorded asset and payment of unrecorded liability in, the Realisation A/c., 6. Make payment of partner’s loan, if any., 5. At the end settle the accounts of partners and prepare Cash/Bank Account., Dissolution can be divided into two parts for accounting purposes : Simple dissolution, and Insolvency of one or more partners. Simple dissolution has been discussed in this chapter., , 415
Page 430 :
SBPD Pub li ca tions Accountancy (XII), 8.7.3 Necessary Accounts on Dissolution, Thus, in order to close the books of the firm on dissolution, the following accounts are, opened :, (1) Realisation Account,, (2) Partner's Loan Account, if such Loan Account exists,, (3) Partners' Capital Accounts, Partners' Current Accounts, if required, and, (4) Bank Account or Cash Account., Let us discuss these in detail., ❏ (1) Realisation Account, Meaning : Realisation Account is an account which is drawn up on the dissolution of, the partnership firm. The account is debited with the assets of the partnership firm and any, expenses on realisation. It is credited with the liabilities and the proceeds of any sales made., The difference between the total debits and credits is either a profit or loss on realisation., The profit or loss on realisation is shared between the partners in the ‘Profit-sharing ratio’., Realisation Account is also called as ‘Realisable Account.’, Object of Realisation Account : The object of Realisation Account is to close the, books of account of a dissolved firm and to show profits and losses on realisation of assets, and payments of liabilities., Nature of Realisation Account : Realisation Account is a Nominal Account and, shows profit or loss on realisation of assets and settlement of liabilities. Profit & Loss on, Realisation A/c is distributed in the profit sharing ratio., Journal Entries :, ● If there is a gain/profit :, (When Total of Cr. side of Realisation A/c is, more than that of the Debit side), , Realisation A/c, To Partners’ Capital/Current A/cs, , Dr., , (Being profit on realisation share on profitsharing ratio), , ● If there is a loss :, Partners’ Capital/Current A/c, Dr., When total of debit side of Realisation A/c is, To Realisation A/c, more than(That of the credit side), (Being loss on relisation distributed in Profit-sharing, ratio), , Realisation Account, ❂ Realisation Account is opened on the dissolution of the firm., ❂ ‘Realisation Account’ is a Nominal Account. It is opened for disposing of all the assets, of the firm and making payment to all the liabilities and dissolution expenses., ❂ Its object is to find out the profit or loss on realisation of assets and payment of liabilities., ❂ The profit or loss on realisation is distributed among all partners in their profitsharing ratio., Specimen of Realisation Account, , Dr., Particulars, , Amount, , Particulars, , `, , To Sundry Assets (Write names of all, assets separately), To Bank A/c (Payment of Liabilities), To Partner's Capital or Current A/c, (Liability taken over by Partner), To Bank A/c (Realisation Expenses), , 416, , Book, Value, .........., .........., .........., , Cr., Amount, `, , By Sundry Creditors :, Bills Payable, Loan/Wife's Loan, Bank Overdraft, Reserve for Doubtful Debts, By Bank A/c (Assets Realised), , Book, Value, , ..........
Page 431 :
Dis so lu tion of Part ner ship Firm, To Partner's Capital or Current A/c, (Remuneration), To Profit transferred to Capital/, Current A/cs : (Bal. fig.), `, A, ........, B, ........, C, ........, , By Partner's Capital or Current A/c, .........., (Asset taken over by Partner), .........., In profit By Loss transferred to Capital/Current In profit, sharing, A/cs : (Bal. fig.), `, sharing, ratio, A, ........, ratio, ........., B, ........, C, ........, .........., .........., .........., , Difference between Revaluation, Account and Realisation Account, The following are the main points of difference between Revaluation Account and, Realisation Account :, Basis of Difference, , Revaluation Account, , 1. When Prepared Revaluation Account is prepared when, there is reconstitution of partnership–, such as on admission, retirement or, death of a partner., 2. Object of, The objective of preparing RevalPreparation, uation Account is determination of, profit or loss on revaluation of assets, and liabilities., 3. Recording, This account records increases or, decreases on revaluation of assets and, liabilities., , 4. Continuation, , Even after the preparation of Revaluation Account, the firm continues to, function. As such, this account may be, required to be prepared many times, during the life-time of a firm., , Realisation Account, Realisation Account is prepared when, there is a dissolution of a partnership, firm., Realisation Account is prepared with a, view to determine profit or loss on, realisation (or sale) of different assets, and payment of liabilities., This account records assets and, liabilities at their book values. It also, records realised value of assets and, actual payment of liabilities and, realisation expenses., The partnership firm comes to an end, after the preparation of Realisation, Account. Thus, this account is prepared only once during the life-time of a, firm., , ❏ (2) Partner's Loan Account, A loan to the firm is credited to this account. Partner's Loan Account will be opened, with the balance apearing in the Balance Sheet., (1) Partner's Loan Account is not transferred into Realisation Account., (2) Partner's loan is paid off after paying off outside liabilities (that is, third parties) of, the firm. It is recorded by debiting Partner's Loan Account and crediting Cash or Bank, Account., (3) If the partner agrees to accept less amount than the book value of his loan, the, difference of the amount should be credited to Realisation Account. Thus, the entry will be :, Partner's Loan A/c, Dr., To Cash A/c, To Realisation A/c, In case, the Capital Account of such partner, who has given loan to the firm, shows, insufficient amount, his Loan Account can be closed by transferring its amount to his, Capital Account. In such a situation Partner's Loan Account would be debited and Partner's, Capital Account would be credited., , 417
Page 432 :
SBPD Pub li ca tions Accountancy (XII), Partner's Loan Account, , Dr., Particulars, To Cash or Bank A/c, , Amount, , Particulars, , `, , `, , .........., , .........., , .........., , Amount, , Particulars, , `, , To Balance b/d (Capital/Drawings, shown on Assets side), To Realisation A/c (Assets taken over), , Amount, , .......... By Balance b/d, , ❏ (3) Partner's Capital Accounts, Dr., Partner’s Capital Account (When Capital is Fluctuating), Particulars, , Cr., , Cr., Amount, `, , .........., .........., , By Balance b/d (Capital of Liabilities, side), By Reserve/Reserve Fund, , .........., .........., , To Profit & Loss A/c (Old Loss), To Realisation A/c (Loss on Realisation), , .........., .........., , By Profit & Loss A/c, (Old undistributed profit), , .........., , To Cash/Bank A/c (Final Payment to, Partner), , .........., , By Realisation A/c (Liability taken, over or expense paid by Partner), By Realisation A/c, (Profit on Realisation), By Cash/Bank A/c (Amount brought in), , .........., , .........., .........., .........., .........., , When Partners’ Capital is Fixed :, Partner's Current Account, If the capital of the partnership firm is maintained on the fixed capital system,, Partner's Current Account will also be prepared alongwith Partner's Capital Account. In, this situation profit and loss, reserve fund, share in profit or loss on realisation will be shown, in the Partner's Current Account in their respective profit-sharing ratio. Similarly if any, partner has taken over any asset or discharged any liability, it will be accounted for in, Partner's Current Account. Lastly, balance in the Current Account will be transferred to, respective Capital Accounts., Dr., (a) Partner's Current Account, Cr., Particulars, To Balance b/d (If debit balance), To Profit & Loss A/c (Old Loss), To Realisation A/c (Loss on, Realisation), To Partner's Capital A/c (transfer), (Bal. fig.), , Amount, `, , .......... By Balance b/d (If credit balance), .......... By Profit & Loss A/c (Cr.), By Reserve A/c, .......... By Reserve Fund, By Realisation A/c, .........., (Liability taken over), By Realisation A/c, (Profit on Realisation), By Partner's Capital A/c (transfer), (Bal. fig.), .........., , 418, , Particulars, , Amount, `, , .........., .........., .........., .........., .........., .........., .........., ..........
Page 433 :
Dis so lu tion of Part ner ship Firm, (b) Partner's Capital Account (When Capital is Fixed), , Dr., , Particulars, , Amount, , To Balance b/d (Capital/Drawings, shown on Assets side), To ............Current A/c (Debit balance, of Current A/c transfer), To Bank A/c (Final payment to, Partner) (Bal. fig.), , Particulars, , Cr., Amount, , `, , `, , By Balance b/d (Capital-Liabilities, .........., side), By .........Current A/c (Credit Balance, .........., of Current A/c transfer), By Bank A/c (Amount brought in), .........., .........., , .........., .........., .........., .........., , ❏ (4) Cash/Bank Account, On debit side of Cash/Bank account, entries for opening balance, amount realised from, assets and amount brought by partners are shown. On Credit side entries for payment of, liabilities, expenses on realisation or cost of dissolution and amount paid to partners are, shown. The total of this account must tally. It means, no balance should be left in the Bank, Account/Cash Account., If both Cash and Bank Balances are given in the question :, ❂ Open a single account for convenience., ❂ For this Cash Account should be closed by transferring cash balance to the Bank, Account. Alternatively, Bank Account should be closed by transferring the balance to, Cash Account., Dr., Cash/Bank Account, Cr., Particulars, , Amount, , To Balance b/d (Cash in hand/Cash at, Bank), To Realisation A/c (Assets Realised), To Partner's Capital A/c, (Amount brought in by Partner) :, `, , A, B, , .........., .........., , Particulars, , Amount, , `, , `, , By Balance b/d (Bank Overdraft), .......... By Realisation A/c (Liabilities paid off), .......... By Realisation A/c (Realisation Exp.), By Partner's Capital A/c, (Final payment made) :, `, A, ........, B, ........, .........., C, ........, .........., , .........., .........., .........., , .........., .........., , ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., Details, Practical Problem No., 1 to 5(C), Short Answer Questions—Journal Entries, 1 to 8, Long Answer Questions/Comprehensive Questions, 6 to 29, 9 to 41, 6, 7A, B, (i) Journal Entries/Realisation Account, 9 to 12, 8, (ii) Journal Entries and Necessary Accounts, 13 to 16, 9 to 12, (iii) Realisation A/c, Cash A/c, Partners' Capital A/cs,, 17 to 21, Assets & Liabilities taken over, Unrecorded Assets/, Unrecorded Liabilities, 13, 14, (iv) Partner's Commission/Remuneration, 22, 15, (v) Partners’ Capital and Current A/cs, 23, 24, 16, 17, 18, (vi) Joint Life Policy Investment/Reserves, 25 to 27, 19 to 22, (vii) Giving away of Assets to Settle Liabilities, 28, 29, 23 to 25, (viii) When Balance Sheet is not given, 30 to 33, 26 to 28, Miscellaneous and Boards' Questions, 34 to 39, 28, Total, 39, , 419
Page 434 :
SBPD Pub li ca tions Accountancy (XII), 1., 2., 3., 4., 5., 6., 7., 8., 9., , General Rules for Solving Practical Questions, Prepare Realisation A/c, Partner’s Loan A/c, Partners’ Capital A/cs and Cash/Bank, A/c in this order and put the figures shown in the Balance Sheet into these, accounts., If Balance Sheet is not given, prepare (Memorandum) Balance Sheet on the date of, dissolution and difference, if any, be treated as Profit and Loss A/c (Dr./Cr. balance,, as the case may)., Assets may be sold or taken over by partner(s) or creditors in settlement., All the outside liabilities will be paid off or taken over by partners., Record realisation expenses paid or remuneration payable to a partner and close, the Realisation A/c by transferring the balance to Partners’ Accounts., Make payment of parnter’s loan, if any, and close the Partner’s Loan A/c., If a partner has debit balance in his Capital A/c, he will have to bring in cash., Make final payment to the partners' having credit balance., Cash/Bank A/c and Partners’ Capital A/cs will thus be closed automatically., , SHORT ANSWER ILLUSTRATIONS, Journal Entries, Illustration 1(A) (Realisation Expenses), Journalise the following :, (a) Realisation expenses paid ` 1,000., (b) Realisation expenses amounting to ` 1,000 were paid by Partner A., Solution, Journal Entries, S. No., (a), (b), , Particulars, , Dr., , Cr., , L.F. Amount Amount, `, , Realisation A/c, To Bank A/c, , Dr., , 1,000, , Realisation A/c, To A's Capital A/c, , Dr., , 1,000, , (Being realisation expenses paid by the firm), , (Being payment of dissolution expenses by A), , `, , 1,000, 1,000, , Illustration 1(B), How will you deal with the realisation expenses of the firm of Rashmi and Bindiya in, the following cases ?, (i) Realisation expenses amount to ` 1,00,000., (ii) Realisation expenses amounting to ` 30,000 are paid by Rashmi, a partner., (iii) Realisation expenses are to be borne by Rashmi for which she will be paid, ` 70,000 as remuneration for completing the dissolution process. The actual, expenses incurred by Rashmi were ` 1,20,000., (N.C.E.R.T), Solution, Journal Entries, Dr., Cr., S. No., (i), , Particulars, , L.F. Amount, `, , Realisation A/c, To Bank A/c, , Dr., , 1,00,000, , Realisation A/c, To Rashmi's Capital A/c, , Dr., , 30,000, , (Being realisation expenses paid), , (ii), , (Being realisation expenses paid by Rashmi), , 420, , Amount, `, , 1,00,000, , 30,000
Page 435 :
Dis so lu tion of Part ner ship Firm, (iii), , Realisation A/c, To Rashmi's Capital A/c, , Dr., , 70,000, , 70,000, , (Being realisation expenses agreed to be paid by Rashmi), Note : Amount of realisation expenses ` 1,20,000 will be paid by Rashmi personally., , Illustration 1(C), Pass Journal entries for the following transactions :, (i) Realisation expenses amounted to ` 10,000 were paid by the firm on behalf of a, partner., (ii) Realisation expenses of ` 10,000were to be borne and paid by a partner., (iii) Rajesh (the partner) is paid remuneration of ` 10,000 for dissolution of the, firm. Realisation expenses of ` 6,000 were paid by the firm., (iv) Realisation expenses were ` 20,000, ` 5,000 were to be borne by the firm and, the balance by Kundan, a partner. The expenses were paid by the firm., (v) Realisation expenses of ` 15,000 were to be borne by Prateek, a Partner. It was, paid by Rakesh., Solution, Journal Entries, Dr., Cr., S. No., (i), , Particulars, Partner’s Capital A/c, To Bank A/c, , L.F. Amount Amount, Dr., , `, , 10,000, , (Being the realisation expenses paid by the firm on behalf of the, Partner), , (ii), (iii), , No entry is to be passed., (a) Realisation A/c, To Rajesh’s Capital A/c, , Dr., , 10,000, , (b) Rajesh’s Capital A/c, To Bank A/c, , Dr., , 6,000, , Realisation A/c, Kundan’s Capital A/c, To Bank A/c, , Dr., Dr., , 5,000, 15,000, , Prateek’s Capital A/c, To Rakesh’s Capital A/c, , Dr., , 15,000, , (Being the remuneration payable to Rajesh for dissolution, of the firm), , (Being the realisation expense paid by the firm on behalf of, partner), , (iv), , (Being realisation expenses paid by the firm, the firm’s share of, expenses debited to Realisation A/c and balance to Partner’s, Capital A/c), , (v), , `, , 10,000, , 10,000, , 6,000, , 20,000, , 15,000, , (Being realisation expenses to be borne by Prateek, paid by Rakesh), , Illustration 2 (Realisation of Assets and Payment of Liabilities), What Journal entries would be passed for the following transactions on the dissolution, of a firm, after various assets (other than cash) and third party's liabilities have been, transferred to Realisation Account :, (i) A, a partner, took over 50% of the stock at a discount of 25% (Book value of, stock ` 20,000)., (ii) Balance of stock was sold at a loss of 10%., (iii) Compensation to an employee paid by the firm amounted to` 40,000., , 421
Page 436 :
SBPD Pub li ca tions Accountancy (XII), (iv) There was an unrecorded asset of ` 5,000 which was taken over by B, a partner, at ` 4,000., (v) A, a partner, under took to pay Mrs. A's loan of ` 5,000., Solution, Journal Entries, Dr., Cr., S. No., (i), , Particulars, , L.F. Amount Amount, `, , A's Capital A/c, To Realisation A/c, , Dr., , 7,500 1, , Bank A/c, To Realisation A/c, , Dr., , 9,000 2, , Realisation A/c, To Bank A/c, , Dr., , 40,000, , B's Capital A/c, To Realisation A/c, , Dr., , 4,000, , Realisation A/c, To A's Capital A/c, , Dr., , 5,000, , (For stock taken over by A : book value ` 10,000 less 25%), , (ii), , (For remaining stock was sold at a loss of 10%), , (iii), (iv), (v), , (For compensation paid to an employee), , (For unrecorded asset taken over by B), , (For Mrs. A's loan taken over by A), , `, , 7,500, 9,000, 40,000, 4,000, 5,000, , Working Notes :, 1. Total Book Value of Stock ` 20,000., 50% of ` 20,000 = ` 10,000; 25% of ` 10,000 = ` 2,500, \ ` 10,000 – 2,500 = ` 7,500., 2. Balance of Stock = ` 20,000 – 10,000 = ` 10,000, Loss : 10% of ` 10,000 = ` 1,000; \ ` 10,000 – 1,000 = ` 9,000., , Illustration 3, Pass the necessary Journal entries for the following transactions on the dissolution of, the firm of James and Haider who were sharing profits and losses in the ratio of 2 : 1. The, various assets (other than cash) and outside liabilities have been transferred to Realisation, Account :, (i) James agreed to pay off his brother’s loan ` 10,000., (ii) Debtors realised ` 12,000., (iii) Haider took over all investments at ` 12,000., (iv) Sundry creditors ` 20,000 were paid at 5% discount., (v) Realisation expenses amounted to ` 2,000., (vi) Loss on realisation was ` 10,200., Solution, Jour nal En tries, Dr., Cr., S. No., (i), , Particulars, Realisation A/c, To James Capital A/c, , L.F., , `, , Dr., , 10,000, , Bank A/c, To Realisation A/c, , Dr., , 12,000, , Haider’s Capital A/c, To Realisation A/c, , Dr., , 12,000, , `, , 10,000, , (Being brother’s loan taken over by James), , (ii), , (Being debtors realised), , (iii), , (Being Investment taken over by Haider), , 422, , 12,000, 12,000
Page 437 :
Dis so lu tion of Part ner ship Firm, (iv), , Realisation A/c, To Bank A/c, , Dr., , 19,000, , Realisation A/c, To Bank A/c, , Dr., , 2,000, , James Capital A/c, Haider Capital A/c, To Realisation A/c, , Dr., Dr., , 6,800, 3,400, , (Being creditors settled at 5% discount), , (v), , (Being dissolution expenses paid), , (vi), , (Being loss on realisation transferred to Partners’ Capital A/cs in, their profit-sharing ratio 2 : 1), , 19,000, 2,000, , 10,200, , Illustration 4(A), The amount of sundry assets transferred to Realisation Account was ` 1,60,000. 60% of, these have been sold at a profit of ` 4,000. 20% of the remaining were sold at a discount of, 30% and remaining were taken over by Akshar (a partner) at book value. Give Journal, entries., Solution, Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, , L.F. Amount, `, , Dr., , 1,08,9601, , To Realisation A/c, , `, , 1,08,960, , (Being assets having book value of ` 96,000 was sold for ` 1,00,000, and assets having book value of ` 12,800 were sold for ` 8,960), , Akshar's Capital A/c, To Realisation A/c, , Amount, , Dr., , 51,2002, , 51,200, , (Being assets having book value of ` 48,000 were taken over by Akshar, at this value), Working Notes :, 1. Calculation of Amount Realised from Assets :, (i) 60% of ` 1,60,000, Add : Profit on Sale, (ii) 20% of the remaining assets that is, ` 1,60,000 – 96,000 = ` 64,000 ´, Less : Discount 30% (12,800 ´, , 30, ), 100, , `, 96,000, 4,000, 1,00,000, 20, 100, , \ Total amount realised from assets = (i) + (ii) = ` 1,00,000 + 8,960 = ` 1,08,960, 2. Calculation of Assets taken over by Akshar :, Total Book Value of Assets, Less : Book Values of Assets sold (` 96,000 + 12,800), , 12,800, 3,840, 8,960, , 1,60,000, 1,08,800, 51,200, , Illustration 4(B), O and P were partners in a firm sharing profits and losses equally. Their firm was, dissolved on 15th March, 2017, which resulted in a loss of ` 50,000. On that date the Capital, Account of O showed a credit balance of ` 40,000 and Capital Account of P showed a credit, balance of ` 50,000. There was a cash balance of ` 40,000 on the date of dissolution., You are required to pass the necessary Journal entries for the (i) transfer of loss to the, Capital Accounts of the partners, and (ii) making final payment to the partners., , 423
Page 438 :
SBPD Pub li ca tions Accountancy (XII), Solution, Journal Entries, Date, , Dr., , Particulars, , Cr., , L.F. Amount Amount, `, , O's Capital A/c, , Dr., , 25,000, , P's Capital A/c, , Dr., , 25,000, , To Realisation A/c, , `, , 50,000, , (For transfer of loss on realisation), , O's Capital A/c, P's Capital A/c, To Cash A/c, , Dr., Dr., , 15,000, 25,000, , (For final payment made to partners), , 40,000, , Illustration 5(A) (Distribution of Reserves and Accumulated Profit), Ansh and Vansh are partners in a firm sharing profits and losses in the ratio of 3 : 2., They decided to dissolve the firm on 31st March, 2018 on which date following balances, appeared :, `, General Reserve, 20,000, Workmen’s Compensation Reserve, 5,000, Joint Life Policy Reserve, 10,000, Employees’ Provident Fund, 10,000, Machinery Replacement Reserve, 5,000, Profit & Loss A/c, 15,000, Advertisement Suspense A/c, 12,000, Give the necessary Journal entries relating to the treatment of reserves and, accumulated profits and losses., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , General Reserve A/c, Workmen’s Compensation Reserve A/c, Joint Life Policy Reserve A/c, Profit & Loss A/c, To Ansh’s Capital A/c, To Vansh’s Capital A/c, , Dr., Dr., Dr., Dr., , 20,000, 5,000, 10,000, 15,000, , Ansh’s Capital A/c, Vansh’s Capital A/c, To Advertisement Suspense A/c, , Dr., Dr., , 7,200, 4,800, , (Being the transfer of reserves and accumulated profits to the, partner’s capital accounts in their profit sharing ratio), , (Being the transfer of advertisement suspense account to Partners’, capital accounts in their profit-sharing ratio), , Amount, `, , 30,000, 20,000, , 12,000, , Notes :, 1. Employees Provident Fund represents statutory liability due to employees towards Provident Fund. It is, not an accumulated Profit. Therefore, it is not distributed among the partners., 2. Machinery Replacement Reserve is in the nature of accumulated depreciation and not in nature of, accumulated profits. Hence, it is not distributed among the partners., , 424
Page 439 :
Dis so lu tion of Part ner ship Firm, Illustration 5(B) (Distribution of Reserves and Losses), Anita and Priyanka were partners in a firm sharing profits in the ratio of 3 : 1. Give, Journal entries for the following transactions at the time of dissolution :, (1) Investment Fluctuation Fund ` 10,000., (2) Workmen Compensation Reserve ` 30,000 and Liabilities ` 20,000., (3) Workmen Compensation Reserve ` 30,000 and Liabilities ` 40,000., (4) Profit & Loss A/c (Debit balance) ` 40,000., Solution, Jour nal En tries, S. No., (1), , Particulars, , L.F., , Dr., , Cr., , `, , `, , Investment Fluctuation Fund A/c, To Anita’s Capital A/c, To Priyanka’s Capital A/c, , Dr., , 10,000, , (a) Workmen Compensation Reserve A/c, To Realisation A/c, , Dr., , 20,000, , (b) Workmen Compensation Reserve A/c, To Anita’s Capital A/c, To Priyanka’s Capital A/c, , Dr., , 10,000, , (a) Workmen Compensation Reserve A/c, To Realisation A/c, , Dr., , 30,000, , (b) Realisation A/c, To Bank A/c, , Dr., , 40,000, , (Being Investment, fluctuation fund transferred to Partner’s Capital, Accounts in Profit-sharing ratio), , (2), , (Being W.C.R. to the extent of liability transferred to, Realisation A/c), , (Being surplus of W.C.R. transferred to Partners’ Capital, A/cs in their profit sharing ratio), , (3), , (Being W.C.R. transferred to Realisation A/c), , 7,500, 2,500, , 20,000, , 7,500, 2,500, , 30,000, , 40,000, , (Being the liability on account of workmen compensation paid), , (4), , Anita’s Capital A/c, Priyanka’s Capital A/c, To Profit & Loss A/c, , Dr., Dr., , 30,000, 10,000, , 40,000, , (Being loss transferred to Partners’ Capital A/cs), , Illustration 5(C) (Treatment Related to Workmen Compensation Reserve), A and B were partners sharing profits in the ratio of 3 : 2. Pass Journal entries under, the following situations at the time of dissolution of firm :, (i) Workmen Compensation Reserve appeared at ` 50,000 in the Balance Sheet and, there was no liability toward Workmen Compensation., (ii) Workmen Compensation Reserve appeared at ` 50,000 in the Balance Sheet and, liability in respect of it was ascertained at ` 75,000., (iii) Workmen Compensation Reserve stood at ` 50,000 in the Balance Sheet and, liability in respect of it was ascertained at ` 40,000., (iv) Workmen Compensation Reserve stood at ` 50,000 in the Balance Sheet and, liability in respect of it was ascertained at ` 50,000., (v) There was no Workmen Compensation Reserve in the Balance Sheet and firm had, to pay ` 20,000 as Compensation to workers., , 425
Page 440 :
SBPD Pub li ca tions Accountancy (XII), Solution, Jour nal En tries, S. No., (i), , Particulars, , L.F., , Workmen Compensation Reserve A/c, To A’s Capital A/c, To B’s Capital A/c, , Dr., , Cr., , `, , `, , Dr., , 50,000, , (a) Workmen Compensation Reserve A/c, To Realisation A/c, , Dr., , 50,000, , (b) Realisation A/c, To Bank A/c, , Dr., , 75,000, , (a) Workmen Compensation Reserve A/c, To Realisation A/c, , Dr., , 40,000, , (b) Workmen Compensation Reserve A/c, To A’s Capital A/c, To B’s Capital A/c, , Dr., , 10,000, , (c) Realisation A/c, To Bank A/c, , Dr., , 40,000, , 30,000, 20,000, , (Being Workmen Compensation Reserve transferred to Partner’s, Capital A/cs in their profit-sharing ratio), , (ii), , (Being Workmen Compensation Reserve transferred to, Realisation Account), , (Being payment of liability on account of Workmen Compensation), , (iii), , (Being Workmen Compensation Reserve to the extent of, liability transferred to Realisation A/c), , (Being surplus of W.C.R. transferred to Partners’ Capital, A/cs in their profit-sharing ratio), , 50,000, , 75,000, 40,000, , 6,000, 4,000, , 40,000, , (Being payment of liability on account of Workmen Compensation), , (iv), , (a) Workmen Compensation Reserve A/c, To Realisation A/c, , Dr., , 50,000, , (b) Realisation A/c, To Bank A/c, , Dr., , 50,000, , (Being Workmen Compensation Reserve transferred to, Realisation A/c), , 50,000, , 50,000, , (Being payment of liability on account of Workmen Compensation), , (v), , Realisation A/c, To Bank A/c, , Dr., , (Being payment of liability on account of Workmen Compensation), , 20,000, , 20,000, , Long Answer Illustrations, Illustration 6 (Journal Entries), X and Y are in partnership sharing profits and losses in the ratio of 3 : 2. Their Balance, Sheet on 31st January, 2019 stood as follows :, Bal ance Sheet, Liabilities, Sundry Creditors, Reserve, Bank Loan, Capitals :, X, Y, , 426, , Amount, `, , `, , 6,000, 2,000, , 528 Cash, 500 Debtors, 1,000 Stock, Investments, Building, 8,000, 10,028, , Assets, , Amount, `, , 363, 1,960, 875, 2,080, 4,750, 10,028
Page 441 :
Dis so lu tion of Part ner ship Firm, They decided to dissolve the partnership on this date. The assets with the exception of, the investments and cash realised ` 6,900. The investments were taken over by Y at the, market value of ` 2,200 who also agreed to discharge the loan. The expenses of dissolution, were ` 110. The creditors were paid ` 503 in full settlement. Give Journal entries to record, the above on dissolution., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Realisation A/c, To Debtors A/c, To Stock A/c, To Investment A/c, To Building A/c, , Dr., , 9,665, , Creditors A/c, Bank Loan A/c, To Realisation A/c, , Dr., Dr., , 528, 1,000, , Cash A/c, To Realisation A/c, , Dr., , 6,900, , Y's Capital A/c, To Realisation A/c, , Dr., , 2,200, , Realisation A/c, To Y's Capital A/c, , Dr., , 1,000, , Realisation A/c, To Cash A/c, , Dr., , 110, , Realisation A/c, To Cash A/c, , Dr., , 503, , X's Capital A/c, Y's Capital A/c, To Realisation A/c, , Dr., Dr., , 390, 260, , Reserve A/c, To X's Capital A/c, To Y's Capital A/c, , Dr., , 500, , Dr., Dr., , 5,910, 740, , (For the various assets except cash transferred to Realisation A/c), , (For the liabilities transferred to Realisation A/c), , (For all assets except investment sold), , (For investment taken over by Y), , Amount, `, , 1,960, 875, 2,080, 4,750, , 1,528, 6,900, 2,200, 1,000, , (For Bank loan discharged by Y), , (For the expenses of realisation exp. paid), , (For the payment made to creditors), , (For loss on realisation transferred to partners), , 110, 503, , 650, 300, 200, , (For reserve shared by X and Y in their profit-sharing ratio), , X's Capital A/c, Y's Capital A/c, To Cash A/c, , 6,650, , (For cash paid to partners due to them), , Illustration 7(A) (Preparation of Realisation Account), ‘A’, ‘B’ and ‘C’ are equal partners. The Balance Sheet on the date of distribution was as, follows :, Liabilities, , Amount, , Assets, , `, , Creditors, Bills Payable, B's Loan, , 11,000 Bank, 1,000 Bills Receivables, 2,000 Investments, , Amount, `, , 3,000, 2,000, 8,000, , 427
Page 442 :
SBPD Pub li ca tions Accountancy (XII), Capitals :, ‘A’, ‘B’, ‘C’, , Debtors, 36,000 Stock, 24,000 Furniture, 2,000 Machinery, 76,000, , 16,000, 28,000, 6,000, 13,000, 76,000, , Assets Realised : Debtors and B/R ` 17,000, Investments, ` 7,600, Stock ` 25,000,, Furniture ` 6,600 and Machinery` 8,600. Liabilities were paid, Realisation expenses were ` 500., Prepare Realisation Account., Solution, Dr., Realisation Account, Cr., Particulars, , Amount, , Particulars, , `, , To Bills Receivable, To Investments, To Debtors, To Stock, To Furniture, To Machinery, To Bank A/c (Liabilities), To Bank A/c (Realisation Expenses), , 2,000 By Creditors, 8,000 By Bills Payable, 16,000 By Bank A/c (Assets Realised) : `, 28,000, Debtors and B/R, 17,000, 6,000, Investments, 7,600, 13,000, Stock, 25,000, 12,000, Furniture, 6,600, 500, Machinery, 8,600, By Loss transferred to Capital A/cs :, ‘A’, 2,900, ‘B’, 2,900, ‘C’, 2,900, 85,500, , Amount, `, , 11,000, 1,000, , 64,800, , 8,700, 85,500, , Illustration 7(B), ‘A’, ‘B’ and ‘C’ decided to dissolve the partnership. The position as on 31st Dec., 2018 the, date of dissolution was as follows :, Liabilities, , Amount, , Assets, , `, , Creditors, A's Loan A/c, Capitals A/cs :, ‘A’, ‘B’, ‘C’, , `, , 1,000, 500, 50, , Amount, `, , 2,750 Furniture, 300 Stock, Debtors, Bills Receivables, Cash, 1,550, 4,600, , 50, 1,750, 2,400, 300, 100, 4,600, , 1, 3, 1, They share profits and losses in the ratio of ‘A’ : ; ‘B’ :, and ‘C’ : .` 200 of the debtors, 2, 10, 5, proved bad; the bills receivable were realised in full; the stock realised ` 1,700; Furniture, was taken over by ‘B’ at book value and the expenses of realisation to ` 200., Prepare Realisation Account in the books of the firm., Solution, Realisation Account, Dr., (as on 31.12.2018), Cr., Particulars, To Furniture, , 428, , Amount, `, , 50 By Creditors, , Particulars, , Amount, `, , 2,750
Page 443 :
Dis so lu tion of Part ner ship Firm, To Stock, To Debtors, To Bills Receivables, To Bank A/c (Expenses), To Bank A/c (Creditors), , 1,750 By Bank A/c :, `, 2,400, Debtors, 2,200, 300, B/R, 300, 200, Stock, 1,700, 2,750 By B's Capital A/c, By Loss transferred to Capital A/cs :, A, 225, B, 135, C, 90, 7,450, , 4,200, 50, , 450, 7,450, , Illustration 7(C), A and B are partners in a firm sharing profit & losses in 3 : 1. Their Balance Sheet as on, 31st March 2019 is as below :, Liabilities, Creditors, A's Loan, Capitals A/cs :, A, B, , Amount, , Assets, , `, , Amount, `, , 45,000 Debtors, 20,000 Sundry Assets, , 20,000, 70,000, , 25,000, 90,000, , 90,000, , `, , 10,000, 15,000, , They decided to dissolve their firm on that date. Debtors were realised for ` 15,000 and, sundry assets fetch ` 60,000., Prepare Realisation Account., Solution, Dr., Realisation Account, Cr., Particulars, To Sundry Assets :, Sundry Debtors, Sundry Assets, To Cash A/c (Creditors), , Amount, , Particulars, , `, , `, , 20,000, 70,000, , By Sundry Creditors, By Cash A/c (Debtors), 90,000 By Cash A/c (Sundry Assets), 45,000 By Loss transferred to :, `, A’s Capital A/c, 11,250, B’s Capital A/c, 3,750, 1,35,000, , Amount, `, , 45,000, 15,000, 60,000, 15,000, 1,35,000, , Working Note :, Loss on Realisation ` 15,000 distributed among A and B in their Profit-sharing ratio i.e., 3 : 1., , Illustration 8 (Realisation of Assets and Payment of Liabilities), Ram and Hari are equal partners in a firm. They decided to dissolve the partnership on, 31st March, 2019 when the Statement of Affairs was as follows :, Liabilities, Sundry Creditors, Reserve Fund, Hari's Loan A/c, Capitals :, Ram, Hari, , Amount, `, , Assets, , 2,700 Cash at Bank, 3,000 Sundry Debtors, 3,000 Plant, Stock, 12,000 Lease, 12,000 Furniture and Fittings, 32,700, , Amount, `, , 3,000, 850, 4,700, 15,150, 6,000, 3,000, 32,700, , 429
Page 444 :
SBPD Pub li ca tions Accountancy (XII), The lease was sold for ` 6,300; furniture and fittings for ` 3,300 and stock for ` 13,800., The book debts realised only ` 800, whereas plant realised ` 4,800. The creditors were paid, ` 2,600 in full settlement. Expenses of realisation amounted to ` 500., Pass the necessary Journal entries to close the books of the firm and also prepare, Realisation Account and Bank Account., (J.A.C., 2009), Solution, Journal Entries, Dr., Cr., Date, Particulars, 2019, Mar. 31 Realisation A/c, To Sundry Debtors A/c, To Plant A/c, To Stock A/c, To Lease A/c, To Furniture and Fittings A/c, , L.F. Amount, `, , Dr., , 29,700, , Sundry Creditors A/c, To Realisation A/c, , Dr., , 2,700, , Bank A/c, To Realisation A/c, , Dr., , 29,000, , Reserve Fund A/c, To Ram's Capital A/c, To Hari's Capital A/c, , Dr., , 3,000, , (For transfer of sundry assets to Realisation A/c), , (For transfer of sundry creditors to Realisation A/c), , (For realisation of Assets : Lease ` 6,300; Furniture and Fittings, ` 3,300; Stock ` 13,800; Book Debts ` 800 and Plant ` 4,800), , (For distribution of reserve fund and transfer to Partners' Capital A/cs), , Hari's Loan A/c, To Bank A/c, , Dr., , 3,000, , Realisation A/c, To Bank A/c, , Dr., , 500, , Realisation A/c, To Bank A/c, , Dr., , 2,600, , Ram's Capital A/c, Hari's Capital A/c, To Realisation A/c, , Dr., Dr., , 550, 550, , Dr., Dr., , 12,950, 12,950, , (For payment of Hari's loan), , (For realisation expenses paid), , (For payment of creditors), , (For transfer of realisation loss to Partners’ Capital A/cs), , Ram's Capital A/c, Hari's Capital A/c, To Bank A/c, , (For final payment of cash to partners), , Realisation Account, , Dr., Particulars, To Sundry Debtors, To Plant, To Stock, To Lease, To Furniture and Fittings, To Bank A/c (Creditors paid), To Bank A/c (Expenses), , 430, , Amount, , Amount, `, , 850, 4,700, 15,150, 6,000, 3,000, 2,700, 29,000, , 1,500, 1,500, 3,000, 500, 2,600, , 1,100, , 25,900, , Cr., Particulars, , Amount, , `, , 850 By Sundry Creditors, 4,700 By Bank A/c (Assets Realised), 15,150 By Loss trans. to Capital A/cs :, 6,000, Ram, 3,000, Hari, 2,600, 500, 32,800, , `, , 2,700, 29,000, `, , 550, 550, , 1,100, 32,800
Page 445 :
Dis so lu tion of Part ner ship Firm, Bank Account, , Dr., Particulars, , Amount, , To Balance b/d, To Realisation A/c (Assets Realised), , Cr., Particulars, , Amount, , `, , `, , 3,000 By Realisation A/c (Creditors), 29,000 By Realisation A/c (Expenses), By Hari's Loan A/c, By Ram's Capital A/c, By Hari's Capital A/c, 32,000, , 2,600, 500, 3,000, 12,950, 12,950, 32,000, , Working Note :, Dr., Particulars, To Realisation A/c, To Bank A/c, , Ram, `, 550, 12,950, 13,500, , Capital Accounts, Hari, Particulars, `, 550 By Balance b/d, 12,950 By Reserve Fund, 13,500, , Ram, `, 12,000, 1,500, 13,500, , Cr., Hari, `, 12,000, 1,500, 13,500, , ❏ Preparation of Realisation A/c, Partners’ Capital A/cs and Cash/Bank A/c, Illustration 9 (Taking over of Assets and Liabilities by a Partner), X and Y are in partnership sharing profits and losses in proportion of 3/5 and 2/5. The, following was their Balance Sheet as on 31st March, 2019 :, Liabilities, Creditors, Reserve for Contingencies, Bank Loan, Capital A/cs :, X, Y, , Amount, , Assets, , `, , 2,640 Cash, 2,500 Investments, 5,000 Debtors, Stock, 30,000 Freehold Building, 10,000 Furniture, 50,140, , Amount, `, , 1,815, 10,400, 9,800, 4,375, 22,500, 1,250, 50,140, , They decided to dissolve partnership on this date and the assets, with the exception of, the investments and cash, were sold for ` 34,500. The investments, the market value of, which at the date of the Balance Sheet was ` 11,000, were taken over at that amount by Y,, who also agreed to discharge the Bank loan. The expenses of winding-up were ` 550, the, creditors were paid ` 2,515 in full settlement., You are required to prepare the Realisation Account, Cash Account and Partners', Capital Accounts., (U.S.E.B., 2009), Solution, Dr., Realisation Account, Cr., Particulars, To Investments, To Debtors, To Stock, To Freehold Building, To Furniture, To Y's Capital A/c (Bank Loan), To Cash A/c (Creditors), To Cash A/c (Expenses), , Amount, `, , 10,400, 9,800, 4,375, 22,500, 1,250, 5,000, 2,515, 550, 56,390, , Particulars, By Creditors, By Bank Loan, By Cash A/c (Assets Realised), By Y's Capital A/c (Investment), By Loss transferred to :, `, X's Capital A/c, 1,950, Y's Capital A/c, 1,300, , Amount, `, , 2,640, 5,000, 34,500, 11,000, 3,250, 56,390, , 431
Page 446 :
SBPD Pub li ca tions Accountancy (XII), X's Capital Account, , Dr., Particulars, To Realisation A/c (Loss), To Cash A/c, , Amount, , Cr., Particulars, , `, , 1,950 By Balance b/d, 29,550 By Reserve for Contingencies, 31,500, , Y's Capital Account, , Dr., Particulars, To Realisation A/c (Investment), To Realisation A/c (Loss), To Cash A/c, , Amount, , Particulars, , Particulars, , `, , 11,000 By Balance b/d, 1,300 By Reserve for Contingencies, 3,700 By Realisation A/c (Bank Loan), 16,000, , To Balance b/d, To Realisation A/c, , Amount, `, , `, , 30,000, 1,500, 31,500, , Cr., , Cash Account, , Dr., , Amount, , Amount, `, , 10,000, 1,000, 5,000, 16,000, , Cr., Particulars, , 1,815 By Realisation A/c (Creditors), 34,500 By Realisation A/c (Expenses), By X's Capital A/c, By Y's Capital A/c, 36,315, , Amount, `, , 2,515, 550, 29,550, 3,700, 36,315, , Accounting Treatment for Undisclosed or Unrecorded Assets and Liabilities, (1) Unrecorded Assets : Sometimes some assets are not recorded in the Balance, Sheet at the time of dissolution but they physically exist. On dissolution these assets are :, (i) Sold off, or, (ii) Taken over by any partner, or, (iii) Taken over by any creditor on a fixed value., Following accounting method is adopted in relation to unrecorded assets :, (i) Never transfer unrecorded assets to Realisation Account :, (ii) If unrecorded asset is sold :, Bank A/c, Dr., To Realisation A/c, (For unrecorded asset sold), (iii) If unrecorded asset is taken over by any partner :, Partner’s Capital A/c, Dr., To Realisation A/c, (For unrecorded asset taken over by partner), , (iv) When unrecorded asset is taken over by any creditor :, (a) In full settlement of his claim :, No payment will be made by the firm., (b) In part payment of his claim :, The amount of payment will be reduced by the agreed value of the asset taken, over., (2) Unrecorded Liability : If there is some liability which did not exist in the Balance, Sheet at the time of dissolution but at the time of dissolution it arised due to decision of some, pending Court cases (like contingent liability or claim for some disputed case etc.), then the, method of accounting will be as follows :, , 432
Page 447 :
Dis so lu tion of Part ner ship Firm, (i) Never transfer unrecorded liability to Realisation Account., (ii) When unwritten or unrecorded liability is paid off :, Realisation A/c, Dr., To Bank A/c, (For unrecorded liability paid off), , (iii) When unrecorded liability is taken over or paid by a partner :, Realisation A/c, Dr., To Partner's Capital A/c, (For unrecorded liability taken over by partner), , Illustration 10 (Payment of Unrecorded Liability), A, B and C are partners sharing profits and losses equally. They dissolved the firm on, 30th September, 2019 on which date their position was as below :, Balance Sheet, (as on 30th September, 2019), Liabilities, Capital A/cs :, A, B, C, , Amount, `, , Fixed Assets, Current Assets, Cash at Bank, , `, , 30,000, 30,000, 30,000, , Creditors, , Assets, , Amount, `, , 1,00,000, 40,000, 10,000, , 90,000, 60,000, 1,50,000, , 1,50,000, , All the assets realised 10% less than book value. Creditors were paid in full. Expenses, of realisation amounted to ` 500 and a contingent liability for which no provision was made, paid at ` 500., Prepare necessary Accounts., (U.S.E.B., 2011, 18), Solution, Dr., Realisation Account, Cr., Particulars, To Fixed Assets, To Current Assets, To Bank A/c (Creditors paid), To Bank A/c (Unrecorded Liability), To Bank A/c (Expenses), , Working Notes :, 1 Payment of Contingent Liability ` 500., 2 Assets Realised :, 90, (i) Fixed Assets : 1, 00, 000 ´, 100, 90, (ii) Current Assets : 40,000 ´, 100, , Amount, `, , Particulars, , Amount, `, , 1,00,000 By Creditors, 40,000 By Bank A/c (Assets Realised), 60,000 By Loss trans. to Capital A/cs : `, 5001, A, 5,000, 500, B, 5,000, C, 5,000, , 60,000, 1,26,0002, , 2,01,000, , 2,01,000, , 15,000, , `, 90,000, 36,000, 1,26,000, , 433
Page 448 :
SBPD Pub li ca tions Accountancy (XII), Partners’ Capital Accounts, , Dr., Particulars, To Realisation A/c, (Loss), To Bank A/c, , A, , B, `, , 5,000, 25,000, 30,000, , C, `, , 5,000, 25,000, 30,000, , Cr., , Particulars, `, , 5,000, 25,000, 30,000, , A, , B, `, , By Balance b/d, , 30,000, 30,000, , C, `, , 30,000, 30,000, , `, , 30,000, 30,000, , Bank Account, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, , To Balance b/d, To Realisation A/c, , `, , 10,000 By Realisation A/c (Creditors), 1,26,000 By Realisation A/c (Contingent Liab.), By Realisation A/c (Expenses), By A's Capital A/c, By B's Capital A/c, By C's Capital A/c, 1,36,000, , 60,000, 500, 500, 25,000, 25,000, 25,000, 1,36,000, , Illustration 11 (Unrecorded Assets and Payment of Unrecorded Liability), Deepa and Raj are partners in a firm sharing profits and losses in the ratio of 3 : 2. They, decide to dissolve the firm on 31st March, 2019, when their Balance Sheet was as below :, Liabilities, Capital A/cs :, Deepa, Raj, Profit and Loss A/c, Sundry Creditors, Outstanding Expenses, , Amount, `, `, , 15,000, 12,000, , 27,000, 1,500, 2,000, 500, 31,000, , Assets, Freehold Property, Investments, Sundry Debtors, Stock, Bank, Cash, , Amount, `, , 15,000, 5,000, 2,000, 3,000, 4,000, 2,000, 31,000, , Deepa took over the investments at an agreed value of ` 3,800. Other assets were, realised as follows :, `, Freehold Property, 18,000, Sundry Debtors, 1,800, Stock, 2,800, Creditors of the firm agreed to accept 5% less. It was found however that there was a, liability for ` 3,100 for damages which had to be paid. There was a typewriter in the firm,, which was bought out of the firm's money, was not shown in the Balance Sheet. The, typewriter was now sold for ` 1,000. Expense of realisation amounted to ` 400., Prepare necessary accounts to close the books of the firm., Solution, Dr., Realisation Account, Cr., Particulars, To Freehold Property, To Investments, To Sundry Debtors, To Stock, , 434, , Amount, `, , Particulars, , 15,000 By Sundry Creditors, 5,000 By Outstanding Expenses, 2,000 By Deepa's Capital A/c, 3,000, (Investment taken over), , Amount, `, , 2,000, 500, 3,800
Page 449 :
Dis so lu tion of Part ner ship Firm, To Bank A/c (Creditors paid off), To Bank A/c (Damages Compensation), To Bank A/c (Realisation Expenses), To Bank A/c (Outstanding Expenses), , 1,900 By Bank A/c :, `, Freehold Property, 18,000, 3,100, Sundry Debtors, 1,800, 400, Stock, 2,800, 500 By Bank A/c (Typewriters), By Loss trans. to Partners' Capital A/cs :, Deepa, 600, Raj, 400, 30,900, , Partners' Capital Accounts, , Dr., Particulars, , Deepa, `, , To Realisation A/c, To Realisation A/c, (Investment taken over), To Bank A/c, , 600, 3,800, 11,500, 15,900, , Raj, , Particulars, , `, , 400 By Balance b/d, By Profit & Loss A/c, —, 12,200, 12,600, , Particulars, , Amount, , Deepa, `, , Raj, `, , 15,000, 900, , 12,000, 600, , 15,900, , 12,600, , Cr., Particulars, , `, , To Balance b/d, To Cash A/c (Cash deposited), To Realisation A/c, (Assets Realised), To Realisation A/c (Typewriter), , 1,000, 30,900, , Cr., , Bank Account, , Dr., , 22,600, 1,000, , Amount, `, , 4,000 By Realisation A/c (Creditors), 2,000 By Realisation A/c, (Damages Compensation), 22,600 By Realisation A/c (Expenses), 1,000 By Realisation A/c (O/S Expenses), By Deepa's Capital A/c, By Raj's Capital A/c, 29,600, , 1,900, 3,100, 400, 500, 11,500, 12,200, 29,600, , Illustration 12 (Assets and Liabilities taken over by Partners), Anju, Manju and Sanju sharing profits and losses in the ratio of 3 : 1 : 1 and decided to, dissolve their firm. On March 31, 2019 their position was as follows :, Capital and Liabilities, , Amount, , Assets and Properties, , `, , Creditors, Loan, Capitals :, Anju, Manju, Sanju, , `, 2,75,000, 1,10,000, 1,00,000, , 60,000 Cash at Bank, 15,000 Stock, Furniture, `, Debtors, 2,42,000, Less : Provision for Doubt4,85,000, ful Debts, 12,000, Buildings, 5,60,000, , Amount, `, , 35,000, 83,000, 12,000, 2,30,000, 2,00,000, 5,60,000, , Additional Informations :, 1. Anju takes over the Furniture at ` 10,000 and Debtors amounting to ` 2,00,000 at, ` 1,85,000. Anju also agrees to pay the Creditors., 2. Manju is to take over Stock at book value and Buildings at book value less 10%., 3. Sanju is to take over remaining Debtors at 80% of book value and responsibility for, the discharge of the loan., , 435
Page 450 :
SBPD Pub li ca tions Accountancy (XII), 4. The expenses of dissolution amounted to ` 2,200., Prepare Realisation Account, Bank Account and Capital Accounts of the partners., (N.C.E.R.T.), Solution, In the Books of Anju, Manju and Sanju, Dr., Realisation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Stock, To Furniture, To Debtors, To Buildings, To Anju’s Capital A/c (Creditors), To Sanju’s Capital A/c (Loan), To Bank A/c (Realisation Expenses), , 83,000, 12,000, 2,42,000, 2,00,000, 60,000, 15,000, 2,200, , `, , By Provision for Doubtful Debts, By Creditors, By Loan, By Anju’s Capital A/c :, `, Furniture, 10,000, Debtors, 1,85,000, By Manju’s Capital A/c :, Stock, 83,000, Buildings, 1,80,000, By Sanju’s Capital A/c, (Remaining Debtors less 20% of, Book Value), By Loss transferred to :, Anju’s Capital A/c, 21,360, Manju’s Capital A/c, 7,120, Sanju's Capital A/c, 7,120, , 6,14,200, , Partners’ Capital Accounts, , Dr., Particulars, To Realisation A/c, (Assets), To Realisation A/c, (Loss), To Bank A/c, , Anju, , Manju, , Sanju, , `, , `, , `, , 1,95,000 2,63,000, 21,360, 1,18,640, , 7,120, —, , 3,35,000 2,70,120, , Particulars, , By Balance b/d, 33,600 By Realisation A/c, (Creditors), 7,120 By Realisation A/c, 74,280, (Loan), By Bank A/c, 1,15,000, , Anju, , Manju, , `, , `, , 12,000, 60,000, 15,000, , 1,95,000, , 2,63,000, , 33,600, , 35,600, 6,14,200, Cr., Sanju, `, , 2,75,000 1,10,000 1,00,000, 60,000, , —, , —, , —, , — 15,000, 1,60,120, 3,35,000 2,70,120 1,15,000, , Bank Account, , Dr., Particulars, , Amount, , Cr., Particulars, , `, , To Balance b/d, To Manju’s Capital A/c, , Amount, `, , 35,000 By Realisation A/c (Expenses), 1,60,120 By Anju’s Capital A/c, By Sanju’s Capital A/c, 1,95,120, , 2,200, 1,18,640, 74,280, 1,95,120, , Illustration 13 (Payment of B/P at Discount and Remuneration to a Partner), Sonia, Rohit and Udit are partners sharing profits in the ratio of 5 : 3 : 2. Their Balance, Sheet as on March 31, 2019 was as follows :, Liabilities, Creditors, , 436, , Amount, `, , 30,000 Buildings, , Assets, , Amount, `, , 2,00,000
Page 451 :
Dis so lu tion of Part ner ship Firm, Bills Payable, Bank Loan, Sonia's Husband's Loan, General Reserve, Capitals :, Sonia, Rohit, Udit, , 30,000, 1,20,000, 1,30,000, 80,000, `, , 70,000, 90,000, 1,10,000, , Machinery, Stock, Bills Receivable, Furniture, Cash at Bank, , 40,000, 1,60,000, 1,20,000, 80,000, 60,000, , 2,70,000, 6,60,000, , 6,60,000, , The firm was dissolved on that date. Close the books of the firm with following, information :, (i) Buildings realised for ` 1,90,000; Bills Receivable realised for ` 1,10,000; Stock, realised ` 1,50,000 and Machinery sold for ` 48,000, Furniture for ` 75,000., (ii) Bank Loan was settled for ` 1,30,000. Creditors and Bills payable were settled at, 10% discount., (iii) Rohit paid the realisation expenses of ` 10,000. He was to get a remuneration of, ` 12,000 for completing the dissolution process., Prepare necessary Ledger Accounts., (N.C.E.R.T.), Solution, Dr., Realisation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Buildings, To Machinery, To Stock, To Bills Receivable, To Furniture, To Bank A/c (Bank Loan), To Bank A/c (Creditors), To Bank A/c (B/P), To Bank A/c (Sonia's Husband's, Loan), To Rohit's Capital A/c, (Remuneration), , `, , 2,00,000, 40,000, 1,60,000, 1,20,000, 80,000, 1,30,000, 27,000, 27,000, , By Creditors, By Bills Payable, By Bank Loan, By Sonia's Husband's Loan, By Bank A/c :, `, Building, 1,90,000, B/R, 1,10,000, Stock, 1,50,000, Machinery, 48,000, 1,30,000, Furniture, 75,000, By Loss transferred to Partners’, 12,000, Capital A/cs :, Sonia, 21,500, Rohit, 12,900, Udit, 8,600, 9,26,000, , Partners' Capital Accounts, , Dr., Particulars, To Realisation A/c, (Loss), To Bank A/c, , Sonia, , Rohit, , Udit, , `, , `, , `, , Particulars, , 30,000, 30,000, 1,20,000, 1,30,000, , 5,73,000, , 43,000, 9,26,000, , Cr., Sonia, , Rohit, , Udit, , `, , `, , `, , By Balance b/d, 70,000 90,000 1,10,000, 21,500 12,900, 8,600 By General Reserve, 40,000 24,000 16,000, 88,500 1,13,100 1,17,400 By Realisation A/c, — 12,000, —, 1,10,000 1,26,000 1,26,000, 1,10,000 1,26,000 1,26,000, , 437
Page 452 :
SBPD Pub li ca tions Accountancy (XII), Bank Account, , Dr., Particulars, , Amount, , Cr., Particulars, , `, , To Balance b/d, To Realisation A/c, (Assets Realised), , Amount, `, , 60,000 By Realisation A/c (Bank Loan), By Realisation A/c (Creditors + B/P), 5,73,000 By Realisation A/c (Sonia's, Husband's Loan), By Partners’ Capital A/cs :, `, Sonia, 88,500, Rohit, 1,13,100, Udit, 1,17,400, 6,33,000, , 1,30,000, 54,000, 1,30,000, , 3,19,000, 6,33,000, , Illustration 14 (Commission to a Partner and Debit Balance of a Partner), P, Q and R were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. They, agreed to dissolve their partnership firm on 31st March, 2019. P was deputed to realise the, assets and pay the liabilities. He was paid ` 1,000 as commission for his services. The, financial position of the firm was as follows :, Balance Sheet (as on 31st March, 2019), Liabilities, Creditors, Bills Payable, Investment Fluctuation Fund, Capitals :, `, P, 37,500, Q, 15,050, , Amount, , Assets, , `, , 10,000 Land, Building and Machineries, 3,700 Stock, 4,500 Investments, `, Debtors, 7,100, Less : Provision, 450, 52,550 Cash, R's Capital, 70,750, , Amount, `, , 30,000, 5,500, 15,000, 6,650, 5,600, 8,000, 70,750, , P took over investments for ` 12,500. Stock and debtors were realised ` 11,500. Plant, and Machinery were sold to Q for ` 22,500 for cash. Unrecorded assets realised for ` 1,500., Realisation expenses paid ` 900., Prepare necessary Ledger Accounts to close the books of the firm., Solution, Dr., Realisation Account, Cr., Particulars, , Amount, , Particulars, , `, , To Land, Building and Machineries, To Stock, To Investments, To Debtors, To Cash A/c (` 10,000 + 3,700), To Cash A/c (Expenses), To P's Capital A/c (Commission), , 30,000, 5,500, 15,000, 7,100, 13,700, 900, 1,000, , 73,200, , 438, , Amount, `, , By Provision for Doubtful Debts, By Creditors, By Bills Payable, By Investment Fluctuation Fund, By P's Capital A/c (Investments), By Cash A/c (11,500 + 22,500 + 1,500), By Partners' Capital A/cs :, `, P, 3,275, Q, 1,965, R, 1,310, , 450, 10,000, 3,700, 4,500, 12,500, 35,500, , 6,550, 73,200
Page 453 :
Dis so lu tion of Part ner ship Firm, Capital Accounts, , Dr., Particulars, , P, , Q, , R, , `, , `, , `, , To Balance b/d, —, —, To Realisation A/c, 12,500, —, To Realisation A/c (Loss) 3,275, 1,965, To Cash A/c, 22,725 13,085, 38,500 15,050, , Cr., , Particulars, , 8,000 By Balance b/d, — By Realisation A/c, 1,310 By Cash A/c, —, 9,310, , P, , Q, , R, , `, , `, , `, , 37,500 15,050, 1,000, —, —, —, , —, —, 9,310, , 38,500 15,050, , 9,310, , Cash Account, , Dr., Particulars, , Amount, , Cr., Particulars, , `, , To Balance b/d, To Realisation A/c, To R's Capital A/c, , 5,600 By Realisation A/c (Creditors + B/P), 35,500 By Realisation A/c, 9,310 By P's Capital A/c, By Q's Capital A/c, 50,410, , Amount, `, , 13,700, 900, 22,725, 13,085, 50,410, , Illustration 15 (Partners’ Capital A/cs and Current A/cs), X, Y and Z are in partnership sharing profits and losses equally. On 31st March, 2019,, their Balance Sheet was as follows :, Liabilities, Creditors, Y's Loan, Bills Payable, Reserve Fund, X's Current A/c, Y's Current A/c, Capitals :, X, Y, Z, , Amount, `, , `, , 10,000, 5,000, 5,000, , 6,500, 1,250, 250, 1,500, 750, 750, , Assets, Cash, Debtors, Stock, Furniture, Machinery, Z's Current A/c, Goodwill, , Amount, `, , 750, 6,250, 14,500, 500, 2,500, 1,500, 5,000, , 20,000, 31,000, , 31,000, , On the date they dissolved their partnership, the following arrangements were made, among the partners :, (a) X agrees to pay creditors. (b) Y takes over the stock at an agreed valuation of, ` 12,500. (c) Z takes over goodwill at ` 7,500. (d) Bills payable were cleared off, ` 5 being, allowed for discount. (e) The remaining assets were auctioned and realised ` 7,500., Expenses of realisation amounted to ` 60. (f) Y's loan was also paid off., Show the Realisation Account, Y's Loan Account, Cash Account, Current Accounts and, the Partners' Capital Accounts., Solution, Dr., Realisation Account, Cr., Particulars, , Amount, , Particulars, , `, , To Debtors A/c, To Stock A/c, To Furniture A/c, , 6,250 By Creditors A/c, 14,500 By Bills Payable A/c, 500 By Y's Current A/c (Stock), , Amount, `, , 6,500, 250, 12,500, , 439
Page 454 :
SBPD Pub li ca tions Accountancy (XII), To Machinery A/c, To Goodwill A/c, To X's Current A/c (Creditors), To Cash A/c (B/P), To Cash A/c (Realisation Expenses), , 2,500 By Z's Current A/c (Goodwill), 5,000 By Cash A/c (Assets Realised), 6,500 By Partners' Current A/cs :, 245, X, 60, Y, Z, 35,555, , 7,500, 7,500, `, , 435, 435, 435, , 1,305, 35,555, , Y's Loan Account, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, , To Cash A/c, , `, , 1,250 By Balance b/d, 1,250, , 1,250, 1,250, , Partners' Current Accounts, , Dr., Particulars, To Balance b/d, To Realisation A/c, To Realisation A/c (Loss), To X's Capital A/c, , X, , Y, , `, , Z, , `, , `, , —, —, — 12,500, 435, 435, 7,315, —, , 1,500, 7,500, 435, —, , 7,750 12,935, , 9,435, , Particulars, By Balance b/d, By Reserve Fund A/c, By Realisation A/c, By Y's Capital A/c, By Z's Capital A/c, , Cr., X, , Y, `, , Z, , `, , 750, 750, 500, 500, 6,500, —, — 11,685, —, —, 7,750 12,935, , Partners' Capital Accounts, , Dr., Particulars, To Current A/cs, To Cash A/c, , X, `, , Y, , Z, , `, , — 11,685, 17,315, —, 17,315 11,685, , Particulars, , `, , 8,935 By Balance b/d, — By Current A/c, By Cash A/c, 8,935, , Cash Account, , Dr., Particulars, To Balance b/d, To Realisation A/c (Assets Realised), To Y's Capital A/c, To Z's Capital A/c, , Amount, `, , 750, 7,500, 6,685, 3,935, 18,870, , `, , —, 500, —, —, 8,935, 9,435, , Cr., X, `, , Y, `, , Z, , 10,000 5,000, 7,315, —, —, 6,685, 17,315 11,685, , `, , 5,000, —, 3,935, 8,935, , Cr., Particulars, , By Realisation A/c (B/P), By Realisation A/c (Exp.), By Y's Loan A/c, By X's Capital A/c, , Amount, `, , 245, 60, 1,250, 17,315, 18,870, , Accounting Treatment of Joint Life Policy (JLP), 1. If JLP appears in the Balance Sheet on Assets side, it is transferred to Realisation, Account (on debit side) like other assets at its book value., 2. If JLP Reserve appears in the liabilities side of the Balance Sheet, it is transferred to, Realisation Account (on credit side). Alternatively, it may be distributed among partners in, their profit sharing ratio., 3. The amount realised from the Insurance Company on surrender of the policy is, credited to Realisation Account., 4. If JLP does not appear in the Balance Sheet but in additional information it is given, that on surrender of JLP some amount is received, then such amount should be distributed, , 440
Page 455 :
Dis so lu tion of Part ner ship Firm, among partners in their profit-sharing ratio and credited to their capital accounts or current, accounts, as the case may be or should be transferred (credited) to Realisation Account., Journal Entries, 1. For transferring J.L.P. shown on the Assets, side of the Balance Sheet, , Realisation A/c, To Joint Life Policy A/c, , Dr., , (Being Joint Life Policy transferred to Realisation A/c), , 2. For transferring J.L.P. Reserve shown on the, Liabilities side of the Balance Sheet to, Realisation A/c, Or, For distribution of J.L.P. Reserve among, partners in their Profit sharing ratio, , Joint Life Policy Reserve Fund A/c, To Realisation A/c, , Dr., , (Being Joint Life Policy Reserve Transferred to, Realisation A/c), Or, , Joint Life Policy Reserve A/c, To Partners’ Capital A/cs, , Dr., , (Being J.L.P. Reserve credited to partners’ capital A/cs, in their profit sharing ratio), , 3. For receiving surrender value from the, Insurance Company for J.L.P., , Bank A/c, To Realisation A/c, , Dr., , (Being the amount of surrender value received), , Illustration 16, X, Y and Z are partners sharing profits and losses in the ratio of 4 : 3 : 3. They agreed to, dissolve their business of partnership business on 31st March, 2018 on which date their, Balance Sheet was as follows :, Liabilities, Creditors, Employees’ Provident Fund, Joint Life Policy Reserve, Capitals :, X, Y, Z, , Amount, , Assets, , `, , 30,000 Cash at Bank, 3,000 Sundry Assets, 20,000, , Amount, `, , 550, 1,07,450, , `, , 22,000, 9,000, 24,000, , 55,000, 1,08,000, , 1,08,000, , Sundry Assets were realised ` 93,000. Creditors were paid in full and the cost of, dissolution amounted to ` 6,350., Prepare necessary Ledger Accounts to close the books of the firm., Solution, Dr., Realisation Account, Cr., Particulars, , Amount, , Particulars, , `, , To Sundry Assets, To Bank A/c (Creditors), To Bank A/c (E.P.F.), To Bank A/c (Real. Exps.), , 1,07,450, 30,000, 3,000, 6,350, , 1,46,800, , Amount, `, , By Creditors, By Employees’ Provident Fund, By Bank A/c (Sundry Assets), By Loss on Realisation :, `, X’s Capital A/c, 8,320, Y’s Capital A/c, 6,240, Z’s Capital A/c, 6,240, , 30,000, 3,000, 93,000, , 20,800, 1,46,800, , 441
Page 456 :
SBPD Pub li ca tions Accountancy (XII), Part ners' Cap i tal Ac counts, , Dr., Particulars, , X, , Y, , `, , `, , Z, , Particulars, , `, , To Reali sa tion A/c (Loss), 8,320 6,240 6,240 By Bal ance b/d, To Bank A/c (Final Payment) 21,680 8,760 23,760 By Gen eral Reserve, 30,000 15,000 30,000, , Cr., X, , Y, , Z, , `, , `, , `, , 22,000 9,000 24,000, 8,000 6,000 6,000, 30,000 15,000 30,000, , Bank Account, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, , To Bal ance b/d, To Reali sa tion A/c (Sundry As sets), , `, , 550 By Reali sa tion A/c (Cred i tors), 93,000 By Reali sa tion A/c (EPF), By Realisation A/c (Exps.), By X's Cap i tal A/c, By Y's Cap i tal A/c, By Z's Cap i tal A/c, 93,550, , 30,000, 3,000, 6,350, 21,680, 8,760, 23,760, 93,550, , Illustration 17, A, B and C are partners sharing profits and losses in the ratio of 3 : 2 : 1. On 31st March,, 2019, their Balance Sheet was as follows :, Liabilities, Creditors, Bills Payable, A's Loan, Capitals :, A, B, C, General Reserve, , Amount, , Assets, , Amount, , `, , `, , 80,000, 12,000, 40,000, , 40,200 Cash at Bank, 16,800 Stock, 57,000 Debtors, Less : Provision, Plant & Machinery, 1,32,000, 9,000, 2,55,000, , `, , `, , 57,000, 3,000, , 12,500, 57,400, 54,000, 1,31,100, , 2,55,000, , The firm was dissolved on 1st April, 2019., (i) There was a Joint Life Policy of ` 60,000. The policy was surrendered for` 15,000., (ii) The assets were realised as under : Stock ` 47,000; Goodwill ` 12,000; Debtors, 60% of the book value; Machinery` 90,000., (iii) Liabilities were paid in full., (iv) The expenses on realisation amounted to` 400., You are required to prepare the Realisation Account, Partners' Capital Accounts and, Bank Account., Solution, Dr., Realisation Account, Cr., Particulars, To Stock, To Debt ors, To Plant and Ma chin ery, , 442, , Amount, `, , Particulars, , 57,400 By Pro vi sion for Doubt ful Debts, 57,000 By Cred i tors, 1,31,100 By Bills Pay able, , Amount, `, , 3,000, 40,200, 16,800
Page 457 :
Dis so lu tion of Part ner ship Firm, To Bank A/c :, Cred i tors, Bills Pay able, To Bank A/c, (Dis so lu tion Exp.), , By Bank A/c (As sets Realised) :, J.L.P., 57,000, Stock, Good will, 400, Debt ors, Ma chin ery, By Loss trans ferred to :, A, B, C, 3,02,900, , `, , 40,200, 16,800, , `, , 15,000, 47,000, 12,000, 34,200, 90,000, , 1,98,200, , 22,350, 14,900, 7,450, , 44,700, 3,02,900, , Part ners' Cap i tal Ac counts, , Dr., Particulars, To Reali sa tion A/c, (Loss), To Bank A/c, , A, , B, , `, , `, , C, , Particulars, , `, , By Bal ance b/d, 22,350 14,900 7,450 By Gen eral Reserve, 62,150, 100 34,050, 84,500 15,000 41,500, , Cr., A, , B, , C, , `, , `, , `, , 80,000 12,000 40,000, 4,500 3,000 1,500, 84,500 15,000 41,500, , Bank Account, , Dr., Particulars, , Amount, , Cr., Particulars, , `, , To Bal ance b/d, To Reali sa tion A/c (As sets, Reaslised), , 12,500 By Reali sa tion A/c, (Cred i tors + B/P), 1,98,200 By Reali sa tion A/c (Exp.), By A's Loan A/c, By A's Cap i tal A/c, By B's Cap i tal A/c, By C's Cap i tal A/c, 2,10,700, , Working Note :, , Amount, `, , 57,000, 400, 57,000, 62,150, 100, 34,050, 2,10,700, , A’s Loan Account, , Dr., , Particulars, , Amount, , Cr., Particulars, , `, 57,000 By Balance b/d, 57,000, , To Bank A/c, , Amount, `, 57,000, 57,000, , Un re corded Joint Life Pol icy amount ing to` 60,000 will not be trans ferred to the debit side of Reali sa tion A/c,, ` 15,000 the amount real ised as its sur ren der value will be cred ited to Reali sa tion A/c and deb ited to Bank A/c., , Illustration 18 [Joint Life Policy (J.L.P.) and Reserve], A, B and C were the partners sharing profits and losses in their capital ratio. Their, Balance Sheet as on 31st March, 2019 was as follows :, Liabilities, , Amount, , Assets, , `, , Creditors, Joint Life Policy Reserve, Capitals :, A, B, C, , `, , 30,000, 20,000, 10,000, , 57,400 Plant and Machinery, 15,000 Stock, Investments, Joint Life Policy Investment (S.V.), Furniture, 60,000 Cash at Bank, 1,32,400, , Amount, `, , 43,600, 16,000, 47,600, 15,000, 3,700, 6,500, 1,32,400, , 443
Page 458 :
SBPD Pub li ca tions Accountancy (XII), The firm was dissolved on the above date. A took over Investment and Stock at ` 40,600., Joint Life Policy was realised at surrender value. Furniture was sold at book value and, Plant and Machinery were realised for ` 82,040. Creditors were paid in full settlement., Prepare necessary accounts to close the books of the firm., Solution, Dr., Realisation Account, Cr., Particulars, , Amount, , Particulars, , Amount, , `, , To Plant and Machinery, To Stock, To Investments, To Joint Life Policy Investments, To Furniture, To Bank A/c (Creditors), To Partners' Capital A/cs :, `, A, 15,220, B, 10,147, C, 5,073, , 43,600, 16,000, 47,600, 15,000, 3,700, 57,400, , `, , By Creditors, By Joint Life Policy Reserve, By A's Capital A/c (Invst. + Stock), By Bank A/c (Assets Realised) : `, Furniture, 3,700, J.L.P., 15,000, Plant & Machinery, 82,040, , 30,440, 2,13,740, , Particulars, , A, , B, `, , To Realisation A/c, To Bank A/c, , C, `, , Cr., , Particulars, `, , A, , B, , `, , 40,600, —, — By Balance b/d, 4,620 30,147 15,073 By Realisation A/c, 45,220 30,147 15,073, , Particulars, To Balance b/d, To Realisation A/c, , Amount, , C, `, , `, , 30,000 20,000 10,000, 15,220 10,147, 5,073, 45,220 30,147 15,073, , Bank Account, , Dr., , 1,00,740, , 2,13,740, , Capital Accounts, , Dr., , 57,400, 15,000, 40,600, , Cr., Particulars, , Amount, , `, , 6,500 By Realisation A/c, 1,00,740 By Capital A/cs :, A, B, C, 1,07,240, , `, , 57,400, `, , 4,620, 30,147, 15,073, , 49,840, 1,07,240, , Transfer or giving away of Assets to Settle Liabilities, 1. If the value of asset accepted or taken over by the creditor is full and final, ( i.e., asset, given to the creditors is in full settlement), then no entry is passed in the book for, settlement of liability., Reason : It is because the assets and liabilities are already transferred to the, Realisation A/c., 2. If a creditor accepts partly an asset and partly cash, then only payment of cash is, recorded. No entry is made for the asset given to the creditors in settlement of his, claim., Reason : It is so because the liability due to the creditors has already been, transferred to the credit of Realisation A/c and the assets taken over by the creditor, is appearing on the debit side of the Realisation A/c. The debit of an asset automatically, cancells the credit of corresponding liability in the Realisation Account., , 444
Page 459 :
Dis so lu tion of Part ner ship Firm, 3. If the value of asset taken over by the creditor is more than the amount due, then the, creditor will pay cash for the excess value. The Journal entry will be :, Cash/Bank A/c, Dr., To Realisation A/c, 4. If value of assets is less than the value of creditors, creditors will be paid in cash for, the balance. The Journal entry will be :, Realisation A/c, Dr., To Cash/Bank A/c, Illustration 19, A, B and C were partners in a firm sharing profits in the ratio of 4 : 3 : 3. The firm was, dissolved on 28.2.2017. After transfer of assets and external liabilities to Realisation, Account, following transactions took place :, (i) K, a creditor, to whom ` 6,000 were due to be paid, accepted office equipment at, ` 4,000 and the balance was paid to him in cash., (ii) L, a creditor, to whom ` 16,000 were due to be paid, took over machinery at, ` 20,000. Balance was paid by him in cash., (iii) An unrecorded liability of the firm ` 7,800 was paid by A., (iv) The loss on realisation was ` 10,000., Pass necessary Journal entries for the above transactions in the books of the firm., Solution, , Journal Entries, , S. No., (i), , Particulars, , L.F., , Dr., , Cr., , Amount, , Amount, , `, , Realisation A/c, To Cash A/c, , Dr., , 2,000, , Cash A/c, To Realisation A/c, , Dr., , 4,000, , Realisation A/c, To A's Capital A/c, , Dr., , 7,800, , A's Capital A/c, B's Capital A/c, C's Capital A/c, To Realisation A/c, , Dr., Dr., Dr., , 4,000, 3,000, 3,000, , (Being K, a creditor to whom ` 6,000 were due accepted equipment for ` 4,000, the balance paid in cash), , (ii), , (Being received cash from L, a creditor who accepted machinery, of ` 20,000 for ` 16,000), , (iii), , (Being unrecorded liability accepted by A), , (iv), , (Being realisation loss transferred to partners in profit ratio), , `, , 2,000, , 4,000, , 7,800, , 10,000, , Illustration 20, Verma and Sharma were partners in sharing profits in the ratio of 3 : 1. On 31.3.2018, their Balance Sheet was as follows :, Balance Sheet of Verma and Sharma (as on 31-3-2018), Liabilities, , Amount, , Assets, , `, , Capitals :, Verma, Sharma, Creditors, , `, , 1,20,000, 80,000, , Land and Building, Machinery, 2,00,000 Debtors, 70,000 Bank, 2,70,000, , Amount, `, , 70,000, 60,000, 80,000, 60,000, 2,70,000, , 445
Page 460 :
SBPD Pub li ca tions Accountancy (XII), The firm was dissolved on 1.4.2018 and the Assets and Liabilities were settled as follows :, (i) Creditors of ` 50,000 took over Land and Building in full settlement of their claim., (ii) Remaining creditors were paid in Cash., (iii) Machinery was sold at a depreciation of 30%., (iv) Debtors were collected at a cost of ` 500., (v) Expenses of realisation were ` 1,700., Pass necessary Journal Entries for dissolution of the firm., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , 2018, April, 1 Realisation A/c, To Land and Building A/c, To Machinery A/c, To Debtors A/c, , Dr., , Amount, `, , 2,10,000, , Amount, `, , 70,000, 60,000, 80,000, , (Being assets transferred to Realisation Account), , Creditors A/c, To Realisation A/c, , Dr., , 70,000, 70,000, , (Being creditors transferred to Realisation Account), , Bank A/c, To Realisation A/c, , Dr., , 1,21,500, 1,21,500, , (Being the assets realized Machinery at ` 42,000 and Debtors at, ` 79,500), , Realisation A/c, To Bank A/c, , Dr., , 20,000, 20,000, , (Being remaining Creditors paid off), , Realisation A/c, To Bank A/c, , Dr., , 1,700, 1,700, , (Being the payment of realisation expenses), , Verma’s Capital A/c, Sharma’s Capital A/c, To Realisation A/c, , Dr., Dr., , 30,150, 10,050, 40,200, , (Being the loss on realisation transferred to Partners’ Capital, Accounts), , Verma’s Capital A/c, Sharma’s Capital A/c, To Bank A/c, , Dr., Dr., , 89,850, 69,950, 1,59,800, , (Being the final payment made) (Note), Working Notes :, , 1. Realisation Account, , Dr., Particulars, To, To, To, To, To, , Land and Building A/c, Machinery A/c, Debtors A/c, Bank A/c (Creditors), Bank A/c (Expenses), , 446, , Amount, , Cr., Particulars, , `, 70,000 By Creditors A/c, 60,000 By Bank A/c (Assets realised), 80,000 By Loss transferred to :, 20,000, Verma’s Capital A/c, 1,700, Sharma’s Capital A/c, 2,31,700, , Amount, `, , `, 30,150, 10,050, , 70,000, 1,21,500, 40,200, 2,31,700
Page 461 :
Dis so lu tion of Part ner ship Firm, 2. Partners’ Capital Accounts, , Dr., Particulars, To Realisation A/c (Loss), To Bank A/c, (Bal. Fig. Final Payment), , Verma, `, 30,150, 89,850, 1,20,000, , Sharma, , Particulars, , Cr., Verma, , Sharma, , `, 10,050 By Balance b/d, 69,950, , `, 1,20,000, , `, 80,000, , 80,000, , 1,20,000, , 80,000, , Illustration 21 (Payment to Creditors by giving away Some Asset), Sumit, Amit and Vinit are partners sharing profits in the ratio of 5 : 3 : 2. Their Balance, Sheet as on March 31, 2019 was as follows :, Capital and Liabilities, , Amount, , Assets and Properties, , Amount, , `, , Capitals :, Sumit, Amit, Vinit, Profit and Loss, Mrs. Amit’s Loan, Sundry Creditors, , `, , 40,000, 50,000, 60,000, , `, , Machinery, Investment, Stock, 1,50,000 Debtors, 10,000 Cash at Bank, 40,000, 90,000, 2,90,000, , 80,000, 1,50,000, 10,000, 35,000, 15,000, , 2,90,000, , The firm was dissolved on that date. Amit took over his wife’s loan. One of the creditor, for ` 2,600 did not claim the amount. Other assets realised as follows :, 1. Machinery was sold for ` 70,000., 2. Investments with book value of ` 1,00,000 were given to Creditors in full settlement, of their account. The remaining Investments were took over by Vinit at an agreed, value of ` 45,000., 3. Stock was sold for ` 11,000 and Debtors for ` 3,000 proved to be bad., 4. Realisation expenses were ` 1,500., Prepare ledger accounts to close the books of the firm., Solution, In the Books of Amit, Sumit and Vinit, Dr., Realisation Account, Cr., Particulars, , Amount, , Particulars, , `, , To Machinery, To Investments, To Stock, To Debtors, To Amit’s Capital A/c (Mrs. Amit’s, Loan), To Bank A/c (Realisation Expenses), , 80,000 By Sundry Creditors, 1,50,000 By Mrs. Amit’s Loan, 10,000 By Bank A/c :, `, 35,000, Machinery, 70,000, Stock, 11,000, 40,000, Debtors, 32,000, 1,500 By Vinit’s Capital A/c (Investments), By Loss transferred to :, Amit’s Capital A/c, 14,250, Sumit’s Capital A/c, 8,550, Vinit’s Capital A/c, 5,700, 3,16,500, , Amount, `, , 90,000, 40,000, , 1,13,000, 45,000, , 28,500, 3,16,500, , 447
Page 462 :
SBPD Pub li ca tions Accountancy (XII), Partners’ Capital Accounts, , Dr., Particulars, To Realisation A/c, (Assets), To Realisation A/c, (Loss), To Bank A/c, , Amit, , Sumit, , Vinit, , `, , `, , `, , —, 14,250, 70,750, 85,000, , —, 8,550, 44,450, 53,000, , Particulars, , By Balance b/d, 45,000 By Realisation A/c, (Mrs. Amit’s, 5,700, Loan), 11,300 By Profit & Loss A/c, 62,000, , Cr., Amit, , Sumit, , `, , `, , Vinit, `, , 40,000, , 50,000, , 60,000, , 40,000, 5,000, 85,000, , —, 3,000, 53,000, , —, 2,000, 62,000, , Bank Account, , Dr., Particulars, , Amount, , Cr., Particulars, , `, , To Balance b/d, To Realisation A/c (Assets Realised), , Amount, `, , 15,000 By Realisation A/c (Expenses), 1,13,000 By Amit’s Capital A/c, By Sumit's Capital A/c, By Vinit’s Capital A/c, 1,28,000, , 1,500, 70,750, 44,450, 11,300, 1,28,000, , Note : No entry has been made for the investments taken over by the creditors as per rules., , Illustration 22 (Payment to Creditors by giving away Some Asset), X and Y are partners in a firm sharing profits and losses in the ratio of 3 : 1. They, decided to dissolve their firm. On March 31, 2019, their Balance Sheet was as follows :, Liabilities, , Amount, , Assets, , `, , Capital A/cs :, X, Y, Sundry Creditors, Bills Payable, , `, , 45,000, 40,000, , Amount, `, , Machinery, Investments, 85,000 Stock, 30,000 Sundry Debtors, 10,000 Cash, 1,25,000, , 35,000, 25,000, 11,000, 51,500, 2,500, 1,25,000, , Additional Informations :, (i) Machinery was given to creditors in full settlement of their account and stock, was given in full settlement for Bills Payable., (ii) Investments were taken over by Y at book value. Sundry Debtors having book, value ` 25,000 were taken over by X at 10% less and from remaining debtors, ` 25,500 were realised., (iii) Realisation expenses amounted to ` 1,000., Prepare necessary ledger accounts to close the books of the firm., Solution, Dr., Realisation Account, Cr., Particulars, To Machinery, To Investments, , 448, , Amount, `, , Particulars, , 35,000 By Sundry Creditors, 25,000 By Bills Payable, , Amount, `, , 30,000, 10,000
Page 463 :
Dis so lu tion of Part ner ship Firm, To Stock, To Sundry Debtors, To Cash A/c (Realisation Exps.), , 11,000 By Y's Capital A/c (Investments), 51,500 By X's Capital A/c (Debtors), 1,000 By Cash A/c (Debtors), By Loss transferred to Capital, A/cs :, `, X, 7,875, Y, 2,625, 1,23,500, , 25,000, 22,500, 25,500, , 10,500, 1,23,500, , Partners' Capital Accounts, , Dr., Particulars, , X, , Y, `, , To Realisation A/c, (Investments), To Realisation A/c, (Sundry Debtors), To Realisation A/c (Loss), To Cash A/c, , —, 22,500, 7,875, 14,625, 45,000, , Particulars, , Cr., X, , `, , 25,000, , By Balance b/d, , —, 2,625, 12,375, 40,000, , `, , 45,000, , 40,000, , 45,000, , 40,000, , Cash Account, , Dr., Particulars, To Balance b/d, To Realisation A/c, , Amount, , Y, `, , Cr., Particulars, , `, , 2,500 By Realisation A/c, 25,500 By X's Capital A/c, By Y's Capital A/c, 28,000, , Amount, `, , 1,000, 14,625, 12,375, 28,000, , 8.8 When Balance Sheet of the Firm is Not Given, Or, , Determining Missing Figure of Sundry Assets, When Balance Sheet of the firm is not given, then before preparing Realisation Account, prepare :, (i) The Memorandum Balance Sheet to ascertain the position before dissolution., (ii) Write all the known assets on the assets side of the Balance Sheet and all known, liabilities and Capital Accounts on the liabilities side., (iii) If the total of liabilities side is more than the assets side, then the difference of, amount will be shown on the assets side as Profit & Loss Account (it represents, loss). Similarly, if the total of assets side is more than that of the liabilities side, it will, be shown on liabilities side as Profit & Loss Account (now this represents profit)., (iv) If assets are not given in the question, then their value will be assumed to be equal, to the total of liabilities side., (v) If interest is to be paid on capital, then calculate the same and adjust it with the, profit or loss arising from the business., (vi) The balance then left after adjustment will be distributed among the partners in, their profit-sharing ratio., Illustration 23 (When Balance Sheet is not Given), A, B and C were partners in a firm sharing profits in the ratio of 4 : 3 : 3. On 1.4.2019 they, decided to dissolve the firm. On that date A's capital was ` 1,25,000, B's capital was ` 45,000 and, C's capital was ` 15,000 (Dr.). The creditors amounted to ` 23,150 and Cash in hand was ` 4,520., , 449
Page 464 :
SBPD Pub li ca tions Accountancy (XII), The assets realised ` 1,44,910 and the expenses of dissolution were ` 1,860. Prepare Realisation, Account and show your workings clearly., Solution, In this problem, Balance Sheet on the date of dissolution is not given. Hence, Balance, Sheet on the date of dissolution i.e., 1.4.2019 shall be prepared to ascertain value of assets., Memorandum Balance Sheet, (as on 1st April, 2019), Liabilities, , Amount, , Assets, , `, , Creditors, A's Capital, B's Capital, , 23,150 Cash in hand, 1,25,000 C's Capital, 45,000 Sundry Assets (Bal. fig.), 1,93,150, , Realisation Account, , Dr., Particulars, To Sundry Assets, To Cash A/c : Creditors, To Cash A/c : Expenses, , Amount, , Amount, `, , 4,520, 15,000, 1,73,630, 1,93,150, , Cr., Particulars, , `, , 1,73,630 By Creditors, 23,150 By Cash A/c, 1,860 By Loss transferred to Capital, A/cs :, `, A, 12,232, B, 9,174, C, 9,174, 1,98,640, , Amount, `, , 23,150, 1,44,910, , 30,580, 1,98,640, , Illustration 24 (Memorandum Balance Sheet), The capitals of A, B, C and D on 31st March, 2017 were ` 26,130, ` 9,540, ` 11,720 and, ` 37,210 respectively. They share profits and losses in the proportion of 7 : 4 : 6 : 8. After having, paid their creditors, the assets realised ` 22,100. B and C brought in all that was due from, them. Prepare (a) Realisation Account, (b) Cash Account, and (c) Partners' Capital Accounts., Solution, Hence Balance Sheet on the date of dissolution as on 31st March, 2017., Memorandum Balance Sheet, Dr., (as on 31st March, 2017), Cr., Liabilities, , Capital A/cs :, A, B, C, D, , Dr., , Particulars, , To Sundry Assets, , 450, , Amount, `, , 26,130, 9,540, 11,720, 37,210, 84,600, , Assets, , Sundry Assets (Bal. fig.), , Realisation Account, Amount, `, , Amount, `, , 84,600, , 84,600, Particulars, , 84,600 By Cash A/c, By Loss trans. to Capital A/cs : `, A, 17,500, B, 10,000, C, 15,000, D, 20,000, 84,600, , Cr., , Amount, `, , 22,100, , 62,500, 84,600
Page 465 :
Dis so lu tion of Part ner ship Firm, Distribution of Realisation Loss :, 62,500´ 7, A= `, = ` 17,500;, 25, 62,500´ 6, C= `, = ` 15,000;, 25, , 62,500´ 4, = ` 10,000;, 25, 62,500´ 8, D =`, = ` 20,000., 25, B = `, , Partners' Capital Accounts, , Dr., Particulars, To Realisation A/c (Loss), To Cash A/c, , A, , B, `, , 17,500, 8,630, 26,130, , Particulars, `, , 10,000 By Balance b/d, — By Cash A/c, 10,000, , Cr., A, , B, `, , 26,130, —, 26,130, , `, , 9,540, 460, 10,000, , Partners' Capital Accounts, , Dr., Particulars, To Realisation A/c (Loss), To Cash A/c, , C, , D, `, , Particulars, `, , Particulars, , C, , D, `, , `, , 15,000, —, , 20,000 By Balance b/d, 17,210 By Cash A/c, , 11,720, 3,280, , 37,210, —, , 15,000, , 37,210, , 15,000, , 37,210, , Cash Account, , Dr., , Cr., , Amount, , Cr., Particulars, , `, , Amount, `, , To Realisation A/c, , 22,100 By A's Capital A/c, , 8,630, , To B's Capital A/c, To C's Capital A/c, , 460 By D's Capital A/c, 3,280, , 17,210, , 25,840, , 25,840, , Illustration 25, On 1st April, 2019 A, B and C commenced business in partnership sharing profits and, losses in the proportion of 1/2, 1/3 and 1/6 respectively. They paid into their Bank Account as, their capital ` 40,000 being ` 20,000 by A, ` 15,000 by B and ` 5,000 by C. During the year, each partner withdrew ` 2,000 and on 31st March, 2018, they dissolve their partnership. A, taking up stock at the agreed valuation of ` 7,000, B taking up furniture at ` 1,000 and C, taking up debtors at ` 5,000. After paying off their creditors, their remained a balance of, ` 3,000 at the Bank., Prepare the necessary accounts assuming that the distribution of cash at the Bank and, of the further cash brought in by any partner or partners as the case required., Solution, Book value of the assets has not been given in the question. On dissolution the value of, capital and assets will be ascertained in the following manner :, `, Total Capital at the beginning, 40,000, Less : Total Drawings ( ` 2,000 ´3), 6,000, Capital at the date of Dissolution, 34,000, Since, Capital = Value of All Assets – Liabilities, Therefore, in this question the value of net assets on the date of dissolution will be, considered as ` 34,000., , 451
Page 466 :
SBPD Pub li ca tions Accountancy (XII), Realisation Account, , Dr., Particulars, To Sundry Net Assets, , Amount, , Cr., Particulars, , Amount, , `, , 34,000 By Capital A/cs :, A—Stock, B—Furniture, C—Debtors, By Bank A/c (Note), By Capital A/cs :, A (1/2), B (1/3), C (1/6), 34,000, , `, `, , 7,000, 1,000, 5,000, 9,000, 6,000, 3,000, , A's Capital Account, , Dr., Particulars, To Drawings A/c, To Realisation A/c (Stock), To Realisation A/c (1/2 Loss), To Bank A/c (31-3-2018), , Amount, , Particulars, , Particulars, , `, , 2,000 By Bank A/c (1-4-2017), 7,000, 9,000, 2,000, 20,000, , To Drawings A/c, To Realisation A/c (Furniture), To Realisation A/c (Loss), To Bank A/c (31-3-2018), , Amount, , Particulars, , Particulars, , `, , 2,000 By Bank A/c (1-4-2017), 1,000, 6,000, 6,000, 15,000, , To Drawings A/c, To Realisation A/c (Debtors), To Realisation A/c (Loss), , Amount, `, , 2,000 By Bank A/c (1-4-2017), 5,000 By Bank A/c (31-3-2018), 3,000, , To Realisation A/c, To C's Capital A/c, , Amount, , Amount, `, , 15,000, , 15,000, , Amount, `, , 5,000, 5,000, , Cr., Particulars, , `, , Amount, `, , 3,000 By A's Capital A/c, 5,000 By B's Capital A/c, , 2,000, 6,000, , 8,000, , 8,000, , Note : Balance of Bank ` 3,000 after paying off liabilities treated as surplus realised from assets., , 452, , 20,000, , 10,000, , Bank Account, Particulars, , `, , 20,000, , Cr., Particulars, , 10,000, , Dr., , Amount, , Cr., , C's Capital Account, , Dr., , 18,000, 34,000, , Cr., , B's Capital Account, , Dr., , 13,000, 3,000
Page 467 :
Dis so lu tion of Part ner ship Firm, ❏ Miscellaneous and Boards' Questions, Illustration 26 (Commission on Sale of Assets and Unrecorded Liabilities), A, B and C shared profits in the ratio of 3 : 2 : 1. They dissolved the partnership and, appointed A to realise the assets. A is to receive 5% commission on the sale of assets (except, cash) and is to bear all expenses of realisation. The position of the firm was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , Capitals :, `, A, 90,000, B, 60,000, C, 10,000, Bank Overdraft, Creditors, Provident Fund, Investment Fluctuation Fund, Commission received in Advance, , `, , Plant, Investments, Stock, 1,60,000 Debtors, 25,000 Cash in hand, 60,000 Profit & Loss A/c, 12,000, 6,000, 8,000, 2,71,000, , 91,200, 15,000, 36,000, 52,300, 22,500, 54,000, , 2,71,000, , Additional Informations :, (i) A realised the assets as follows :, Debtors ` 30,000; Stock ` 26,000; Investment at 75% value; Plant at ` 42,750;, Expenses of realisation amounted to ` 4,100., (ii) Commission received in advance is returned to the customer after deducting, ` 3,000 for work done., (iii) Firm had to pay ` 7,200 for outstanding expenses, not provided earlier., (iv) Compensation to employees paid by the firm amounted to ` 9,800. This liability, was not provided for in the above Balance Sheet., (v) ` 25,000 had to be paid for Provident Fund., Prepare necessary Accounts., Solution, Dr., Realisation Account, Cr., Particulars, To Sundry Assets :, `, Plant, 91,200, Investments, 15,000, Stock, 36,000, Debtors, 52,300, To Bank A/c :, Adv. Commission (Returned) 5,000, Salaries O/S, 7,200, Compensation paid, 9,800, Provident Fund paid, 25,000, Creditors, 60,000, To A's Capital A/c, (Commission on Sale of Assets), , Amount, , Particulars, , Amount, , `, , By Sundry Assets :, Creditors, Provident Fund, Investment Fluctuation, 1,94,500, Fund, Commission Received in, Advance, By Bank A/c :, Debtors, Stock, 1,07,000, Investments, Plant, 5,500 1 By Loss transferred to :, A's Capital A/c, B's Capital A/c, C's Capital A/c, 3,07,000, , `, `, , 60,000, 12,000, 6,000, 8,000, , 86,000, , 30,000, 26,000, 11,250, 42,750, , 1,10,000, , 55,500, 37,000, 18,500, , 1,11,000, 3,07,000, , 453
Page 468 :
SBPD Pub li ca tions Accountancy (XII), Partners' Capital Accounts, , Dr., Particulars, To P. & L. A/c (Loss), To Realisation A/c, (Loss), To Bank A/c, (Realisation Exp.), To Bank A/c (Bal., fig.), , A, , B, `, , C, `, , 27,000 18,000, , Particulars, , `, , 9,000 By Balance b/d, By Realisation A/c, 55,500 37,000 18,500, (Comm.), By Bank A/c (Bal., 4,100, —, —, fig.), 8,900, 5,000, —, 95,500 60,000 27,500, , Cr., A, , B, `, , C, `, , `, , 90,000 60,000 10,000, 5,500, , —, , —, , —, , — 17,500, , 95,500 60,000 27,500, , Dr., , Bank Account, , Particulars, To Cash A/c (Deposited), To Realisation A/c (Assets Sold), To C's Capital A/c, , `, Particulars, 22,500 By Balance b/d (Bank Overdraft), 1,10,000 By Realisation A/c (Liabilities paid), 17,500 By A's Capital A/c (Exps.), By A's Capital A/c, By B's Capital A/c, 1,50,000, , Cr., `, , 25,000, 1,07,000, 4,100, 8,900, 5,000, 1,50,000, , Working Notes :, 1. Calculation of Commission : ` 1,10,000 × 5/100 = ` 5,500., 2. Bank Overdraft is treated as credit balance of Bank and Cash in hand is deposited in Bank Account., Alternatively, Cash Account may be opened and Bank overdraft may be treated as liability and paid off., 3. Realisation expenses will not be shown in the Realisation A/c as it is borne by A., 4. Realisation Expenses ` 4,100 may be paid by A from his personal account. In that case, final payment on, his account will ` 13,000., , Illustration 27, Prashant and Rajesh were partners in a firm sharing profits in the ratio of 3 : 2. The, Court ordered for the dissolution of their partnership firm on 31st March, 2019. Prashant, was deputed to realise the assets and to pay liabilities. He was paid ` 1,000 as commission, for his services. The financial position of the firm on 31st March, 2019 was as follows :, Bal ance Sheet, (as on 31st March, 2019), Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Mrs. Prashant’s Loan, Rajesh’s Loan, Investment Fluctuation Fund, Capitals :, `, Prashant, 42,000, Rajesh, 42,000, , 80,000 Building, 40,000 Investments, 24,000 Debtors, 8,000, Less : Provision for, Doubtful Debts, Bills Receivables, 84,000 Cash, Profit and Loss A/c, Goodwill, 2,36,000, , Following was agreed upon :, (i) Prashant agreed to pay off his wife’s loan., (ii) Debtors realised ` 24,000., (iii) Rajesh took away all investments at ` 27,000., , 454, , `, `, , 34,000, 4,000, , 1,20,000, 30,600, , 30,000, 37,400, 6,000, 8,000, 4,000, 2,36,000
Page 469 :
Dis so lu tion of Part ner ship Firm, (iv) Building realised ` 1,52,000., (v) Creditors were payable after 2 months. They were paid immediately at 10% discount., (vi) Bills Receivable were settled at a loss of ` 1,400 ., (vii) Realisation expenses amounted to ` 2,500., Prepare Realisation Account, Partners’ Capital Accounts and Cash Account to close the, books of the firm., Solution, Dr., Realisation Account, Cr., Particulars, , Amount, , To Sundry Assets :, `, Building, 1,20,000, Investments, 30,600, Debtors, 34,000, Bills Receivable, 37,400, Goodwill, 4,000, To Prashant’s Capital A/c, (Mrs. Prashant’s Loan), To Cash A/c :, Creditors (` 80,000 – 8,000) 72,000, Expenses, 2,500, To Profit transferred to :, Prashant’s Capital A/c, 13,500, Rajesh’s Capital A/c, 9,000, , Particulars, , Amount, , `, , 27,000, , `, 80,000, 8,000, , Prashant, `, , To Realisation A/c, (Investments), To Profit and Loss A/c (Loss), To Cash A/c (Bal. fig.), , 2,12,000, , 3,63,000, , 72,000, , Partners’ Capital Accounts, Particulars, , 1,20,000, 4,000, , 22,500, 3,63,000, , Note : Creditors are paid, æ, 10 ö÷, Less : 10% çç 80, 000´, ÷, çè, 100 ÷ø, , Dr., , `, , By Sundry Liabilities :, `, Creditors, 80,000, Mrs. Prashant’s Loan, 40,000, By Provision for Doubtful Debts, By Cash A/c :, 2,26,000, Debtors, 24,000, Building, 1,52,000, 40,000, B/R, 36,000, By Rajesh’s Capital A/c, (Investments), 74,500, , —, 4,800, 95,500, , 1,00,300, , Rajesh, , Particulars, , Prashant, , `, , By Balance b/d, 27,000 By Investment Fluctuation, 3,200, Fund, 24,000 By Realisation A/c (Mrs., Prashant’s Loan, By Realisation A/c (Profit), 54,200, , Cash Account, , Dr., Particulars, To Balance bd, To Realisation A/c (Assets Realised), , Amount, Particulars, `, 6,000 By Realisation A/c (Creditors), 2,12,000 By Realisation A/c (Expenses), By Rajesh’s Loan A/c, By Prashant’s Capital A/c, By Rajesh’s Capital A/c, 2,18,000, , `, , Cr., , Rajesh, `, , 42,000, , 42,000, , 4,800, , 3,200, , 40,000, 13,500, 1,00,300, , —, 9,000, 54,200, , Cr., Amount, `, 72,000, 2,500, 24,000, 95,500, 24,000, 2,18,000, , 455
Page 470 :
SBPD Pub li ca tions Accountancy (XII), Working Note :, , Rajesh’s Loan Account, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, 24,000 By Balance b/d, 24,000, , To Bank A/c, , `, 24,000, 24,000, , Illustration 28, Pass necessary Journal entries on the dissolution of a partnership firm in the following, cases :, (i) Expenses of dissolution were ` 9,000., (ii) Expenses of dissolution ` 3,400 were paid by a partner, Vishal., (iii) Shiv, a partner, agreed to do the work of dissolution for a commission of ` 4,500. He, also agreed to bear the dissolution expenses. Actual dissolution expenses ` 3,900 were, paid from the firm’s bank account., (iv) Naveen a partner, agreed to look after the dissolution work for which he was, allowed a remuneration of ` 3,000. Naveen also agreed to bear the dissolution, expenses. Actual expenses on dissolution ` 2,700 were paid by Naveen., (C.B.S.E., A.I., 2017), Solution, Journal Entries, Dr., Cr., S. No., (i), , Particulars, Realisation Expenses A/c, To Bank A/c, , L.F., Dr., , Amount, `, , 9,000, , Amount, `, , 9,000, , (Being the Dissolution expenses paid), , (ii), , Realisation A/c, To Vishal’s Capital A/c, , Dr., , 3,400, 3,400, , (Being expenses of dissolution paid by a partner, Vishal), , (iii), , (a) Realisation A/c, To Shiv’s Capital A/c, , Dr., , 4,500, 4,500, , (Being Commission payable to Shiv), , (b) Shiv’s Capital A/c, To Bank A/c, , Dr., , 3,900, 3,900, , (Being the dissolution expenses paid by the firm on behalf, of Shiv), , (iv), , Realisation A/c, To Naveen’s Capital A/c, , Dr., , 3,000, 3,000, , (Being the remuneration due to Naveen), , Expenses on dissolution were to be paid by Naveen himself., Hence, no entry is passed for actual expensed incurred by him., , 8.9 FAST REVISION, l Meaning : Dissolution of a firm means discontinuation of relationship between (among) partners., , Dissolution of partnership and dissolution of partnership firm is not one and the same thing., In case of dissolution of partnership, the firm continues, only the partnership is reconstituted., In case of dissolution of the firm, both the partnership and the partnership firm are dissolved., l Modes of Dissolution of a Firm :, (i) Dissolution by Agreement,, (ii) Compulsory Dissolution,, (iii) Dissolution by Notice in case of Partnership/at Will,, (iv) Dissolution by a Court., , 456
Page 471 :
Dis so lu tion of Part ner ship Firm, l Mode of Settlement of Accounts : In case of dissolution of a firm, the firm ceases to conduct, , normal business and has to settle the accounts. For this purpose all assets of the firm are sold, out and the liabilities are paid off. It is called settlement of accounts., (i) Treatment of Losses : Any business loss shall be paid first out of profits, then out of, capital and lastly by the partners individually in the proportions in which they were, entitled to share profits., (ii) Disposal of the Proceeds of the Sale of Assets : The amount realised from the sale of, assets of the firm including any sum of money contributed by the partners to make up, deficiencies of capital shall be applied in the following order :, (a) Expenses of realisation,, (b) Payment to outside liabilities, i.e., third parties including partner's spouse,, (c) Payment of loans and advances made by the partners to the firm,, (d) In payment of balance of capital of partners,, (e) The balance, if any, shall be distributed among the partners in their profit-sharing ratio., If there is a debit balance in the Capital Account of a partner who has given loan, the debit, balance of the Capital Account will be adjusted against the Loan Account and afterwards,, the payment of the balance of Loan Account shall be made to the partners., , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6/8 Marks Questions), , 1., 2., 3., 4., 5., , Under what circumstances a firm is dissolved ? How the accounts of a firm are closed on dissolution ?, What do you mean by Dissolution of Firm ? Show the entries made at the time of dissolution., Under what circumstances can a partnership firm be dissolved ?, What Journal entries will you pass in case of dissolution of a partnership firm ?, What is meant by dissolution of partnership firm ? What accounting record is made on, dissolution of partnership firm ?, 6. What is Realisation Account ? When and how is it prepared ?, 7. Explain different modes of dissolution of a firm., , (B) Short Answer Type Questions, , (3/4 Marks Questions), , 1., 2., 3., 4., 5., , State the modes of dissolution of a partnership firm., What is Realisation Account ? How is it prepared ?, State the rules of preparation of Realisation Account on dissolution of a firm., What Journal entries will you pass in case of dissolution of a partnership firm ?, Under what circumstances, a partnership firm is deemed to be dissolved ?, Or, In what circumstances can a firm be dissolved., 6. How Capital Accounts are closed on dissolution of partnership ?, 7. Distinguish between dissolution of partnership and dissolution of firm., 8. State any three differences between Revaluation Account and Realisation Account., 9. Write the circumstances under which a firm is dissolved., 10. Write any four distinctions between dissolution of partnership and dissolution of firm., (C) Very Short Answer Type Questions, (1 Mark Questions with Answers), 1. What is meant by dissolution of a firm ?, [Ans. Dissolution of a firm means the dissolution of partnership between all the partners of a firm., So in case of dissolution of the firm, both the partnership and the partnership firm are dissolved.], 2. What is dissolution of partnership ?, [Ans. Dissolution of partnership refers to the change in the existing relations of the partners., The business of the firm, however, continues in a reconstituted form.], 3. State any one difference between dissolution of partnership and dissolution of, partnership firm., [Ans. The dissolution of the firm involves discontinuation of the partnership business whereas in, case of dissolution of partnership, the business continues.], , 457
Page 472 :
SBPD Pub li ca tions Accountancy (XII), 4. State any two circumstances under which partnership is deemed to have been dissolved., [Ans. (i) On the expiry of the period of partnership; (ii) On admission, retirement or death of a, partner.], 5. State any two circumstances under which a partnership firm is dissolved., [Ans. (i) When all partners agree to dissove the firm—Dissolution by Agreement. (ii) When all, the partners or one partner, becomes insolvent.], 6. What are the two important modes of dissolution of partnership firm ?, [Ans. (1) Dissolution by agreement, (2) Dissolution by Court.], 7. State any two grounds on which a Court can pass order for dissolution of the firm., [Ans. (i) When a partner becomes insane. (ii) When a partner is found guilty of misconduct.], 8. State any two problems which arise at the time of dissolution of the firm., [Ans. (1) Settlement of Accounts; (2) Payment of Firm's Debts and Private Debts.], 9. Which section of the Indian Partnership Act, 1932 deals with the settlement of accounts ?, [Ans. Section 48.], 10. Which section of the Indian Partnership Act, 1932 deals with the payment of firm's, debts and private debts ?, [Ans. Section 49], 11. Name the accounts which are opened in the firm's books in case of dissolution of the, partnership firm., (U.S.E.B., 2012), [Ans. (i) Realisation Account, (ii) Partner's Loan Account, (iii) Partners' Capital Accounts,, (iv) Bank or Cash Account.], 12. What is Realisation Account ?, [Ans. Realisation Account is a nominal account. It is prepared to find out profit or loss on, realisation of assets and payment of liabilities. The profit (or loss) on realisation is, transferred to Partners' Capital Accounts in their profit-sharing ratio.], 13. Give any two objects of preparing the Realisation Account in case of dissolution of a firm., [Ans. (1) To close the books of accounts of the firm i.e., various assets and liabilities., (2) To find out profit or loss on realisation of various assets and settlement of various, liabilities.], 14. Give any one point of difference between Revaluation Account and Realisation Account., [Ans. Revaluation Account is prepared when there is reconstitution of partnership, such as, admission, retirement or death of a partner, Realisation Account is prepared when there is, a dissolution of a partnership firm.], 15. What Journal entry would you pass for the dissolution expenses paid by X, a partner of, the firm ?, [Ans. Realisation A/c, Dr., To X's Capital A/c, (Being dissolution expenses paid by X)], , 16. There was an unrecorded asset of ` 10,000 which was taken over by A, a partner at, ` 6,000. What Journal entry would be passed on the dissolution of a firm ?, [Ans. A's Capital A/c, Dr., 6,000, To Realisation A/c, 6,000, (Being unrecorded asset taken over by A)], , 17. What Journal entry would be passed for the following transaction on the dissolution, of a firm after the assets and liabilities are transferred to the Realisation Account :, Y took over investment of the firm at ` 10,000 (Book value ` 12,000)., [Ans. Y's Capital A/c, Dr., 10,000, To Realisation A/c, 10,000, (Being investment taken over by Y)], , 18. Anubhav, a partner, is to bear realisation expenses for which he will get ` 2,000. The, actual expenses paid by Anubhav were ` 1,500. Pass Journal entry for the same., [Ans. Realisation A/c, Dr., 2,000, To Anubhav's Capital A/c, 2,000, (Being the realisation expenses paid to Anubhav)], , 458
Page 473 :
Dis so lu tion of Part ner ship Firm, 19. Ankur, one of the partners, agreed to take over the creditors of ` 25,000 for ` 22,000., Pass necessary Journal entry at the time of dissolution of the firm., [Ans. Realisation A/c, Dr., 22,000, To Ankur's Capital A/c, 22,000, (Being creditors taken over by Ankur)], , 20. State the provision of Indian Partnership Act, 1932 relating to treatment of firm's debts., [Ans. Firm's property is applied towards the payment of firm's debts. Then the surplus, if any, is, applied towards the payment of partner's private debts to the extent to which the, concerned partner is entitled to share in the surplus.], 21. State the provision of Indian Partnership Act, 1932 relating to the treatment of, private debts., [Ans. Partner's private property is applied first in payment of his private debts and the surplus,, if any, in payment of firm's debts if the firm's liabilities exceed the firm assets.], 22. At the time of dissolution of a firm the debtors were ` 60,000 in the Balance Sheet in, which ` 20,000 were Bad debts. Balance were realised at 5% discount. Pass a Journal, entry on realisation., [Ans., Bank A/c, Dr., 38,000, To Realisation A/c, 38,000, (Being debtors realised), , 23. On the dissolution of a firm 3/4th amount was realised from selling of machine worth, ` 16,000. Pass entry for realisation., (C.B.S.E., A.I., 2012), [Ans., Bank A/c, Dr., 12,000, To Realisation A/c, 12,000, (Machine realised 3/4th of ` 16,000), , 24. On dissolution of a firm out of proceeds received from the sale of assets who will be, paid first of all., [Ans. Outside liabilities will be paid first.], 25. What Journal entry is passed if a partner takes over an asset of the firm ?, [Ans. Partner's Capital A/c, Dr., To Realisation A/c, (Being asset taken over by partner ....)], 26. What Journal entry is passed if a partner takes over a liability of the firm ?, [Ans. Realisation A/c, Dr., To Partner's Capital A/c, (Being Partner’s Capital A/c credited)], , (D) Objective Type Questions, I. Select the correct alternative :, 1. On dissolution of a firm, Bank overdraft is transferred to :, (a) Cash Account, (b) Bank Account, (c) Realisation Account, (d) Partner's Capital Account., 2. On dissolution of a firm, Parnter's Loan Account is transferred to :, (a) Realisation Account, (b) Partner's Capital Account, (c) Partner's Current Account, (d) None of these., 3. Unrecorded assets when taken over by a partner are shown in :, (a) Debit side of Realisation Account, (b) Debit side of Bank Account, (c) Credit side of Realisation Account, (d) Credit side of Bank Account., 4. Unrecorded liabilities when paid are shown in :, (a) Debit side of Realisation Account, (b) Debit side of Bank Account, (c) Credit side of Realisation Account, (d) Credit side of Bank Account., 5. The accumulated profits and reserves are transferred to :, (a) Realisation Account, (b) Partners' Capital Accounts, (c) Bank Account, (d) None of these., [Ans. 1. (c), 2. (d), 3. (c), 4. (a), 5. (b).], , 459
Page 474 :
SBPD Pub li ca tions Accountancy (XII), II. State whether the following statements are ‘True’ or ‘False’ :, 1. At the time of dissolution of the firm, Revaluation Account is opened., 2. Dissolution expenses of a partnership firm are recorded in the debit side of Realisation Account., (N.C.E.R.T.), 3. Realisation Account is opened on dissolution of a firm., 4. Realisation Account is a Nominal Account., 5. Private assets of the partner can be used for the discharge of liabilities of the firm., 6. Dissolution of a partnership is different from dissolution of a firm., [Ans. 1. False, 2. True, 3. True, 4. True, 5. True, 6. True.], , PRACTICAL PROBLEMS, ❏ Journal Entries, 1. Journalise the following transactions regarding realisation expenses :, (a) Realisation expenses amounted to ` 2,500. (b) Realisation expenses amounting to ` 3,000 paid, by Ashok, one of the partners. (c) Amit, a partner, was appointed to realise the assets at a cost of, ` 4,000. The actual amount of realisation amounted to ` 3,000., (N.C.E.R.T), [Ans. Journal Entries], 2. What Journal entries will be recorded for the following transactions on the dissolution of a firm :, (a) Payment of unrecorded liabilities ` 3,200. (b) Stock worth ` 7,500 is taken by a partner Rohit., (c) Profit on realisation amounting to ` 18,000 is to be distributed between the partners Ashish and, Tarun in the ratio of 5 : 7. (d) An unrecorded asset realised ` 5,500., (N.C.E.R.T.), [Ans. J/E], 3. What Journal entries would you pass for the following transactions on the dissolution of a firm of, partners A and B :, (i) Dissolution expenses amounted to ` 500. (ii) Unrecorded asset realised ` 2,500. (iii) Stock worth, ` 2,000 already transferred to Realisation Account was taken over by a partner ‘A'. (iv) Creditors,, already transferred to Realisation Account, were paid ` 3,000. (v) Profit on Realisation ` 4,000 is to, be distributed between partners A and B in the ratio of 3 : 1., [Ans. Total of Journal ` 12,000], 4. What Journal entries would be passed for the following transactions on the dissolution of a firm,, after various assets (other than cash) and third party liabilities have been transferred to, Realisation Account :, (i) Bank Loan ` 12,000 is paid. (ii) Stock worth` 6,000 is taken over by partner B. (iii) Expenses on, dissolution amounted to ` 1,500 and were paid by the partner A. (iv) A typewriter completely, written off in the books of accounts was sold for ` 200. (v) Loss on realisation ` 14,000 was to be, distributed between A and B in the ratio of 5 : 2., [Ans. Total of Journal ` 33,700], 5. Give the necessary Journal entries to record the following unrecorded assets in the books of M and N :, (a) A partner, Mr. ‘M' agreed to take over the firm's goodwill (not recorded in the books of the firm), at a valuation of ` 50,000. (b) T, an old customer whose account for ` 2,000 was written off as bad in, the previous year, paid 50%. (c) A Joint Life Policy having a surrender value of ` 15,000 remain, unrecorded. (d) There was an old computer which had been written off completely in the books of, accounts. It was estimated to realise ` 5,000. It was taken over by N, a partner at the estimated price, less 40%. (e) M, a partner, undertook to pay Mrs. M's loan of ` 20,000., [Ans. Total of Journal ` 89,000], 6. Pass necessary Journal entries for the following transactions at the time of dissolution :, (a) Loan of ` 10,000 advanced by a partner to the firm was refunded. (b) X, a partner takes over an, unrecorded asset (typewriter) at ` 300. (c) Undistributed balance (debit) of P. & L. A/c ` 30,000. The, firm has three partners X, Y and Z. (d) The assets of the firm realised ` 1,25,000. (e) Y who, undertakes to carry out the dissolution proceedings is paid ` 2,000 for the same. (f) Creditors, were paid ` 28,000 in full settlement of their amount of ` 30,000., [Ans. Total of Journal ` 1,95,300], 7. Pass the necessary Journal entries for the following transactions on the dissolution of the firm of, P and Q after the various assets (other than cash) and outside liabilities have been transferred to, Realisation Account :, , 460
Page 475 :
Dis so lu tion of Part ner ship Firm, (i) Bank Loan ` 12,000 was paid. (ii) Stock worth ` 16,000 was taken over by partner Q., (iii) Partner P paid a creditor ` 4,000. (iv) An asset not appearing in the books of accounts, realised ` 1,200. (v) Expenses of realisation ` 2,000 were paid by partner Q. (vi) Profit on, realisation ` 36,000 was distributed between P and Q in 5 : 4 ratio., [Ans. Total of Journal ` 71,200.], (C.B.S.E., Delhi, 2011), ❏ Journal Entries, 8. Pass the necessary Journal entries for the following transactions on the dissolution of the firm of, X, Y and Z (who were sharing profits in the ratio of 2 : 2 : 1). All the assets (other than cash) and, external liabilities have been transferred to Realisation Account :, (a) Debtors were of ` 1,24,200. X takes over debtors amounted to ` 1,20,000 at ` 1,17,000 and the, remaining debtors were sold a debt collecting agency at 50% of the value., (b) Sundry assets were of ` 1,17,000. Y is to take over some sundry assets at ` 72,000 (being 10%, less than the book value). Z is to take over remaining sundry assets at 80% of the book value., (c) Z assumes the responsibility of discharge of Mrs. Z's loan of ` 11,500 together with accrued, interest of ` 2,300., [Ans. J/E.], [Hints : (i) Remaining debtors sold to a debt collecting agency for ` 2,100, (ii) Remaining assets, taken over by Z at ` 29,600.], ❏ Long Practical/Comprehensive Questions, 9. The following Balance Sheet was prepared on 31st March, 2019 :, Liabilities, Creditors, Reserve Fund, Capitals :, Bimal, Shyamal, , Amount, , Assets, , Amount, , `, , `, , 18,000, 22,000, , 15,000 Bank, 3,500 Stock, Debtors, Less : Provision, 40,000 Fixed Assets, 58,500, , `, , `, , 9,000, 500, , 12,000, 8,000, 8,500, 30,000, 58,500, , The partners decide to dissolve the firm as on the date of Balance Sheet., Assets realised as follows :, `, Stock, 6,500, Fixed Assets, 28,500, Debtors, 8,000, Expenses of Realisation, 1,100, Creditors were fully paid off., Bimal and Shyamal share profits in the ratio of 2 : 3. Make entries in the books of the firm to close, its books., [Ans. Realisation Loss ` 4,600 : Bimal—` 1,840, Shyamal—` 2,760, Final Payment : Bimal, ` 17,560, Shyamal ` 21,340.], ❏ Preparation of Realisation Account, 1 3, 1, 10. X, Y and Z were partners, sharing profits and losses in the ratio of , and respectively. On 31st, 2 8, 8, December, 2018, they agreed to dissolved their partnership firm when their position was as follows :, Liabilities, , Amount, , Assets, , `, , Reserve Fund, Loan from X, Creditors, Capitals :, X, , `, , 20,000, , 4,000 Freehold Property, 3,000 Machinery, `, 8,000 Book Debts, 16,000, Less : Bad Debts Reserve 1,000, Stock, , Amount, `, , 18,000, 12,000, 15,000, 13,000, , 461
Page 476 :
SBPD Pub li ca tions Accountancy (XII), Y, Z, , 15,000, 10,000, , Cash, , 2,000, , 45,000, 60,000, , 60,000, , The assets were realised as follows :, Freehold Property ` 22,000; Machinery ` 11,000; Book Debts 10% less; Stock ` 12,000 and, Goodwill ` 4,000. The sundry creditors were paid off at a discount of 2.5% and expenses on, realisation amounted to ` 500. Rent ` 300 was outstanding and had to be paid., Prepare Realisation Account., [Ans. Realisation Profit ` 4,800], 11A. M/s Ram & Brothers was dissolved on 31st March, 2019. On that date their assets and liabilities, are as follows :, Balance Sheet, (as on 31st March, 2019), Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, General Reserve, Capital A/cs :, Ram, Mohan, , `, , 30,000, 20,000, , `, , 20,000 Cash, 10,000 Debtors, Less : Provision for Bad, Debts, 50,000 Sundry Assets, Sohan's Capital A/c, 80,000, , `, , 10,000, , 30,000, 5,000, , 25,000, 30,000, 15,000, 80,000, , Other Informations : (i) Profit-sharing ratio is 5 : 3 : 2 (Ram : Mohan : Sohan). (ii) ` 8,000 were bad debts., (iii) Ram took 1/2 part of sundry assets for ` 10,000 and remaining assets were sold in cash for ` 8,000., Prepare Realisation Account., [Ans. Realisation Loss ` 15,000.], 11B. Anil and Sunil agree to dissolve partnership on 31st March, 2019, on which date their Balance, Sheet was as follows :, Liabilities, Sundry Creditors, Anil's Loan A/c, Capital A/cs :, Anil, Sunil, , Amount, `, , `, , 40,000, 20,000, , Assets, , 12,000 Cash, 16,000 Sundry Debtors, Stock, Plant, 60,000 Fixtures, Goodwill, 88,000, , Amount, `, , 2,000, 10,000, 40,000, 20,000, 8,000, 8,000, 88,000, , The partners share profits and losses in proportion to their capitals., The Sundry Debtors realised ` 8,400; Stock ` 36,000; Plant and Fixtures 20% less than the book, value and the Goodwill ` 12,000. The creditors were paid off at a discount of 5% and the cost of, dissolution amounted to ` 1,200., Prepare Realisation Account on dissolution of the firm., [Ans. Realisation Loss ` 7,800.], ❏ Journal Entries and Necessary Accounts, 12. A & B agreed to dissolve their business of partnership on 31st December, 2019 on which date their, Balance Sheet was as follows :, , 462
Page 477 :
Dis so lu tion of Part ner ship Firm, Liabilities, , Amount, , Assets, , `, , Creditors, A's Loan A/c, Capitals :, , 12,000 Cash, 16,000 Debtors, Stock, 40,000 Plant and Fixtures, 20,000 Goodwill, 88,000, , A, B, , Amount, `, , 2,000, 10,000, 40,000, 28,000, 8,000, 88,000, , The partners share profits and losses in the ratio of their capitals. The sundry debtors realised, ` 8,400; stock ` 36,000; plant & fixtures 20% less than the book value and the goodwill ` 12,000., The creditors were paid off at a discount of 5% and the cost of dissolution amounted to ` 1,200., Pass the necessary journal entries and open the Realisation Account and other accounts showing, the final disposal of cash balance., (U.S.E.B., 2019), [Ans. Revaluation A/c Loss ` 7,800. Final Payment : A ` 34,800, B ` 17,400, Cash A/c Total, ` 80,800], ❏ Preparation of Necessary Accounts, 13. A, B and C are partners in a firm sharing profits in the ratio of 2 : 1 : 1. Their Balance Sheet as on, 31st March, 2019 was as under :, Liabilities, , Amount, `, , Creditors, A's Capital, B's Capital, C's Capital, , 50,000, 80,000, 80,000, 60,000, , Assets, , Amount, , Goodwill, Land and Buildings, Plant and Machinery, Motor-car, , 30,000, 80,000, 56,000, 54,000, , Debtors, Cash, 2,70,000, , `, , 48,000, 2,000, 2,70,000, , The firm was dissolved on that date. The assets realised : Goodwill ` 20,000; Land and Buildings, ` 1,00,000; Plant and Machinery ` 50,000; Motor-car ` 28,000 and Debtors 50% of the book value., Realisation expenses were ` 2,000. Prepare Realisation Account, Capital Accounts of Partners, and Cash Account to close the books of the firm., [Ans. Loss on Realisation ` 48,000; Final Payment : A ` 56,000, B ` 68,000, C ` 48,000, Cash A/c, (Total) ` 2,24,000.], 14. P and Q are partners sharing profits and losses in the ratio of 3 : 2. Their Balance Sheet as on 30th, September, 2019 was as under :, Liabilities, Amount, Assets, Amount, `, , Creditors, General Reserve, Capitals :, P, Q, , `, , 80,000, 60,000, , 90,000 Fixed Assets, 20,000 Current Assets (including Cash, ` 20,000), 1,40,000, 2,50,000, , `, , 1,50,000, 1,00,000, , 2,50,000, , Partners decided to dissolve the firm on the above date., All the assets realised less than 20% of book value. Creditors were paid in full. Realisation expenses, amounted to ` 4,000. Prepare Realisation Account, Partners' Capital Accounts and Cash Account., [Ans. Realisation Loss ` 50,000; Final Payment : P ` 62,000, Q ` 48,000; Total of Cash Account, ` 2,04,000.], , 463
Page 478 :
SBPD Pub li ca tions Accountancy (XII), 15. Following is the Balance Sheet of A and B who share profits and losses equally :, Liabilities, , Amount, , Assets, , Amount, , `, , Capitals :, A, B, Creditors, A's Loan A/c, , `, , 10,000, 7,000, , `, , Machinery, Plant, 17,000 Debtors, 3,000 Bank, 4,000, 24,000, , 9,000, 10,000, 2,500, 2,500, 24,000, , They decided to dissolve the firm. Assets are realised as follows : Machinery 20% less than book value,, Plant 10% less than book value, Debtors ` 2,000. The creditors were paid off at a discount of 10%., Open necessary accounts for dissolution assuming the cost of liquidation amounted to ` 500., [Ans. Realisation Loss ` 3,500; Payment to Partners : A— ` 8,250, B— ` 5,250; Bank A/c Total, ` 20,700], (U.S.E.B., 2010), 16. Supriya and Monika are partners, who share profits in the ratio of 3 : 2. Following is the Balance, Sheet as on March 31, 2019 :, Balance Sheet of Supriya and Monika (as on 31st March, 2019), Liabilities, Amount, Assets, Amount, `, , Supriya's Capital, Monika's Capital, Sundry Creditors, Reserve Fund, , 32,500 Cash at Bank, 11,500 Stock, 48,000 Sundry Debtors, 13,500, Less : Provision for, Doubtful Debts, Fixed Assets, 1,05,500, , `, , `, , 21,500, 500, , 40,500, 7,500, 21,000, 36,500, 1,05,500, , The firm was dissolved on March 31, 2019. Close the books of the firm with the following information:, (i) Debtors realised at a discount of 5%. (ii) Stock realised at ` 7,000. (iii) Fixed assets realised at, ` 42,000. (iv) Realisation expenses ` 1,500. (v) Creditors are paid in full., Prepare necessary Ledger Accounts., (N.C.E.R.T.), [Ans. Realisation Profit ` 2,925; Supriya ` 1,755; Monika ` 1,170; Final Payment : Supriya, ` 42,355, Monika ` 18,070, Total of Bank A/c ` 1,09,925], ❏ Assets and Liabilities to be taken over by Partners, 17. A, B and C are partners sharing profits in the ratio of 2 : 2 : 1 respectively. On 31st December,, 2018, their Balance Sheet is as follows :, Liabilities, Creditors, Capitals :, A, B, C, , Amount, `, , `, , 50,000, 40,000, 30,000, , Assets, , 30,000 Cash, Debtors, Stock, Furniture, 1,20,000 Other Fixed Assets, 1,50,000, , Amount, `, , 10,000, 30,000, 40,000, 10,000, 60,000, 1,50,000, , The firm is dissolved on this date. A takes furniture at` 6,000. Debtors realise ` 25,000; Stock, ` 35,000 and other fixed assets ` 50,000. Creditors are paid ` 26,000 in full satisfaction. An, unrecorded investment of ` 2,000 is taken by B. Expenses of realisation amount to ` 1,000., Prepare Realisation A/c, Partners' Capital A/cs and Cash A/c., [Ans. Realisation A/c Loss ` 19,000; Final Payment to Partners : A` 36,400; B ` 30,400; C ` 26,200;, Total of Cash A/c ` 1,20,000], 18. A, B and C are partners carrying on business share profits and losses in the proportion of 4 : 3 : 2., Their Balance Sheet as on 31st March, 2019 was as under :, , 464
Page 479 :
Dis so lu tion of Part ner ship Firm, Liabilities, Capitals :, A, B, C, Creditors, , Amount, `, , `, , 40,000, 20,000, 10,000, , Assets, , Land and Building, Motor-car, Stock-in-trade, 70,000 Debtors, 40,000 Cash, 1,10,000, , Amount, `, , 55,000, 15,000, 20,000, 18,000, 2,000, 1,10,000, , They agreed to dissolve the partnership on that date. A agreed to take over stock and debtors at a, discount of 10%. B took over motor-car for ` 16,000. Land and building was sold for ` 75,000 and, expenses for sale amounted to ` 1,600. Creditors are settled at a discount of 1.5%. Show the, relevant ledger accounts., [Ans. Profit on Realisation ` 16,200; Payment to A : ` 13,000, B : ` 9,400, C : ` 13,600; Total of, Cash A/c ` 77,000], 19. A and B share profits in the ratio of 2 : 3. Following was their Balance Sheet as on 31.3.2019., Balance Sheet, Liabilities, Amount, Assets, Amount, `, `, Creditors, 18,000 Cash, `, 5,000, Cap i tals :, `, Debt ors, 40,000, A, 60,000, Pro vi sion, 2,000, 38,000, B, 90,000 1,50,000 Stock, 52,000, A’s Wife’s Loan, 32,000 Machinery, 40,000, Land and Build ing, 65,000, 2,00,000, 2,00,000, On the above date, partners decided to dissolve the firm. Assets realised as follows :, From Stock ` 45,000, from machinery 20% less than the book value, ` 35,000 from debtors,, ` 35,000 more than the book value of land and building. Creditors agreed to take ` 17,000. A took, the liability of paying wife’s loan at ` 33,000. Realisation expenses amounted to ` 1,500., Prepare Realisation Account, Partner’s Capital Accounts and Cash Account., [Ans. Realisation Profit ` 15,500; Final Payment : A ` 99,200, B : ` 99,300; Total ` 2,17,000], 20. P and Q were Partners in a firm sharing profits in the ratio of 3 : 2. On 31.3.2018 their Balance, Sheet was as follows :, Balance Sheet, Liabilities, Amount, Assets, Amount, `, `, Cap i tals :, `, Goodwill, 80,000, P, 80,000, Land and Building, 80,000, Q, 70,000 1,50,000 Stock, 60,000, Creditors, 50,000 Debtors, 40,000, Workmen Compensation Fund, 80,000 Bank, 20,000, 2,80,000, 2,80,000, The firm was dissolved on 1.4.2018 and the Assets and Liabilities were settled as follows :, (i) P agreed to take over Land and Building at ` 1,00,000 by paying cash. (ii) Stock was sold for, ` 50,000. (iii) Goodwill was found value less. (iv) Debtors realised ` 78,000. (v) Workmen, Compensation claim was ` 85,000. (vi) Creditors were paid in full., Prepare Realisation A/c, Partner’s Capital A/c and Bank A/c., [Ans. Loss on Realisation ` 37,000, Final Payment P ` 57,800, Q ` 55,200], ❏ Taken over of Firm's Assets, Liabilities, Unrecorded Assets and Unrecorded Liabilities by a, Partner, 21. S and W are partners in a firm sharing profits and losses in the ratio of 4 : 1. They decided to, dissolve partnership on 31.3.2019 on which date their Balance Sheet stood as follows :, , 465
Page 480 :
SBPD Pub li ca tions Accountancy (XII), Bal ance Sheet (as on 31.3.2019), Liabilities, Capital A/cs :, S, W, Bank Loan, Creditors, , `, , 80,000, 30,000, 10,000, 40,000, , Assets, Plant, Furniture, Debtors, Less : Provision, Trade Marks, Stock, Cash, Advertisement Suspense, , 1,60,000, , `, `, , 45,000, 2,000, , 60,000, 2,000, 43,000, 6,000, 30,000, 14,000, 5,000, 1,60,000, , The realisation showed the following results : (a) Debtors realised 90% of the book value;, (b) Trade marks ` 4,000; (c) The goodwill was sold for ` 5,000; (d) Plant and stock were taken over, by S for ` 72,000 and ` 18,000 respectively; (e) An unrecorded asset estimated at` 3,000 was sold for, ` 1,000. Discounts amounting to ` 400 were allowed by creditors while paying their claims. The, expense for realisation amounted to ` 2,000. Furniture is assumed to be valueless., Prepare the necessary accounts. The settlement was made on April 1, 2017., [Ans. Realisation Loss : S— ` 1,680; W—` 420; Final Payment : W—` 28,580; S to bring ` 15,680;, Total of Cash A/c ` 80,180.], Hint : Advertisement Suspense A/c will not be transferred to Realisation A/c as it has been, treated as deferred revenue expenditure. It will be shared by S and W and will appear in, their Capital A/cs., ❏ Commission on Realisation of Assets and Balance of P/L A/c, 22. A, B and C are in partnership. They decided to dissolve their firm on 31.12.2018 and B was, appointed to realise all assets. B was to receive 10% commission on the amount realised from, plant and machinery and debtors. Their position on the date of dissolution was as follows :, Bal ance Sheet (as at 31.12.2018), Liabilities, Capitals :, A, B, Profit and Loss A/c, Creditors, Bills Payable, , Amount, `, , `, , 20,000, 12,000, , Assets, , Plant and Machinery, Computer, 32,000 Debtors, 3,000 C's Capital, 25,380 Bank, 4,000, 63,380, , Amount, `, , 36,450, 8,420, 16,650, 1,280, 580, 63,380, , The firm was dissolved on the above date and the following transactions took place :, Debtors realised ` 15,800, Machinery was sold for ` 46,000, Goodwill sold for ` 2,500, Realisation, expenses ` 540., ` 16,000 of the creditors accepted computer at 20% less than the book value and ` 200 in full, settlement of their claims; remaining creditors were paid ` 200 less than the book value., During the course of dissolution, bills payable were settled at ` 5,200., Prepare Realisation Account Capital Accounts and Bank Account., [Ans. Realisation A/c : Profit ` 10,860, Final Payment : A ` 24,620, B ` 21,800, C ` 3,340, Bank, Account Total ` 64,880.], ❏ Preparation of Partners’ Capital and Current Accounts, 23. A, B and C are in partnership sharing profits and losses equally. On 31st March, 2019 their, Balance Sheet was as follows :, , 466
Page 481 :
Dis so lu tion of Part ner ship Firm, Liabilities, Creditors, B's Loan, Bills Payable, Reserve Fund, A's Current A/c, B's Current A/c, Capitals :, A, B, C, , Assets, , `, , `, , 20,000, 10,000, 10,000, , 13,000, 2,500, 500, 3,000, 1,500, 1,500, , Cash, Debtors, Stock, Furniture, Machinery, C's Current A/c, Goodwill, , 40,000, 62,000, , `, , 1,500, 12,500, 29,000, 1,000, 5,000, 3,000, 10,000, , 62,000, , On the date they dissolve their partnership, the following agreement was made among the partners :, (i) A agrees to pay creditors; (ii) B takes over the stock at an agreed valuation of ` 25,000; (iii) C, takes over goodwill at ` 15,000; (iv) Bills payable were cleared off ` 10 being allowed for discount;, (v) The remaining assets were auctioned and realised ` 15,000. Expenses of realisation amounted, to ` 120; (vi) B's loan was also paid off., Show the Realisation Account, Bank Account, Current Accounts and the Partners' Capital Accounts., [Ans. Loss on Realisation : ` 2,610; A to withdraw ` 34,630, B and C bring ` 13,370 and ` 7,870, respectively; Total of Cash A/c ` 37,740.], 24. Nayana and Arushi were partners sharing profits equally. Their Balance Sheet as on March 31,, 2019 was as follows :, `, `, Capital and Liabilities, Assets and Properties, Bank Overdraft, 5,000 Bank, 30,000, Creditors, 20,000 Debtors, 25,000, Capitals Accounts :, `, Stock, 35,000, Furniture, 40,000, Nayna, 1,00,000, 60,000, Arushi, 50,000 1,50,000 Machinery, Arushi’s Current A/c, 10,000 Nayna’s Current Account, 10,000, Workmen’s Compensation Fund, 15,000, 2,00,000, 2,00,000, The firm was dissolved on the above date :, (1) Nayana took over 50% of the stock at 10% less on its book value and the remaining stock was, sold at a gain of 15%. Furniture and Machinery realised for ` 30,000 and ` 50,000 respectively., (2) There was an unrecorded investment which was sold for ` 25,000. (3) Debtors realised for, ` 31,500 (with interest) and ` 1,200 were recovered for bad debts written-off last year. (4) There, was an outstanding bill for repairs which had to be paid for ` 2,000., Prepare necessary ledger accounts to close the books of the firm., [Ans. Profit on Realisation : ` 11,575; Current Account Balance : Nayana (Dr.) ` 12,462.5,, Arushi (Cr.) ` 23,286.5; Final Payment : Nayana ` 87,537.5, Arushi ` 73,287.5; Bank A/c, (Total) ` 1,87,825.], ❏ Joint Life Policy and Debit Balance of Profits & Loss Accounts, 25. Ravi and Mohan were partners in a firm sharing profits in the ratio of 3 : 2. On 1.3.2019 the firm, was dissolved. On that date the Balance Sheet of the firm was as follows :, Liabilities, Amount, Assets, Amount, Loan, Creditors, Capitals :, Ravi, Mohan, , `, , `, , 6,00,000, 2,00,000, , 1,40,000 Cash, 2,60,000 Building, Stock, Profit & Loss A/c, 8,00,000, 12,00,000, , `, , 20,000, 10,00,000, 80,000, 1,00,000, 12,00,000, , 467
Page 482 :
SBPD Pub li ca tions Accountancy (XII), Building realised ` 4,50,000; Stock ` 2,00,000. ` 2,40,000 were paid to the creditors in full, settlement of their account. The firm has a joint life policy of ` 2,00,000 which was surrendered for, ` 90,000. The annual premium paid on the joint life policy was debited to the Profit and Loss Account., Prepare Realisation Account, Cash Account and Partners' Capital Accounts., [Ans. Realisation Loss ` 4,10,000; Final Payment : Ravi ` 3,48,000, Mohan` 32,000; Total of Cash, A/c ` 7,60,000.], Note : Surrender Value of J.L.P. to be distributed in the ratio of 3 : 2 between the partners., 26. J, S and R were in partnership sharing profits and losses in the ratio of 3 : 2 : 1. Their Balance, Sheet as on 31st March, 2019 was as follows :, Liabilities, Capital A/cs :, J, S, R, Reserve Fund, Employees' Provident Fund, Depreciation Reserve, Creditors, , Amount, `, , 24,000, 17,200, 20,800, 6,000, 6,000, 10,000, 22,000, 1,06,000, , Assets, Buildings, Plant, Stock, Joint Life Policy, Debtors, Accrued Interest, Cash, , Amount, `, , 20,000, 44,000, 12,000, 12,400, 10,000, 2,000, 5,600, 1,06,000, , It was agreed to dissolve the firm and the terms of the dissolution were :, (i) J took over Buildings at book value and agreed to pay off creditors. (ii) Accrued interest was not, collected whereas there was a contingent liability of ` 1,200 which was met. (iii) Other assets, realised : Plant : ` 50,000, Stock :` 10,000, Debtors : ` 9,200. (iv) Realisation Expenses ` 1,200., Prepare Realisation Account, Capital Accounts and Cash Account., [Ans. Loss on Realisation ` 3,600, Refund of Capitals, J ` 27,200, S ` 18,000 and R ` 21,200,, Total of Cash A/c ` 74,800.], ❏ Debit Balance of a Partner and J.L.P./J.L.P. Fund Account, 27. A, B and C who shared profits in the ratio of 3 : 2 : 1 agreed upon the dissolution of their, partnership on 31st December, 2018, on which date their Balance Sheet was as under :, Liabilities, Capital A/cs :, A, B, Mrs. A's Loan, Creditors, Joint Life Policy Fund, Investment Fluctuation Fund, , Amount, `, , 50,000, 10,000, 8,000, 20,500, 14,000, 6,000, 1,08,500, , Assets, Machinery, Stock, Investments, Joint Life Policy, Debtors, Cash at Bank, C's Capital A/c, , Amount, `, , 40,000, 8,000, 20,000, 14,000, 9,000, 6,000, 11,500, 1,08,500, , Following transactions took place :, (i) The Joint Life Policy was surrendered for ` 15,000. (ii) The investments were taken over by A, for ` 17,500. He also agreed to discharge his wife's loan. (iii) B took over the stock at ` 7,500 and, Debtors amounting to ` 5,000 at ` 4,000. (iv) Machinery realised ` 50,000 and the remaining Debtors, realised 50% of the book value. (v) The expenses of realisation amounted to ` 1,000. (vi) Investments, worth ` 3,000 were not recorded in the books and realised at the same price., Prepare necessary Accounts to close the books of the firm., [Ans. Realisation A/c Profit ` 21,000, Final Payment A : ` 54,000, B : ` 7,500, C to bring ` 7,000.], ❏ Use or Transfer of Assets to Settle Liabilities, 28. Record necessary Journal entries on the dissolution of a firm in the following cases :, (a) Creditors worth ` 85,000 accepted ` 40,000 as cash and investment worth ` 43,000 in full, settlement of their claim. (b) Creditors were ` 16,000. They accepted machinery valued at ` 18,000 in, , 468
Page 483 :
Dis so lu tion of Part ner ship Firm, settlement of their claim. (c) Creditors were ` 90,000. They accepted building valued ` 1,20,000 and, paid cash to the firm ` 30,000., (N.C.E.R.T.), [Ans. J/E], 29. Sanjay and Sameer were partners sharing profits in the ratio of 2 : 3. Following were the Balance, Sheet as on 31.3.2019 :, Balance Sheet of Sanjay and Sameer (as on 31.3.2019), Liabilities, , Amount, , Assets, , `, , Capitals :, `, Sanjay, 2,00,000, Sameer, 3,00,000, Creditors, Workmen Compensation Fund, , Amount, `, , Land and Building, Stock, 5,00,000 Debtors, 1,05,000 Bank, 1,00,000, , 3,00,000, 1,00,000, 1,50,000, 1,55,000, , 7,05,000, , 7,05,000, , The firm was dissolved on 1.4.2019 and the assets and liabilities were settled as follows :, (i) Sanjay agreed to take over land and building at ` 3,50,000 by paying cash. (ii) Stock was sold, for ` 90,000. (iii) Creditors accepted debtors in full settlement of their claim., Prepare necessary Journal entries for dissolution of the firm., (C.B.S.E., A.I., 2012), [Ans. J/E], Hint. : Realisation Loss ` 5,000, Final Payment : Sanjay ` 2,38,000, Sameer ` 3,57,000., ❏ When Balance Sheet is Not Given, 30. Ganesh, Vishnu and Mahesh are partners, sharing profits and losses in proportion to their, capitals, which on 30th June, stood at ` 6,000, ` 4,000 and ` 2,000 respectively. The firm's, liabilities on that date amounted to ` 6,000. In addition Mahesh had loaned ` 1,200 to the firm., They dissolved the partnership on 30th June. Expenses of dissolution amounted to ` 1,200 and, the assets realised as ` 28,800., Close the books of the firm., [Ans. Profit on Realisation ` 8,400; Payment : Ganesh ` 10,200; Vishnu ` 6,800, Mahesh ` 3,400,, Total of Cash A/c ` 28,800.], Hint : Book Value of Sundry Assets ` 19,200., 31. M and N were partners sharing profits in the ratio of 3 : 2. On the date of dissolution their capitals, were—M : ` 7,650; N : ` 4,300. The creditors amounted to ` 27,500. The balance of cash was ` 760., The assets realised ` 25,430, the expenses on dissolution were ` 1,540. All partners were solvent., Close the books of the firm, showing the Realisation, Capital and Cash Accounts (show the, workings clearly)., [Ans. Book Value of Assets other than Cash ` 38,690; Loss on Realisation ` 14,800, Cash brought, in by M : ` 1,230 and N : ` 1,620; Total of Cash Account ` 29,040.], 32. The partnership between A and B was dissolved on March 31, 2019. Their capitals on that date, were ` 1,70,000 and ` 30,000 respectively. ` 1,00,000 was owed by the firm to A, and B owed to the, firm ` 20,000. Creditors on that date were ` 2,00,000. The assets realised ` 4,50,000 exclusive of, what was owed by B. Find the profit or loss on realisation., [Ans. Realisation Loss ` 30,000], Hint : Sundry Assets on 31.3.2019 ` 4,80,000., 33. B and C were partners in a firm sharing profits in 3 : 1 ratio. On 1.3.2019 their firm was dissolved., On that date B's capital was ` 1,20,000 and C's capital was ` 90,000. Creditors on that date were, ` 40,000 and there was a balance of ` 68,000 in General Reserve. Cash balance was ` 10,000. Sundry, assets realised ` 6,00,000 and expenses on dissolution were ` 15,000., Prepare Realisation Account, Cash Account and Partners' Capital Accounts., [Ans. Realisation Profit ` 2,77,000. Final Payment : B ` 3,78,750, C ` 1,76,250, Total of, Cash Account ` 6,10,000.], , 469
Page 484 :
SBPD Pub li ca tions Accountancy (XII), ❏ Miscellaneous and Boards' Questions, 34. A, B and C are partners sharing profits and losses equally. They dissolved the firm on 30th, December, 2018 on which date their positions were as under :, Balance Sheet (as on 30th December, 2018), Liabilities, Amount, Assets, Amount, Creditors, Capital A/cs :, A, B, C, , `, , `, , 30,000, 30,000, 30,000, , 60,000 Fixed Assets, Current Assets, Cash at Bank, 90,000, 1,50,000, , `, , 1,00,000, 40,000, 10,000, 1,50,000, , All the assets realised less than 10% of book value. Creditors were paid in full. Expenses of, realisation amounted to ` 500. Prepare Realisation Account, Partners' Capital Accounts and, Cash or Bank Account., (U.S.E.B., 2015), [Ans. Realisation Loss ` 14,500; Final Payment : A ` 25,167; B ` 25,167; C ` 25,166, Bank A/c, Total ` 1,36,000.], 35. Shilpa, Meena and Nanda decided to dissolve their partnership on March, 31, 2019. Their profit, sharing ratio was 3 : 2 : 1 and their Balance Sheet was as under :, Liabilities, Capital A/cs :, Shilpa, Meena, Bank Loan, Creditors, Provision for Doubtful Debts, General Reserve, , Amount, `, , 80,000, 40,000, 20,000, 37,000, 1,200, 12,000, 1,90,200, , Assets, Land, Stock, Debtors, Nanda’s Capital, Cash, , Amount, `, , 81,000, 56,760, 18,600, 23,000, 10,840, , 1,90,200, , The stock of value of ` 41,660 are taken over by Shilpa for ` 35,000 and she agreed to discharge, Bank loan. The remaining stock was sold at ` 14,000 and debtors amounting to ` 10,000 realised, ` 8,000. Land is sold for ` 1,10,000. The remaining debtors realised 50% at their book value. Cost, of realisation amounted to ` 1,200. There was a typewriter not recorded in the books worth, ` 6,000 which were taken over by one of the creditors at this value. Prepare necessary Ledger, Accounts., (N.C.E.R.T.), [Ans. Profit on Realisation ` 20,940; Final Payment to Shilpa ` 81,470, Meena ` 50,980 and Cash, received from Nanda ` 17,510, Total of Cash Account ` 1,64,650.], 36. Shanti and Satya were partners in a firm sharing profits in the ratio of 4 : 1. On 31st March, 2019, their Balance Sheet was as follows :, Bal ance Sheet of Shanti and Satya (as on 31st March, 2019), Liabilities, Amount, Assets, Amount, Creditors, Workmen Compensation Fund, Satya's Current A/c, Capitals :, `, Shanti, 2,00,000, Satya, 1,00,000, , 470, , `, , 45,000 Bank, 40,000 Debtors, 65,000 Stock, Furniture, Machinery, 3,00,000 Shanti's Current A/c, 4,50,000, , `, , 55,000, 60,000, 85,000, 1,00,000, 1,30,000, 20,000, 4,50,000
Page 485 :
Dis so lu tion of Part ner ship Firm, On the above date, the firm was dissolved., (1) Shanti took over 40% of the stock at 10% less than its book value and the remaining stock was, sold for ` 40,000. Furniture realised ` 80,000. (2) An unrecorded investment was sold for` 20,000., Machinery was sold at a loss of ` 60,000. (3) Debtors realised ` 55,000. (4) There was an, outstanding bill for repairs for which ` 19,000 were paid., Prepare Realisation Account., (C.B.S.E., A.I., 2014), [Ans. Realisation Loss ` 98,400.], 37. The following is the Balance Sheet of a firm which was dissolved on 31st Dec., 2018 :, Liabilities, , Amount, , Assets, , Amount, , Fixed Assets, Goodwill, Bank, Other Current Assets, , 5,00,000, 15,000, 10,000, 3,75,000, , `, , Trade Creditors, N's Loan, L's Capital, M's Capital, N's (Minor) Capital, , 5,00,000, 1,00,000, 1,50,000, 1,00,000, 50,000, 9,00,000, , `, , 9,00,000, , It was decided that L shall be incharge of realisation. He shall be paid a remuneration of 5% on, the amount distributed to the partners towards their contributions other than loans. Assets, realised as under :, Fixed Assets ` 6,25,000, Other Current Assets` 2,70,000; Realisation Expenses amounted to, ` 11,000. The firm is solvent. The profit-sharing ratio was as under : In case of Profit 2 : 2 : 1, In, case of Loss 1 : 1 : 0 respectively., Prepare Realisation A/c, Bank A/c and Partners' Capital A/cs., [Ans. Realisation A/c : Loss ` 20,000, Final Payment : L ` 1,54,000, M ` 90,000 and N ` 50,000,, Bank A/c Total ` 9,05,000.], Hint : L’s remuneration ` 14,000., 38. M, N and O were in partnership sharing Profit in the proportion of 3 : 1 : 1 respectively. They, agreed to dissolve their partnership on 31st March, 2018, when their Balance Sheet shows the, following position :, Bal ance Sheet (as on 31st March, 2018), Liabilities, , Amount, `, , Creditors, Less : Re serve for, Dis count, In vest ment Fund, Cap i tals :, M, N, O, , 10,000, 400, , 40,000, 20,000, 20,000, , Assets, , `, , Building, Plant & Ma chin ery, 9,600 Furniture, `, 400 Debt ors, 12,000, Less : Prov. for Doubtful, Debts, 2,000, 10,000, Less : Prov. for Dis count 1,000, 80,000 Investment, Cash at Bank, 90,000, , Amount, `, , 41,000, 20,000, 6,000, , 9,000, 4,000, 10,000, 90,000, , The following conditions of dissolution were agreed upon :, (i) Build ing were sold for` 40,000 and Ma chin ery for ` 15,000. (ii) M took over fur ni ture at ` 5,000, and in vest ment at ` 3,000. (iii) Stock was taken over by N at ` 8,000. (iv) O took over debt ors at, ` 8,000. (v) ` 8,000 were paid over to cred i tors in full set tle ment. (vi) ` 800 were paid as cost of, Reali sa tion, out of which ` 300 were paid by M from his pri vate sources., , 471
Page 486 :
SBPD Pub li ca tions Accountancy (XII), Close the Books of the Firm by preparing necessary ledger accounts., [Ans. Realisation Profit ` 200; Total Bank A/c ` 65,000; Capital A/c : M ` 32,420, N ` 12,040,, O ` 12,040.], 39. Gaurav, Saurabh and Vaibhav were partners in a firm sharing profits and losses in the ratio of, 2 : 2 : 1. They decided to dissolve the firm on 31st March, 2018. After transferring sundry assets, (other than cash in hand and cash at Bank) and third party liabilities to realisation account, the, assets were realized and liabilities were paid off as follows :, (i) A machinery with a book value of ` 6,00,000 was taken over by Gaurav at 50% and stock, worth ` 5,000 was taken over by a creditor of ` 9,000 in full settlement of his claim., (ii) Land and building (book value ` 3,00,000) was sold for ` 4,00,000 through a broker who, charged 2% commission., (iii) The remaining creditors were paid ` 76,000 in full settlement of their claim and the, remaining assets were taken over by Vaibhav for ` 17,000., (iv) Bank loan of ` 3,00,000 was paid alongwith interest of ` 21,000., Pass necessary journal entries for the above transactions in the books of the firm., [Ans. J/E], , l, , 472
Page 487 :
Part A : Company Accounts, , 1, , Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 1.1 Meaning of a Company, , 2, , 1.2 Essential Features of a Company, , 2, , 1.3 Nature of Company, , 2, , 1.4 Types (or Kinds) of Companies, , 2, , 1.5 Important Documents of a Company, , 6, , ❑ Useful Questions, , 8, , 1
Page 488 :
SBPD Publications Accountancy (XII), , 1.1 Meaning of a Company, A company is a voluntary association of persons formed for some common purpose, having a capital divided into transferable shares. It is created by law and effected by law. A, company may be defined as an artificial person created by law, having a perpetual, succession and a common seal., In the words of L. H. Haney, ‘‘A company is an artificial person created by law having a, separate entity with a perpetual succession and a common seal. It is a voluntary, association of individuals for profits, having a capital divided into transferable shares,, ownership of which is the condition of membership.”, As per Section 2(20) of Companies Act, 2013, A company means a company, incorporated or registered under the Companies Act, 2013 or under any other Previous, Companies Act., According to Chief Justice Marshall, “A company is a person, artificial, invisible,, intangible and existing only in the eyes of law, being a mere creation of law, it possesses, only those properties which the charter of its creation confers upon it, either expressly or, as incidental to its very existence.”, , 1.2 Essential Features of a Company, Following are the essential features (characteristics) of a company :, 1. Association of Persons : A company is an association of persons, usually for profit., 2. Artificial Person : It is an artificial person created by law., 3. Separate Legal Entity : It has a separate legal entity from its members. So it can, sue and can be sued in its own name. It can own or dispose of property in its own name., 4. Limited Liability : It has limited liability. Liability of members is limited to the, extent of the face value of shares held by them., 5. Perpetual Succession : A company, being an artificial person never dies. It has, continuous existence. It is a creation of law. So, its existence can be terminated only by law., It is not affected by death of its members., 6. Common Seal : It has a common seal which acts as official signature of the, company. Any document without common seal of the company is not binding on the, company., 7. Transferability of Shares : The capital of a company is divided into shares. The, shares of a company are freely transferable except in case of a private company., 8. Separation of Ownership and Management : In companies there is a divorce, between ownership and management. It is owned by members (i.e., shareholders) but it is, managed by the Board of Directors who are elected by shareholders. Members of a, company can not directly participate in management of the business of the company., , 1.3 Nature of Company, A company is an organisation created by law having separate entity with a perpetual, succession, limited liability and common seal. Therefore, this organisation is different, from sole trading partnership business., , 1.4 Types (or Kinds) of Companies, , (Not in Syllabus), , As per Companies Act, 2013, Companies may be classified as ahead :, , 2
Page 489 :
Company : General Introduction, Types of Company, 1. Company Limited, by Shares, Sec. 2(22), , 2. Company Limited, by Guarantee, Sec. 2(21), , 3. Unlimited Company, Sec. 2(92), , (i), Private Company, [Sec. 2(68)], (ii), Public Company, [Sec. 2(71)], (iii), One Person Company (O.P.C.), [Section 2(62)], A brief discussion of every type of company is given below :, 1. Company Limited by Shares, ‘‘Company Limited by Shares means a company having the liability of its members, limited by the memorandum to the amount, if any, unpaid on the shares respectively held, by them.’’ Hence, a member is liable to pay only the face value or the nominal value of the, shares held by him. If the shares are fully paid-up, no further liability rests on him. If the, shares are not fully paid-up, the liability of members is limited to the amount remaining, unpaid. This is most common type of companies. The great majority of companies, now-a-days are of this type., [Section 2(22)], Company Limited by shares is of three types, namely., (i) Private Company, (ii) Public Company, and (iii) One-person Company., (i) Private Company : A ‘Private Company’ means a company which has minimum, paid-up capital as may be prescribed, and which by its Articles :, (a) restricts the right to transfer its shares;, (b) except in case of one person company, limits the number of its members to two, hundred : Provided that where two or more persons hold one or more shares in company, jointy, they shall for the purposes of this clause, be treated as a single member., (c) prohibits any invitation to the public to subscribe for any shares in, or debentures, of, the company., [Sec. 2(68)], (d) It will have 2 or more persons which may ectend to 200., (e) It will have last words ‘‘Private Limited’’., (ii) Public Company : A Public Company means a company which, (a) is not a private company,, (b) has a minimum paid-up share capital as may be prescribed : Provided that a, company which is a subsidiary of a company, not being a private company, even where, such subsidiary company continues to be a private company in its Articles shall be deemed, to be a Public Company., [Sec. 2(71)], ❂ Will have 7 or more members, ❂ Name of company with the last word ‘‘Limited Company''., A public company may be either a listed company or an unlisted company., Listed Company : A listed company is that public company whose securities are, listed in any recognised stock exchange of India. This means that its securities (shares, and debentures) are traded in the stock exchanges., [Sec. 2(52)], Unlisted Company : An unlisted company is that public company whose, securities are not listed in any recognised stock exchange in India. Thus, the shares or, other securities are not traded in the stock exchanges., A public company may consist of any number of persons (members) but not less than, seven. It can offer shares to the public for subscription. Its shares are freely transferable., The name of every public limited company must end with the word ‘Limited’ (or Ltd.)., , 3
Page 490 :
SBPD Publications Accountancy (XII), (iii) One Person Company (OPC) : ‘‘One Person Company means a company which, has only one person as a member (shareholders)’’., [Sec. 2(62)], It is a company incorporated as a private company which has only one member., The words ‘One Person Company’ shall be mentioned in brackets below the name of, such company, whenever its name is printed, affixed or engraved., [Sec. 12(3)], Main Features of OPC : As per Rule 3 of the Companies (Incorporation) Rules of, 2014, following are the main features of OPC :, (i) Paid-up Capital : There is no statutory minimum limit of paid-up share capital, for OPC, but threshold limit ` 50 lakhs., (ii) Number of Directors : Atleast 1 and maximum 15., (iii) Member : Only a natural person, being an Indian citizen and resident in India, can form one-person company or can be nominee for the sole member of OPC., (iv) Provisions : All provisions applicable on private company shall also apply on, OPC., (v) It cannot carryout non-banking financial investment activities including, investment in securities of any body corporate., (vi) Its average annual turnover should not exceed ` 2 crores., Formation of One-Person Company [Rule 3], Only a natural person who is an Indian citizen and resident in India :, — shall be eligible to incorporate a One-person Company;, — shall be a nominee for the sole member of a One-person Company., ❂ The term ‘‘resident in India’’ means a person who has stayed in India for a, period of not less than 182 days immediately preceding one calender year., 2. Company Limited by Guarantee, ‘‘Company Limited by Guarantee means company having the liability of its members, limited by the memorandum to such amount as the members may respectively undertake, to contribute to the assets of the company in the event of its being wound-up. The members, of a company limited by guarantee have limited liability. Here the liability of members is, limited by the Memorandum to such amount which they undertake to pay in the event of, the company's winding-up. In fact, companies limited by guarantee are formed for the, promotion of art, science, culture, religion, sports, literature, or for any other similar, purpose., [Section 2(21)], 3. Unlimited Company, ‘‘Unlimited Company’’ means a company not having any limit on liability of its, members. An unlimited company is very much like a partnership firm. This is a company, not having any limit on liability of its members. Hence, members of this type of company, have unlimited liability (like partners). Such companies are now extremely rare., [Section 2(92)], , 4
Page 491 :
Company : General Introduction, On the basis of Ownership, On the basis of ownership companies may be classified into the following two, categories :, 1. Government Company : A Government company is a company in which at least, 51% of the paid-up share capital is held by the Central Government or by any State, Government or Governments or jointly by the Central Government and one or more State, Governments., [Sec. 2(45)], 2. Non-Government Company : The companies which are not Government, companies are called non-government companies. All the companies (whether public, limited company or private limited company) working in the private sector are nongovernment companies., On the basis of Nationality, On the basis of nationality companies may be divided into two categories :, 1. Indian Companies, 2. Foreign Companies., 1. Indian Companies : Those companies which have been incorporated in India, under the Companies Act are Indian companies., Indian companies may carry on their business outside India and may have foreigners, as their shareholders., 2. Foreign Companies : The companies which have been incorporated outside India, but carry on business in India are called foreign companies., On the basis of Control, On the basis of control companies may be divided into two categories :, 1. Holding Company, 2. Subsidiary Company., 1. Holding Company : According to Section 2(46) of the Companies Act, 2013, ‘‘holding company’’ in relation to one or more other companies, means a company of which, such companies are subsidiary companies., A company is said to be a holding company if it holds more than 50% (say 51% or more), of the noting power of some other company, or has controlling voice in the management of, that company., 2. Subsidiary Company : ‘‘Subsidiary Company’’ or ‘‘subsidiary’’ means a company, in which the holding company :, (i) Controls the composition of the Board of Directors; or, (ii) Exercises or controls more than one-half of the noting power either at its own, or together with or more of its subsidiary companies., [Sec. 2(87)], On the basis of Size, 1. Small Company : According to the Companies Act, 2013 ‘‘small company’’ means a, company, other than a public company :, (i) paid-up capital of which does not-exceed 50 lakh rupees or such higher, amount as may be prescribed which shall not be more than 10 crore rupees,, or, (ii) turnover of which as per its last profit and loss account does not exceed two, crore rupees or such higher amount as may be prescribed which shall not be, more than twenty crore rupees., Provided that nothing in this clause shall apply to :, (A) a holding company or subsidiary company;, (B) a company registered under section 8; or, (C) a company or body corporate governed by any special Act., [Sec. 2(85)], 2. Large Company : A Large Company is one which is not a small company as, defined section 2(85) of the Companies Act., , 5
Page 492 :
SBPD Publications Accountancy (XII), On the basis of Formation, 1. Registered or Incorporated Company : A registered company is one which is, registered in accordance with the provisions of the Companies Act, 2013 or was registered, under any of the previous Companies Act. In other words it also includes existing, companies., A registered Company may either be (a) private limited company or (b) public limited, company., 2. Statutory Company : A company which is established under a specific Act of the, Legislature or Parliament is called a statutory company. The special Act by which a, company is created states the objectives and powers of such company. Examples of, statutory companies : The Reserve Bank of India, Industrial Finance Corporation of, India, Life Insurance Corporation of India, Damodar Valley Corporation, etc., 1.4.1 Difference between Private Company and Public Company, Basis of Difference, 1. Number of, Members, , Private Company, The Minimum number of members, is 2, and the maximum number is, 200 (exclusive of past and present, employees), 2. Invitation to Public It cannot invite public for subscribing its shares and debentures., 3. Transfer of Shares Transfer of shares is restricted in, private company., 4. Allotment of Shares Shares can be allotted after incorporation, 5. Articles of, Association, , Preparation as Articles is mandatory for private company, , 6. Number of, It must have 2 Directors but not, Directors, more than 15., 7. Issue of Prospectus A private Company is not required, to issue prospectus., 8. Name, 9. Public Deposits, , The word private limited' must be, used after its name., It cannot invite and accept deposits, from public., , Public Company, The minimum number of members, is 7 and their is no limit to maximum number. However, it is limited, to the number of shares issued., It can invite the public for subscribing its shares and debentures, There is no restriction on the transfer of shares can be freely transferred., Shares can be allotted only when, the minimium subscription has, been received., Preparation of Articles is not mandatory. Table ‘F’ given in Schedule I, of the Companies Act, 2013 may be, adopted,, It must have 3 Directors but not, more than 15., A public company is required to, issue prospectus or statement in, lieu of prospectus., The word ‘Limited’ is used as a part, of the name., It can invite and accept deposits, from public., , 1.5 Important Documents of a Company, The following are the important documents of a company :, 1. Memorandum of Association, 2. Articles of Association, 3. Prospectus., ❏ 1.5.1 Memorandum of Association, The Memorandum of Association is the fundamental document of a company. It, defines the company's powers and provides the framework within which it has to operate., It lays down the basic condition on which the company is incorporated. It defines the, relationship of the company with the outside world. It is divided into six clauses (including, capital clause), viz., (i) Name clause, (ii) Situation clause, (iii) Object clause, (iv) Liability, clause, (v) Capital clause, (vi) Association clause., , 6
Page 493 :
Company : General Introduction, This document should be signed by at least seven persons in case of public company, and by two persons in case of private company., ‘‘Memorandum’’ means the Memorandum of Association of a company as originally, framed or altered from time to time is pursuance of any previous company law or this Act., [Sec. 2(56)], ❏ 1.5.2 Articles of Association, The Articles of Association contain a set of rules and regulations of the company for, management of the company. The articles govern the internal working of the company., Among other matters the articles should cover issue of shares, their forfeiture and reissue,, election of directors, maintenance of books, division of profit, calling of meetings etc., The articles of a company shall be in respective forms specified in Tables F, G, H, I and, J of Schedule I of the Companies Act, 2013 as may be applicable to the company., ❏ 1.5.3 Prospectus, A prospectus means any document described or issued as a prospectus. It includes a, red herring prospectus or shelf prospectus or any notice, circular, advertisement or other, document inviting offers from the public for the subscription or purchase of any securities, of a body corporate. The purpose of issuing a prospectus is to raise capital for the company,, whether by inviting deposits, or offers for shares and debentures from the public., Prospectus is like a key hole through which an investor can have short quick look, where the company stands and what it promises to be like in future. Hence, it contains, various facts relating to capital, present position and future prospects of the company. It, contains the terms and conditions regarding issue of shares., The prospectus is the basis of agreement between the company and the shareholders, who take the shares on the strength of the prospectus. If they have been mislead by any, statement in or omission of a material fact from the prospectus, they may, ❂ hold the directors responsible for the loss that he may have suffered, and, ❂ rescind the contract for taking the shares., Therefore, the prospectus must be truthfully drawn up. Intentional mis-statements, or omissions are punishable with fine and imprisonment., It should be noted that a copy of prospectus signed by the directors must be filed with, the Registrar on or before the date of its publication. It must contain certain particulars, statutorily., ❏ Statement in Lieu of Prospectus, If prospectus is not issued, a company is required to file with the Registrar of, Companies a statement in lieu of prospectus. A statement in lieu of prospectus is prepared, on the same line and contains more or less same particulars as given in the prospectus, paper. This provision does not apply to private company., ❏ Shelf Prospectus [Section 31(1)], Section 31(1) of the Indian Companies Act, 2013 focuses on ‘Shelf Prospectus’. ‘Shelf, Prospectus’ means prospectus issued by any class of company or companies for one or more, issues of the securities or class of securities specified in that prospectus. A company filing a, shelf prospectus with the Registrar, shall not be required to file prospectus afresh at every, stage of offer of securities by it within a validity of such shelf prospectus. It shall simply be, required to an information memorandum on all material facts relating to new changes, created, changes in the financial position as have occurred between the first offer of, securities, previous offer of securities and the succeeding offer of securities. But this, should be done within such time as may be prescribed by the Central Government, prior to, making of a second or subsequent offer of securities under the shelf prospectus., , 7
Page 494 :
SBPD Publications Accountancy (XII), Red Herring Prospectus [(Section 32(1)] : A company proposing to make an offer of, securities may issue a red herring prospectus prior to the issue of a prospectus., For the purposes of this section, the expression ‘‘red herring prospectus’’ means a, prospectus which does not include complete particulars of the quantum or price of the, securities included therein., Any class or classes of companies may file shelf prospectus with the registrar at the, stage of the first offer of securities included there in which shall include a period not, exceeding one year as the period of validity of such prospectus which shall commence, from the date of opening of the first offer of securities under that prospectus, and in, respect of subsequent offer during the validity of that prospectus no further prospectus, is required., [Sec. 31(1)], ❏ 1.5.4 Information Memorandum, Information Memorandum means ‘‘a process undertaken prior to the filing of a, prospectus by which a demand for the securities proposed to be issued by a company is, elicited and the price and the terms of issue for such securities is assessed, by means of a, notice, a circular, advertisement or document.’’, USEFUL QUESTIONS, (A) Long Answer Type Questions, 1., 2., 3., 4., , (5/6 Marks Questions), , What do you mean by a Company ? State its essential features., Define Company. Describe its Characteristics., Differentiate between Private Company and Public Company., Classify the Company on the basis of formation and size., , (B) Short Answer Type Questions, , (2/3 Marks Questions), , 1. What is a Company ?, Or, What is a Joint Stock Company ? Define a Company., 2. State any three features of a Company., 3. What is the nature of a Company ?, 4. What is a Private Company ?, 5. What do you understand by a Public Company., 6. What is meant by ‘One Person Company’ ?, 7. What is meant by Company Limited by Guarantee ?, , (C) Very Short Answer Type Questions, , (1/2 Marks Questions with Answers), 1. What do you mean by a Company ?, Or, Define a Company., [Ans. A company means a company incorporated or registered under the Companies Act, 2013, or under any other earlier Companies Act., 2. What is a Private Company ?, (J.A.C., 2011), [Ans. A private company means a company which has minimum paid up capital as may be, prescribed and which by its articles and restricts the right to transfer its shares and, limits the number of its members to 200.], 3. What is a Public Company ?, [Ans. A public company means a company which is not a private company and has a minimum, paid up capital as may be prescribed.], 4. What do you mean by a listed company ?, [Ans. A listed company is that public company whose securities are listed in any registered, stock exchange in India, this means that its securities traded in the stock exchanges.], , 8
Page 495 :
Company : General Introduction, 5. State any two features of a Company., [Ans. (i) It is an artifical person created by law, (ii) It has a separate legal entity.], 6. What is a Statutory Company ?, [Ans. Statutory Company means a company which is established by special Act of parliament, or legislation assembly. Example : life insurance corporation of India, Reserve Bank of, India etc.], 7. What is Foreign Company ?, [Ans. Foreign Company means a company which have been incorporated outside India but, carry on business in India.], 8. What is meant by Government Company ?, (N.C.E.R.T.), Or, Define Government Company., [Ans. A Government Company is a company in which at least 51% of the paid-up share capital, held by Central Government or by any state Government or joint by Central Government, and one or more State Government.], 9. State any two essential features of a Private Company., [Ans. (i) Restricted the number of members 200., (ii) Restricts the right to transfer its shares.], 10. State any two essential features of a Public Company., [Ans. (i) The minimum number of members are 7 and no any restriction on maximum number, of members., (ii) No restriction to transfer of its shares.], 11. Define Prospectus., [Ans. The Articles of Association contain a set of rules and regulations of the company for, management of the company. The articles govern the internal working of the company.], 12. What is Memorandum of Association ?, [Ans. The Memorandum of Association is the fundamental document of a company. It defines, the company's powers and provides the framework within which it has to operate. It lays, down the basic condition on which the company is incorporated.], 13. What is Articles of Association ?, [Ans. A prospectus means any document described or issued as a prospectus. It includes a red, herring prospectus or shelf prospectus or any notice, circular, advertisement or other, document inviting offers from the public for the subscription or purchase of any securities, of a body corporate.], , (D) Objective Type Questions, I. Select the correct alternative :, 1. A Company is :, (a) An Illegal Person, (b) An Artificial Person, (c) An Artificial Legal Person, (d) A Special Person, 2. By whom a company is created :, (a) By Preference Shareholders, (b) By Promoters, (c) By Law, (d) By Debentureholders, 3. A company is generally created for the purpose of :, (a) For rendering service to the public (b) Earning profit, (c) For benefiting the Government, (d) None of these, 4. Maximum number of members in a Private Company is Limited to :, (a) 20, (b) 07, (c) 50, (d) 200, 5. Which of the following is not a feature of a company ?, (a) Artificial Person, (b) Separate Legal Entity, (c) Unlimited Liability, (d) Created by Law, 6. Feature of a Company is ..................., (a) Separate Legal Entity, (b) Limited Liability, (c) Perpetual Existence, (d) All of the above, , 9
Page 496 :
SBPD Publications Accountancy (XII), 7. The company whose more than half rating power is acquired by another company, is called :, (a) Holding Company, (b) Subsidiary Company, (c) ‘a’ or ‘b’, (d) None of these, [Ans. 1. (c), 2. (c), 3. (b), 4. (d), 5. (c), 6. (d), 7. (b).], II. State whether the following statements are ‘True’ or ‘False’ :, 1. A company is a legal artificial person., 2. A company is an artificial person., 3. A joint-stock company is an association of shareholders., 4. A company may be either listed or unlisted., 5. The minimum number of members in a private company is 2., 6. The minimum number of members in a public company is 7., 7. A private company is one which restricts the number of its members to 200., 8. A public company means a company which is not a private company., 9. Shareholder is a creditor of a company., (J.A.C., 2018), 10. The liability of a shareholder is limited., 11. The liability of a shareholder is unlimited., [Ans. 1. True, 2. True, 3. True, 4. True, 5. True, 6. True, 7. True, 8. True, 9. False, 10. True,, 11. False.], , l, , 10
Page 497 :
2, Learning Objectives, After Studying this chapter, you would be able to understand :, 2.1 Share Capital of a Company, , P.No., 12, , ● Meaning of Share Capital ● Nature of Share Capital ● Types of, , Share Capital, 2.2 Shares, , 15, , ● Meaning of Share ● Nature of Shares ● Types or Classes of Shares, ● Difference between Preference Shares and Equity Shares ● Issue of, , Shares ● Issue and Allotment of Shares, 2.3 Disclosure or Presentation of Share Capital in Company’s, Balance Sheet, , 23, , ❑ Useful Questions, , 27, , ❑ Practical Problems, , 32, , 11
Page 498 :
SBPD Publications Accountancy (XII), , 2.1 Share Capital of a Company, ❏ 2.1.1 Meaning of Share Capital, A company usually raises its capital in the form of shares (called share capital) and, debentures (debt capital). Hence, this chapter deals with accounting for share capital of, companies., Share capital refers to the capital raised by a company by the issue of shares. As the, capital of the company is divided into shares, the capital of the company is called share capital., According to Oxford Dictionary of Accounting, ‘‘Share capital is that part of the, finance of a company received from its owners (i.e ., its members or shareholders) in, exchange for shares.’’, According to Section 43 of the Companies Act, 2013 the share capital of a company, limited by shares may be of two kinds namely (a) equity share capital and (b) Preference, share capital., ❏ 2.1.2 Nature of Share Capital, ❂ In the case of a Company, Capital means share capital, because in the Companies, Act, the word 'Capital' is qualified by the word 'share'., ❂ The persons who contribute capital to the company are known as shareholders., ❂ The numbers of shareholders are very large, so a separate capital account cannot, be opened for each one of them. Size of share capital depends on the size of the, company., ❂ Hence, there is one consolidated capital account called as Share Capital Account., ❏ 2.1.3 Types of Share Capital, The share capital of the company may be classified into the following categories :, Authorised Capital, Issued Capital, Types of Share Capital, , Subscribed Capital, Called-up Capital, Paid-up Capital, Uncalled Capital, Reserve Capital, , (1) Authorised or Nominal or Registered Capital : According to Section 2(8) of the, Companies Act, 2013, ‘‘Authorised Capital’’ or ‘‘Nominal Capital’’ means such capital as is, authorised by the Memorandum of a company to be the maximum amount of share capital of, the company. Thus, Authorised capital is the maximum amount of capital stated in the, Memorandum of Association which the company is authorised to raise. This capital is also, called as ‘Registered Capital’. Ratnesh & Co. was registered with a capital of ` 10,00,000, divided into 10,000 shares of ` 100 each. Here authorised capital is ` 10 lakh. Authorised, capital can be increased or decreased by following prescribed procedure., (2) Issued Capital : ‘‘Issued Capital’’ means such capital as the company issues from, time to time for subscription.’’, [Section 2(50)], Issued capital is a part of the authorised capital which is offered to the public for, subscription. For example, if Ratnesh & Co. offers to the public 9,000 shares of ` 100 each, its, , 12
Page 499 :
Accounting for Share Capital : Share and Share Capital, issued capital will be ` 9,00,000. Infact, Issued Capital means the nominal value of shares, issued by the company for :, (a) Cash, (b) Consideration other than cash to : (i) Promoters of a Company, (b) Vendors of Assets., Note : It should be noted that Issued Capital cannot exceed the Company’s Authorised Capital., , Distinction between Authorised Capital and Issued Capital, (i), , Basis, Meaning, , (ii) Disclosure, (iii) Determination, (iv) Quantity, , Authorised Capital, Issued Capital, It is the amount with which a It is the part of the authorised, company is registered. It is the capital which is issued to the, maximum amount of share capital. public for subscription., It is required to be disclosed in It is not required to be disclosed in, Memorandum of Association., the Memorandum of Association., It is determined on the basis of It is determined after considering, present and future requirements. the present requirements., Authorised capital can exceed iss- Issued capital can not exceed authued capital., orised capital., , (3) Subscribed Capital : According to Section 2(86) of the Companies Act, 2013,, ‘Subscribed Capital means such part of capital which is for the time being subscribed by the, members of a company. Thus, it is that part of issued or authorised capital, which have, been taken up (or subscribed) by the public. For example, if the applications are received, for 8,000 shares of ` 100 each and duly allotted, subscribed capital will be ` 8,00,000. The, balance of issued capital not subscribed for by the public is called the unsubscribed capital., (4) Called-up Capital : It means such part of (subscribed) capital which has been called, for payment [Section 2(15)]. For example, ` 80 per share has been called-up on 8,000 shares,, the called-up capital will be8,000 ´` 80 = ` 6,40,000. Generally, the company does not demand, for entire amount of the share at a time. The shareholder is generally required to pay it in two, or three instalments which are called ‘calls’., (5) Paid-up Capital : It is that part of the called-up capital which the company has, actually received from the shareholders. According to Section 2(64) of the Companies Act,, 2013 ‘‘Paid-up Share Capital’’ or ‘‘Share Capital paid-up’’ means such aggregate amount of, money credited as paid-up as is equivalent to the amount received as paid-up in respect of, shares issued’’., Therefore, paid-up capital is equal to the called-up capital minus calls-in-arrear. The, sum which is still to be paid is known as Calls-in-arrear . For example, when ` 80 per share, has been called-up on 8,000 shares and the money is duly received with the exception of, one shareholder holding 100 shares on first call of ` 20 each, the paid-up capital will be as, under :, `, 8,000 Shares of ` 100 each ` 80 per Share Called-up, Less : Calls-in-arrear (100 Shares´ ` 20), , Paid-up Capital, , 6,40,000, 2,000, 6,38,000, , Paid-up capital is the real capital of the company., (6) Uncalled Capital : It is uncalled portion of the subscribed capital. It is thus,, difference between the subscribed capital and called-up capital., (7) Reserve Capital : A limited company may determine that any portion of the, uncalled capital shall not be called-up during the life time of the company. It happens, when a special resolution to this effect is passed. It can be called-up only in the event of, winding-up. The uncalled capital so ear-marked is known as ‘Reserve Capital’ (Section 65, of Companies Act, 2013)., , 13
Page 500 :
SBPD Publications Accountancy (XII), (8) Unissued Capital : That portion of authorised capital which has not yet been, issued is called ‘Unissued Capital’.The company has the right to issue this capital later on, when it requires more funds., For convenience, the different types of Capital may be shown through the following, chart :, Authorised/Registered Capital, , Issued Capital, , Unissued Capital, , Subscribed Capital, , Unsubscribed Capital, , Called-up Capital, , Calls-in-Arrears, , Uncalled Capital, , Paid-up Capital, , Unreserve Capital, , Reserve Capital, , Capital Reserve : Capital Reserve are those reserve, which are made out of capital, profit. The profit which are not earned by the company in the normal course of business are, called capital profits. This reserve will not be available for distribution as dividend to the, shareholders. Capital reserve is shown in the laibilities side of the Balance Sheet under, the head ‘Reserves and Surplus’., Capital reserve is created out of the capital profits such as :, (i) Profit on Revaluation of Fixed Assets., (ii) Profit on Sale of Fixed Assets., (iii) Premium on Issue of Shares and Debentures., (iv) Profit on Redemption of Debentures., (v) Profit on Purchase of Business., , Distinction between Reserve Capital and Capital Reserve, Basis of Distinction, , Reserve Capital, , Capital Reserve, , (i) Meaning, , It is that part of uncalled capital It refers to the amounts which are, which has been reserved for the generated out of capital profits e.g.,, purpose of liquidation., profit on sale of assets., , (ii) Nature, , It is a portion of capital., , (iii) Disclosure in, Balance Sheet, , It is not shown in the Balance Sheet. It is shown on the liabilities side of, the Balance Sheet under the head, ‘Reserves and Surplus’., , 14, , It is accumulation of profits of, capital nature.
Page 501 :
Accounting for Share Capital : Share and Share Capital, (iv) Application, , It is used only at the time of liqui- It is used for writing off capital, dation., losses., , (v) Mandatory, , It is not mandatory to have reserve If there are capital profits, it has to, capital., be created., , (vi) Special Resolution Its creation requires special reso- Its creation does not require special, lution., resolution., , 2.2 Shares, ❏ 2.2.1 Meaning of Share, The capital of a company is divided into units of small denomination. Each unit is, called a share. The word share implies an unit of share capital having property rights. In, fact, share is one of a number of titles of ownership in a company. According to Section, 2(84) of the Companies Act, 2013, ‘‘share means a share in the share capital of a company, and includes stocks.'' A company may divide its capital into shares of ` 1, ` 10, ` 50 or ` 100, or any suitable amount. Thus, a share in a company is one of the units into which, the total capital of the company is divided., For example, if the capital of a company is ` 20,00,000 and is divided into 2,00,000, units of ` 10 each, each unit of ` 10 will be called a share of the company. Theoretically, a, share may be of any denomination but as directed by the Stock Exchange Division of the, Finance Ministry, vide its Circular Letter dated 22.1.1983, it should be of ` 10 or ` 100 in, the case of equity shares and of ` 100 in the case of preference shares., ❏ 2.2.2 Nature of Shares, (i) A share represents a fractional part of the share capital of the company., (ii) It is an expression of proprietory relationship between a shareholder and the, company. In other words, it is the basis of ownership of a company., (iii) Shares are movable property and are transferable in the manner specified by, the Articles., [Section (44)], ❏ 2.2.3 Types or Classes of Shares, A company may issue two types of shares, namely :, (1) Preference Shares, and (2) Equity Shares., Shares, , Preference Shares, , Equity Shares, , (1) Preference Shares : According to Sec. 43(b) Preference shares are those shares on, which there is preferential right as (a) to dividend during the life time of the company, (b) to, repayment of capital on the winding-up of the company, before the capital of equity, shareholders is returned. They carry a fixed rate of dividend payable out of each year's, profits in priority to equity shareholders. In addition to the two rights cited above,, preference shares may have additional rights, depending upon the terms of issue, which are, either defined in the Articles of Association or in the Prospectus of the Company., ❏ Features of Preference Shares, 1. It has preferential rights to dividends at a fixed rate., 2. It has cumulative rights to dividends., , 15
Page 502 :
SBPD Publications Accountancy (XII), 3. It has preferential rights to get refund of capital before that of equity shares in the, case of winding-up., 4. Preference shareholders have no voting rights., 5. It has right to participate in the extra profit’ when a specified dividend has been, paid on the equity shares. or right to premium at the time of redemption., 6. It can be redeemed before the expiry of 20 years from the date of issue., 7. It can be bought or sold in a stock exchange., Classification Types of Preference Shares : Preference shares can be of several types :, Types of Preference Shares, Basis, Cumulative, Dividend Right, Non-cumulative, Convertible, Conversion, Non-convertible, Redeemable, Redemption, Irredeemble, Participating, Participation in, Surplus Profits, Non-participating, (i) Cumulative Preference Shares : Cumulative preference shares are those, shares on which the arrears of dividend accumulate. If in any year, the company does not, earn sufficient profit, dividends on preference shares may not be paid for that year. In case, of cumulative preference shares such unpaid dividend is treated as an arrear. The arrears, of dividend will accumulate. Such accumulated dividends will be payable out of the profits of, the subsequent years. Dividend on equity shares can be paid only after the payment of such, arrears., For example, suppose a company has 10,000, 10% Cumulative Preference Shares of, ` 100 each. The dividend for 2012-13 and 2013-14 has not been paid so far. In 2014-15, company's divisible profit stands at ` 5,00,000. The 10% cumulative preference, shareholders will be paid dividends of ` 3,00,000, i.e., for 2012-13, 2013-14 and 2014-15, before making any payment of dividend to equity shareholders for the year 2014-15., Preference shares are always cumulative unless otherwise expressly stated in the, Company's Articles., (ii) Non-cumulative Preference Shares : Non-cumulative preference shares are, those shares on which arrears of dividend do not accumulate as per Articles of Association., If there are no profits in any year, the arrears of dividend can not be claimed in subsequent, years by this type of shareholders. In fact, if the dividend on such shares are not paid by the, company during a particular year, the right to claim dividend lapses., (iii) Convertible Preference Shares : Convertible preference shares are those, shares which can be converted into equity shares within a prescribed period., , 16
Page 503 :
Accounting for Share Capital : Share and Share Capital, (iv) Non-convertible Preference Shares : Preference shares which cannot be, converted into equity shares are called non-convertible preference shares., (v) Redeemable Preference Shares : Redeemable preference shares are those, shares which are repayable (redeemable) after a fixed period., (vi) Irredeemable Preference Shares : Preference shares which are not, redeemable, are called irredeemable preference shares. In other words, irredeemable (or, non-redeemable) preference shares are those shares which are not to be redeemed unless the, company goes into liquidation., The Companies Act, 2013 does not permit company limited by shares to issue, irredeemable preference shares., (vii) Participating Preference Shares : Participating preference shares are those, shares which are entitled to a share in the surplus profit of the company which remains, after payment to equity shareholders. Thus, participating preference shares get a share in, ‘surplus profits’ apart from fixed rate of dividend., (viii) Non-participating Preference Shares : Non-participating preference, shares are those on which only a fixed rate of dividend is paid. They do not share in the surplus, profits., Note : If the Articles of Association are silent, all preference shares are assumed to be cumulative and, non-participating., , (2) Equity Shares : Equity shares are those shares which are not preference shares., The holders of such shares are entitled to a dividend or share in the property after the, preference shares are paid. So equity shares are common shares., [Sec. 43(a)], Equity is the risk capital of a company. Normally, the equity shareholders control the, affairs of the company and have right to all the profits after the preference dividend has, been paid. Hence, there will no fixed rate of dividend to be paid to the equity shareholders., This may vary from year to year. Such shareholders may go without any dividend if no, profit is made. Therefore, the share capital raised through equity shares is called as ‘Risk, Capital’. As per Company Law, A company can also issue equity shares with differential, voting rights and differential dividend rights., ❏ Features of Equity Shares, 1. It is the risk capital of the company., 2. It can be bought and sold in a stock exchange., 3. It cannot be redeemed during the life-time of the company., 4. Equity shareholders have right to vote in the election of directors., 5. Equity shareholders can participate in the profits of a company., ❏ 2.2.4 Difference between Preference Shares and Equity Shares, The difference between preference shares and equity shares are as under :, Basis of Difference, 1. Right of Dividend, , 2. Rate of Dividend, 3. Refund of Capital, , Preference Shares, Preference shares have preferential, right to get dividend. They get, dividend before any dividend is paid, to equity shares., The rate of dividend on preference, shares is fixed., In case of winding-up of the company preference shareholders enjoy, the right to get their capital back, before the capital is returned to, equity shareholders., , Equity Shares, Dividend on equity shares is paid, after the payment of preference, dividend and that too, if there is, surplus., The rate of dividend is not fixed in, case of equity shares., In case of winding-up of the company equity share capital is refunded only after the payment of the, preference share capital., , 17
Page 504 :
SBPD Publications Accountancy (XII), 4. Participation in, Management, 5. Voting Right, 6. Arrears of, Dividends, , Preference shareholders have no, right to participate in management, of the company., Preference shareholders can vote, only in special circumstances., In case of cumulative preference, shares arrears of dividends are, accumulated., , Equity shareholders have full right, to participate in the management of, the company., Equity shareholders have full right, to vote in all circumstances., Accumulation of arrears of dividend, on equity shares does not arise., , Sweat Equity Shares, [Sec. 54], Meaning : Sweat equity shares are those shares which are issued by the company to, its employees or directors in recognition of their services to the corporate life of the, company. Hence, sweat shares are reward to the employees/directors for sweating for the, growth of the company., Sweat equity shares are issued to the employees/directors at a discount. They may be, issued even for a consideration other than cash for providing know-how or making available, rights to use intellectual property. These shares can be issued by a company only after one, year has elapsed since it has commenced its business. This one year is called ‘lock in period’., Conditions, According to Section 54 of the Indian Companies Act, 2013, a companies may issue, sweat shares if the following conditions are fulfilled, namely, (i) The issue is authorised by a special resolution by the company., (ii) The resolution should specify the number of shares, current market price,, consideration, if any, and the class or classes of directors or employees to whom such, shares are to be issued., (iii) Not less than one year has elapsed since the date of commencement of business 1, and, (iv) Where the Sweat Equity Shares of a company are listed on a recognised stock, exchange, the sweat equity share are issued in accordance with the guidelines issued by, Securities Exchange Board of India (SEBI)., ❏ 2.2.5 Issue of Shares, Price of Shares : When a public limited company is incorporated, it takes necessary, steps to obtain the required capital., For this purpose, the company issues a prospectus inviting the public to subscribe its, shares. The terms and conditions of the issue of shares are stated in the prospectus., Shares can be issued at par, at premium or at discount., Issue of Shares, , At Par, , At Premium, , At Discount, , Shares Issued at Par : When shares are issued at their face value, they are said to be, issued at par. For example, when shares of ` 10 each (face value) are issued at ` 10 only or, shares of ` 100 each at` 100 only, these are said to be issued at par (that is, face value)., Shares Issued at Premium [ Section 52] : When shares are issued at a price above, their nominal or face value, they are said to be issued at premium. For example, when shares, of ` 100 (face value) are issued at ` 110, it is said that the shares have been issued at premium., Here ` 10 (` 110 – 100) is premium. ‘Premium' is capital profit of the company., 1, , This provision has been repealed by Companies (Amendment) Act, 2017., , 18
Page 505 :
Accounting for Share Capital : Share and Share Capital, Shares Issued at Discount : When shares are issued at less than their face value or, nominal value, they are said to be issued at discount. The amount by which the market, price or issue price of share is below its nominal face value is called ‘‘discount on issue of, share.’’ For example, when a ` 10 share is issued at` 9 or a share of ` 100 is issued at ` 95, it, is said to be at a discount of ` 1 (or 10%) and ` 5 (or 5%) respectively., When shares are issued at a discount, the company incurs loss. So, this discount is, debited to ‘‘Discount on Issue of Shares Account., Normally, a Company cannot issue shares at discount., Important, According to Section 53 of Company Act, 2013, except as provided in Section 54, a, company shall not issue shares at a discount. The only shares that can be issued at, discount are Sweat Equity Shares wherein shares are issued to employees or directors in, lieu of their services under Sec. 54 of Companies Act, 2013., ❏ 2.2.6 Issue and Allotment of Shares, A public company can raise its capital, whenever it needs the same formation, further, expansion or diversification. The company has various options to raise capital by issue of, shares. These options are :, (1) Private Placement of Shares,, (2) Public Subscription of Shares,, (3) Employees Stock Option Plan,, (4) Right Issue,, Not in Syllabus, (5) Bonus Issue., ❏ Private Placement of Shares (PPS), Meaning : A public company usually raises money from public at large. There may be, instances where a public company may, also go for private placement of shares., An issue of shares which is not a public issue but offered to a selected group of, persons which may be 50 or such higher number as may be fixed in a financial year is, called ‘private placement of shares’. Thus, private placement refers to the allotment of, shares to a selected group of persons . It is permitted by the Indian Companies Act., Condition : Private Placement of Shares is a preferential issue. Hence, it is governed, by the SEBI guidelines., Accounting Treatment : Accounting treatment relating to private placement of, shares is the same as in the case of equity shares because they are issued for a consideration. Company should allot these shares within 60 days of receiving application money., Other Points relating to Private Placement of Shares, (i) At times a broker or an underwriter may find persons to whom shares may be, placed. There is no need to issue prospectus in such a case., (ii) Such shares can be issued on conversion of debentures and also for a consideration, other than cash, i.e., they can be issued in exchange of some fixed assets to a selected group, of people., ❏ Public Subscription of Shares, When a company offers its shares to general public to subscribe, it is called ‘public, issue of shares’ or ‘public subscription of shares’. It can be made by a public company after, complying with the prescribed legal requirements., , 19
Page 506 :
SBPD Publications Accountancy (XII), Procedure for Issue of Shares for Cash : Following steps are followed by a public, company for issuing of shares to the public :, (1) To Issue Prospectus,, (2) To Receive Applications,, (3) To Make Allotments,, (4) To Make Calls., 1. To Issue Prospectus : First of all, company issues a prospectus to provide, information related to company, to public. According to Section 2(70) of the Companies, Act, ‘‘Prospectus’’ means any document described or issued as a prospectus and includes red, herring prospectus or shelf prospectus or any notice, circular, advertisement or other, document of inviting offers from the public for the subscription or purchase of any securities, of a body corporate.’’, It contains information like name and registered address of the company, objects of, the company, names and addresses of directors, terms of the issue alongwith the opening, and closing date of issue, name and branches of scheduled banks where the application, money is to be deposited, etc. It also contains information about the profitability and, financial soundness of the company., It also contains consent of SEBI (Securities and Exchange Board of India), authorised, and issued capital and number of shares offered., 2. To Receive Applications : Whenever shares are to be issued by a company, an, advertisement in a leading newspaper is given for the information of the general public., Those who are interested in purchasing the shares may get an application form alongwith, a copy of prospectus. The application duly filled in alongwith application money (A/c payee, cheque) is deposited with the prescribed scheduled bank as mentioned in the, advertisement. The bankers will send the application money to the company alongwith a, list of applicants. The amount payable by applicants with application is called ‘Application, Money’., It needs to be mentioned that :, ❂ Application is an offer by an investor to subscribe for a specified number of shares, in a company., ❂ The acceptance of these offers by the company is the allotment., ❂ The directors are at liberty to call any amount by way of the application money. As per, Sec. 39(2), the application money shall not be less than 5% of the nominal value of the, shares. However, as per SEBI guidelines, the minimum application money payable must, be atleast 25% of the issue price of each share., After the closing date, all applications received from the public are forwarded by, prescribed bank/banks/to the company. Applications are then serially numbered and, recorded in Share Application and Allotment Book., 3. Allotment of Shares : Allotment is the allocation of shares to the successful, applicants by the directors of a company. The applications for shares by the members of, the public are ‘proposals’. They may be accepted by the Board of Directors in full, rejected, in full or accepted in part. It must be noted that the Directors of the company cannot, proceed to allot shares unless Minimum Subscription mentioned in the prospectus has, been received by the company., When an offer is accepted, the successful applicants are sent letter of allotment,, stating the number of shares allotted and the amount of allotment money. Acceptance of, the offer brings a contract into existence and the applicants become shareholders. These, , 20
Page 507 :
Accounting for Share Capital : Share and Share Capital, shareholders are liable to pay the unpaid amount of shares (that is, nominal value minus, application money) as and when called or required., Those applicants, to whom shares could not be allotted are sent letters of regret, together with refunds of their application money., 4. To Make Calls on Shares : The amount paid by shareholders after the payment of, share allotment money is called calls. Infact, if the whole amount of a share is not, demanded and paid on application and allotment, the balance may be called by the, directors in one or more instalments named, first call, second call etc. Calls should be made, strictly according to the provisions of Articles of Association or the provisions of ‘Table F’ of, Schedule I of the Companies Act, 2013., Provisions of Articles of Association given in Schedule I, Table F on Rule 13, Regarding Calls are as under :, (i) No call shall exceed one-fourth or 25% of the nominal value of shares., (ii) There must be atleast one month gap between two calls., (iii) Atleast 14 days notice must be given to members to make the payment of call., (iv) The notice must specify the time or times and place of payment., (v) A call may be revoked or postponed by the Board of Directors., (vi) Calls must be made on uniform basis on all the shares within the same class, of shares., Subscription, , Minimum, Subscription, , Full Subscription, , Under-, , Full Sub-, , Subscription, , scription, , Minimum Subscription, Or, Allotment of Securities by a Company, Minimum Subscription refers to the minimum amount of capital stated in the, prospectus of the company that should be subscribed for by the public before the company, can proceed to allot shares., Section 39 of the Companies Act, 2013 provides that :, 1. No allotment of any securities of a company offered to the public for, subscription shall be made unless the amount stated in the prospectus as the, minimum amount has been subscribed and the sums payable on application, for the amount so stated have been paid to and received by the company by, cheque or other instrument., [Section 39(1)], 2. The amount payable on application every securities shall not be less than 5%, of the nominal amount of the securities or such percentage or amount as, specified by the SEBI., [Section 39(2)], 3. If the stated minimum amount has not been subscribed and the sum payable, on application is not received within a period of 30 days from the date of, issue of the prospectus, or such other time as may be prescribed by SEBI,, company cannot proceed to allotment of shares and shall return the whole, amount within 15 days., [Section 39(3)], , 21
Page 508 :
SBPD Publications Accountancy (XII), Interest : If application money is not repaid within 15 days [as stated in Sec. 39(3)],, interest @ 15% p.a. will paid for the delayed period., [Rule 11, Companies (Prospectus and Allotment of Securities) Rules, 2014], Note : As per SEBI circular No. 12 of June 17, 2014, Rule 1(c) condition of 90% as minimum subscription of, issue share has been withdrawn. Now it requires merely disclosure of minimum subscription in the, offer document as required under section 39(1) of the Companies Act, 2013., , Hence the minimum Subscription may now be 100% or may be 50%., Purpose of Minimum Subscription : The minimum subscription must be, sufficient for the following purposes :, (i) For the payment of purchase price of any property purchased or to be, purchased;, (ii) For the payment of any preliminary expenses or any commission and, brokerage on issue of shares;, (iii) For the repayment of any money borrowed by the company for the above two, purposes;, (iv) For working capital; and, (v) For any other expenditure required for the usual conduct of business operations., Full Subscription : When the public has subscribed equal to shares offered by a, company for subscription, this is said to be fully subscribed. For example, a company has, offered 20,000 shares to the public and the public has applied for 20,000 shares, this is said, to be full subscription., Under Subscription : When the number of shares applied for by the public is less, than the number of shares offered to the public for subscription, the issue is termed as, under-subscribed. The accounting for under-subscription is done in the usual way with the, number of shares applied for by the public. In this case, company can satisfy all the, applicants in full, provided the minimum subscription has been received., Over Subscription : When the application money is received for more number of, shares than the number of shares offered to the public by a company, it is called, over-subscription. When the shares are over-subscribed, the company cannot satisfy all, the applicants. This is due to the reason that the total number of shares to be allotted will, no case, exceed the number of shares offered., Preliminary Expenses, Preliminary expenses are those expenses which are incurred in connection with the, formation or promotion of a company. It is also termed as ‘‘Incorporation Expenses,’’, Promotion Expenses or ‘‘Formation Expenses’’. Preliminary expenses include the, following expenses :, (a) Registration fees and stamp duty,, (b) Cost of drafting printing of different documents and issuing prospectus,, (c) Underwriting commission payable,, (d) Advertising and other expenses incidental to the formation,, (e) Cost of preliminary books and common seal etc., Accounting Treatment of Preliminary Expenses, Preliminary expenses should be written off in the year in which they are incurred and, shall not be carried forward in the Balance Sheet to be written off in the subsequent, accounting periods., —Para 17 of Guidance Note, ICAI, (1) First of all, Preliminary Expenses A/c should be written off against Securities, Premium (permitted by section 52 of the Companies Act, 2013)., , 22
Page 509 :
Accounting for Share Capital : Share and Share Capital, (2), , Thereafter, balance of Preliminary Expenses A/c, if any, be written off with, surplus of Statement of Profit and Loss., (3) If there is not credit balance in Statement of Profit and Loss, it should be, shown under the head ‘Reserves and Surplus’ as a negative item., Journal Entries, Securities Premium Reserve A/c, Dr., Statement of Profit and Loss, Dr., To Preliminary Expenses A/c, (Being preliminary expenses written off), , ❏ Initial Public Offer (IPO), Making an offer, inviting the public in general to subscribe to shares for the first time, is generally known as Initial Public Offer (IPO). Such shares are called shares available, for public. Such issue is also called public issue of shares. These shares may be issued to, public at par or at premium but not at a discount due to restrictions as per section 53 of, Companies Act, 2013., , 2.3 Disclosure or Presentation of Share Capital in Company's, Balance Sheet, According to Schedule III, Part I of the Companies Act, 2013 share capital will be, presented in the Balance Sheet in vertical form and as a Note to Accounts as under :, Balance Sheet of ................ (as at..........................), Note, No., , Particulars, EQUITY AND LIABILITIES, Shareholders’ Funds :, (a) Share Capital*, (b) Reserve and Surplus, (c) Money received against Share Warrants, , At the end, of Current, Financial, Year, , At the end, of Previous, Financial, Year, , `, , `, , (1), , * As per Schedule III of the Companies Act, 2013 disclosure requirements partaining to share capital are, , to be provided in notes to accounts., Notes to Account :, Note No., 1, , Particulars, Share Capital, Authorised Capital :, ............... Equity Shares of ` ........... each, ............... Preference Shares of ` ............ each, , `, , ..............., ..............., , ............., Issued Capital :, ............... Equity Shares of ` ............ each, ............... Preference Shares of ` ............ each, , ..............., ..............., , ............., Subscribed Capital :, Subscribed and Fully paid-up :, ............... Equity Shares of ` .......... each, ............... Preference Shares of ` .......... each, , ..............., ..............., , ............., , 23
Page 510 :
SBPD Publications Accountancy (XII), Subscribed but not Fully paid-up :, ............... Shares of` ` ............ each, ` ............. called-up, Less : Calls-in-Arrears, Add : Shares Forfeited A/c, , `, ..........., ..........., ..........., , ..............., ..............., , ............., , Classification of Subscribed Capital, As per Companies Act, 2013, subscribed capital is shown in the Balance Sheet under, two heads :, (i) Subscribed and Fully paid-up : Shares are classified or shown a ‘‘Subscribed, and Fully paid-up’’ in Notes to Accounts on ‘Share Capital’ when the entire face value (or, nominal value) has been called by the company and is also paid by the shareholders. In this, case,, Paid-up Capital = Subscribed Capital/Called-up Capital., (ii) Subscribed but Not Fully paid-up : Shares are classified or shown as, ‘Subscribed but Not Fully paid-up’ in the Notes to Accounts on ‘Share Capital’ when :, (a) The company has not called-up full face value of the share,, (b) The company has called-up entire face value (or nominal value) of the share but, the shareholders have not paid some part of the value of shares, i.e., calls-in-arrears., In this case, Paid-up Capital = Called-up Capital – Calls-in-arrears., ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., , Details, , Practical Problem No., , Disclosure of Share Capital in the Balance Sheet, 1, 2, 3, 4, 5, 5, , Subscribed Capital : Fully Paid-up., , 1, , Subscribed Capital : Not fully paid-up., , 2, 3, , Subscribed Capital : Fully Paid-up and not fully paid-up., , 4, 5, 5, , Total, , Illustration 1 (Subscribed Capital : Fully Paid-up), The authorised Capital of Vaishali Ltd. is ` 20,00,000 divided into ` 2,00,000 equity, shares of ` 10 each., Out of these, the company issued 1,00,000 equity shares for subscription to the public., The public applied for 80,000 equity shares and all the money was duly received. How, will you show the ‘Share Capital’ in the Balance Sheet. Also prepare `Notes to Accounts' for, the same., Solution, Extract of Balance Sheet of Vaishali Ltd., (as at ............), Particulars, , Note No., , I. EQUITY AND LIABILITIES, , Amount, Current, Year, , Amount, Previous, Year, , `, , `, , Shareholders' Funds :, (a) Share Capital, , 24, , 1, , 8,00,000
Page 511 :
Accounting for Share Capital : Share and Share Capital, Notes to Accounts :, Particulars, 1. Share Capital :, Authorised Capital :, 2,50,000 Equity Shares of ` 10 each, , Amount, `, 20,00,000, , Issued Capital :, 1,00,000 Equity Shares of ` 10 each, Subscribed Capital Subscribed and fully Paid-up :, 80,000 Equity Shares of ` 10 each, , 10,00,000, 8,00,000, , Illustration 2 (Disclosure of Share Capital in Balance Sheet), The authorised capital of Suhas Ltd. is ` 50,00,000 divided into 25,000 shares of ` 200, each. Out of these, the company issued 12,000 shares of ` 200 each at a premium of 10%., The amount per share was payable as follows :, ` 60 on application, ` 60 on allotment (including premium), ` 30 on first call and, balance on final call., Public applied for 11,000 shares. All the money was duly received. Show share capital, in the Balance Sheet of Suhas Ltd. as per the Companies Act, 2013 Schedule III, Part I., Solution, Balance Sheet of Suhas Ltd., (as at ............), Particulars, , Note No., , I. EQUITY AND LIABILITIES, 1. Shareholders' Funds :, (a) Share Capital, , 1, , Amount, Current, Year, , Amount, Previous, Year, , `, , `, , 22,00,000, , Notes to Accounts :, Particulars, , Amount, , 1. Share Capital :, Authorised Capital :, 25,000 Shares of ` 200 each, , 50,00,000, , Issued Capital :, 12,000 Shares of ` 200 each, , 24,00,000, , Subscribed Capital :, Subscribed and fully Paid-up :, 11,000 Shares of ` 200 each, , 22,00,000, , `, , Illustration 3 (Subscribed but not fully paid), On 1st April, 2019 Vivek Ltd. was formed with an authorized capital of ` 1,00,00,000, divided into 2,00,000 equity shares of 50 each. The company issued prospectus inviting, applications for 1,80,000 shares. The issued price was payable as under :, On Application, :, ` 15, On Allotment, :, ` 20, On Call, :, Balance amount, The issue was fully subscribed and the company allotted shares to all the applicants., The company did not make the call during the year., Show the following :, (a) Share capital in the Balance Sheet of the company as per revised, Schedule-III, Part-I of the companies Act, 2013., (b) Also prepare `Notes to Accounts' for the same., , 25
Page 512 :
SBPD Publications Accountancy (XII), Solution, , Balance Sheet of Vivek Ltd., As at ............ (as per Revised Schedule III), Part I, Particulars, , I. EQUITY AND LIABILITIES, 1. Shareholders' Funds :, (a) Share Capital, , Note No., , 1, , Amount, Current, year, , Amount, Previous, year, , `, , `, , 63,00,000, , Notes to Accounts :, Particulars, 1. Share Capital :, Authorised Capital :, 2,00,000 Equity Shares of ` 50 each, , Amount, `, 1,00,00,000, , Issued Capital :, 1,80,000 Equity Shares of ` 50 each, , 90,00,000, , Subscribed Capital :, Subscribed but not fully Paid :, 1,80,000 Shares of ` 50 each ` 35 called-up, , 63,00,000, , Illustration 4 (Subscribed Capital fully paid-up and not fully paid-up), Swadeshi Ltd. was registered with an authorized capital of ` 5,00,000 divided into, 50,000 equity shares of ` 10 each. The company decided to offer to the public for, subscription 30,000 equity shares. Applications for 28,000 shares were received and, allotment was made to all the applicants. All calls were made and duly received except the, final call of ` 2 per share on 200 shares. Show the `Share Capital' in the Balance Sheet of, Newbie Ltd. as per Schedule III of the Companies Act, 2013. Also prepare Notes to, Accounts for the same., Solution, Swadeshi Ltd., Extract of Balance Sheet, (as at ...............), Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders' Funds :, (a) Share Capital, , Note No., , 1, , Amount, Current, Year, , Amount, Previous, Year, , `, , `, , 2,79,600, , Notes to Accounts :, Particulars, 1. Share Capital :, Authorised Capital :, 50,000 Equity Shares of ` 10 each, , Amount, `, 5,00,000, , Issued Capital :, 30,000 Equity Shares of ` 10 each, Subscribed Capital :, Subscribed and Fully Paid Capital :, 27,800 Equity Shares of ` 10 each fully called-up, Subscribed but not Fully Paid Capital :, 200 Equity Shares of ` 10 each fully Called-up, Less : Calls-in-Arrears (200 Shares ´ ` 2), , 26, , 3,00,000, `, 2,78,000, `, 2,000, 400, , 1,600, , 2,79,600
Page 513 :
Accounting for Share Capital : Share and Share Capital, Illustration 5 (Disclosure of Share Capital in Balance Sheet), ABC Ltd. was formed with a capital of ` 10,00,000 divided into equity shares of ` 10 each., Out of these 5,000 shares were issued to the vendors as fully paid as purchase consideration, for Land and Building acquired. 15,000 shares were offered to the public and of these 12,000, shares were applied for and duly allotted. The Director called ` 8 per share and received the, entire amount except a call money of ` 2 per share on 1,000 shares held by Raghav., How would you show share capital in the Balance Sheet of ABC Ltd. ?, Solution, Balance Sheet of ABC Ltd., (as at.....), Particulars, , Note No., , I. EQUITY AND LIABILITIES, , Amount Amount, Current Previous, Year, Year, `, , `, , 1. Shareholders’ Funds :, (a) Share Capital, , 1, , 1,44,000, , Notes to Accounts :, Particulars, , `, , 1. Share Capital :, Authorised Capital :, 1,00,000 Equity Shares of ` 10 each, , 10,00,000, , Issued Capital :, 20,000 Equity Shares of ` 10 each, , 2,00,000, , Subscribed Capital :, Subscribed and fully paid-up :, 5,000 Equity Shares of ` 10 each (issued as fully paid, for consideration other than cash), Subscribed but not fully paid-up :, 12,000 Equity Shares of ` 10 each, ` 8 per share called-up, Less : Calls-in-arrear, , USEFUL QUESTIONS, (A) Long Answer Type Questions, , 50,000, `, 96,000, 2,000, Total, , 94,000, 1,44,000, , (5/6 Marks Questions), , 1. What do you mean by share ? How many types of shares can be issued by a limited, company. Explain them in brief., 2. What is meant by 'Share Capital'. Explain in brief different kinds of share capital., 3. What is share ? Describe its different types., 4. Distinguish between Preference Shares and Equity Shares., , (B) Short Answer Type Questions, 1., 2., 3., 4., 5., 6., , Define share., What are the two types of shares which a company can issue ?, What are equity shares ?, What are the preference shares ?, Explain the different types of shares., State any four features of preference shares., , (2/3 Marks Questions), , 27
Page 514 :
SBPD Publications Accountancy (XII), 7., 8., 9., 10., 11., 12., 13., 14., 15., 16., 17., 18., 19., 20., 21., 22., 23., 24., 25., 26., , 27., 28., 29., 30., 31., 32., , State any four features of equity shares., What are Sweat Equity Shares ?, What is meant by private placement of shares ?, What is meant by minimum subscription ?, What are Preliminary Expenses ?, Distinguish between a Preference Share and Equity Share. (Any four points), What do you meant by 'Share Capital' ?, What is meant by 'Reserve Capital' ?, What do you mean by 'Share' and 'Share Capital' ?, Distinguish between authorised capital and paid-up capital., What is full subscription ?, What is ‘Over subscription’ of shares ?, What is under subscription ?, Explain the meaning of over-subscription and under-subscription., What is meant by Capital Reserve ?, What is meant by issue of shares at par ?, What is meant by issue of shares at premium ?, What is meant by issue of shares at a discount ?, What is initial Public Offer ?, What is meant by Securities Premium Reserve ?, Or, What do you mean by securities premium account ?, Explain the Authorised Capital and Issued Capital., Distinguish between Authorised Capital and Issued Capital., (U.S.E.B., 2016), Distinguish between Preference Shares And Equity Shares (any two points)., Explain any four kinds of Preference Shares., Distinguish between Reserve Capital and Capital Reserve., Define share. State its types., , (C) Very Short Answer Type Questions, , (1/2 Marks Questions with Answers), , 1. What do you mean by Share ?, [Ans. Shares refer to the units in which the total share capital of a company is divided. Thus, a, share is a fractional part of the share capital and forms the basis of ownership interest in, the company.], 2. Explain the nature of Shares., [Ans. Shares are movable property and are transferable in the manner prescribed by the, Articles of Association.], 3. Name the types of shares which can be issued by a company., [Ans. A company can issue two types of shares : (1) Equity Shares, (2) Preference Shares.], 4. What do you mean by Equity Shares ?, [Ans. An equity share is a share which is not a preference share (Sec. 85). Equity share does not, enjoy any preferential right in the payment of dividend or repayment of liability. Equity, shares are the permanent source of capital.], 5. What do you mean by Preference Shares ?, [Ans. Preferece Shares are those shares which have the following two preferential rights :, (1) Right to receive dividend at a fixed rate., (2) Right to the repayment of capital on the winding-up of the company.], 6. What is meant by Cumulative Preference Shares ?, [Ans. Cumulative Preference Shares are those shares which carry right to receive arrears of, dividend before dividend is paid to the equity shareholders.], 7. What is meant by ‘Non-cumulative Preference Shares' ?, [Ans. Non-cumulative preference shares are those shares on which arrears of dividend do not, accumulate.], , 28
Page 515 :
Accounting for Share Capital : Share and Share Capital, 8. What do you mean by Convertible Preference Shares ?, [Ans. Convertible preference shares are those shares which can be converted into equity shares, according to the terms of issue.], 9. What do you mean by Non-convertible Preference Shares ?, [Ans. Preference shares which cannot be converted into equity shares are called nonconvertibe preference shares.], 10. What is meant by Redeemable Preference Shares ?, [Ans. Redeemable preference shares are those shares which are repayable (redeemable) either, after a fixed period or earlier at the option of the company.], 11. What is meant by Irredeemable Preference Shares ?, [Ans. Irredeemable (or non-redeemable) preference shares are those preference shares the amount, of which cannot be returned by the company unless the company goes into liquidation.], 12. What do you mean by Participating Preference Shares ?, [Ans. Participating preference shares are those shares on which the shareholders have the, right to participate in the surplus profit in addition to the fixed preference dividend.], 13. What do you mean by Non-participating Preference Shares ?, [Ans. Non-participating preference shares are those shares on which only a fixed rate of, dividend is paid. They do not share in the surplus profits.], 14. What is meant by shares issued at par ?, [Ans. When shares are issued at their face value, they are said to be issued at par. For example,, when shares of ` 10 each are issued at ` 10 only, the issue is called issue of shares at par.], 15. What is meant by issue of shares at a discount ?, [Ans. When a share is issued at a price lower than its face (or par) value, it is said to be issue of, shares at discount. For example, X Ltd. invited applications of 10,000 equity shares of, ` 10 each, at ` 9 per share. Here shares have been issued at a discount of ` 1 per share.], 16. What is meant by issue of shares at a premium ?, [Ans. When shares are issued at a price above their face value, such issue is called as shares, issued a premium. For example, if a share of ` 10 is issued at ` 16, ` 6 will be the premium, on shares.], 17. What is Securities Premium Account ?, [Ans. According of Section 78 of the Companies Act, 1956 a company issuing securities (shares,, bonds or debentures) at a premium whether for cash or for a consideration other than, cash, should credit a sum equal to the aggregate amount of the premium on the securities,, to a separate account called ‘Securities Premium Account’., Or, Securities Premium A/c is an account showing premium received on issue of securities,, shares and debentures, and utilisation of such premium.], 18. What is meant by private placement of shares ?, (C.B.S.E., A.I., 2017), [Ans. An issue of shares which is not a public issue but offered to a selected group of persons is, called ‘private placement of shares’.], 19. What is Initial Public Offer (IPO) ?, [Ans. Making an offer, inviting the public in general to subscribe to shares, is generally known, as Initial Public Offer.], 20. What is Sweat Equity ?, [Ans. Sweat Equity means the equity shares issued by the company to employees or directors at, a discount or for consideration other than cash for providing know-how to making, available intellectual property rights.], 21. What is Employees Stock Option Plan or E.S.O.P. ?, (C.B.S.E., 2017), [Ans. Employees Stock Option Plan is a scheme under which an option right is given to the, wholetime directors, officers and employees to purchase or subscribe (at a future date), the securities of the company at a pre-determined price.], 22. What is the object of Employees Stock Option Plan (E.S.O.P.) ?, [Ans. The main object of E.S.O.P. is to retain high caliber employees or to give them a sense of, belonging.], , 29
Page 516 :
SBPD Publications Accountancy (XII), 23. What is meant by Public Subscription of Shares ?, (C.B.S.E., 2016), [Ans. When a company desires to raise capital by issue of shares to the public, it generally, invites public to buy shares by circulating prospectus. Then the company receipts, applications for shares from the public. This is called as Public Subscription of Shares.], 24. What does mean by Under-subscription ?, [Ans. When the number of shares applied for by the public is less than the number of shares, issued by the company, it is known as under-subscription of shares.], 25. What is meant by Over-subscription ?, (J.A.C., 2017), [Ans. When the number of shares applied for is more than the number of shares offered to the, public for subscription, it is said to be over-subscription of shares.], 26. Kuttons Ltd. invited applications for 10,000 equity shares of ` 10 each. Applications were received for 25,000 shares. Name the kind of subscription., [Ans. Over-subscription.], 27. Elite Ltd. invited applications for 1,00,000 equity shares of ` 10 each. Applications, were received for 92,000 shares. Name the kind of subscription., [Ans. Under-subscription.], 28. Give two point of difference between ‘Over-subscription' and ‘Under-subscription'., [Ans., Basis, , Over-subscription, , Under-subscription, , 1. No. of applica- In this case, the number of shares In this case, the number of shares, tions received applied for is more than the number applied for is less than the number, of shares offered to the public., of shares offered to the public ., 2. Acceptance of In this, some applications have to be In this, all the applications are, accepted., Applications or rejected., Allotment, 29. What is meant by Share Capital ?, [Ans. Share Capital means the amount of capital raised by the issue of shares. (As the capital of, the company is divided into shares, the capital of the company in called share capital.)], 30. What is meant by authorised capital of a company ?, [Ans. Authorised capital is the capital stated in the Memorandum of Association (MOA). It is, the maximum amount of capital which a company can raise during its life time.], 31. What is meant by issued capital of a company ?, [Ans. Issued capital is that part of capital which is actually issued to the public for subscription, and allotment.], 32. What is unissued capital of a company ?, [Ans. The authorised capital which is not offered for public subscription is known as ‘unissued, capital'. Unissued Capital = Authorised Capital – Issued Capital.], 33. What is subscribed capital ?, [Ans. Subscribed capital is that part of the issued capital which has been actually subscribed, (taken up) by the public.], 34. What is meant by called-up capital ?, [Ans. Called-up capital is that part of the subscribed capital which has been called-up by the, company for payment.], 35. What is meant by uncalled share capital ?, [Ans. It is that portion of the subscribed capital which has not been called-up. Thus,, Uncalled Capital = Subscribed Capital – Called-up Capital.], 36. What is meant by paid-up capital ?, [Ans. Paid-up capital refers to that part of called-up capital that the shareholders of the, company have paid.], , 30
Page 517 :
Accounting for Share Capital : Share and Share Capital, 37. What is meant by Reserve Capital ?, [Ans. A company may reserve a portion of its uncalled capital to be called only in the event of, winding-up of the company. Such uncalled amount is called ‘Reserve Capital' of the, company. (This is done by a Special Resolution under Section 99 of the Companies Act.)], 38. What is Capital Reserve ?, [Ans. Capital Reserves are those reserves which are created out of capital profits. Capital, Profits are those profits which are not earned in the normal course of the business., Capital profits cannot be utilised for the distribution of dividends.], 39. When is ‘Reserve Capital’ called by the company ? Write any one purpose of it., (J.A.C., 2013), [Ans. Reserve capital can be called only in case of liquidation of the company. Its purpose is to, make available amount for the payment to creditors on liquidation of the company.], , (D) Objective Type Questions, I. Select the correct alternative :, 1. Shares can be issued :, (a) at per only, (b) at premium only, (c) at discount only, (d) at par/at premium, 2. Equity shareholders are ................ of the company :, (a) Creditors, (b) Owners, (c) Customers, (d) None of these, 3. Shareholders get :, (a) Interest, (b) Dividend, (c) Commission, (d) Profit, 4. A company may issue the shares :, (a) By private placement of shares, (b) By public subscription of shares, (c) For consideration other than cash, (d) By all of the above, 5. A Company can issue .......... :, (a) Equity Shares, (b) Preference Shares, (c) Equity and Preference both shares, (d) None of the above, 6. To whom dividend is given at a fixed rate in a company ? :, (a) To equity shareholders, (b) To preference shareholders, (c) To debentureholders, (d) To promoters, 7. The portion of the capital which can be called-up only on the winding-up of the company is, called .......... :, (a) Authorised Capital, (b) Issued Capital, (c) Uncalled Capital, (d) Reserve Capital, 8. Shares issued by a company to its employees or directors in consideration of 'Intellectual, Property Rights' are called :, (a) Right Equity Shares, (b) Private Equity Shares, (c) Sweat Equity Shares, (d) Bonus Equity Shares, 9. Dividends are usually paid on :, (a) Authorised Capital, (b) Issued Capital, (c) Called-up Capital, (d) Paid-up Capital, 10. Total amount of liabilities includes :, (a) Authorised Capital, (b) Issued Capital, (c) Paid-up Capital, (d) Subscribed Capital, [Ans. : 1. (d), 2. (b), 3. (b), 4. (d), 5. (c), 6. (b), 7. (d), 8. (c), 9. (d), 10. (c).], II. State whether the following statements are ‘True’ or ‘False’ :, 1. Shareholders are the owners of the company., 2. Shareholders are the creditors of the company., 3. Shares of the company are transferable., 4. Shares of the company are not transferable., 5. Preference shareholders get interest at a fixed rate., , 31
Page 518 :
SBPD Publications Accountancy (XII), 6., 7., 8., 9., 10., , Preference shareholders get dividend at a fixed rate., Rights of shareholders are unlimited., A company can issue its shares at discount., A company can issue shares more than authorised., Liability of a shareholder is limited to the value of shares allotted to him., [Ans. : 1. True, 2. False, 3. True, 4. False, 5. False, 6. True, 7. False, 8. False, 9. False,, 10. True.], , PRACTICAL PROBLEMS, ❏ Subscribed and Fully Paid-up Capital, 1. The authorised Capital of ABC Ltd. is 20,00,000 divided into 2,00,000 equity shares of ` 10, each. Out of these, the company issued 1,00,000 equity shares at par. The amount was payable, as under :, On Application ` 3, On Allotment ` 5, On First & Final Call ` 2., The public applied for 90,000 equity shares and the entire amount was received in full., Show ‘Share Capital’ in the Balance Sheet of the Company. Also Provide ‘Notes to Accounts’, for the same., [Ans. Subscribed and fully paid-up Capital ` 9,00,000, Share Capital ` 9,00,000.], , ❏ Subscried Capital not Fully paid-up, 2. Ashok Textiles Ltd. was formed with an authorised capital of ` 10,00,000 divided into, equity shares of ` 10 each. The Directors offered 20,000 shares to the public and called up, ` 7 per share and received the entire called up amount on shares allotted. Show the ‘Share, Capital’ in the Balance Sheet of the company as per Schedule III of the Companies Act,, 2013., [Ans. Subscribed but not Fully paid Capital ` 1,40,000], 3. A company has an athorised capital of ` 2,00,000 divided into 20,000 equity shares of ` 10, each. It decided to issue 12,000 shares for subscribtion. Applications were received for 12,000, shares and shares were allotted to all the applicants. Upto 31st March, 2019 it had called 9 per, share. All shareholders have duly paid the amount called except one shareholder, holding 1,000, shares who has paid only ` 7 per share. Show the ‘Share Capital’ in the Balance Sheet of the, Company. Also prepare ‘Notes to Accounts.’, [Ans. Share Capital ` 1,06,000, Subscribed but not fully paid-up Capital ` 1,06,000.], , ❏ Subscribed Capital Fully paid-up and not Fully Paid-up, 4. S Ltd. was registered with an authorised capital of ` 4,00,000 divided into 40,000 equity, shares of ` 10 each. The company offered to the public for subscription 30,000 equity, shares. Applications for 25,000 equity shares were received and allotment was made to all, the applicants. All calls were made and were duly received except the final call of ` 2 per, share on 300 shares., Show the ‘Share Capital’ in the Balance Sheet of the Company., [Ans. Share Capital ` 2,49,400, Subscribed and fully paid-up Capital ` 2,47,000, Subscribed, but not fully paid-up ` 2,400.], 5. Goodluck Co. Ltd. was registered with the authorised share capital of ` 5,00,000 divided, into 40,000 Equity Shares of ` 10 each and 1,000, 10% Preference Shares of ` 100 each. The, company offered 25,000 Equity Shares for subscription to public and also 1,000 10%, preference shares., Applications were received for 23,000 Equity Shares and 1,000 preference Shares. The, directors had called the entire nominal value of equity shares and ` 90 on 10% Preference, shares. The money called or both, equity shares and preference shares was received. Show, the Share Capital in the books of Balance Sheet of the Company., [Ans. Share Capital ` 3,20,000; Subscribed & fully paid-up ` 2,30,000, Subscribed but not, fully paid-up ` 90,000.], , l, , 32
Page 519 :
3, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 3.1 Issue of Shares for Cash, , 34, , ● Meaning of Share Capital ● Nature of Share Capital ● Types of, , Share Capital, 3.2 Issue of Shares for Consideration other than Cash, , 60, , ● Meaning of Share ● Nature of Shares ● Types or Classes of Shares, ● Difference between Preference Shares and Equity Shares ● Issue of, , Shares ● Issue and Allotment of Shares, 3.3 Preferential Allotment of Shares, , 65, , 3.4 Issue of Right Shares [Sec. 62(1)], , 65, , 3.5 Fast Revision, , 66, , ❑ Useful Questions, , 67, , ❑ Practical Problems, , 69, , 33
Page 520 :
SBPD Publications Accountancy (XII), In the last chapter we discussed Share and Share Capital', their nature and types. In, this chapter, we shall focus our attention on the accounting treatment of share capital with, respect to its issue, allotment and related adjustments., , 3.1 Issue of Shares for Cash, Various ways issuing Shares :, The shares of a company may be issued in the following ways :, I. For Cash :, (a) by Public Subscription of Shares, (b) by Private Participation of Shares, II. For Consideration other than cash, I. Issue of Shares for Cash, The Company can issue shares for cash in two ways :, (1) In the instalment, i.e., in lump-sum, (2) In Instalment., 1. Issue of Shares for Cash payable in one Instalment/in lump-sum : When the, entire nominal or face value of the share is called by the company alongwith application,, such method of issue is known as ``Lump-sum'' method. Issue of shares for cash may be at, par or at ‘premium’., Accounting Entries : Following Journal entries are passed for Lump-sum issue :, (A) Issue of Shares at Par, 1. For Receipt of Application Money, , Bank A/c (With the amount received) Dr., To Share Application & Allotment A/c, (Being application money received on ....shares), , 2. For acceptance of Application and, Allotment of Shares, , Share Application & Allotment A/c, , ...Dr., , To Share Capital A/c, (With the Face Value of the Share), (Being the shares allotted and transferred to, Share Capital A/c), , (B) Issue of Shares at Premium, 1. For Receipt of Application Money including Bank A/c (Face Value + Premium), Premium, , ...Dr., , To Share Application & Allotment A/c, (Being Application money received on ..... Shares, alongwith Premium), , 2. For Accepting Application and Allotment, of Shares, , Share Application & Allotment A/c ....Dr., To Share Capital A/c (Shares × Face Value), To Securities Premium (Reserve) A/c, (Without of Premium), (Being application money accepted and money, transferred to share capital A/c and Securities, Premium A/c), , 34
Page 521 :
Accounting for Share Capital : Issue of Shares, ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., 1 to 21, 1, , Details, , Practical Problem No., , Very Short/Short Answer Type Questions, , 1 to 16, , I. Issue of Shares for Cash, , 1 to 22, , (i) Shares Issue at par and Payable in lump-sum, (ii) Receipt of Cash in Instalment, , 2, 3, , Shares Issued at Par, , 1 to 4, , 4, 5, 6, , Shares Issued at Par and Calls-in-arrears, , 5, 6, 7, , 7, 8, 9, , Shares Issued at par and Calls-in-advance, , 8, , 10, 11, 12, 13(A), 13(B), 14, 15(A) to 21, 22 to 26, 27, 27, , Calls-in-advance and Calls-in-arrears, , 9, , Use of Cash Book/Journal & Cash Book entries, , 10, 11, , Shares Issued at Premium, , 12 to 16, , Under-Subscription of Shares, , 17, , Over-Subscription of Shares, , 18 to 22, , II. Issue of Shares for Consideration other than Cash, Miscellaneous and Board’s Questions, , 23 to 26(B), 27, 28, 16 + 28, , Total, , Illustration 1 (Shares Issued at Par and Payable in Lump-sump), ABC Ltd. issued 20,000 equity shares of ` 10 each at par. The whole amount was, payable on application. The public applied for all the shares and the shares were duly, allotted. Pass the necessary Journal entries in the books of the company., Solution, In the Books of ABC Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Bank A/c, To Equity Share Application and Allotment A/c, , Amount, `, , 2,00,000, 2,00,000, , (Being the application money received on 20,000 equity shares @ ` 10, each), , Equity Share Application and Allotment A/c, To Equity Share Capital A/c, , Dr., , 2,00,000, 2,00,000, , (Being the shares allotted and application money transferred to Equity, Share Capital A/c), , (2) Shares Payable in Instalments : When the amount of shares offered to the, public are payable not in lump-sum rather in different instalments at different stages, the, shares so offered are said to be payable in instalments., The different instalments may be paid on (i) application, (ii) allotment, or (iii) in, different calls., ❂ The amount received alongwith applications is called application money., ❂ The amount which become due on allotment is called allotment money., , 35
Page 522 :
SBPD Publications Accountancy (XII), Balance of the amount may be received in different instalments by the company, depending upon the need for the funds. First instalment is known as the first call;, the second instalment as the second call and the last instalment as the final call., ❂ The amount which becomes due on first call is termed as first call money., ❂ The amount which becomes due on second call is known as second call money., ❂ Similarly the amount which becomes due on final call is referred to as final, call money., Issue of Shares at Par : Accounting Treatment, ❂, , ❏, , Journal Entries, 1. On Receipt of Application Money, , Bank A/c, To Share Application A/c, , Dr., , (For application money received on ... shares @, ` .... per share), , 2. For Transfer of Share Application Money to, Share Capital A/c, , Share Application A/c, To Share Capital A/c, , Dr., , 3. For Allotment Money due, , Share Allotment A/c, To Share Capital A/c, , Dr., , (For application money transferred to Share, Capital A/c), , (For allotment money due on....shares @ ` ......each), , 4. For Receipt of Allotment Money, , Bank A/c, To Share Allotment A/c, , Dr., , (For receipt of allotment money on..... shares, @ ` ...... each), , 5. For First Call Money due, , Share First Call A/c, To Share Capital A/c, , Dr., , Bank A/c, To Share First Call A/c, , Dr., , (For first call money due on .... shares @ ` .... each), , 6. On Receipt of First Call Money, , (For first call money received on ........ shares), , 7. For Amount due on Second/Final Call, , Share Second/Final Call A/c, To Share Capital A/c, , Dr., , (For second/final call money due on.....shares, @ ` .... each), , 8. On Receipt of Second/Final Call Money, , Bank A/c, To Share Second/Final Call A/c, , Dr., , Preliminary Expenses A/c, To Bank A/c, , Dr., , (For second/final call money received), , 9. For Formation or Preliminary Expenses, , (For formation expenses paid), , Use of Cash Book, If a cash book is to be prepared, all entries relating to Cash and Bank Account will be, recorded in cash book and not in the Journal and other transactions will be entered in the, Proper Journal. Entries marked 2, 3, 5 and 7 will be recorded in Journal while other, entries relating to cash will be recorded in the Cash Book., Dr., Cash Book (Bank Column only), Cr., Date, , Particulars, , Amount Date, , Particulars, , `, , To Share Application A/c, , 36, , ............, , Amount, `, , By Balance c/d*, , ............
Page 523 :
Accounting for Share Capital : Issue of Shares, To, To, To, To, , Share Allotment A/c, Share First Call A/c, Calls-in-advance A/c, Share Second/Final Call A/c, , To Balance b/d, , ............, ............, ............, ............, ..........., ..........., , .........., , * This balance will appear in Balance Sheet as Cash at Bank., Notes : 1. If nothing is mentioned regarding the class of shares issued, shares are presumed to be equity shares., 2. If company issues both Preference Shares and Equity Shares, Journal entries are passed separately, for preference share capital and equity share capital., , Illustration 2 (Issue of Shares at Par), Eastern Electronics Ltd. was registered with a capital of ` 2,00,000 divided into, 20,000 Equity Shares of ` 10 each. It offered to the public all the shares at par payable, as ` 2 per share on Application,` 3 on Allotment, ` 3 on 1st Call and ` 2 on Final Call., All shares were subscribed by the public and payments were duly received., Pass necessary Journal entries., (U.S.E.B., 2015), Solution, In the Books of Eastern Electronics Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Bank A/c, To Equity Share Application A/c, , Dr., , 40,000, , Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 40,000, , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 60,000, , Bank A/c, To Equity Share Allotment A/c, , Dr., , 60,000, , Equity Share First Call A/c, To Equity Share Capital A/c, , Dr., , 60,000, , Bank A/c, To Equity Share First Call A/c, , Dr., , 60,000, , Equity Share Final Call A/c, To Equity Share Capital A/c, , Dr., , 40,000, , Bank A/c, To Equity Share Final Call A/c, , Dr., , 40,000, , (For application money received on 20,000 Equity Shares @ ` 2 per share), , (For transfer of application money to Equity Share Capital A/c), , (For allotment money due on 20,000 Equity Shares @ ` 3 per share), , Amount, `, , 40,000, 40,000, 60,000, , 60,000, , (For allotment money received on 20,000 Equity Shares @ ` 3 per, share), , (For first call money due on 20,000 shares @ ` 3 per share), , (For first call money received on 20,000 shares @ ` 3 per share), , (For final call money due on 20,000 shares @ ` 2 per share), , (For final call money received on 20,000 shares @ ` 2 per share), , 60,000, 60,000, 40,000, 40,000, , Illustration 3, X Ltd. issued 10,000 shares of ` 10 each at par payable as ` 3 on application, ` 4 on, allotment and the balance on a call. All the shares were taken up and all the instalments, were duly received., Show the Journal entries and prepare the Ledger Accounts., , 37
Page 524 :
SBPD Publications Accountancy (XII), Solution, , In the Books of X Ltd., Journal Entries, , Date, , Dr., , Particulars, , L.F. Amount, `, , Bank A/c, To Share Application A/c, , Dr., , 30,000, , Share Application A/c, To Share Capital A/c, , Dr., , 30,000, , Share Allotment A/c, To Share Capital A/c, , Dr., , 40,000, , Bank A/c, To Share Allotment A/c, , Dr., , 40,000, , Share First and Final Call A/c, To Share Capital A/c, , Dr., , 30,000, , Dr., , 30,000, , (For amount received on 10,000 shares @ ` 3 per share), , (For application money transferred to Share Capital A/c), , (For amount due on allotment of 10,000 shares @ ` 4 per share), , (For allotment money received), , Cr., Amount, `, , 30,000, , 30,000, , 40,000, , 40,000, , 30,000, , (For amount due on first and final call @ ` 3 per share), , Bank A/c, To Share First and Final Call A/c, , 30,000, , (For first and final call money received), , Ledgers, Share Capital Account, , Dr., Date, , Particulars, , Amount, , Date, , `, , To Balance c/d, , 1,00,000, , Cr., Particulars, , By Share Application A/c, By Share Allotment A/c, By Share First and Final, Call A/c, , 1,00,000, , Amount, `, , 30,000, 40,000, 30,000, 1,00,000, , Bank Account, , Dr., Date, , Particulars, , Amount, , To Share Application A/c, To Share Allotment A/c, To Share First and Final, Call A/c, , Date, , `, , 30,000, 40,000, , Cr., Particulars, , By Balance c/d, , 30,000, 1,00,000, , Date, , Particulars, To Share Capital A/c, , 38, , Amount, `, , 30,000, 30,000, , `, , 1,00,000, , 1,00,000, , Share Application Account, , Dr., , Amount, , Date, , Cr., Particulars, , By Bank A/c, , Amount, `, , 30,000, 30,000
Page 525 :
Accounting for Share Capital : Issue of Shares, Share Allotment Account, , Dr., Date, , Particulars, To Share Capital A/c, , Dr., Date, , Amount, , Date, , `, , Particulars, , Amount, `, , By Bank A/c, , 40,000, 40,000, , Share First and Final Call Account, , Cr., , Particulars, To Share Capital A/c, , 40,000, 40,000, , Cr., , Amount, , Date, , `, , 30,000, , Particulars, By Bank A/c, , Amount, `, , 30,000, , Calls-in-Arrear, Meaning : If any shareholder fails to pay the amount due on allotment or any calls,, the amount not so received is called calls-in-arrear. In other words, if a shareholder makes, a default in sending the call money due on allotment or any calls according to the, conditions, the money not so sent is called calls-in-arrear., ‘Calls-in-arrear Account' is technically an Asset Account but it is shown as deduction, from the ‘Called-up Capital' on the liabilities side of the Balance Sheet., Methods of dealing with Calls-in-arrear : There are two alternative methods of, dealing with the accounting of calls-in-arrear :, (a) Without Opening Calls-in-arrear Account : Under this method, a separate, account for calls-in-arrear is not opened. In that case, amount actually received from the, shareholders (that is, call money less amount unpaid on call) is credited to the relevant call, account. Therefore, the various call accounts will show debit balance equal to the total, unpaid amount of each call., On a subsequent date, when the amount of calls-in-arrear is received, Bank Account, is debited and the relevant call account is credited., (b) By Opening Calls-in-arrear Account : The other method of dealing with the, calls-in-arrear is to maintain a separate account for calls-in-arrear. If the company, maintains Calls-in-arrear Account, the Calls-in-arrear Account is debited with the, amount of call that has not been paid by some shareholders. In this case, share allotment, and other call accounts will not show any balance but the Calls-in-arrear Account will, show a debit balance equal to the total unpaid amounts on various calls. If later on, any, amount is received from the defaulting shareholder(s), it is credited to the Calls-in-arrear, Account., If the company maintainsCalls-in-arrear Account, the following entry will be passed :, (1) For Calls-in-arrear on Share Allotment/Share Calls :, Calls-in-arrear A/c, Dr., To Share Allotment A/c, To the extent of amount not received, To Relevant Call A/c, , }, , (For arrears on share allotment and....call transferred), , (2) On Receipt of Amount of Calls-in-arrear at a Subsequent Date :, Bank A/c, Dr., To Calls-in-arrear A/c, (For amount of calls-in-arrear received), , Presentation of Calls-in-arrear in Balance Sheet : If on Balance Sheet date,, there is any balance in Calls-in-arrears Account, then it will be shown by deducting from, , 39
Page 526 :
SBPD Publications Accountancy (XII), called-up capital. The balance of called-up capital remaining after deducting calls-inarrears is called paid-up capital., ❏ Interest on Calls-in-arrear or Unpaid Amount1, The company is authorised to charge interest on calls-in-arrear from the day fixed for, payment to the day of actual payment. The rate of interest must be specified in the Articles, of Association. If the articles are silent, Table ‘F’ of the Companies Act, 2013 shall be, applicable. Table F provides for 10% interest per annum or at such lower rate, if any, as the, Board may determine. However, the Board has the right to waive the payment of such, interest wholly or in part., Accounting Entries of Interest on Calls-in-arrear, (1) For Interest becoming due on Calls-in-arrear :, Sundry Members A/c, Dr. (with amount of Interest), To Interest on Calls-in-arrear A/c, (For interest on calls-in-arrear due), , (2) On Receipt of Interest on Calls-in-arrear :, Bank A/c, Dr. (with the amount of interest received), To Sundry Members A/c, (For receipt of interest on calls-in-arrear), , (3) For transfer of Interest on Calls-in-arrear to Statement of P. & L. :, Interest on Calls-in-arrear A/c, Dr., To Statement of Profit & Loss, (For transfer of interest on calls-in-arrear), , Illustration 4 (Calls-in-Arrears), Mona Ltd. did not receive the first call money on 10,000 Equity Shares @ ` 3 per share, which was due on 1.4.2019. This amount was received on 3.5.2019., Pass necessary Journal entries in the books of the company by opening, Calls-in-arrears account., Solution, In the Books of Mona Limited, Journal Entries, Dr., Cr., Date, 1.4.2019, , Particulars, , L.F. Amount Amount, `, , Calls-in-Arrears A/c, To Equity Share First Call A/c, , Dr., , 30,000, , Bank A/c, To Calls-in-Arrears A/c, , Dr., , 30,000, , (Being amount due on first call on ` 10,000 equity shares @ 3 per, share), , 3.5.2019, , (Being Calls-in-Arrears on 10,000 equity shares received), , `, , 30,000, , 30,000, , Illustration 5 (Shares Issued at Par and Calls-in-arrear), X Ltd. company was formed with a capital of ` 15,00,000 in shares of ` 10 each. It, offered to the public 1,00,000 shares payable at ` 1 per share on application, ` 2 per share, on allotment and ` 3 per share on first call. The balance of ` 4 per share was to be called in, case of necessity. Applications were received for 90,000 shares and shares were allotted, accordingly. All the money was duly received with the exception of allotment money on 300, shares and first call money on 600 shares., Pass necessary Journal entries in the books of X Ltd., (U.S.E.B., 2014), 1, , Students have not to study interest on calls-in-arrears., , 40
Page 527 :
Accounting for Share Capital : Issue of Shares, Solution, Journal Entries in the Books of X Ltd., Date, , Particulars, , Dr., L.F. Amount, `, , Bank A/c, To Share Application A/c, , Dr., , 90,000, , Share Application A/c, To Share Capital A/c, , Dr., , 90,000, , Share Allotment A/c, To Share Capital A/c, , Dr., , 1,80,000, , Bank A/c, To Share Allotment A/c, , Dr., , 1,79,400, , Share First Call A/c, To Share Capital A/c, , Dr., , 2,70,000, , Dr., , 2,68,200, , (For application money received on 90,000 shares @ ` 1 per share), , Cr., Amount, `, , 90,000, , 90,000, , (For application money transferred to Share Capital A/c), , (For amount due on allotment of 90,000 shares @ ` 2 per share), , (For receipt of allotment money on 89,700 shares), , 1,80,000, , 1,79,400, , 2,70,000, , (For amount due on first call an 90,000 shares @ ` 3 per share), , Bank A/c, To Share First Call A/c, , (For the first call money received on 89,400 shares), Working Note :, Arrear on Allotment (300 ´ 2), On 1st Call (600 ´ 3), , 2,68,200, `, , Total Arrear Amount, , 600, 1,800, 2,400, , Cash at Bank = ` 90,000 + 1,79,400 + 2,68,200 = ` 5,37,600., , Illustration 6 (Calls-in-Arrears Account maintained in the Books), Cronic Limited issued 10,000 equity shares of ` 10 each payable ` 2.50 on application,, ` 3 on allotment, ` 2 on first call and the balance of ` 2.50 on the final call. All the shares, were fully subscribed and paid except of a shareholder having 100 shares who could not, pay for the final call. Company maintain Calls-in-Arrears Account. Give Journal entries to, record these transactions., (N.C.E.R.T.), Solution, In the Books of Cronic Limited, Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Bank A/c, To Equity Share Application A/c, , Dr., , 25,000, , Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 25,000, , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 30,000, , (For money received on applications for 10,000 shares @ ` 2.50 per, share), , (For transfer of application money on 10,000 shares to Share, Capital A/c), , Amount, `, , 25,000, , 25,000, , 30,000, , (For amount due on the allotment of 10,000 shares @ ` 3 per share), , 41
Page 528 :
SBPD Publications Accountancy (XII), Bank A/c, To Equity Share Allotment A/c, , Dr., , 30,000, , Dr., , 20,000, , Dr., , 20,000, , Equity Share Final Call A/c, To Equity Share Capital A/c, , Dr., , 25,000, , Bank A/c, Call-in-Arrears A/c, To Equity Share Final Call A/c, , Dr., Dr., , 24,750, 250, , 30,000, , (For allotment money received), , Equity Share First Call A/c, To Equity Share Capital A/c, , 20,000, , (For first call money due on 10,000 shares @ ` 2 per share), , Bank A/c, To Equity Share First Call A/c, , 20,000, , (Being first call money received), , (Being final call money due), , (Being final call money received except that of 100 shares), , 25,000, , 25,000, , Calls-in-Advance, Calls-in-advance is just opposite to Calls-in-arrear. It refers to such an amount which, is paid by some of the shareholders for calls not yet due. It also refers to the excess, application money exceeding that due on share allotment and transferred to ‘Calls-inadvance’. A company may accept Calls-in-advance only when it is authorised by Articles of, Association. Calls-in-advance is a liability of the company. Unadjusted portion of this, account is shown on the liabilities side of the Balance Sheet., Difference between Calls-in-arrears and Calls-in-advance, The following are the main points of differences between Calls-in-arrears and Callsin-advance :, Basis of Difference, Calls-in-arrears, Calls-in-advance, 1. Meaning, The amounts which are not received Calls-in-advance is the amount not, by a company on allotment or calls are called by the company, but paid by the, termed as calls-in-arrears., shareholders in excess of what they, are asked to pay., 2. Nature of Balance Calls-in-arrears show a debit balance. Calls-in-advance show a credit balance., 3. Interest, Interest is charged on calls-in-arrears. Interest is paid on calls-in-advance by, It is an income for the company., the company. It is an expense for the, company., 4. Rate of Interest In the absence of any rate given in If no rate of interest is mentioned in, Articles, the rate of 10% p.a. as per the Articles of Association, then the, Table F will be charged on calls-in- rate of 12% p.a. as per Table F will, arrears., apply on calls-in-advance ., 5. Disclosure in, Call-in-arrear is deducted from called- Balance of calls-in-advance, if any, is, Balance Sheet, up capital to arrive at paid-up capital. shown on the liabilities side of the, Balance Sheet as a liability., , Accounting Entries relating to Calls-in-advance, (i) For amount received on Calls-in-advance :, Bank A/c, Dr., To Calls-in-advance A/c, (For calls paid in advance received), , (ii) When the respective call becomes due of which advance was received, the entry for, cancellation or adjustment of calls-in-advance is to be passed., , 42
Page 529 :
Accounting for Share Capital : Issue of Shares, On Adjustment of Calls-in-advance towards the Call, Calls-in-advance A/c, Dr. (with the amount of adjustment), To Respective Call A/c, (say) First Call A/c, (For calls-in-advance adjusted), , ❏ Interest on Calls-in-advance1, (1) The company has to pay interest at the rate prescribed in its Articles of, Association., (2) If the Articles are silent, Table F may be adopted. As per Table F, company is, required to pay interest at such rate not exceeding 12% p.a. on such calls-in-advance from, the date of its receipts to the date when the call becomes due. 2 The company in general, meeting shall otherwise direct as may be agreed up on between the Board and member, paying the sum in advance., Illustration 7 (Calls-in-advance), On 1.1.2020 X Ltd. received in advance the first call of ` 2 per share on 10,000 equity, shares. The first call was due on 15.2.2020., Journalise the above transactions and transfer the advance to first call account by, opening a calls-in-advance account., Solution, In the Books of X Ltd., Journal Entries, Dr., Cr., Date, 2020, Jan. 1, , Particulars, , L.F. Amount Amount, , Bank A/c, To Calls-in-Advance A/c, , Dr., , Calls-in-Advance A/c, To Equity Share First Call A/c, , Dr., , `, , 20,000, , (Being first call money received in advance on 10,000 equity shares @, ` 2 per share), , Feb. 15, , 20,000, , `, , 20,000, , 20,000, , (Being amount of calls-in-advance transferred to Share First Call A/c), , Calls-in-Advance Account, , Dr., Date, , Particulars, , 2020, Feb. 15 To Equity Share, First Call A/c, , J.F. Amount, `, , 20,000, 20,000, , Date, , Particulars, , 2020, Jan. 1 By Bank A/c, , Cr., J.F. Amount, `, , 20,000, 20,000, , Illustration 8 (Calls-in-advance), Swadeshi Company Ltd. issued 10,000 shares of ` 10 each. Payment on these shares is, to be made in the following manner :, On Application : ` 3 (1st Jan., 2020), On Allotment : ` 3 (1st March, 2020), On First Call : ` 2 (1st May, 2020), Balance in case of necessity., All the shares were subscribed. Minku to whom 500 shares were allotted paid the full, amount on first call., Pass necessary Journal entries., 1, , Students have not to study interest on calls-in-advance., , 2. In case Table ‘F’ of Companies Act, 2013 has been adopted, the company shall have to pay interest on, calls-in-advance @ 12% p.a., , 43
Page 530 :
SBPD Publications Accountancy (XII), Solution, , In the Books of Swadeshi Co. Ltd., Journal Entries, , Date, Particulars, 2020, Jan. 1 Bank A/c, To Share Application A/c, , Dr., `, , Dr., , 30,000, , Share Application A/c, To Share Capital A/c, , Dr., , 30,000, , Mar. 1 Share Allotment A/c, To Share Capital A/c, , Dr., , 30,000, , Bank A/c, To Share Allotment A/c, , Dr., , 30,000, , Share First Call A/c, To Share Capital A/c, , Dr., , 20,000, , Dr., , 21,000, , (For amount received on application @ ` 3 per share), , (For application money transferred to Share Capital A/c), , (For allotment money due), , (For allotment money received), , May 1, , Cr., , L.F. Amount Amount, `, , 30,000, 30,000, 30,000, 30,000, 20,000, , (For first call money due on 10,000 shares @ ` 2 each), , Bank A/c, To Share First Call A/c, To Calls-in-advance A/c, , (For first call money received on 10,000 shares and calls-in-advance, received on 500 shares @ ` 2 per share), , 20,000, 1,000, , Illustration 9 (Calls-in-advance), Escort India Ltd. issued 30,000 shares of ` 10 each. Payment on these shares is to be, made in the following manner : Application fee ` 2 per share received on 1st Jan., 2019,, Allotment fee ` 3 received on 1st Feb., 2019, First call of ` 2 and Second call of ` 3 were, received on 1st July, 2019 and 1st Nov., 2019 respectively. Pankaj who had 500 shares,, paid the amount of second call with first call. All the calls were made and amounts were, duly received., Pass the necessary Journal entries in the books of the company., Solution, In the Books of Escort India Ltd., Journal Entries, Dr., Cr., Date, Particulars, 2019, Jan. 1 Bank A/c, To Share Application A/c, , L.F. Amount Amount, `, , Dr., , 60,000, , Dr., , 60,000, , Dr., , 90,000, , Dr., , 90,000, , Dr., , 60,000, , (For amount received on application 30,000 shares at ` 2 each), , Share Application A/c, To Share Capital A/c, , `, , 60,000, 60,000, , (For transfer of application money to Share Capital A/c), , Share Allotment A/c, To Share Capital A/c, , (For allotment money due on 30,000 shares @ ` 3 per share), , Feb. 1 Bank A/c, To Share Allotment A/c, , (For allotment money received), , Share First Call A/c, To Share Capital A/c, (For first call money due on 30,000 shares @ ` 2 per share), , 44, , 90,000, 90,000, 60,000
Page 531 :
Accounting for Share Capital : Issue of Shares, July 1 Bank A/c, To Share First Call A/c, To Calls-in-advance A/c, , Dr., , 61,500, , (For first call money received on 30,000 shares and received ` 1,500, Calls-in-advance on 500 shares @ ` 3 per share), , Share Second & Final Call A/c, To Share Capital A/c, , Dr., , 90,000, , Dr., Dr., , 88,500, 1,500, , (For second call money due on 30,000 shares @ ` 3 per share), , Nov. 1 Bank A/c, Call-in-advance A/c, To Share Second & Final Call A/c, , 60,000, 1,500, , 90,000, , 90,000, , (For amount of second call received on 29,500 shares and adjustment, of ` 1,500 received in advance), , Interest on Calls-in-advance is a charge against the profits and hence is to be, paid whether there are profits or not., Illustration 10 (Calls-in-arrear and Calls-in-advance), Rohit & Company issued 30,000 shares of ` 10 each payable at` 3 on application, ` 3 on, allotment and ` 2 on first call after two months. All money due on allotment was received,, but when the first call was made a shareholder having 400 shares did not pay the first call, and a shareholder of 300 shares paid the money for the second and final call of ` 2, which, had not been made as yet., Give the necessary Journal entries in the books of Rohit & Company., (N.C.E.R.T.), Solution, In the Books of Rohit & Company, Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To Share Application A/c, , L.F. Amount, , Amount, , `, , Dr., , 90,000, , Share Application A/c, To Share Capital A/c, , Dr., , 90,000, , Share Allotment A/c, To Share Capital A/c, , Dr., , 90,000, , Bank A/c, To Share Allotment A/c, , Dr., , 90,000, , Share First Call A/c, To Share Capital A/c, , Dr., , 60,000, , Bank A/c (` 59,200 + 600), Call-in-Arrears A/c (400 Shares ´ ` 2), To Share First Call A/c (30,000 Shares ´ ` 2), To Calls Paid-in-Advance A/c (300 Shares ´ ` 2), , Dr., Dr., , 59,800, 800, , `, , 90,000, , (Being application money received on 30,000 shares @ ` 3 per share), , (Being application money transferred to Share Capital A/c), , (Being allotment money due on 30,000 shares @ ` 3 per share), , 90,000, , 90,000, , 90,000, , (Being allotment money received), , (Being first call money due on 30,000 shares @ ` 2 per share), , 60,000, , 60,000, 600, , (Being share first call money received on 29,600 shares @ 2 per share and, calls paid in advance on second call received on 300 shares @ 2 per, share), , 45
Page 532 :
SBPD Publications Accountancy (XII), [Journal and Cash Book Entries or (Use of Cash Book)], Illustration 11 (Cash Book), Prashant Ltd. issued 10,000 equity shares of ` 100 each payable at ` 20 on application,, ` 30 on allotment, ` 30 on first call and ` 40 on second and final call. All the amounts were, duly received., Prepare Cash Book in the books of Prashant Ltd., (J.A.C., 2018), Solution, Dr., Cash Book (Bank Column), Cr., Particulars, To Equity Share Application A/c, To Equity Share Allotment A/c, To Equity Share First Call A/c, To Equity Share Second & Final, Call A/c, , Amount, , Particulars, , Amount, , `, , `, , 2,00,000 By Balance c/d, 3,00,000, 3,00,000, , 12,00,000, , 4,00,000, 12,00,000, , 12,00,000, , Illustration 12 (Issue of Equity and Preference Shares/Use of Cash Book), The Dass Motors Co. Ltd., which has been registered with an Authorised Capital of, ` 20,00,000 divided into 1,00,000 Equity Shares of ` 10 each and 10,000 Preference Shares of, ` 100 each, offered to the public for subscription 60,000 equity shares and 8,000 preference, shares. The amount payable on both types of shares was as follows : 10% on application,, 30% on allotment, 30% on first call and 30% on second and final call., All the shares except 500 equity shares on which final call money and 600 preference, shares on which first and final call money was not paid were taken up and money, duly paid., You are required to pass Journal and Cash Book entries., Solution, In the Books of Dass Motors Co. Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount Amount, `, , Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 60,000, , Preference Share Application A/c, To Preference Share Capital A/c, , Dr., , 80,000, , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 1,80,000, , Dr., , 2,40,000, , Equity Share First Call A/c, To Equity Share Capital A/c, , Dr., , 1,80,000, , Preference Share First Call A/c, To Preference Share Capital A/c, , Dr., , 2,40,000, , (For application money on 60,000 equity shares at ` 1 per share, transferred to Equity Share Capital A/c), , (For transfer of application money on 8,000 preference shares at ` 10, per share to Preference Share Capital A/c), , `, , 60,000, , 80,000, , 1,80,000, , (For amount due on 60,000 equity shares at ` 3 per share), , Preference Share Allotment A/c, To Preference Share Capital A/c, , 2,40,000, , (For amount due on 8,000 preference shares at ` 30 per share), , (For amount due on 60,000 equity shares at ` 3 per share), , (For amount due on 8,000 preference shares at ` 30 per share), , 46, , 1,80,000, 2,40,000
Page 533 :
Accounting for Share Capital : Issue of Shares, Equity Share Second & Final Call A/c, To Equity Share Capital A/c, , Dr., , 1,80,000, , Preference Share Second & Final Call A/c, To Preference Share Capital A/c, , Dr., , 2,40,000, , (For amount due on 60,000 equity shares at ` 3 per share), , 1,80,000, 2,40,000, , (For amount due on 8,000 preference shares at ` 30 per share), , Cash Book, , Dr., Particulars, , Amount, , To Equity Share Application A/c, To Preference Share Application A/c, To Equity Share Allotment A/c, To Preference Share Allotment A/c, To Equity Share First Call A/c, To Preference Share First Call A/c, To Equity Share Second and Final, Call A/c, To Preference Share Second and, Final Call A/c, , To Balance b/d, , Cr., Particulars, , `, , 60,000 By Balance c/d, 80,000, 1,80,000, 2,40,000, 1,80,000, 2,22,000, , Amount, `, , 13,62,500, , 1,78,500, 2,22,000, 13,62,500, , 13,62,500, , 13,62,500, , Issue of Shares at Premium, , [Sec. 52], , Meaning : When a share is issued at a price which is above its face value (or nominal, value), it is known as the shares issued at premium. For example, an equity share having a, face value of ` 10 is issued at ` 12. Here ` 2 ( ` 12 – 10) is the premium on such share. Thus,, the amount in excess of face value is called share premium. As per provisions of the Indian, Companies Act, when a company issues shares at a premium, whether received in cash or, otherwise, it must be credited to a separate account called ‘Securities Premium Account’., Securities premium is a capital receipt. It is shown on the liabilities side of the, Balance Sheet under the head ‘Reserves and Surplus'. It can be utilised in writing off, capital losses., Utilisation of the Premium Money, Section 52(2) of the Indian Companies Act regulates the utilisation of the money, called as premium., Premium on shares, that is, Securities Premium Account may be used wholly or in, part for the following purposes :, (i) Issuing fully paid bonus shares to the members;, (ii) Writing off the preliminary expenses of the company;, (iii) Writing off the expenses incurred or the commission paid, or discount allowed on, any issue of shares or debentures of the company; or, (iv) Providing for the premium payable on the redemption of any redeemable, preference shares or any debentures of the company. Thus, securities premium cannot be, distributed as dividend;, (v) In purchasing its own shares Buy-back., [Sec. 68], , 47
Page 534 :
SBPD Publications Accountancy (XII), 1., 2., , Important Note, The amount of Securities Premium may be demanded either in lump-sum, or in instalment., The amount of securities premium may be demanded alongwith application,, allotment or call money., , ❐ If the question is silent, it is assumed that the amount of securities premium is due alongwith, the allotment money., , 3., , 4., , Securities Premium A/c versus Securities Premium Reserve A/c, As per Section 52(1) of the Companies Act, 2013 the amount of premium, should be Credited to ‘Securities Premium A/c’ whereas Schedule III of the, Companies Act, 2013 has given the head ‘Securities Premium Reserve Advise’,, Students may use either of the two terms while making the Journal entries, for securities premium., Securities premium is in the nature of capital receipt and not a revenue receipt., , Accounting Treatment, Journal Entries, (1) When Share Premium is payable with Application Money :, (i) At the time of Receipt of Application Money :, Bank A/c, Dr. (With total application money, To Share Application A/c, including share premium), (For share application money received alongwith, premium), , (ii) At the time of transfer of Application Money :, Share Application A/c, Dr. (Total Application Money), To Share Capital A/c, (With money received for capital), To Securities Premium A/c or, (Money received for share premium), Securities Premium Reserve A/c, (For application money transferred to Share, Capital A/c and Securities Premium A/c or, Securities Premium Reserve A/c), , (2) When Premium is payable on Allotment :, (i) Share Allotment A/c, Dr., To Share Capital A/c, To Securities Premium A/c or, Securities Premium Reserve A/c, (For allotment money due together with premium), , (ii) On receipt of Allotment Money :, Bank A/c, Dr., To Share Allotment A/c, , (For allotment money received including premium), , (3) When Premium is payable with Share Call Money :, (i) Share Call A/c, Dr., To Share Capital A/c, To Securities Premium A/c or, Securities Premium Reserve A/c, (For call money due together with premium), , (ii) When Call Money is received :, Bank A/c, To Share Call A/c, , Dr., , (For call money received including premium), , 48
Page 535 :
Accounting for Share Capital : Issue of Shares, Illustration 13(A) (Issue of Shares at Premium), Sunrise Ltd. invited applications for issuing 20,000 equity shares of ` 10 each at a, premium of ` 3 per share. The whole amount was payable on application. The issue was, fully subscribed., Pass Journal Entries., Solution, In the Books of Sunrise Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To Equity Share Application and Allotment A/c, , L.F. Amount, Dr., , `, , 2,60,000, , Amount, `, , 2,60,000, , (Being application money received on 20,000 equity shares of ` 10, each at a premium of ` 3 per share), , Equity Share Application & Allotment A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , 2,60,000, , (Being application money transferred to share capital account and, securities premium account), , 2,00,000, 60,000, , Illustration 13(B) (Issue of Shares at Premium), Jupiter Company Limited issued 35,000 equity shares of ` 10 each at a premium of ` 2, payable as follows :, (N.C.E.R.T.), On Application, `3, On Allotment, ` 5 (including Premium), Balance on First and Final Call, The issue was fully subscribed and all the money was duly received., Record Journal entries in the books of Jupiter Company Limited., Solution, In the Books of Jupiter Company Limited, Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To Equity Share Application A/c, , L.F. Amount, Dr., , `, , 1,05,000, , Amount, `, , 1,05,000, , (Being equity share application money received on 35,000 equity, shares @ ` 3 per share), , Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 1,05,000, , 1,05,000, , (Being equity share application money received on 35,000 equity shares, @ ` 3 per share transferred to Equity Share Application A/c), , Equity Share Allotment A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , Bank A/c, To Equity Share Allotment A/c, , Dr., , Equity Share First and Final Call A/c, To Equity Share Capital A/c, , Dr., , 1,75,000, , (Being equity share allotment money due on 35,000 equity shares, @ ` 5 per share including premium @ ` 2 per share), , 1,75,000, , (Being equity share allotment money received on 35,000 equity shares, @ ` 5 per share including premium), , 1,40,000, , 1,05,000, 70,000, , 1,75,000, , 1,40,000, , (Being equity share first and final call money due on 35,000 equity, shares @ ` 4 per share), , 49
Page 536 :
SBPD Publications Accountancy (XII), Bank A/c, To Equity Share First and Final Call A/c, , Dr., , (Being equity share first and final call money received on 35,000, equity shares @ ` 4 per share), , 1,40,000, , 1,40,000, , Issue of Shares at Discount, [Sec. 53], Meaning : When shares are issued at a price less than their face value (or nominal, value) it is said that they have been issued at discount. For example, if a share of ` 10 is, issued for ` 9, ` 1 ( ` 10 – 9) will be treated as discount on issue of shares., Prohibition on Issue of Shares at Discount, According to section 53 :, (1) Except as provided in section 54 of the Indian Companies Act, 2013, a, company shall not issue shares at a discount., (2) Any share issued by a company at a discounted price shall be void., (3) Only Sweat Equity Shares can be issued by the company at discount to its, employees or directors as per section 54 of the Companies Act, 2013. Thus,, shares can be issued now only (i) at par, or at premium., (4) Where a company contravences the provisions of this section, the company, shall be punishable with fine of ` 1 lakh to ` 5 lakh and every officer who is, in default shall be punishable with imprisonment for term which may extend, to 6 months or with fine (between ` 1 lakh to ` 5 lakh) or with both., Discount on issue of shares is a capital loss. Therefore, discount on issue of shares, if, any, should be written off out of profit or shown as negative item under the head ‘‘Reserves, and Surplus’’., Journal Entries, (1) At the time of Allotment of Shares :, Share Allotment A/c, Dr., Discount on Issue of Shares A/c, Dr., To Share Capital A/c, (For amount of allotment due and discount allowed), , (2) On receipt of Amount Money :, Bank A/c, To Share Allotment A/c, , Dr., , (For money excluding discount received), , (3) At the time of writing off Discount :, Statement of Profit & Loss, To Discount on Issue of Shares A/c, , Dr., , (For discount on shares written off), , Share Issued at Discount : As per Companies Act 2013 Issue of Share at discount is, restricted., Under-subscription of Shares, Meaning of Under-subscription : Sometimes shares are under-subscribed. When, the number of shares applied for by the public is less than the number of shares issued by, the company, it is called under-subscription. For example, if Minku Ltd. issues 10,000, shares of ` 100 each and applications are received for 9,500 shares, such a situation will be, termed as ‘under-subscription’., It must be noted that a company can allot shares only after satisfying the condition of, minimum subscription (i.e., 90% of issued shares)., Accounting Treatment in case of Under-subscription : Under-subscription does, not require any special treatment. Journal entries are made on the basis of actual number, of shares applied for and allotment made., , 50
Page 537 :
Accounting for Share Capital : Issue of Shares, Illustration 14, Sanjay Ltd. invited applications for 60,000 shares of ` 10 each payable as follows :, On Application, `3, On Allotment, `4, On First and Final Call, `3, The applications were received for 55,000 shares and all of these were accepted. All, money due were received., Pass the necessary Journal entries in the books of the company., Solution, In the Books of Sanjay Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To Share Application A/c, , Dr., , Amount, , Amount, , `, , `, , 1,65,000, 1,65,000, , (For share application money received on 55,000 shares @ ` 3 per share), , Share Application A/c, To Share Capital A/c, , Dr., , 1,65,000, 1,65,000, , (For share application money transferred to Share Capital A/c), , Share Allotment A/c, To Share Capital A/c, , Dr., , 2,20,000, 2,20,000, , (For share allotment money due on 55,000 shares @ ` 4 per share), , Bank A/c, To Share Allotment A/c, , Dr., , 2,20,000, 2,20,000, , (For allotment money received), , Share First and Final Call A/c, To Share Capital A/c, , Dr., , 1,65,000, 1,65,000, , (For share first and final call money due on 55,000 shares @ ` 3 per share), , Bank A/c, To Share First and Final Call A/c, , Dr., , 1,65,000, 1,65,000, , (For first and final call money received), , Over-subscription of Shares, When the number of shares applied for are more than the number of shares offered to, the public, the issue is said to be over-subscribed. However, a company cannot allot shares, more than those offered for subscription., If the shares of the company are dealt in the recognised stock exchanges then the, excess money can not be utilised towards allotment or other calls. The excess money shall, have to be refunded otherwise the directors will have to return the money along with, interest at the rate of 12% p.a., If, however, the permission is obtained from the stock exchange, the company can, utilise excess application money towards allotment and calls., In case of over-subscription there are three options available to the company, regarding allotment of shares :, (1) Full Allotment and Rejection of Excess Applications : The applications for, excess shares are rejected and full allotment is made upto the number of shares offered., Where some applications are totally rejected, the whole of the application money received, thereon shall be refunded., (2) Partial Allotment : Partial allotment means that all or some applicants get a, smaller number of shares than the number of shares applied for., , 51
Page 538 :
SBPD Publications Accountancy (XII), (3) Pro-rata Allotment : All applicants may be allotted less number of shares than, they have applied for. In this case, shares are allotted to all applicants but proportionately., Therefore, this is known as ‘pro-rata allotment'. In case of pro-rata allotment surplus, application money is not refunded but retained. It is treated as payment towards allotment, and calls. So, excess application money is adjusted towards sum due on allotment. Any, excess amount, beyond this amount (that is, adjustment towards allotment), shall be, either refunded to the allottees or adjusted towards sum due on call. For example, if, company issues 10,000 shares in the public but the public applies for 12,000 shares. Such, case is known as over-subscription., Now, if the directors decide to allot on pro-rata basis, it would mean that 10,000, shares will be issued to the applicants in portion to the number of shares applied for by, them. Thus, the ratio of allotment will be 12,000 : 10,000, i.e., 6 : 5. In this way, if any, applicant has applied for 6 shares, he will get 5 shares., (4) Mixed Approach : Some applicants' applications are accepted and allotted in full,, some are rejected (or not allotted) out right and rest may be allotted shares proportionately., In case of partial and pro-rata allotment, the excess application money is not refunded, but is adjusted towards the money due on allotment and calls., Unless and otherwise stated in the question, the excess application, money over and above that due on allotment should be refunded to the, allottees, i.e. shareholders., Distinction between Over-subscription and Under-subscription, Basis of Difference, (i) Meaning, , Over-subscription, In this, the number of shares, applied for is more than the, number of shares offered to, the public., , Under-subscription, In this, the number of shares, applied for is less than the, number of shares offered to, the public., , (ii) Acceptance of Applications or In this, some applications, Allotment, have to be rejected., (iii) Minimum Subscription, In this, the problem of, minimum subscription does not, arise., (iv) Return of Money, The Company returns the, money to the applicants whose, applications have either been, rejected or have been accepted, partially., , In this, all the applications are, accepted., In this, a company has to, ensure that it has received, minimum subscription., The question of returning the, money does not arise., , ❏ Reservation for Small Applicants (Investors), In case of over-subscription of shares, as per SEBI guidelines, the following, reservation for small individual applications should be kept in mind :, (a) A minimum of 50% of the net offer to public, should be initially made to individual, applicants who have applied for 10 or less than 10 marketable lots of the securities offered., (b) The remaining net offer to public shall be allotted to :, (i) The individual applicants who have applied for more than 10 marketable lots, of the securities; and, (ii) Other investors including corporate bodies or institutions irrespective of the, number of shares applied for., (c) The unsubscribed portion of the net offer made to any of the above mentioned two, categories shall may be allotted to other categoreis., The allotment is to be made in marketable lots separately on proportionate basis., , 52
Page 539 :
Accounting for Share Capital : Issue of Shares, ❏ Minimum Marketable or Tradeable Lot, It is fixed on the basis of offer price of the shares of ` 10 each at the option of the, company and in consultation with the Stock Exchange. The minimum marketable lot, in, no case, cannot be more than 100 shares., Offer Price per Share, (i), Upto ` 100, (ii) ` 101-400, (iii) More than ` 400, , Minimum Marketable Lot, 100 Shares, 50 Shares, 10 Shares, , Accounting Treatment in case of Over-Subscription, Following entries are passed for recording over-subscription :, (1) For total amount received on application :, Bank A/c, Dr. (No. of Shares Applied ´ per share, To Share Application A/c, application money), (Being application money received), , (2) For transferring application money into Share Capital Account and, refund of application money on rejected applications :, Share Application A/c, Dr., To Share Capital A/c, (with amount trans. to Share Capital A/c), To Bank A/c, (with amount refunded), (Being transfer to Share Capital A/c and excess money returned), , (3) For adjusting the excess application money towards share allotment, and calls-in-advance :, Share Application A/c, Dr., To Share Allotment A/c, To Calls-in-advance A/c, or Compound Entry for No. 2 & 3 entries :, Share Application A/c, Dr., To Share Capital A/c, (No. of Shares allotted ´ Rate), To Bank A/c, (Rejected Shares ´ Rate of application money), To Share Allotment A/c, (Adjustment toward allotment), To Share Call-in-advance A/c, (Excess amount, if any), Illustration 15(A) [Refund of Excess Amount (Case I)], Megha Ltd. had invited applications for 40,000 equity shares of ` 10 each at a, premium of ` 5 each. The total application money received at ` 6 per share was ` 3,00,000., Specify the kind of subscription and pass entries for application, while extra amount is to, be refunded., Solution, Applications invited for 40,000 equity shares @ ` 6 per share, i.e., 40,000 ´ ` 6 =, ` 2,40,000 (required). Actual amount received ` 3,00,000. Hence it is a case of, over-subscription., In the Books of Megha Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To Equity Share Application A/c, , (Being application money received on 50,000 shares @ ` 6 per share), , L.F. Amount Amount, Dr., , `, , 3,00,000, , `, , 3,00,000, , 53
Page 540 :
SBPD Publications Accountancy (XII), Equity Share Application A/c, To Equity Share Capital A/c, To Bank A/c, , Dr., , 3,00,000, , (Being application money adjusted and surplus amount refunded), , 2,40,000, 60,000, , Illustration 15(B), Dolly Ltd. invited application for 40,000, 10% preference shares of ` 20 each payable, whole amount on application. 50,000 shares were applied for. The directors accepted, applications for 40,000 shares and rejected the remaining applications. Give journal, entries., Solution, In the Books of Dolly Ltd., Journal Entries, Date, , Particulars, , L.F., , Amount, `, , Bank A/c, Dr., To 10% Preference Share Application & Allotment A/c, , 10,00,000, , Amount, `, , 10,00,000, , (Being application money received on 50,000, 10% Pref. shares @ ` 20 per, share), , 10% Preference Share Application & Allotment A/c, To 10% Preference Share Capital A/c (40,000 ´ ` 20), To Bank A/c (10,000 ´ ` 20), , Dr., , 10,00,000, , (Being application money adjusted and surplus refunded), , 8,00,000, 2,00,000, , Illustration 16, On 1st January, 2019 the Directors of X Ltd. decided to issue 1,00,000 shares of ` 10, each, ` 2.50 payable on application and ` 2.50 payable on allotment., Applications are received for 1,20,000 shares. On 10th January the Directors decided, to reject applications in respect of 20,000 shares, the application money being refunded in, full. All allotment money are received in full., On 31st March call of ` 2.50 per share was made and all sums due were received except, on 1,000 shares allotted to Mr. A. Pass necessary Journal entries., (J.A.C., 2009), Solution, Analysis Table, Application, Issued, , Application, Received, , Shares, Allotted, , Application, Money Received, , 1, , 2, , 3, , 4, , 1,00,000, , 1,20,000, , 1,00,000, , 3,00,000, , Application, Money, Due, , `, , 5, `, , 2,50,000, , Excess, (Col. 4 – Remarks, Col. 5), 6, , 7, , `, , Refund, in Cash, , 50,000, , Calls-in-arrear on First Call = 1,000 ´ 2.50 = ` 2,500., In the Books of X Ltd., Journal Entries, Date, Particulars, 2019, Jan. 1 Bank A/c, To Share Application A/c, , Dr., , L.F. Amount Amount, Dr., , (For application money received on 1,20,000 shares @ ` 2.50 per share), , 54, , Cr., , `, , 3,00,000, , `, , 3,00,000
Page 541 :
Accounting for Share Capital : Issue of Shares, Jan. 10 Share Application A/c, To Share Capital A/c, To Bank A/c, , Dr., , 3,00,000, , Share Allotment A/c, To Share Capital A/c, , Dr., , 2,50,000, , Bank A/c, To Share Allotment A/c, , Dr., , 2,50,000, , (For application money transferred to Share Capital A/c on 1,00,000, shares and refund in respect of 20,000 shares which were rejected), , (For allotment money due on 1,00,000 shares @ ` 2.50 per share), , (For allotment money received on 1,00,000 shares @ ` 2.50 per share), , Mar. 31 Share First Call A/c, To Share Capital A/c, , Dr., , 2,50,000, , Dr., , 2,47,500, , (For first call money due on 1,00,000 shares @ ` 2.50 per share), , Bank A/c, To Share First Call A/c, , 2,50,000, 50,000, , 2,50,000, 2,50,000, 2,50,000, 2,47,500, , (For first call money received on 99,000 shares @ ` 2.50 per share), , Illustration 17 [Excess Application Money Utilised on Allotment (Case II)], A Ltd. Company issued 10,000 shares of ` 20 each to the public payable ` 4 on, application, ` 8 on allotment and ` 8 on first call. Applications were received for 12,500, shares. The Directors decided to allot 10,000 shares and surplus of application money was, utilised for allotment., Pass the Journal entries assuming that the amounts due were received., Solution, Analysis Table, Shares, Issued, 10,000, , Shares, Applied for, 12,500, , Shares, Allotted, , Application, Application, Money Received Money Due, , 10,000, , `, , 50,000, (12, 500 ´ 4), , `, , Remarks, , `, , 40,000, 10,000, (10,000 ´ 4) (50,000 40,000), , In the Books of A Ltd., Journal Entries, Date, , Excess, (Surplus), , Dr., , Particulars, , Excess, adjusted, towards, Allotment, , Cr., , L.F. Amount Amount, `, , Bank A/c, To Share Application A/c, , Dr., , 50,000, , Share Application A/c, To Share Capital A/c, To Share Allotment A/c, , Dr., , 50,000, , Share Allotment A/c, To Share Capital A/c, , Dr., , 80,000, , Bank A/c, To Share Allotment A/c, , Dr., , 70,000, , Share First and Final Call A/c, To Share Capital A/c, , Dr., , 80,000, , (For application money received on 12,500 shares @ ` 4 per share), , (For transfer of application money to Share Capital A/c on 10,000, shares and excess money to allotment for adjustment), , (For amount due on allotment @ ` 8 per share), , (For amount received for allotment), , `, , 50,000, 40,000, 10,000, , 80,000, 70,000, 80,000, , (For first and final call money due on 10,000 shares @ ` 8 per share), , 55
Page 542 :
SBPD Publications Accountancy (XII), Bank A/c, To Share First and Final Call A/c, , Dr., , 80,000, , (For amount received on first and final call), , 80,000, , Illustration 18 [Refund of Excess Application Money and Adjustment towards, Allotment (Case III)], The Delhi Ltd. was registered on 1.1.2019 with an authorised capital of ` 1,00,000, divided into 10,000 equity shares of ` 10 each. The company offered for sale 5,000 shares on, which money was payable as follows : ` 2 on Application, ` 2 on Allotment, ` 3 on First Call, and ` 3 on Second and Final Call., The company received applications for 6,000 shares. Allotment was duly made. Half, of the excess money received on application was refunded and the remaining half was, adjusted towards allotment. All the calls were made and money received., Make the necessary Journal entries in the books of the company., Solution, Shares Issued, Shares Applied, Pro-rata, 5,000, 6,000, 5,500, Refund (500 Shares, Adjustment to Allotment, (i.e., 500 × ` 2 = ` 1,000), 500 Shares, (i.e. 500 × ` 2 = ` 1,000), In the Books of Delhi Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Bank A/c, To Equity Share Application A/c, , Dr., , 12,000, , Equity Share Application A/c, To Equity Share Capital A/c, To Equity Share Allotment A/c, To Bank A/c, , Dr., , 12,000, , (For application money received @ ` 2 per share on 6,000 shares), , Amount, `, , 12,000, 10,000, 1,000, 1,000, , (For application money transferred to Share Capital, share allotment, for adjustment and balance refunded to applicants), , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 10,000, , Bank A/c, To Equity Share Allotment A/c, , Dr., , 9,000, , Equity Share First Call A/c, To Equity Share Capital A/c, , Dr., , 15,000, , Bank A/c, To Equity Share First Call A/c, , Dr., , 15,000, , Equity Share Second & Final Call A/c, To Equity Share Capital A/c, , Dr., , 15,000, , (For allotment money due @ ` 2 per share on 5,000 shares), , 10,000, 9,000, , (For allotment money received), , (For first call money due @ ` 3 per share on 5,000 shares), , (For first call money received), , (For second and final call due @ ` 3 per share on 5,000 shares), , 56, , 15,000, 15,000, 15,000
Page 543 :
Accounting for Share Capital : Issue of Shares, Bank A/c, To Equity Share Second & Final Call A/c, , Dr., , 15,000, , 15,000, , (For second and final call money received), , Illustration 19, X Ltd. issued 10,000 equity shares of ` 10 each payable as ` 2 on applications, ` 3 on, allotment and the balance on first and final call. Applications were received for 12,000, shares. Directors of the company allotted them as under : Applicants for 8,000 shares were, allotted all the shares. Applicants who applied for 3,000 shares were allotted 2,000 shares, and applicants of 1,000 shares were not allotted shares at all. Application allotment and, call money were duly received. Pass necessary Journal entries in the books of the company., (U.S.E.B., 2018), Solution, In the Books of X Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , Bank A/c, To Equity Share Application A/c, , Dr., , 24,000, , Dr., , 24,000, , Amount, `, , 24,000, , (Being application money received on 12,000 shares @ ` 2 per, share), , Equity Share Capital A/c, To Equity Share Capital A/c (10,000 × ` 2), To Equity Share Allotment A/c (1,000 × ` 2), To Bank A/c (1,000 × ` 2), , 20,000, 2,000, 2,000, , (Being the application money transferred to Share Capital A/c and, excess money adjusted and refunded), , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 30,000, , Bank A/c, To Equity Share Allotment A/c, , Dr., , 28,000, , (Being allotment money due), , (Being allotment money received), , Equity Share First and Final Call A/c, To Equity Share Capital A/c, , Dr., , 50,000, , 30,000, , 28,000, , 50,000, , (Being first & Final Call money due on 10,000 shares @ 5 per share), , Bank A/c, To Equity Share First & Final Call A/c, , Dr., , 50,000, , 50,000, , (Being first and final call money received), , Illustration 20 (Over-subscription and Adjustment of Excess Allotment Amount, in Calls-in-advance), Srijan Ltd. issued 10,000 shares of ` 100 each at a premium of ` 20 per share, payable, as follows :, On Application, ` 10 per share, On Allotment, ` 40 per share (including premium of, ` 10 per share), On First & Final Call, Balance, Over payments on application were to be applied towards sums due on allotment and, first and final call. Where no allotment was made, money was to be refunded in full, applications were received for 23,000 shares., , 57
Page 544 :
SBPD Publications Accountancy (XII), Applicants for 12,000 shares were allotted only 2,000 shares and applicants for 3,000, shares were sent letters of regret and application money was returned to them., All the money due was duly received. Give Journal entries to record the above, transactions in the books of the company., Solution, In the Books of Shaijan Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , Bank A/c, To Share Application A/c (23,000 ´ ` 10), , Dr., , 2,30,000, , Share Application A/c, To Share Capital A/c (10,000 × ` 10), To Share Allotment A/c (2,000 × ` 40), To Calls in Advance A/c (` 1,00,000 – ` 80,000)1, To Bank A/c (3,000 × ` 10), , Dr., , 2,30,000, , Share Allotment A/c, To Share Capital A/c, To Securities Premium Reserve A/c, , Dr., , 4,00,000, , Bank A/c, To Share Allotment A/c, , Dr., , 3,20,000, , Share First and Final Call A/c, To Share Capital A/c, To Securities Premium Reserve A/c 2, , Dr., , 7,00,000, , Bank A/c, Calls in Advance A/c, To Share First & Final Call A/c, , Dr., Dr., , 6,80,000, 20,000, , Amount, `, , 2,30,000, , (Being application money received for 23,000 shares @ ` 10 per, share), , 1,00,000, 80,000, 20,000, 30,000, , (Being application money adjusted), , (Being allotment money due on 10,000 shares), , (Being allotment money received), , (Being first & final Call due on 10,000 shares including the, remaining premium of @ ` 10), , 3,00,000, 1,00,000, 3,20,000, 6,00,000, 1,00,000, , 7,00,000, , (Being Call money received), Working Notes :, 1. Applicants for 12,000 shares have been allotted 2,000 shares., Hence excess application money received on 10,000 shares @ ` 10 per share, Less : Amount adjusted on Allotment on 2,000 shares @ ` 40 per share, , `, 1,00,000, 80,000, Balance 20,000, , This amount of ` 20,000 will be transferred to Calls in Advance A/c, as it will be adjusted on future calls., 2. Out of premium of ` 20, ` 10 are due on allotment., Remaining ` 10 will be assumed to be due on first and final call., , Illustration 21, Sarthak Ltd. invited applications for 40,000 equity shares of ` 50 each, issued at a, premium of ` 10 per share. The amount was payable as follows :, On application and allotment ` 20 per share. Balance (including premium) on first, and final call., Applications for 70,000 shares were received. Applications for 20,000 shares were, rejected and pro-rata allotment was made to the remaining applicants. First and final call, was made and duly received except on 400 shares allotted to Nitesh., Pass Journal entries to record these transactions., , 58
Page 545 :
Accounting for Share Capital : Issue of Shares, Solution, , Working Notes :, (i) Statement showing application money received and adjusted :, Shares Issued, Shares Applied, Pro-rata Allotment, 40,000, 70,000, 50,000, , Adjustment to Share First & Final Call (Calls in Advance), Befund (20,000 Shares), 10,000 Shares, (i.e., 20,000 × ` 20 = ` 4,00,000), (i.e., 10,000 × ` 20 = ` 2,00,000), (ii) No. of Shares applied by Nitesh :, Pro-rata Shares, =, × No. of Shares Allotted to Nitesh, Actual Shares Issued, 50, 000, =, × 400 = 500 Shares, 40, 000, (iii) Share First and Final Call money due on 400 shares of Nitesh, (400 × ` 40), Less : His excess application money adjusted to First and Final Call (500 – 400) × ` 20, Amount unpaid on Share First & Final Call, (iv) Amount received on First and Final Call, Amount due on First and Final Call (40,000 × ` 40), Less : Amount already adjusted to First and Final Call (Calls in Advance), Less : Amount unpaid on First and Final Call in respect of Nitesh, , In the Books of Sarthak Ltd., Journal Entries, Date, , Particulars, , Dr., L.F., , Amount, `, , Bank A/c, To Share Application and Allotment A/c, , Dr., , 14,00,000, , Dr., , 14,00,000, , `, 16,000, 2,000, 14,000, 16,00,000, 2,00,000, 14,00,000, 14,000, 13,86,000, , Cr., Amount, `, , 14,00,000, , (Being application money received on 70,000 shares @ ` 20, per share), , Share Application and Allotment A/c, To Share Capital A/c (40,000 × ` 20), To Bank A/c (20,000 × ` 20), To Calls in Advance A/c (10,000 × ` 20), , 8,00,000, 4,00,000, 2,00,000, , (Being application and allotment money transferred to Share, Capital, refund on 20,000 applications and balance adjusted, towards allotment and calls in advance), , Share First and Final Call A/c (40,000 × ` 40), To Share Capital A/c (40,000 × ` 30), To Securities Premium A/c (40,000 × ` 10), , Dr., , 16,00,000, , Bank A/c, Calls in Advance A/c, To Share First and Final Call A/c, , Dr., Dr., , 13,86,000, 2,00,000, , (Being amount due on first and final call), , 12,00,000, 4,00,000, , 15,86,000, , (Being amount received on first and final call excepting 400 shares), , 59
Page 546 :
SBPD Publications Accountancy (XII), ❏ Issue of Shares to Employees, Now-a-days companies issue shares on a preferential basis to their employees (including, whole time directors). This gives employees a sense of belonging and loyalty to the company. A, company can issue shares to their employees under following two schemes :, (a) Employees Stock Purchase Scheme (ESPS),, (b) Employees Stock Option Plan (ESOP)., [Section 2(37)], Employees Stock Purchase Scheme (ESPS) : Employee stock purchase scheme is, a preferential allotment of shares to employees at a pre-determined price. It is a scheme, under which the company offers shares to employees a part of public issue or otherwise. In, such a case, the allottees will not sell their securities in the open market for a minimum, period of one year from the date of allotment. This scheme is subject to guidelines issued by, SEBI., Employees Stock Option Plan (ESOP) : Employees Stock Option Plan is an, employees compensation scheme through which companies want to introduce a sense of, belonging and participation among the employees. Under this scheme a choice is given to, the whole time directors, officers and employees whereby they get the right to purchase or, subscribe the securities of the company at a price much lower than the market price., It should be noted that employees are not bound to buy such shares under any, compulsion. They may buy or may not buy the shares. The company simply gives an option, to the employees to purchase shares according to their will. Hence, it is known as, Employees Stock Option Plan (ESOP)., This plan is not open to the employees or directors who belong directly or indirectly to, promotor group who hold more than 10% of the company's shares., Lock-in Period : The shares purchased under this scheme shall be locked-in for a, minimum period of one year from the date of allotment. They cannot be traded within, lock-in period. The ‘lock-in period’ is not applicable to shares purchased by employees, through a public issue., ❏ Stages in the Employees Stock Option Plan, There are three stages in the employees stock option plan :, (i) Granting of Option : The first stage is the declaration by the company that it is, granting the options to the employees at a pre-determined price., (ii) Filing of Application : The second stage is the filing of a application by the, employees, if they wish, within a ‘vesting period’, that they want to exercise this right., (iii) Paying the Amount : In the third stage the employees pay the amount to, acquire the shares physically during the exercise period., ESOP has become very popular in recent years. Infosys Technologies Ltd. was, perhaps the first company to have introduced this scheme in India. Later on Wipro Ltd.,, Gujarat Ambuja Cement Ltd. and a host of other companies also issued such shares., Note : If the employees fail to tender the price for the shares even after accepting the offer, the option lapses, and the employees lose the right to buy the shares., , 3.2 Issue of Shares for Consideration other than Cash, Meaning : When a company issues shares not for cash but for purchase of some assets, or services, it is called issue of shares for consideration other than cash. Such issues may be, in the following circumstances :, (a) Issue of Shares to Vendors (for Purchase of Assets)., (b) Issue of Shares to Promoters etc. (for Managerial Services, Technical Services etc.)., , 60
Page 547 :
Accounting for Share Capital : Issue of Shares, (A) Issue of Shares to Vendors, Sometimes a company issues fully paid shares to the vendors from whom it buys some, assets. Such shares may be issued by the company to the vendors either at par, or at, premium or at discount., According to the Companies Act, issue of such shares must be distinguished from the, issue made for cash. These shares must be clearly stated in the Balance Sheet., Calculation of Number of Shares to be Issued, (a) When Shares are Issued at Premium :, Purchase Price / Amount Payable, Number of Shares to be Issued =, Issue Price (Face Value + Premium), (b) When Shares are Issued at Discount :, Purchase Price /Amount Payable, Number of Shares to be Issued =, Issue Price (Face Value – Discount), (c) When Shares are Issued at Par :, Number of Shares to be Issued =, (d) Nominal Value of Shares =, , Purchase Price /Amount Payable, Issue Price (Face Value), , Amount Payable to Vendor, Issue Price of Share, , Journal Entries, (1) For Purchase of Asset(s) :, Assets A/c, To Vendor's A/c, , ´ Face Value of a Share, , Dr. (with Purchase Price), , (For assets purchased), , (2) On Issue of Shares at Par :, Vendor's A/c, , Dr. (with the Face, Value of Shares), , To Share Capital A/c, (For shares issued for purchase of asset), , (3) When Shares are Issued at Premium :, Vendor's A/c, To Share Capital A/c, To Securities Premium A/c, , Dr., (with the Face Value), (with Share Premium), , (For shares issued at premium for purchase of asset), , (4) When Shares are Issued at Discount :, Vendor's A/c, Discount on Issue of Shares A/c, To Share Capital A/c, , Dr. (with Purchase Price), Dr. (with Discount), (with Face Value), , (For issue of shares at discount against asset purchased), , (5) Payment partly in Cash and partly in Shares :, Vendor's A/c, To Bank A/c, To Share Capital A/c, , Dr., , (For payment made to vendor in cash and through issue of....., shares @ ` ....each), , 61
Page 548 :
SBPD Publications Accountancy (XII), (6) Issue of Shares against Underwriting Commission :, Underwriting Commission A/c, Dr., To Share Capital A/c, (For issue of share against underwriting commission), , Attention Please, Treatment of Difference between Purchase Consideration and Net Assets, 1. If the payment made to the vendors (Cash + Value of Shares) is less than the, purchase price, the difference should be treated as ‘Capital Reserve’. Capital, Reserve should be credited., 2. If the value of shares issued and cash paid to vendors is more than the, purchase price of assets, the difference should be treated as ‘Goodwill’ and it, should be debited. See Illus. 22(B), Illustration 22 (Short Answer Type Question), Ram & Co. purchased machinery from Mona & Co. for ` 4,00,000. A sum of ` 1,75,000, was paid by the means of a bank draft and for the balance due Ram & Co. issued Equity, Shares of ` 10 each., Journalise the above transactions in the books of the company., Solution, In the Books of Ram & Co., Journal Entries, Dr., Cr., S. No., 1., , Particulars, Machinery A/c, To Mona & Co. A/c, , L.F. Amount, `, , Dr., , 4,00,000, , Dr., , 1,75,000, , Dr., , 2,25,000, , Amount, `, , 4,00,000, , (Being machinery purchased from Mona & Co.), , 2., , Mona & Co. A/c, To Bank A/c, , 1,75,000, , (Being amount paid to Mona & Co. by Bank draft), , 3., , Mona & Co. A/c, To Equity Share Capital A/c, , (Being issue of 25,000 fully paid equity shares of ` 10 each), , 2,25,000, , Illustration 23, ABC Ltd. purchased assets worth ` 4,18,000 from Bihar Industrial Corporation and, issued Equity Shares of ` 100 each, fully paid, in satisfaction of the purchase, consideration. Show the Journal entries in the books of ABC Ltd. assuming that the shares, were issued (i) at par, and (ii) at a premium of 10%., Solution, In the Books of ABC Ltd., Journal Entries, Dr., Cr., S. No., , Particulars, Assets A/c, To Bihar Industrial Corporation A/c, , L.F. Amount, `, , Dr., , 4,18,000, , Dr., , 4,18,000, , Amount, `, , 4,18,000, , (For assets purchased), , (i), , Shares issued at Par :, Bihar Industrial Corporation A/c, To Equity Share Capital A/c, , (For issue of 4,180 equity shares of ` 100 each, fully paid in satisfaction of purchase price), , 62, , 4,18,000
Page 549 :
Accounting for Share Capital : Issue of Shares, (ii), , Share issued at Premium :, Bihar Industrial Corporation A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , 4,18,000, , (For issue of 3,800 equity shares of ` 100 each at a premium of 10%), , 3,80,000, 38,000, , Working Note :, No. of shares of issued in case (ii), =, , 418, , , 000, 100 + 10, , = 3, 800 shares, , Premium Amounts = 3, 800 ´ 10 =, , `, , 38, 000, , Share Capital = 3, 800 ´ 100 = 3, 80, 000, Total = 4,18,000, , Illustration 24, Nikhil Ltd. purchased a running business from Sonia Ltd. for a sum of ` 22,00,000 by, issuing 20,000 fully paid equity shares of ` 100 each at a premium of 10%. The assets and, liabilities consisted of the following :, Machinery ` 7,00,000, Debtors ` 2,50,000, Stock ` 5,00,000, Building ` 11,50,000 and, Bills Payable ` 2,50,000., Pass necessary Journal entries in the books of Nikhil Ltd. for the above transactions., (C.B.S.E., A.I., 2013), Solution, In the Books of Nikhil Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , Machinery A/c, Debtors A/c, Stock A/c, Building A/c, To Bills Payable A/c, To Sonia Ltd. (P.P.), To Capital Reserve (Bal. fig.), , Dr., Dr., Dr., Dr., , Sonia Ltd. A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , Amount, `, , 7,00,000, 2,50,000, 5,00,000, 11,50,000, 2,50,000, 22,00,000, 1,50,000, , (Being the purchase of assets and liabilities of Sonia Ltd. for, ` 22,00,000), , (Being purchase price discharged by issue of 20,000 fully paid equity, shares of ` 100 each at a premium of 10%), , 22,00,000, , 20,00,000, 2,00,000, , Illustration 25, Priyanshu Ltd. purchased a business from Meekon Ltd. for a sum of ` 15,00,000., ` 3,00,000 was paid by cheque and the balance by issuing 10,000 fully paid equity shares of, ` 100 each at a premium of 20%. The assets and liabilities of Meekon Ltd. consisted of the, following :, Sundry Assets ` 14,00,000 and Sundry Creditors ` 2,00,000., , 63
Page 550 :
SBPD Publications Accountancy (XII), Pass necessary Journal entries in the books of Priyanshu Ltd. for the above, transactions., Solution, In the Books of Priyanshu Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , Sundry Assets A/c, Goodwill A/c (Bal. fig.), To Sundry Creditors A/c, To Meekon Ltd. (Purchase Price), , Amount, , Amount, , `, , Dr., Dr., , 14,00,000, 3,00,000, , Meekon Ltd. A/c, To Bank A/c, , Dr., , 3,00,000, , Meekon Ltd. A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , 12,00,000, , `, , 2,00,000, 15,00,000, , (Being assets and liabilities of Meekon Ltd. taken over and, purchase price agreed upon), , (Being payment made through Cheque No. .....), , (Being issue of 10,000 equity shares of ` 100 each at a premium, of 20%), , 3,00,000, , 10,00,000, 2,00,000, , (B) Shares Issued to Promoters, Sometimes company may allot fully paid shares to promoters or any other person for, their services. These services may be technical services, engineering services, managerial, services, drawing and specifications etc., This should be noted that the amount paid to promoters or other persons for their, services is treated as capital expenditure and, is debited to Preliminary Expenses Account, (or Goodwill A/c). Shares issued to promoters for their services should be treated as, ‘incorporation costs’. Hence, it is debited to ‘Incorporation Cost Account’ or Goodwill Account., Notes :, 1. Goodwill Account is debited on the assumption that promoter’s function has resulted informing the, company into profitable unit., 2. Shares issued to promoters are disclosed separately under the head ‘Share Capital’ (sub-head,, Subscribed Capital)., , Journal Entry, Incorporation Cost A/c or Goodwill A/c, To Share Capital A/c, , Dr. (No. of Shares ´ Paid-up Value), , (For issue of..........shares of ` .........each, fully paid to promoters), , Illustration 26 (Very Short Answer Type Question), 1,000 shares of ` 10 each are issued to promoters for thier services at a premium of ` 4, per share. Give Journal entries., Solution, Journal Entry, Dr., Cr., Date, , Particulars, Incorporation Cost A/c/Goodwill A/c, To Share Capital A/c, To Securities Premium A/c, , (Being shares issued at premium to promoters), , 64, , L.F. Amount, Dr., , `, , 14,000, , Amount, `, , 10,000, 4,000
Page 551 :
Accounting for Share Capital : Issue of Shares, , 3.3 Preferential Allotment of Shares, Preferential allotment of shares is made to the promoters, risk taking industrialists,, financial institutions, customers of company’s products and suppliers at the, pre-determined price. These shares cannot be sold in the open market up to three years, from the date of allotment. This period is known asLock-in- period. Preferential allotment, is made only when 3/4 shareholders agree to issue shares on preferential basis., SEBI's Guidelines : According to SEBI, the minimum price of such issues should be, ascertained on the basis of the average price of the maximum price and minimum price, prevailing during 26 weeks from the date of preferential allotment of shares. Besides, if, the preferential allotment is 15% or more than this, the open offer will be treated as, compulsory by the SEBI. As of now, the maximum price has not been fixed by SEBI,, because in preferential allotment, the higher price is influenced by market value., , 3.4 Issue of Right Shares [Section 62(1)], The existing shareholders have a right, under Sec. 62(1) of the Indian Companies Act,, 2013 to subscribe to the further issue of shares by a company for a consideration decided by, the company. They may sell their right in the market., A special resolution has to be passed to issue right shares., The existing shareholders will have to pay for the right shares. The accounting, procedure for right shares is the same as for other shares., Value of Right = Market Price of a Share (MPS) – Average Price of a Share (APS), Average Price =, , Market Price of Existing Shares - Issue Price of Proportionate Right Shares, Existing Shares + Right Shares, , Section 62 of Companies Act, 2013 provides that where a Public Company proposes to, increase its subscribed capital by the issue of further shares, such shares shall be offered to, the existing shareholders of equity shares in proportion to the paid-up share capital. Such, an issue is known as rights issue, and each shares are called ‘Rights Shares’ or ‘Rights’., However, shareholders have a right (i) to accept, or (ii) reject, or (iii) renounce the offer in, the name of some other persons., Rights shares are offered to the existing shareholders by sending a letter of offer, subject to the conditions laid down in section 62., ❏ Miscellaneous and Boards’ Questions, Illustration 27 (Cash Book, Journal and Balance Sheet), Raj Swadeshi Ltd. having an authorised capital of 20,000 shares of ` 10 each issued, 11,000 shares to public. Applications were received for 10,000 shares. The amount payable, was as follows :, On Application, ` 3 per Share, On Allotment, ` 4 per Share, On First & Final Call, ` 5 per Share, All sum was duly received by the company except the following :, (i) Rahul, holder of 100 shares, did not pay allotment and call money., (ii) Sanjiv, holder of 200 shares, did not pay call money., Show the entries in the Cash Book and Journal of the Company., Solution, Dr., Cash Book (Bank Column), Cr., Date, , Particulars, To Share Application A/c, , `, , 30,000, , Date, , Particulars, By Balance c/d, , `, , 1,18,100, , 65
Page 552 :
SBPD Publications Accountancy (XII), To Share Allotment A/c, , 39,600, , To Share First & Final Call, A/c, , 48,500, 1,18,100, , 1,18,100, , Journal Entries, Date, , Particulars, Share Application A/c, To Share Capital A/c, , L.F., Dr., , Dr., , Cr., , `, , `, , 30,000, 30,000, , (For application money transferred to Share Capital A/c), , Share Allotment A/c, To Share Capital A/c, To Securities Premium A/c, , Dr., , 40,000, 20,000, 20,000, , (Being amount due on 10,000 shares @ ` 4 per share including, premium of ` 2), , Share First and Final Call A/c, To Share Capital A/c, , Dr., , 50,000, 50,000, , (Being first and final call money due on 10,000 shares @ ` 5 per, share), , 3.5 FAST REVISION, l Share : A share is a fractional part of the company. It forms the basis of ownership in a company., In other words, the capital of the company is divided into small units known as shares., Shares are of Two Types : (i) Preference Shares, and (ii) Equity Shares. Preference, shares are of different types., l Share Capital : Share capital is the amount of capital raised by the company through issue, of shares (equity or preference or both)., l Types of Share Capital : (i) Authorised Capital, (ii) Issued Capital, (iii) Subscribed Capital,, (iv) Called-up-Capital, (v) Paid-up Capital, (vi) Uncalled Capital, (vii) Reserve Capital., l Stages of Issue of Shares : (i) To issue prospectus, (ii) To Receive applications, (iii) To, make allotment of shares, (iv) To make calls., Issue of shares may be (i) at par, (ii) at premium, and (iii) at discount. As per Companies Act,, 2013 issue of share at Discounted Restricted., l Initial Public Offer : Making an offer, inviting the public in general to subscribe to shares,, is generally known as Initial Public Offer (IPO)., l Minimum Subscription : Minimum subscription refers to the minimum amount of capital, that should be subscribed for by the public to meet the needs of the company. According to SEBI, guidelines, minimum subscription has been fixed at 90% of the entire issue., l Over-subscription : When the number of shares applied for is more than the number of, shares offered for it is known as Over-subscription. A company cannot allot shares more, than shares offered for subscription., l Under-subscription : When the number of shares applied for is less than the number of, shares offered for issue, it is known as Under-subscription., l Shares Issued at Par : When shares are issued for an amount equal to the face value of the, share, they are said to be issued at par., l Shares Issued at Premium : When a company issues a share at a price which is more than, its face value, it is said to be issued at premium., l Allotment of Shares : Allotment is the allocation of shares to the successful applicants by the, directors of a company. When offer is accepted, the successful applicants are sent letter of, allotment, stating the number of shares allotted and the amount of allotment money., , 66
Page 553 :
Accounting for Share Capital : Issue of Shares, l Pro-rata Allotment : In case of over-subscription of shares, the application for some, shares are outright rejected and pro-rata allotment is made to the remaining applicants., Pro-rata allotment of shares means the allotment when the applicants are allotted in the, same ratio., l Private Placement of Shares : Private placement of shares means issue of shares to a, selected group of persons., l Issue of Shares for Consideration other than Cash : When company issues shares not, for cash but for purchase of some property or assets or services, it is called issue of share for, consideration other than cash., l Employees Stock Option Plan : Employees Stock Option Plan (ESOP) is a scheme under, which whole-time directors, officers and employees are given a right to purchase or, subscribe at a future date the securities of the company at pre-determined price., , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6 Marks Questions), , 1. What do you mean by subscription of shares ? Differentiate between ‘over-subscription’ and, ‘under-subscription’. How would you treat the excess application money in the books of accounts ?, 2. Give the meaning of ‘Issue of Shares at a Premium’. For what purposes can the amount of, share premium be utilised ?, 3. What is meant by calls-in-advance and calls-in-arrears ? What is the rate of interest which, can be allowed on calls-in-advance and calls-in-arrears ?, 4. What is the difference between Calls-in-arrear and Calls-in-advance., (U.S.E.B., 2016), (B) Short Answer Type Questions, (3/4 Marks Questions), 1. Describe the purpose for which a company can use Securities Premium., 2. Explain the term ‘Calls-in-advance’., (C.B.S.E., 2012), 3. Explain the term ‘Calls-in-arrear’., (C.B.S.E., 2010), 4. What is meant by over-subscription and under-subscription of shares ?, 5. How are ‘Calls-in-advance’ and ‘Calls-in-arrear’ shown in a Balance Sheet ?, 6. Explain by the following :, (i) Issue of Shares at Par,, (ii) Issue of Shares at Premium,, (U.S.E.B., 2010, 14), (iii) Issue of Shares for Consideration other than Cash,, (iv) Pro-rata Allotment of Shares., (v) Issue of Sweat Equity Shares., (U.S.E.B., 2014), 7. Distinguish between Authorised Capital and Issued Capital., (U.S.E.B., 2016), 8. Distinguish between ‘Over-subscription’ and ‘Under-subscription’., (U.S.E.B., 2015), 9. Distinguish between Calls-in-arrear and Calls-in-advance., 10. What is Over-subscription of Shares ?, 11. State the purposes for which balance to the credit of Securities Premium Account can be used., 12. State the legal provisions for the utilisation of Share (Securities) Premium Account., 13. What is share premium ? Give any two utilisation of share premium., (U.S.E.B., 2013), 14. Write any four uses of securities premium., 15. What options are available to a company for allotment of shares in case of over-subscription?, , (C) Very Short Answer Type Questions, , (1/2 Marks Questions with Answer), , 1. What is Initial Public Offer (IPO), [Ans. Making an offter, inviting the public in general to subscribe to shares is generally known, as Initial Public Offer.], 2. How ‘Securities Premium' shown in the Balance Sheet ?, [Ans. Securities Premium appears on the liabilities side of the Balance Sheet under ‘Reserve, and Surplus'.], , 67
Page 554 :
SBPD Publications Accountancy (XII), 3. Can ‘Securities Premium' be distributed as dividend ?, [Ans. Amount of securities premium can not be distributed as dividend. It can only be used for, the purposes listed under Section 52 of the Companies Act, 2013.], 4. State two purposes for which securities premium amount can be used by a company., [Ans. (1) For issuing fully paid-up bonus shares to the existing shareholders of the company., (2) For writing off preliminary expenses.], 5. Kuttons Ltd. invited applications for 10,000 equity shares of ` 10 each. Applications were received for 25,000 shares. Name the kind of subscription., [Ans. Over-subscription.], 6. Elite Ltd. invited applications for 1,00,000 equity shares of ` 10 each. Applications, were received for 92,000 shares. Name the kind of subscription., [Ans. Under-subscription.], 7. What is meant by issue of shares for consideration other than cash ? (C.B.S.E., 2006), [Ans. When a company issues shares in satisfaction of purchase price of assets or services, it is, called issue of shares for consideration other than cash.], 8. What is meant by application money ?, [Ans. Application money is the amount which an applicant is required to deposit with the, banker of the company alongwith application form.], 9. What is meant by Share Allotment ?, [Ans. Share allotment is a process of accepting the offer of the applicants for the purchase of, shares. (If minimum subscription has been received, the company may proceed for the, allotment of shares after fulfilling certain other legal formalities).], 10. What is minimum subscription ?, [Ans. Minimum subscription means the minimum amount that must be received by the, company stated in the prospectus otherwise shares cannot be allotted. In general, it is, 90% of the issued amount.], 11. What is meant by ‘Preferential Allotment of Shares' ?, [Ans. Preferential allotment means an allotment of shares made at a pre-determined price to, the pre-identified people having strategic stake in the company such as promoters,, venture, capitalists, financial institutions, suppliers etc.], 12. What is ‘Pro-rata' Allotment of Shares ?, [Ans. In case, the issue is over-subscribed, applicants may be allotted shares proportionately,, i.e., on pro-rata basis. It means the applicants will be allotted less number of shares than, they applied for.], 13. What is meant by calls on shares ?, [Ans. The amount demanded after allotment money is known as calls-on-shares. It may be first, call, second and final call.], 14. What are Calls-in-arrears ?, (C.B.S.E., A.I., 2013), [Ans. Calls-in-arrears refer to that portion of called-up amount which is not paid by the, shareholders within a specified time.], 15. What is meant by calls received in advance ?, (C.B.S.E., Delhi, A.I., 2012), [Ans. Calls-in-advance refers to the amount paid by the shareholders in excess of the amount, due from them. A company may accept calls-in-advance only when it is authorised by, Articles.], 16. If a company adopts Table F, how much interest can be charged on calls-in-arrears ?, [Ans. If a company adopts Table F, interest can be charged @ 10% p.a. on the amount of callsin-arrears from the due date to the date of actual payment.], 17. If a company adopts Table F, how much interest is payable by the company on, calls-in-advance ?, Or, At what rate of interest is paid by the company on calls-in-advance, if it has not, prepared its own Articles of Association ?, (C.B.S.E., A.I., 2013), [Ans. 12% p.a. from the date of receipt of calls-in-advance to the date of the call.], 18. Explain the term ‘initial public offer.’, (U.S.E.B., 2016), [Ans. Making an offer, inviting the Public in general to subscribe to shares is general known as, Initial Public Offer (IPO).], 19 What is meant by calls-in-arrears ?, [Ans. See page No. 39], , 68
Page 555 :
Accounting for Share Capital : Issue of Shares, 20. What is meant by calls-in-advance ?, [Ans. See page No. 42], , (D) Objective Type Questions, I. Select the correct alternative :, 1. Securities Premium can not be applied :, (a) For paying dividend to members (b) For issuing bonus shares to members, (c) For writing off preliminary expenses of company, (d) For writing off discount on issue of debentures, 2. A company cannot issue its shares at discount under which of the following section of the, Companies Act, 2013 :, (a) 78, (b) 79, (c) 52, (d) 53, 3. A company can issue its shares at a premium under which of the following section of the, Indian Companies Act, 2013 :, (a) 77, (b) 78, (c) 52, (d) 53, 4. Share Allotment Account is :, (a) Personal A/c, (b) Real A/c, (c) Nominal A/c, (d) None of these, 5. Premium on issue of shares is :, (a) Capital gain, (b) Capital loss (c) Revenue gain, (d) Revenue loss, 6. Share Application Account is :, (a) Personal A/c, (b) Real A/c, (c) Nominal A/c, (d) None of these, 7. Securities Premium Reserve is shown under which head of the balance sheet ?, (a) Reserve and Surplus, (b) Share Capital, (c) Current Liabilities, (d) None of these, 8. Right shares are issued to :, (a) Promoter for their services, (b) Debentureholders, (c) Existing Shareholders, (d) All of these, [Ans. 1. (a) , 2. (d), 3. (c), 4. (a), 5. (a), 6. (a), 7. (a), 8. (c).], II. State whether the following statements are True or False :, 1. A company may charge interest on calls-in-arrear @ 10% p.a., 2. A company can use securities premium for writing off the discount on issue of shares., (J.A.C., 2014), 3. Call-in-advance is a part of share capital., 4. Shareholders are entitled to receive dividend on calls-in-advance., 5. Registeration of Joint Stock Company is compulsory., (J.A.C., 2015), 6. Memorandum of Association mentions Authorised Capital., (J.A.C., 2015), 7. Securities premium Account is shown on the assets side of the Balance Sheet., 8. Balance of forfeited share Account after reissued is transfer to General Reserve., 9. Shareholder is a creditor of the company., 10. Shareholders are the owners of the company., [Ans. 1. True, 2. True, 3. False, 4. False, 5. True, 6. True, 7. False, 8. False, 9. False, 10. True.], , PRACTICAL PROBLEMS, ❏ Very Short/Short Answer Type Numerical Questions, , Issue of Shares for Cash, ❏ Shares Issued at Par and Receipt of Entire Amount), 1. A company issued 2,00,000 equity shares of ` 10 each to the public. All amounts have been, received in lump-sum on application. Pass the Journal entries in the books of the company., [Ans. Equity Share Capital (Cr.) ` 20,00,000], 2. Satyam Ltd. invited applications for 50,000 equity shares of ` 10 each. Money was payable, in full on application. Applications were received for 48,000 shares which were duly, allotted. Give necessary Journal entries in the books of the company., [Ans. Equity Share Capital (Cr.) ` 4,80,000.], 3. Dixit Ltd. issued 15,000, 12% Preference shares of ` 10 each to public. All amounts were, received in lump-sum. Pass Journal entries in the books of Dixit Ltd., [Ans. 12% Preference Share Capital ` 1,50,000.], , 69
Page 556 :
SBPD Publications Accountancy (XII), 4. Satyam Ltd. invited applications for issuing 10,000 Equity Shares of ` 100 each at a, premium of ` 20 per share. The whole amount was payable on application. The issue was, fully subscribed. Pass necessary Journal entries., [Ans. Share Capital A/c to be Credited by ` 10,00,000 and Securities Premium A/c by, ` 2,00,000.], ❏ Calls-in-Arrears, 5. Konark Ltd. did not receive the final call money on 9,000 equity shares @ 2 per share, which was due on 1.4.2019. This amount was received on 10.5.2019., Pass necessary Journal Entries in the books of the company by opening calls-in-arrears, account., [Ans. J/E Calls-in-arrears ` 18,000.], ❏ Calls-in-Advance, 6. On 1.1.2019 X Ltd. received in advance the first call of ` 3 per share on 10,000 equity, shares. The first call was due on 1.4.2019. The subscribed shares were 50,000 of ` 20 each., Journalise the above transactions and transfer the advance to first call account by opening, a Call-in-Advance Account. Assume the whole amount due on first call was received., [Ans. Calls-in-Advance A/c (Cr.) ` 30,000], ❏ Issue of Shares of Consideration Other then Cash, 7. Jharkhand Ltd. was registered with a capital of ` 10,00,000 divided into shares of ` 10., Company Purchased a machine from Bihar Ltd. for ` 1,50,000. Jharkhand Ltd. issued, equity shares of ` 10 each fully paid in payment of claim., Pass Journal Entries in the books of Bihar Ltd., [Ans. No. of Equity Shares to be Issued 15,000], 8. Goodluck Ltd. purchased machinery costing ` 10,00,000 from Fair Deals Ltd. The company, paid the price by issue of Equity Shares of ` 10 each at premium of 25%., Pass necessary Journal entries for the above transactions in the books of Goodluck Ltd., [Ans. J/E, Securities Premium ` 2,00,000, Total of Journal ` 20,00,000], (C.B.S.E., A.I., Set I, 2011), 9. Jain Ltd. purchased a machine of ` 6,00,000 from Kamal. 50% of the payment was made by, cheque and for the remaining the company issued equity shares of ` 10 each at a premium, of 20%., Give necessary Journal entries in the books of Jain Ltd. for the above transactions., [Ans. Payment by Cheque` 3,00,000, Issue of Shares ` 2,50,000, Securities Premium ` 50,000], 10. Raj & Co. purchased a machinery for ` 1,96,000 and issued equity shares of ` 100 at ` 98, each fully paid-up in full payment. Calculate number of equity shares issued and pass, necessary Journal entries in the books of Raj & Co., [Ans. 2,000 Equity Shares.], 11. J. P. Ltd. purchased building costing ` 70,00,000 from M/s Construction Ltd. The company, paid ` 20,50,000 by cheque and for the balance issued equity shares of ` 100 each in favour, of M/s Construction Ltd. Pass necessary Journal entries in the books of J.P. Ltd. for the, purchase of building and making payments if shares were issued at a premium of 25%., [Ans. Securities Premium ` 9,90,000.], (J.A.C., 2009), 12. A Limited issued 5,000 equity shares of ` 10 each payable as ` 2 on application, ` 3 on, allotment, ` 3 on first call and the balance on second call. All the amounts were duly, received. Prepare Cash Account in the books of A Ltd., (U.S.E.B., 2012), [Ans. Cash A/c Total ` 50,000.], ❏ Issue of Shares to Promoters, 13. Bharat Ltd. issued 5,000 equity shares of ` 100 each to its promoters and 1,000 equity, shares of ` 100 each as fully paid to underwriters in lieu of their services at par., Pass Journal entries in the books of the company., [Ans. J/E Formation Expenses (Dr.) ` 5,00,000, Underwriting Com. (Dr.) ` 1,00,000], 14. On 28.2.2019 the first call of ` 2 per share because due on 50,000 equity shares allotted by, Kumar Ltd. Komal, a holder of 1,000 shares did not pay the first call money. Kovil, a, holder of 750 shares paid the second and final call of ` 4 per share alongwith first call., Pass the necessary Journal entry for the amount received by opening calls-in-arrears and, calls-in-advance account in the books of the company., (C.B.S.E., 2016), [Ans. Calls-in-arrears (Dr.) ` 2,000; Calls-in-advance (Cr.) ` 3,000, Bank A/c (Dr.) ` 1,01,000], , 70
Page 557 :
Accounting for Share Capital : Issue of Shares, ❏ Over-subscription of Shares, 15. CMC Ltd. invited application for issuing 1,00,000 equity shares of ` 10 each at a premium of, ` 3 per share. The whole amount was payable on application. The issue was over-subscribed, by 30,000 shares and allotment was made on pro-rata basis. Pass Journal entries., [Ans. Securities Premium ` 3,00,000, Equity Share Capital (Cr.) ` 10,00,000, Refund of Cash, ` 3,90,000], ❏ Calculation of Amount Received on Allotment, 16. A Company issued 5,000 equity shares of ` 10 each at ` 2 premium. Applications were, received for 12,000 shares. Applicants for 2,000 shares were not allotted and pro-rata, allotment was made to the remaining applicants., Money was payable on shares as follows : On application ` 3, on allotment ` 4 (including, premium) and balance on call. A shareholder of 200 shares could not pay allotment amount., Calculate amount received on allotment., [Ans. Amount received on allotment ` 4,800], ❏ Long Answer Type Numerical Questions, (I) Issue of Shares for Cash, ❏ Receipts of Cash in Instalments, 1. Meenakshi Ltd. issued 12,000 Equity shares of ` 10 each to general public, payable as ` 2, on application, ` 4 on allotment and ` 4 on first and final call. All amounts were received as, and when due., Pass Journal entries in the Company’s books., [Ans. Share Capital ` 1,20,000.], 2. A Ltd. Company with registered capital of ` 1,00,000 divided into 10,000 shares of ` 10, each, issued 4,000 shares payable as ` 1 per share on application, ` 2 on allotment, ` 3 on, first call and the balance on final call. All payments were duly received. You are required to, give Journal entries to record the above transactions., [Ans. J/E Total of Journal ` 80,000], 3. The Authorised Capital of Mohan Ltd. is ` 2,00,000 which is divided in 20,000 equity shares, of ` 10 each. Out of these shares, 12,000 equity shares have been issued to the public, payable as : ` 2 on application, ` 4 on allotment and ` 4 on first and final call. All the, amounts have been duly received. Pass the necessary entries in the books of Company., [Ans. Total of Cash at Bank ` 1,20,000], (U.S.E.B., 2016), 4. A company invited applications for 1,000, 6% preference shares of ` 100 each, payable as follows :, 20% On Application 30%, On Allotment 50% On First and Final Call, All the shares were subscribed and fully paid. Pass entries in the Cash Book and Journal of, the company., [Ans. Cash Book Balance ` 1,00,000], ❏ Calls-in-arrears, 5. Cronic Limited was issued 10,000 equity shares of ` 10 each payable at ` 2.50 on, application, ` 3.00 on allotment, ` 2.00 on first call and the balance of ` 2.50 on final call., All the shares were fully subscribed and paid except of a shareholder having 100 shares, could not pay for the final call. Give Journal entries to record these transactions., [Ans. Total of Journal ` 1,99,750], 6. A Limited Company issued 10,000 shares of ` 100 each payable as under :, On Application, ` 20, On Allotment, ` 30, On First and Final Call, ` 50, The public applied for 9,000 shares which were allotted. All the money due on shares was, received except the first and final call on 400 shares. Give Journal entries., [Ans. Total of Journal ` 17,80,000], 7. A Limited issued 4,000 equity shares of ` 10 each. The amount of these shares was payable, as ` 2 on application, ` 3 on allotment and ` 5 on first and final call. All the amounts were, duly received but Mohan, who holds 50 equity shares did not pay allotment and first call, amounts on these shares and Sohan, who holds 30 shares did not pay first call amount., Pass necessary Journal entries in the books of A Ltd., (U.S.E.B., 2012), [Ans. Total of Journal ` 79,450], , 71
Page 558 :
SBPD Publications Accountancy (XII), ❏ Calls-in-advance, 8. Patna Tractors Ltd. issued to the public, 5,000 Equity Shares of ` 100 each on Jan. 1, 2019, payable as follows : On Application ` 20, Allotment (made on March 1, 2019) ` 30, First call, (made on June 1, 2019) ` 30 and Final call (made on Aug. 1, 2019) ` 20. Applications were, received for all shares and the shares were allotted. One shareholder to whom 200 shares, were allotted paid all the money with the first call money. Give necessary Journal entries, in the books of the company., 12, 2, [Ans. Interest on Advance Money : 4,000´, ´, = ` 80; Total of Journal ` 10,04,080.], 100 12, ❏ Calls-in-arrears and Calls in Advance, 9. Adarsh Limited was registered with a capital of ` 3,00,000 in shares of ` 100 each. It issued, 2,000 of such shares payable ` 25 per share on application, ` 25 on allotment; ` 20 on first, call; and the balance as and when required., All moneys payable on application and allotments were duly received; but when the first, call of ` 20 per share was made, one shareholder holding 100 shares failed to pay the, amount due and another shareholder holding 200 shares paid them in full., Record these transactions in the journal of the company., [Ans. Calls-in-Arrears ` 2,000, Calls-in-Advance ` 6,000], ❏ Use of Cash Book, 10. Bihar Ltd. offered for subscription 50,000, 8% preference shares of ` 10 each. The amount, was payable as follows :, On Application, ` 3 per share, On Allotment, ` 4 per share, On First & Final Call, ` 3 per share, All the shares were fully subscribed, called-up and paid-up., Record these transations in the journal and cash book of the company., [Ans. Total of Cash Book (Bank Column) ` 5,00,000], 11. X Ltd. issued 10,000 equity shares of ` 10 each. The amounts on there shares were payable, as ` 2 on application, ` 3 on allotment and ` 5 on first and final call. All the amounts were, duly received. A who holds 500 equity shares did not pay allotment and first call amounts, on these shares and B who holds 300 shares did not pay the first call money. Prepare Bank, A/c in the Books of X Ltd., (U.S.E.B., 2017), [Ans. Bank A/c Total ` 94,500], ❏ Issue of Shares at Premium, 12. X Ltd. issued 16,000 shares of ` 10 each at a premium of ` 3 per share payable as follows :, ` 4 On Application, ` 4 On Allotment including Premium, Balance on First & Final Call, Applications were received for 15,000 shares. All money was duly received. Pass necessary, entries in the books of the company., [Ans. Securities Premium Reserve ` 45,000], ❏ Issue of Shares at Premium, Entries of Journal and Cash Book, 13. P. Ltd. had an Authorised Capital of ` 10,00,000 divided into 10,000 shares of ` 100 each., Out of these the company issued only 8,000 shares at a premium of ` 5 per share payable, as follows :, On Application, ` 30, On Allotment, ` 35 (including premium), On First Call, ` 20, On Final Call, ` 20, Applications for 7,500 shares were received and these shares were duly allotted to the, applicants. All the calls were made and amounts were duly received. Show the Cash Book, and Journal entries., [Ans. Cash Book Balance ` 7,87,500], 14. Agfa Co. Ltd. issued 15,000 shares of ` 10 each at a premium of ` 2 per share, payable ` 3, (including premium) per share on application, ` 2 per share on allotment, ` 3 on first call, and ` 4 on final call. The shares were all subscribed and money was duly received except, , 72
Page 559 :
Accounting for Share Capital : Issue of Shares, the first call money on 2,000 shares and the final call money on 2,500 shares. Give the, Journal and Cash Book entries to record the above transactions., [Ans. Cash Book Balance ` 1,64,000], 15. Harsha Ltd. issued 6,000 shares of ` 10 each payable at a premium of ` 3 per share., Instalments were fixed as under : ` 3 on application (including ` 1 for premium), ` 3 on, allotment (including ` 1 for premium) and ` 7 on call (including ` 1 for premium). All the, amounts were duly received. Prepare Cash Account in company's books.(U.S.E.B., 2010, 19), [Ans. Total of Cash A/c ` 78,000], ❏ Shares Issued (i) at Par, (ii) at Premium and, 16. Viram Ltd. issued 10,000 equity shares of ` 10 each. What entries will be made if in case, such issue is (a) at Par, (b) and (b) at a Premium of 20% ?, [Ans. J/E, Premium ` 20,000], (J.A.C., 2015), ❏ Under-subscription, 17. Asam Tea Ltd. issued 1,00,000 shares of ` 10 each at a premium of 10%. Payment were to, be made as follows :, On Application ` 3, on Allotment ` 5 (including premium), On First and Final Call ` 3., Applications were received for 90,000 shares and all were accepted. All cash is duly, received except that a holder of 500 shares who did not pay the first and final call., Pass necessary Journal entries in the books of the company., [Ans. Calls-in-arrears ` 1,500; Bank Balance ` 9,88,500], ❏ Over-subscription, 18. A Limited issued 20,000 shares of ` 10 each to the public, payable ` 2 on application, ` 4 on, allotment and ` 4 on first call. Applications were received for 25,000 shares. Pass the, Journal entries in the books of the company assuming that the amount due were received, and application for 5,000 shares were rejected and application money was returned., [Ans. Total of Journal ` 4,20,000], (U.S.E.B., 2013), 19. Sarita Limited issued 2,000 shares of ` 100 each to the public payable as ` 20 on, application, ` 40 on allotment and ` 40 on first and final call. Applications were received for, 2,500 shares. Surplus of application money was utilised for allotment. All the amounts due, were duly received. Pass Journal entries in the books of Sarita Ltd., [Ans. Total of Journal ` 4,10,000], 20. Tata Ltd. issued a prospectus inviting applications for 20,000 shares of ` 10 each, payable, on application, on allotment, on first call and on final call ` 2.50 each. Applications were, received for 30,000 shares. Directors allotted the shares as follows :, To Applicants for 15,000 Shares, Full Allotment, To Applicants for 9,000 Shares, 5,000 Shares, To Applicants for 6,000 Shares, Nil, Give Journal entries assuming that all sums on allotment and calls have been received., [Ans. Total of Journal ` 4,40,000], (U.S.E.B., 2016), 21. Nagarjun Co. Ltd. with an authorised capital of ` 30,00,000 invited applications for 2,00,000, shares of ` 10 each, payable ` 3 on application, ` 4 on allotment (including premium) and, ` 4 on first and final call. Application were received for 3,60,000 shares. Allotment was, made as follows :, (a) To applicants of 1,50,000 Shares–1,50,000 Shares, (b) To applicants of 25,000 Shares – Nil, (c) To applicants of 1,85,000 Shares – 50,000 Shares, Excess money on application was adjusted against the sum due on allotment and call. All, money due was duly received., Give Journal entries to record the above transactions., [Ans. J/E, Total of Journal ` 51,60,000.], Hint : Adjustment of excess application money – ` 2,00,000 against Allotment, ` 2,00,000, against Calls-in-advance and ` 80,000 refund., 22. Black & White Company invited applications for 10,000 shares of ` 100 each payable as follows :, On Application, 20%, On Allotment, 30%, On First Call, 40%, On Final Call, 10%, Applications were received for 12,000 shares. The applicants for 8,000 shares were allotted, all the shares applied for. One applicant who had applied for 4,000 shares was, however,, , 73
Page 560 :
SBPD Publications Accountancy (XII), allotted only 2,000 shares and the excess application money was retained for adjustment on, allotment dues. All the calls were made and money realised except the final call money on, 600 shares. Pass the necessary Journal entries in the books of the company., [Ans. J/E, Final Call Money received ` 94,000, Total of Journal ` 20,34,000], (II) Issue of Shares for Consideration other than Cash, 23. X Ltd. purchased assets at ` 3,80,000 from Ram Traders. It issued equity shares of ` 10, each fully paid in satisfaction of their claim. What entries will be made in case such issue is, (a) at par, (b) at a premium of 25% ?, [Ans. Securities Premium ` 76,000], 24. A Co. purchased machinery from B Co. for ` 40,000. A sum of ` 27,000 was paid by means, of Bank draft and for the balance due A Co. issued equity share of ` 10 each. Journalise the, above transaction in the books of the company., (J.A.C., 2013), [Ans. Total of Journal ` 80,000], 25. U.K. Ltd. was incorporated with an authorised share capital of 1,00,000 Equity Shares of, ` 10 each. The directors decided to allot 12,000 shares credited as fully paid to the, promoters for their services., The company also purchased land and building from X Ltd. for ` 3,00,000 payable in fully, paid-up shares of the company. The balance of the shares were issued to the public, which, were fully subscribed and paid for., You are required to pass Journal entries., [Ans. Shares Issued to X Ltd. 30,000; Total of Journal ` 13,00,000], 26A. Raghav Ltd. purchased a running business from Krishna Traders Ltd. for a sum of ` 15,00,000,, payable ` 3,00,000 by cheque and for the balance, it issued equity shares of ` 100 each at a, premium of 20%., The assets and liabilities consisted of the following :, `, Plant and Machinery, 4,00,000, Building, 6,00,000, Stock, 5,00,000, Sundry Debtors, 3,00,000, Sundry Creditors, 2,00,000, Record necessary Journal entries in the books of Raghav Ltd., [Ans. J/E. Total of Journal ` 33,00,000, Capital Reserve ` 1,00,000], Hint : Issue of 10,000 Shares, Securities Premium ` 2,00,000., 26B. Akansha Ltd. purchased the business of Utsav Ltd. on 1.4.2016 for a sum of ` 12,00,000., The assets of Utsav Ltd. were ` 13,50,000 and liabilities ` 2,00,000. ` 2,00,000 was paid in, cash on 5.4.2016 and for the balance, 8% preference shares of ` 100 each were issued on, 10.4.2016 at a premium of 25%., Pass necessary Journal entries in the books of Akansha Ltd. for the above transactions., [Ans. J/E, Total of Journal ` 26,00,000], Hint : Goodwill ` 50,000, Issue of 8,000 Preference Shares., ❏ Miscellaneous and Boards' Questions, 27. J. K. Ltd. invited applications for 5,00,000 shares of ` 10 each. Payments were to be made, as follows :, On Application, ` 2, On Allotment, ` 3, On First and Final Call, ` 5, All the shares were applied for 8,000 fully paid shares issued to promoters for their, services. Shares issue expenses amounted to ` 16,000. Give Journal entries assuming that, all sums due on allotment and call have been received., (J.A.C., 2017), [Ans. Total of Journal ` 1,00,96,000], 28. K Ltd. took over the assets of ` 15,00,000 and liabilities of ` 5,00,000 of P Ltd. for purchase, consideration of ` 13,68,500, ` 25,500 were paid by issuing a promissory, note in favour of P, Ltd. payable after two months and the balance was paid by issue of equity shares of ` 100, each at a premium of 25%., Pass necessary Journal entries for the above transactions in the books of K Ltd., [Ans. No. of Share issued 10,744; Security Premium ` 2,68,600.], (C.B.S.E., 2016), , l, , 74
Page 561 :
4, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 4.1 Meaning of Forfeiture of Shares, , 76, , 4.2 Effect of Forfeiture of Shares, , 76, , 4.3 Procedure of Forfeiture of Shares, , 76, , 4.4 Accounting Treatment on Forfeiture of Shares, , 76, , 4.5 Re-issue of Forfeited Shares, , 89, , ● Accounting Treatment on Re-issue of Forfeited Shares, , 4.6 Surrender of Shares, , 107, , 4.7 Difference between Surrender of Shares and Forfeiture of Shares, , 107, , 4.8 Fast Revision, , 109, , ❑ Useful Questions, , 109, , ❑ Practical Problems, , 111, , 75
Page 562 :
SBPD Publications Accountancy (XII), , 4.1 Meaning of Forfeiture of Shares, The term ‘forfeit’ means taking away of a thing or property on breach of a condition or, default. A shareholder is liable to pay all the calls made by the company within the, stipulated time. If a shareholder fails to pay allotment money and/or call money due on the, shares held by him the company has right to forfeit such shares. But the company will have, to follow the procedures specified in its Articles of Association. To forfeit a share means to, cancel the allotment of defaulting shareholders. Thus, forfeiture of shares means, compulsory termination of membership. It also means the forfeiture of the amount already, paid by the defaulting shareholder(s)., According to SEBI Guidelines, the subscription money must be received within, twelve months, from the date of allotment. If the investor fails to pay call money within, twelve months, the subscription money already paid may be forfeited., Forfeited Shares Account : When shares of a shareholder are forfeited, Share, Capital Account of such shareholder is closed and the amount already received on such, shares is put into a newly opened account which is called Forfeited Shares Account., , 4.2 Effect of Forfeiture of Shares, l Name of defaulting shareholders is removed from the Register of Members. So, he, , now ceases to be a member of the company., , l Forfeited shares then cease to be a part of the share capital. This means reduction, , in share capital., , l Defaulting shareholder loses all his rights in the company and the amount already, , paid by him is forfeited (seized)., , l Forfeited amount is transferred into a separate account called ‘Forfeited Shares, , Account’. It is shown in the liabilities side of Balance Sheet., , 4.3 Procedure of Forfeiture of Shares, The Model Articles of Association of a company limited by shares as containd in Table, ‘F’ of Companies Act, 2013, provide as follows in regard to forfeiture of shares :, (i) The Articles of Association must empower the company to forfeit the shares., Generally the Articles of Association lay down the procedure to be followed at the time of, forfeiture., (ii) A clear 14 days notice must be given to the defaulting shareholders., (iii) The notice should clearly state that in case of default by the shareholder, the, shares would be forfeited by the company., (iv) A resolution for forfeiture of shares must be passed by the Board of Directors. The, defaulting shareholders should be informed about the forfeiture of their shares., , 4.4 Accounting Treatment on Forfeiture of Shares, (A) Forfeiture of Shares Issued at Par, If the shares are issued at par and forfeited due to non-payment of allotment or call,, the following entry would be passed :, Share Capital A/c, Dr., (With No. of shares forfeited ´ Amount, called-up per share), To Forfeited Shares A/c, (With the amount already received), Or Share Forfeiture A/c, To Share Allotment A/c, (Amount not received on allotment), To Share Call A/c, (Amount not received on call), (......shares forfeited for non-payment of share allotment and call money), Note : If the unpaid calls have been transferred to Calls-in-arrear Account, Calls-in-arrear Account will be, credited in place of Share Allotment and Share Call Account in case of forfeiture. Then the entry would be :, , 76
Page 563 :
Forfeiture and Re-issue of Shares, Share Capital A/c, To Forfeited Shares A/c, To Calls-in-arrears A/c, , Dr., , (No. of Shares´ Called-up Value per Share), (Amount received), (Amount due but not paid), , (B) Forfeiture of Shares in case of Shares Issued at Premium, On forfeiture of shares originally issued at premium, there may be either of the, following situations :, Case : (i) When Share Premium Amount has been received on Forfeited, Shares : When shares originally issued at premium, on which amount of premium has been, received are forfeited, accounting treatment of forfeiture would be on the same pattern as in, case of shares issued at par. It means the amount received securities premium account on, securities premium reserve account is not cancelled that is not debited at the time of, forfeiture. The amount of premium will remain in `Securities Premium A/c.’, Accounting Entry :, The accounting entry will be the same as the one passed in case of shares issued at, par, i.e.,, Share Capital A/c, Dr. (With amount called-up ´ No. of shares forfeited), To Forfeited Shares A/c, (With amount received), To Share Call A/c, (With amount unpaid on calls), (For forfeiture of....shares for non-payment on.....call), , Case : (ii) Share Premium not received on Forfeited Shares : If the shares were, originally issued at premium and the premium remains in arrear on forfeited shares, the, amount of such premium should be cancelled. The reason is that at the time of allotment or, first call, as the case may be, Securities Premium Account must have been credited. For, cancelling the amount of premium not received on forfeited shares, Securities Premium, Account should be debited., Accounting Entry :, Share Capital A/c, Dr. (With amount called-up ´ No. of shares forfeited), Securities Premium A/c, Dr. (With the amount of share premium remaining, unpaid on forfeited shares), To Forfeited Shares A/c, (With the amount already received), To Share Allotment A/c, (With the amount unpaid on allotment including, share premium), To Share Call A/c, (With the amount unpaid on calls), (For forfeiture of.....shares for non-payment of.....call), Note : In case `Calls-in-Arrears Account’ is maintained by a company, calls-in-Arrears A/c would be credited, instead of allotment call A/c., Journal Entry :, Share Capital A/c, Dr., To Forfeited Shares A/c, To Calls-in-Arrears A/c, , (C) Forfeiture of Shares Issued at Discount, If the shares were originally issued at discount and the ‘Discount on Issue of Shares, Account’ was already debited, on forfeiture of such shares, such discount should be written, off. This is done by crediting ‘Discount on Issue of Shares Account.’, Accounting Entry :, Share Capital A/c, Dr. (With the amount called-up including discount), To Forfeited Shares A/c, (With the amount actually received on forfeited, shares), To Discount on Shares A/c, (With the amount of discount on forfeited shares), , 77
Page 564 :
SBPD Publications Accountancy (XII), To Share Allotment A/c, To Share Call A/c, , (With the amount due but not received), (With the amount due but not paid on call), , (For ....shares forfeited for non-payment on....), Note : If the unpaid calls have been transferred to Calls-in-arrear Account, Calls-in-arrear Account will be, credited in place of Share Call Account in case of forfeiture., , Disclosure of the Balance of the Forfeited Shares Account in Balance Sheet :, The balance of Forfeited Shares Account is shown as an addition to the total paid-up, capital of the company under the heading Share Capital on the liabilities side of the, Balance Sheet till the forfeited shares are re-issued., ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration Nos., Details, —, Very Short Answer Numerical Questions, —, Long Answer Numerical Questions, , Problem Nos., 1 to 7, —, , I. Forfeiture of Shares, 1(A), 1(B), 2, 3 to 9, 10, 11, , Forfeiture of Shares Issued at Par, Forfeiture of Shares Issued at Premium, Over Subscription and Forfeiture in case of Pro-rata Allotment, , 1 to 4, 5 to 10, 11, , II. Forfeiture and Re-issue of Shares, 12 to 16, 17 to 19, 20 to 25, 26, 27, 28, 28, , Re-issue of all Forfeited Shares, Partial Re-issue of Forfeited Shares, Forfeiture and Re-issue of Forfeited Shares in case of Prorata Allotment, Disclosure of Share Capital in Balance Sheet, Miscellaneous and Boards' Questions, Total, , 12 to 18, 19 to 23, 24 to 29, 30, 31, 32, 33 to 37, 7 + 37, , Short Answer Type Questions, Illustration 1(A) (Forfeiture of Shares Issued at Par), P Ltd. allotted 1,000 shares of ` 10 each to Ranjan. Ranjan paid ` 3 per share on, application, ` 4 on allotment, but failed to pay ` 3 per share on first and final call., Consequently his shares were forfeited., Pass necessary Journal entries in the books of P Ltd., Solution, Journal Entry, Dr., Cr., Date, , Particulars, Share Capital A/c (1,000 ´ `10), To Forfeited Shares A/c (1,000´ ` 7), To Share First & Final Call A/c (1,000´ ` 3), , L.F. Amount, `, , Dr., , 10,000, , Amount, `, , 7,000, 3,000, , (For forfeiture of 1,000 shares for non-payment of first and final call, @ ` 3 each), , Alternatively :, Date, , Journal Entry, Particulars, , Share Capital A/c (1,000 ´ ` 10), To Share Forfeiture A/c (1,000´ ` 7), To Calls-in-arrears A/c, (For forfeiture of 1,000 shares of ` 10 each on account of nonpayment of first and final call), , 78, , Dr., , Cr., , L.F. Amount, `, , Dr., , 10,000, , Amount, `, , 7,000, 3,000
Page 565 :
Forfeiture and Re-issue of Shares, Illustration 1(B), X Ltd. forfeited 500 equity shares of ` 10 each for the non-payment of the first call of ` 2, per share. The final call of ` 3 per share was yet to be made. Pass Journal entries for the, forfeiture., Solution, Journal Entry, Dr., Cr., Date, , Particulars, , L.F. Amount, , Equity Share Capital A/c (500 ´ ` 7), To Equity Share First Call A/c (500´ ` 2), To Forfeited Shares A/c (500´ ` 5), , Amount, , `, , Dr., , `, , 3,500, , 1,000, 2,500, , (Being the forfeiture of 500 equity shares of ` 10 each, ` 7 called-up, for non-payment of 1st call), , Long Answer Type Questions, Illustration 2, Ratnesh Ltd. was registered with a capital of ` 10 lacs divided into 10,000 Equity, Shares of ` 100 each. The company offered to the public 5,000 shares on which the amount, was payable as follows :, On Application, ` 50 per share, On Allotment, ` 20 per share, On First Call, ` 20 per share, On Final Call, ` 10 per share, The company received applications for 4,000 shares which were allotted accordingly., All the money was duly received with the exception of first call and final call money on 100, shares. The Board of Directors decided to forfeit these shares., Give necessary Journal entries in the books of the company to record the above, transactions., Solution, Analytical Table, On, On, On, On, , Call, Application, Allotment, First Call, Final Call, , Amount due, 4,000 ´ ` 50 = 2,00,000, 4,000 ´ ` 20 = 80,000, 4,000 ´ ` 20 = 80,000, 4,000 ´ ` 10 = 40,000, , Amount Received, , Arrear, —, —, 78,000 (3,900 ´ ` 20) 100 ´ 20 = ` 2,000, 39,000 (3,900 ´ ` 10) 100 ´ 10 = ` 1,000, ` 2,00,000, ` 80,000, , In the Books of Ratnesh Ltd., Journal Entries, Date, , Dr., , Particulars, Bank A/c, To Equity Share Application A/c, , L.F. Amount, Dr., , `, , 2,00,000, , Cr., Amount, `, , 2,00,000, , (Being application money received on 4,000 shares @ ` 50 per share), , Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 2,00,000, , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 80,000, , Bank A/c, To Equity Share Allotment A/c, , Dr., , 80,000, , (Being application money transferred to Share Capital A/c), , (Being allotment money due on 4,000 shares @ ` 20 per share), , 2,00,000, , 80,000, , 80,000, , (Being allotment money received), , 79
Page 566 :
SBPD Publications Accountancy (XII), Equity Share First Call A/c, To Equity Share Capital A/c, , Dr., , 80,000, , Bank A/c, To Equity Share First Call A/c, , Dr., , 78,000, , Equity Share Final Call A/c, To Equity Share Capital A/c, , Dr., , 40,000, , Bank A/c, To Equity Share Final Call A/c, , Dr., , 39,000, , (Being first call money due on 4,000 shares @ ` 20 each), , 80,000, , 78,000, , (Being first call money received on 3,900 shares @ ` 20 each), , (Being final call money due on 4,000 shares @ ` 10 each), , 40,000, , 39,000, , (Being the receipt of final call money on 3,900 shares @ ` 10 each), , Equity Share Capital A/c, To Forfeited Shares A/c, To Equity Share First Call A/c, To Equity Share Final Call A/c, , Dr., , 10,000, , 7,000, 2,000, 1,000, , (Being the forfeiture of 100 shares as per Board of Directors, resolution dated............), , ❏ Very Short Answer Type Questions, Illustration 3 (Forfeiture of Shares Issued at Premium), Samresh Ltd. forfeited 500 shares of ` 10 which were issued to Mohar at a premium of, 20% for non-payment of first call of` 2 and final call of ` 3. Give necessary Journal entries., Solution, Journal Entry, Dr., Cr., Date, , Particulars, , L.F. Amount Amount, `, , Share Capital A/c, To Forfeited Shares A/c, To Share First Call A/c, To Share Final Call A/c, , Dr., , 5,000, , (For forfeiture of 500 shares of Mohar for non-payment of first and, final call), , `, , 2,500, 1,000, 1,500, , Note : Since the share premium has already been received, it will not be debited at the time of forfeiture of, shares., , Illustration 4 (Forfeiture of Shares Issued at Premium but not Received), Jaishankar, a shareholder, holding 500 Equity Shares of ` 10 each did not pay the, allotment of ` 5 (including premium ` 2) and the first and final call of ` 4. His shares were, forfeited. Pass the necessary Journal entries., Solution, Journal Entry, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Equity Share Capital A/c, Securities Premium A/c, To Forfeited Shares A/c, To Equity Share Allotment A/c, To Equity Share First & Final Call A/c, , Dr., Dr., , (For forfeiture of 500 equity shares issued at premium on which allotment and first and final call money was not received), , 80, , 5,000, 1,000, , Amount, `, , 1,500, 2,500, 2,000
Page 567 :
Forfeiture and Re-issue of Shares, ❏ Long Answer Type Questions, Illustration 5 (Forfeiture of Shares Issued at Premium), Blue Star Ltd. issued 40,000 Equity shares of ` 10 each at ` 12 per share. The amount, was payable as follows :, On application ` 2, On allotment ` 4 (including premium) on first call ` 3 and on final, call ` 3. All the shares were subscribed and allotted. The company did not make final call., Dilip, holder of 400 shares, failed to pay first call money and his shares were forfeited., Pass necessary Journal entries in the books of Blue Star Ltd., Solution, Journal of Blue Star Ltd., Date, , Particulars, , L.F. Amount, , Amount, , `, , Bank A/c, To Equity Share Capital A/c, , Dr., , 80,000, , Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 80,000, , Equity Share Allotment A/c, To Equity Share Capital A/c, To Securities Premium Reserve A/c, , Dr., , 1,60,000, , (Being share application money received on 40,000 shares @ ` 2 per, share), , (Being application money transferred to share capital), , `, , 80,000, , 80,000, 80,000, 80,000, , (Being share allotment money due on 40,000 shares @ ` 4 per share, including premium), , Bank A/c, To Equity Share Allotment A/c, , Dr., , 1,60,000, , Equity Share First Call A/c, To Equity Share Capital A/c, , Dr., , 1,20,000, , Bank A/c, To Equity Share First Call A/c, , Dr., , 1,18,800, , Equity Share Capital A/c (400 ´ ` 7), To Equity Share First Call A/c (400 ´ ` 3), To Forfeited Shares A/c (400 ´ ` 4), , Dr., , 2,800, , (Being allotment money received), , (Being first call money due on 40,000 equity shares @ ` 3 per share), , (Being share first call money received on 39,600 shares), , (Being forfeiture of Dilip’s 400 equity shares for non-payment of, first call money), , 1,60,000, 1,20,000, 1,18,800, 1,200, 1,600, , Illustration 6, Jyoti Ltd. issued 1,00,000 shares of ` 10 each at a premium of ` 1 per share, payable as, follows :, On application ` 2; on allotment` 4 (including premium) and on first and final call ` 5., All the shares were subscribed for and the company received at the money due, with, the exception of the allotment and call money on 2,000 shares. These shares were forfeited., Show Journal entries and Cash Book in the books of the company., Solution, Journal of Jyoti Ltd., Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 2,00,000, , Amount, `, , 2,00,000, , (Being share application money transferred to equity share capital A/c), , 81
Page 568 :
SBPD Publications Accountancy (XII), Equity Share Allotment A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , 4,00,000, , Equity Share First and Final Call A/c, To Equity Share Capital A/c, , Dr., , 5,00,000, , Equity Share Capital A/c (2,000 ´ ` 10), Securities Premium A/c (2,000 ´ ` 1), To Equity Share Allotment A/c, To Equity Share First and Final Call A/c, To Share Forfeiture A/c, , Dr., , 20,000, 2,000, , 3,00,000, 1,00,000, , (Being allotment money due including premium), , (Being share first call and final call money due), , 5,00,000, , 8,000, 10,000, 4,000, , (Being forfeiture of 2,000 shares for non-payment of allotment and, call money), , Cash Book (Bank Column Only), , Dr., Date, , Particulars, , Amount, , Date, , Particulars, , `, , To Equity Share Application A/c, (Being share application, money received on, 1,00,000 shares @ ` 2 per, share), To Equity Share Allotment A/c, (Being allotment money, received on 98,000 shares, @ ` 4 per share), To Equity Share First &, Final Call A/c, (Being First & Final call, money received on 98,000, shares @ ` 5 per share), , 2,00,000, , Cr., Amount, `, , By Balance c/d, , 10,82,000, , 3,92,000, , 4,90,000, , 10,82,000, , 10,82,000, , Case III. When Premium amount on forfeited shares is due but received, partially, In this case, for premium received on the portion of forfeited shares would not be, debited to ‘Securities Premium A/c’ as case 1 at the time of forfeiture. But the securities, premium A/c would must be debited with the amount of premium due so for ( i.e., premium, not received) at the time of forfeiture. Journal entry will be the same as given in case II., Illustration 7 (Forfeiture of Shares Issued at Premium, but Premium Partially, Received), Magadh Steel Ltd. invited applications for issuing 80000 equity shares of ` 10 each at, a premium of ` 25 per share. The amount was payable as follows :, On Application ` 15 (including ` 12 premium), On Allotment ` 10 (including ` 8 premium), On First and Final Call—Balance., Applications were received for 70,000 shares and allotment was made to all the, applicants. A shareholder, Shivam was allotted 2,000, failed to pay the allotment money., His shares were forfeited immediately after allotment. Afterwards, the first call was, made. Sunderam who had 3,000 shares failed to pay to first and final call. His shares were, also forfeited., Pass necessary Journal Entries in the books of Magadh Steel Ltd., , 82
Page 569 :
Forfeiture and Re-issue of Shares, Solution, Journal of Magadh Steel Ltd., Date, , Dr., , Particulars, , L.F. Amount, , Cr., Amount, , `, , Bank A/c, To Equity Share Application A/c, , Dr., , 10,50,000, , Equity Share Application A/c, To Equity Share Capital A/c (70,000 ´ ` 3), To Securities Premium A/c (70,000 ´ ` 12), , Dr., , 10,50,000, , Equity Share Allotment A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , 7,00,000, , Bank A/c, To Equity Share Allotment A/c, , Dr., , 6,80,000, , Equity Share Capital A/c (2,000 ´ ` 5), Securities Premium A/c (2,000 ´ ` 8), To Equity Share Allotment A/c (2,000 ´ ` 10), To Share Forfeiture A/c (2,000 ´ ` 3), , Dr., Dr., , 10,000, 16,000, , Share First and Final Call A/c, To Equity Share Capital A/c (68,000 ´ ` 5), To Securities Premium A/c (68,000 ´ ` 5), , Dr., , 6,80,000, , Bank A/c (65,000 ´ ` 10), To Share first and final call A/c, , Dr., , 6,50,000, , Dr., Dr., , 30,000, 15,000, , (Being share application money received on 70,000 shares @ ` 15 per, share), , (Being share application money transferred to share capital and, Securities Premium A/c), , (Being allotment money due including premium), , (Being share allotment money received on 68,000 shares), , `, , 10,50,000, , 2,10,000, 8,40,000, , 1,40,000, 5,60,000, 6,80,000, , 20,000, 6,000, , (Being forfeiture of 2,000 shares of Shivam for non-payment of, allotment money), , (Being share first and final call money due on 68,000 shares @ ` 10, per share including premium), , 3,40,000, 3,40,000, , 6,50,000, , (Being share first and final call money received on 65,000 shares), , Equity Share Capital A/c (3,000 ´ ` 10), Securities Premium A/c (3,000 ´ ` 5), To Equity Share First and Final Call A/c, To Share Forfeiture A/c (3,000 ´ 5), , 30,000, 15,000, , (Being forfeiture of 3,000 equity shares for non-payment of first and, final call money), , ❏ Forfeiture of Shares in Case of Over-Subscription and Pro-rata Allotment, In case of over-subscription of shares, pro-rata allotment of shares is made. When, shares are allotted pro-rata, the excess application money received is adjusted against the, amount due on allotment and calls. If, such shares are forfeited on account of non-payment, of allotment money or call money, the following steps should be taken :, (1) Calculate the total number of shares applied for by the defaulting shareholder, by using the following formula :, Subscribed Shares, No. of Shares Applied for =, ´ No. of Shares allotted, Actual Shares Issued, to defaulter shareholder, (2) Calculate the total amount received on such applications by multiplying the, number of shares applied with application money., , 83
Page 570 :
SBPD Publications Accountancy (XII), (3) Calculate application money available for adjustment against allotment and, calls i.e . excess application money :, `, Total amount received as per step 2, ...., Less : Shares Allotted´ Rate of Application Money, ...., Excess Application Money available for Adjustment, ...., (4) Calculate Amount Unpaid on Allotment :, (i) Calculate amount due on allotment on such shares, and (ii) deduct from, the amount adjusted on allotment. The balance so obtained will be the, amount unpaid on allotment (that is, amount not paid by shareholder of, the forfeited shares on allotment)., Thus, Amount unpaid on Allotment = Amount Due on Allotment – Excess, Application Money adjusted towards Allotment, Illustration 8(A) (Pro-rata Allotment of Shares and their Forfeiture), Z applied for 3,000 shares of ` 10 each. He was allotted 2,000 shares. He had paid ` 3, per share on application but did not pay allotment money of ` 2.50 per share. These shares, were forfeited. Pass Journal entry for forfeiture., Solution, Journal Entry, Dr., Cr., Date, , Particulars, , L.F. Amount, , Amount, , `, , Share Capital A/c (2,000 × ` 5.50), To Share Allotment A/c (See Note 1), To Share Forfeiture A/c (3,000 × ` 3), , Dr., , `, , 11,000, , 2,000, 9,000, , (Being forfeiture of 200 shares for non-payment of allotment money), Working Notes :, (A) Surplus received on Application from Shareholder of 3,000 shares = 3,000 × ` 3, Less : 2,000 Allotted × ` 3, Surplus amount which adjusted on allotment, (B) Amount due on allotment : 2,000 × ` 2.50, Less : Surplus amount received on Application Adjusted, Payable on allotment and unpaid Actual Amount, , `, 9,000, 6,000, 3,000, 5,000, 3,000, 2,000, , Illustration 8(B), New India Ltd. forfeited 3,000 shares of ` 10 each issued at a premium of ` 2 each held, by Ankit, who had applied for 3,750 shares but was allotted only 3,000 shares for, non-payment of allotment money of` 2.50 (including premium) per share and First & Final, Call of ` 5.50 per share. Pass Journal entries in the books of the company., Solution, In the Books of New India Ltd., Dr., Cr., Date, , Particulars, , L.F. Amount, , Amount, , `, , Share Capital A/c (3,000 × ` 10), Securities Premium A/c, To Share Forfeited A/c, To Share Allotment A/c (See Note), To Share First & Final Call A/c, , Dr., Dr., , 30,000, 4,500 2, , `, , 13,500, 4,5001, 16,500, , (Being 3,000 shares forfeited for non-payment of allotment and call, money), Working Notes :, Statement showing adjustment of excess money received on application :, Money received on 3,750 shares on Application = 3,750 × ` 4, Less : Money Adjusted on Application = 3,000 × ` 4, Excess Application money adjusted on Allotment, , 84, , `, , (A), , 15,000, 12,000, 3,000
Page 571 :
Forfeiture and Re-issue of Shares, `, 7,500*, 3,000, 4,500, , Amount due on Allotment = 3,000 × ` 2.5, Less : Excess Application money adjusted on Allotment (A), Amount actually due but not paid on Allotment, , Out of ` 7,500, ` 1,500 (3,000 × ` 0.50) are for share capital and ` 6,000 for Securities Premium. Out of, excess application money of ` 3,000, ` 1,500 are adjusted towards allotment as Share Capital and, ` 1,500 are adjusted towards as Securities Premium. Therefore, Securities Premium ` 4,500 (` 6,000 –, 1,500) is outstanding to be debited., , *, , ❏ Long Answer Type Questions, Illustration 9 (Over-subscription and Forfeiture of Shares Issued at Premium), A Joint Stock Company issued 10,000 shares of ` 10 each at ` 12 payable as :, On Application, `2, On Allotment, ` 5 (including premium), On First Call, `3, On Second and Final Call, `2, Applications were received for 14,000 shares. Applicants of 2,000 shares were refused, allotment and their application money were refunded. Excess application money on, further 2,000 shares were applied against allotment. All the money called were duly, received except allotment money on 500 shares and call money on 1,000 shares. 500 shares, were forfeited when first call money remained unpaid. Pass necessary Journal entries in, the books of the Company., Solution, Analytical Table, Application Money, received, 14,000 ´ 2 = ` 28,000, , Application, Money due, 10,000 ´ 2 = ` 20,000, , Excess, , Adjustment, , ` 28,000 – 20,000, = ` 8,000, , Arrear :, First Call = 1,000 ´ ` 3 = ` 3,000, Second and Final Call = 500 ´ ` 2 = ` 1,000, Journal Entries, S.No., (i), , (i) Refund, ` 2,000 ´ 2 = ` 4,000, (ii) On Allotment, 2,000 ´ 2 = ` 4,000, , Dr., , Particulars, , L.F. Amount, Dr., , 28,000, , Share Application A/c, To Bank A/c, , Dr., , 4,000, , Share Application A/c, To Share Capital A/c, To Share Allotment A/c, , Dr., , 24,000, , Share Allotment A/c, To Share Capital A/c, To Securities Premium A/c, , Dr., , (Being refund of application money on 2,000 shares), , (iii), , (Being transfer of application money on 10,000 shares to Share, Capital A/c and excess application money on 2,000 shares applied, against allotment), , (iv), , (Being allotment money due on 10,000 shares @ ` 5 per share including, premium), , Amount, , `, , Bank A/c, To Share Application A/c, , (Being application money received on 14,000 shares @ ` 2 per share), , (ii), , Cr., , 50,000, , `, , 28,000, , 4,000, 20,000, 4,000, , 30,000, 20,000, , 85
Page 572 :
SBPD Publications Accountancy (XII), (v), , Bank A/c (Note 1), To Share Allotment A/c, , Dr., , 43,700, , Share First Call A/c, To Share Capital A/c, , Dr., , 30,000, , Bank A/c, To Share First Call A/c, , Dr., , 27,000, , Share Capital A/c (500 ´ ` 8), Securities Premium A/c (500 ´ ` 2), To Share Allotment A/c, To Share First Call A/c, To Forfeited Shares A/c, , Dr., Dr., , 4,000, 1,000, , Share Second & Final Call A/c, To Share Capital A/c, , Dr., , Bank A/c, To Share Second & Final Call A/c, , Dr., , (Being allotment money received), , (vi), , 43,700, 30,000, , (Being first call money due on 10,000 shares @ ` 3 per share), , (vii), , (Being first call money received on 9,000 shares), , (viii), , (Being the forfeiture of 500 shares for non-payment on allotment and, first call money), , (ix), , 19,000, , (Being amount due on second & final call on 9,500 shares @ ` 2 each), , (x), , 18,000, , (Being second and final call money received on 9,000 shares), Working Notes :, 1. Shares forfeited = 500, , 27,000, , 2,300, 1,500, 1,200, , 19,000, , 18,000, , Subscribed Shares, ´ Alloted Shares, Issued Shares, 12, 000, =, ´ 500 = 600, 10, 000, , Applied shares =, , Amount paid by defaulting shareholders = ` 600 ´ 2 = ` 1,200, Excess application money paid by defaulting shareholder, = ` 1,200 – 1,000 = ` 200, Allotment money due on 500 shares = ` 500 ´ 5 = ` 2,500, Allotment money not paid = ` 2,500 – 200 = ` 2,300, Total Allotment Money, Less : Allotment Money received with Application, Allotment Money to be received, Less : Allotment Money unpaid (b), , ....(a), ....(b), , `, 50,000, 4,000, 46,000, 2,300, , Amount received on Allotment, 43,700, 2. Since 500 shares are forfeited after the first call, second and final call shall be made on 10,000 – 500, = 9,500 shares., , Illustration 10 (Forfeiture in Case of Pro-rata Allotment), Ashok Limited issued 3,00,000 equity shares of ` 10 each at a premium of ` 2 per, share, payable at ` 3 on application, ` 5 on allotment (including premium) and the balance, in two calls of equal amount., Applications were received for 4,00,000 shares and pro-rata allotment was made to all, the applications. The excess application money was adjusted towards allotment. Mr., Mukesh, who was allotted 800 shares, failed to pay both the calls and his shares were, forfeited after the second call. Record necessary Journal entries in the books of Ashok, Limited., (N.C.E.R.T.), , 86
Page 573 :
Forfeiture and Re-issue of Shares, Solution, Shares Issued, 3,00,000, , Shares Applied, 4,00,000, , Pro-rata Allotment, 4,00,000, , Adjusted to Allotment, 1,00,000 Shares, (i.e. 1,00,000 × ` 3 = ` 3,00,000), In the Books of Ashok Limited, Journal Entries, S.No., (i), , Particulars, , No Refund, , Dr., L.F. Amount, `, , Bank A/c, To Equity Share Application A/c, , Dr., , 12,00,000, , Equity Share Application A/c, To Equity Share Capital A/c, To Equity Share Allotment A/c, , Dr., , Equity Share Allotment A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , Bank A/c, To Equity Share Allotment A/c, , Dr., , 12,00,000, , Equity Share First Call A/c, To Equity Share Capital A/c, , Dr., , 6,00,000, , Bank A/c, Calls-in-Arrears A/c, To Equity Share First Call A/c, , Dr., Dr., , 5,98,400, 1,600, , Equity Share Final Call A/c, To Equity Share Capital A/c, , Dr., , (Being application money received on 4,00,000 shares @ ` 3 per share), , (ii), , 12,00,000, , (Being application money on 3,00,000 Equity Shares transferred to, Equity Share Capital A/c and the excess amount adjusted to, Equity Share Allotment A/c), , (iii), , 15,00,000, , (Being allotment money due on 3,00,000 equity shares @ ` 5 per share, including premium @ ` 2 per share), , (iv), , (Being allotment amount received after adjusting excess money, received with application), , (v), , (Being first call amount due on 3,00,000 equity shares @ ` 2 per, share), , (vi), , (Being first call amount received on 2,99,200 equity shares @ ` 2 per, share), , (vii), , 6,00,000, , (Being final call amount due on 3,00,000 equity shares @ ` 2 per share), , (viii) Bank A/c, Calls-in-Arrears A/c, To Equity Share Final Call A/c, , Dr., Dr., , 5,98,400, 1,600, , Cr., Amount, `, , 12,00,000, 9,00,000, 3,00,000, , 9,00,000, 6,00,000, , 12,00,000, , 6,00,000, , 6,00,000, , 6,00,000, , 6,00,000, , (Being amount on 2,99,200 equity shares received @ ` 2 per share), , (ix), , Equity Share Capital A/c, To Share Forfeited A/c, To Call-in-Arrears A/c, , Dr., , (Being forfeiture of 800 shares due to non-payment of equity share, first call and final call), , 8,000, , 4,800, 3,200, , 87
Page 574 :
SBPD Publications Accountancy (XII), Illustration 11, Sangita Limited invited application for issuing 60,000 shares of ` 10 each at par. The, amount was payable as follows : On Application ` 2 per share, On Allotment ` 3 per share,, On First and Final Call ` 5 per share. Applications were received for 92,000 shares., Allotment was made on the following basis :, (i) To applicants for 40,000 shares, — Full, (ii) To applicants for 50,000 shares, — 40%, (iii) To applicants for 2,000 shares, — Nil, ` 1,08,000 was realised on account of allotment (excluding the amount carried from, application money) and ` 2,50,000 on account of call. The Director decided to forfeit shares, of those applicants to whom full allotment of made and on which allotment money was over, due. Pass Journal entries in the books of Sangita Limited to record the above transactions., Solution, (i) Analysis Table, , Working Notes :, , 1, Number of, Shares Applied, , 2, Number of, Shares Alloted, , 40,000, 50,000, , 40,000, 20,000, , 2,000, , —, , 3, 4, Amount received Amount adjusted, on Application, on Application, ` 2, ` 2.00, 80,000, 1,00,000, 4,000, , 80,000, 40,000, —, , 1,84,000, , 1,20,000, , 5, Excess, Amount, , 6, Amount Adjusted on Allotment, `3, , —, 60,000, , 60,000, , 60,000, , (ii) Amount/No. of Shares on which Share Allotment Money was not received :, Total amount due on allotment = 60,000 × ` 3, Less : Amount already adjusted towards allotment, , `, 1,80,000, 60,000, 1,20,000, 1,08,000, 12,000, , Less : Amount received on allotment (given), , Amount unpaid on Allotment, (iii)Amount/No. of Shares on which Share First Call Money was not received :, Total amount due on first and final call = 60,000 × ` 5, 3,00,000, Less : Amount received on Call, 2,50,000, Amount unpaid on First & Final Call, 50,000, 50, 000, No. of Shares on which First & Final Call Money was not received =, = 10,000 Shares, 5, (which includes 4,000 shares on which allotment money was over due. These shares were forfeited), , In the Books of Sangita Ltd., Journal Entries, S.No., (i), , Particulars, Bank A/c (92,000 × ` 2), To Share Application A/c, , Dr., L.F. Amount, `, , Dr., , 1,84,000, , Share Application A/c, To Share Capital A/c (60,000 × ` 2), To Bank A/c (2,000 × ` 2), To Share Allotment A/c, , Dr., , 1,84,000, , Share Allotment A/c, To Share Capital A/c, , Dr., , Cr., Amount, `, , 1,84,000, , (Being application money received on 92,000 shares @ ` 2 per, share), , (ii), , (Being the application money adjusted towards capital and share, allotment refund on 2,000 shares), , (iii), , (Being allotment money due on 60,000 shares @ ` 3 per share), , 88, , 1,80,000, , 1,20,000, 4,000, 60,000, , 1,80,000
Page 575 :
Forfeiture and Re-issue of Shares, (iv), , Bank A/c, To Share Allotment A/c, , Dr., , 1,08,000, , Share First and Final Call A/c, To Share Capital A/c, , Dr., , 3,00,000, , (Being allotment money received), , (v), , 1,08,000, 3,00,000, , (Being first and final call money due on 60,000 shares @ ` 5 per share), , (vi), , Bank A/c, To Share First and Final Call A/c, , Dr., , 2,50,000, , Share, To, To, To, , Dr., , 40,000, , (Being first and final call money received), , (vii), , Capital A/c, Share Forfeited A/c, Share Allotment A/c, Share First and Final Call A/c, , 2,50,000, 8,000, 12,000, 20,000, , (Being 4,000 shares forfeited due to non-payment of allotment, and first and final call), , 4.5 Re-issue of Forfeited Shares, ❏ Can a Company Re-issue Forfeited Shares ?, A company is empowered to re-issue its forfeited shares if authorised by its Articles of, Association. Table A provides that a forfeited shares may be sold or otherwise disposed of, on such terms and in such manner or the Board of Directors thinks fit. Hence, forfeited, shares may be issued at par, at premium or at discount., Meaning of Re-issue of Shares, Re-issue of forfeited shares amounts to sale. It is not allotment of shares. Therefore,, rules relating to allotment of shares do not apply with re-issue of forfeited shares., Important rules regarding re-issue of forfeited shares are as under :, (1) There is no restrictions to re-issue the forfeited shares at par or premium or at, discount., (2) The forfeited shares may be re-issued at a discount provided that the discount, must not exceed the amount actually received on those shares at their first issue (that is,, forfeited amount)., (3) The discount allowed by the company on re-issue of forfeited shares is debited to, Share Forfeited Account or Forfeited Shares Account., (4) After re-issue of forfeited shares the balance left in the ‘Shares Forfeited Account’, is treated as capital profit and is transferred to Capital Reserve Account., ❏ 4.5.1 Accounting Treatment on Re-issue of Forfeited Shares, Re-issue of Forfeited Shares Originally Issued at Par :, 1. If Forfeited Shares are Re-issued at Par :, Bank A/c, Dr. (With the amount actually received), To Share Capital A/c, (Being issue of.....forfeited shares at par), , Amount = No. of Shares ´ Re-issue, 2. If Forfeited Shares are Re-issued at, Bank A/c, Dr., To Share Capital A/c, To Securities Premium A/c, , Price per Share, Premium :, (With the amount received), (With the nominal value or paid-up value), (With premium), , (Being issue of...forfeited shares at premium), , 3. If Forfeited Shares are Re-issued at Discount :, (The discount allowed will be debited to Forfeited Shares A/c), Bank A/c, Dr. (With the amount received), Forfeited Shares A/c, Dr. (With the discount allowed), To Share Capital A/c, (With paid-up value), (Being issue of....forfeited shares @ ` .... per share), , 89
Page 576 :
SBPD Publications Accountancy (XII), Maximum Permissible Discount on Re-issue of Forfeited Shares, Important Note, , b, b, , If shares are originally issued at discount the maximum permissible discount per share is, restricted to amount credited to Share Forfeited Account on forfeiture of Share A/c., Hence, re-issue price cannot be less than the amount unpaid on forfeited shares., , ❏ Profit on Re-issue of Forfeited Shares Transfer to Capital Reserve A/c, Forfeited shares may be re-issued at discount, the company can give a maximum, discount equal to the amount forfeited on the shares. Usually, the discount given is less, than the amount forfeited. The difference between the amount forfeited (credit) and the, discount given (debit) is net capital gain. Therefore, if the company has given no discount, then the entire amount forfeited is net capital gain. In such a case, the entire amount of net, capital gain is transferred to ‘Capital Reserve Account’., In case of re-issue of forfeited shares, how much amount should be treated as capital, gain or how much amount of ‘Forfeited Shares Account' or ‘Share Forfeiture Account', should be transferred to ‘Capital Reserve Account’ should be determined in the following, ways :, (i) When all forfeited shares have been re-issued : In this case the credit balance, left on the ‘Share Forfeiture Account' or ‘Forfeited Shares Account’ is transferred to, Capital Reserve Account, Credit balance left on the Forfeited Shares Account, = Credit amount of Forfeited Shares A/c or Share Forfeited Account, – Debit amount of Forfeited Share A/c (i.e., discount allowed on forfeited shares), Accounting Entry :, Forfeited Shares A/c/Share Forfeiture A/c, Dr., To Capital Reserve A/c, (Being profit on re-issue of forfeited shares transferred, to Capital Reserve A/c), , (ii) Partial Re-issue of Forfeited Shares : In case only a part of the forfeited shares, has been re-issued, only the proportionate profit or gain on re-issue of forfeited shares will, be transferred to Capital Reserve Account. In this case proportionate amount of balance of, Forfeited Shares A/c will remain in the Forfeited Shares A/c till they are re-issued., Symbolically,, Amount to be transferred to Capital Reserve, No. of Forfeited Shares Re-i ssued, = Forfeited Amount´, ...., No. of Forfeited Shares, (–) Discount or Loss on Re-issued Shares, ...., Profit on Re-issued transferred to Capital Reserve, ....., Effect on Balance Sheet : Capital Reserve Account will appear on the liabilities, side of the Balance Sheet under the heading ‘Reserve & Surplus’., ❏ Re-issue of All Forfeited Shares, Illustration 12 (Short Answer Type Question), On 1st April, 2016, Satyapal was the holder of 500 shares of ` 10 each of Scooter India, Ltd. He has paid ` 4 per share. At a meeting of the Directors held on that day his shares, were forfeited for non-payment of the first and final calls of ` 2 and ` 4 per share, respectively. On 1st May, 2016, these shares were re-issued fully paid to Maganlal for, ` 4,500. Give the Journal entries for recording forfeiture and re-issue in the books of the, company., , 90
Page 577 :
Forfeiture and Re-issue of Shares, Solution, Date, , Journal Entries, , Dr., , Particulars, , L.F. Amount, , 2016, April 1 Share Capital A/c, To Forfeited Shares A/c, To Share First Call A/c, To Share Final Call A/c, , Cr., Amount, , `, , Dr., , `, , 5,000, 2,000, 1,000, 2,000, , (Being forfeiture of 500 shares for non-payment of first and final call, of ` 2 and ` 4 per share respectively), , May 1 Bank A/c, Forfeited Shares A/c, To Share Capital A/c, , Dr., Dr., , 4,500, 500, , (Being re-issue of forfeited shares), , Forfeited Shares A/c, To Capital Reserve A/c, , Dr., , 1,500, , (Being balance of forfeited shares transferred to Capital Reserve A/c), , 5,000, 1,500, , ❏ Long Answer Type Questions, Illustration 13 (Forfeiture of Shares Originally Issued at Par, Re-issued at, Discount), A who holds 100 shares of ` 10 each on which he has paid only ` 2.50 per share as, application money., B who holds 200 shares of ` 10 each on which he has paid ` 2.50 and ` 2 per share as, application and allotment money respectively., C who holds 300 shares of ` 10 each and has paid ` 2.50 per share on application, ` 2, per share on allotment and ` 3 per share on first call., They failed to pay their arrears and the final call. Therefore, the Director forfeited, their shares., These shares were subsequently re-issued for cash at 10% discount., Record Journal entries in the books of the company to give effect to the above., Solution, Analytical Table, , A :100 Shares, B :200 Shares, C :300 Shares, Amount received, Amount not received, , Application, ` 2.50, 250, 500, 750, 1,500, —, , Allotment, ` 2.00, 200*, 400, 600, 1,000, 200, , First Call, ` 3.00, 300*, 600*, 900, 900, 900, , Final Call, ` 2.50, 250*, 500*, 750*, —, 1,500, , * Represent Amount not received., Journal Entries, Date, , Dr., , Particulars, Share Capital A/c, To Share Allotment A/c, To Share First Call A/c, To Share Final Call A/c, To Share Forfeiture A/c, , (For 600 shares forfeited due to non-payment on respective calls), , L.F. Amount, Dr., , Cr., Amount, , `, , 6,000, , `, , 200, 900, 1,500, 3,400, , 91
Page 578 :
SBPD Publications Accountancy (XII), Bank A/c, Share Forfeiture A/c, To Share Capital A/c, , Dr., Dr., , 5,400, 600, , Share Forfeiture A/c, To Capital Reserve A/c, , Dr., , 2,800, , (For 600 shares of ` 10 each re-issued at 10% discount), , (For transfer entry made ` 3,400 – 600 = ` 2,800), , 6,000, , 2,800, , Illustration 14 (Re-issue of Shares in Different Cases), Journalise the following transactions in the books of Naveen Ltd. :, (i) 200 shares of ` 10 each issued at a premium of ` 5 per share payable with allotment, were forfeited for the non-payment of allotment money of ` 9 per share including premium., The first and final call of ` 3 per share were not made. The forfeited shares were re-issued, at ` 14 per share fully paid-up., (ii) 800 shares of ` 10 each issued at par were forfeited for the non-payment of final call, of ` 2 per share. These shares were re-issued at ` 8 per share fully paid-up., Solution, In the Books of Naveen Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L. F. Amount, `, , Case (i), , Share Capital A/c, Securities Premium A/c, To Share Forfeited A/c, To Share Allotment A/c, , Dr., Dr., , Bank A/c, To Share Capital A/c, To Securities Premium A/c, , Dr., , Share Forfeited A/c, To Capital Reserve A/c, , Dr., , Share Capital A/c, To Share Forfeited A/c, To Share Final Call A/c, , Dr., , 1,400, 1,000, , (Being 200 shares forfeited for non-payment of allotment money, as per Board's Resolution dated......), , 2,800, , (Being forfeited shares re-issued @ ` 14 per share fully paid-up), , 600, , (Being balance on forfeited shares transferred to Capital Reserve), , Case (ii), , 8,000, , Amount, `, , 600, 1,800, , 2,000, 800, , 600, , 6,400, 1,600, , (Being 800 shares forfeited for non-payment of final call money, as per Board's Resolution dated.....), , Bank A/c, Share Forfeited A/c, To Share Capital A/c, , Dr., Dr., , Share Forfeited A/c, To Capital Reserve A/c, , Dr., , 6,400, 1,600, , (Being forfeited shares re-issued @ ` 8 per share fully paid-up), , (Being balance on forfeited shares transferred to Capital Reserve), , 4,800, , 8,000, , 4,800, , Illustration 15, Dinesh Ltd. invited applications for issuing 10,000 Equity Shares of ` 10 each. The, amount was payable as follows :, , 92
Page 579 :
Forfeiture and Re-issue of Shares, `, , On Application, 1, On Allotment, 2, On First Call, 3, On Second and Final Call, Balance, The issue was fully subscribed. Ram, to whom 100 shares were allotted, failed to pay, the allotment money and his shares were forfeited immediately after allotment. Shyam, to, whom 150 shares were allotted, failed to pay the first call. His shares were also forfeited, after the first call. Afterwards, the second and final call was made. Mohan, to whom 50, shares were allotted failed to pay the second and final call. His shares were also forfeited., All the forfeited shares were re-issued at ` 9 per share fully paid-up. Pass necessary, Journal entries in the books of Dinesh Ltd., (C.B.S.E., O.D., 2011), Solution, In the Books of Dinesh Ltd., Journal Entries, Dr., Cr., S.No., (i), , Particulars, , L.F. Amount, , Bank A/c, To Equity Share Application A/c, , Dr., , 10,000, , Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 10,000, , Share Allotment A/c, To Share Capital A/c, , Dr., , 20,000, , Bank A/c, Calls-in-Arrear A/c, To Share Allotment A/c, , Dr., Dr., , 19,800, 200, , Share Capital A/c, To Calls-in-Arrear A/c (on Allotment), To Forfeited Share A/c, , Dr., , 300, , Share First Call A/c, To Share Capital A/c, , Dr., , 29,700, , Bank A/c, Calls-in-Arrear A/c, To Share First Call A/c, , Dr., Dr., , 29,250, 450, , Equity Share Capital A/c, To Calls-in-Arrear A/c, To Forfeited Share A/c, , Dr., , 900, , Equity Share Second and Final Call A/c, To Equity Share Capital A/c, , Dr., , 39,000, , Bank A/c, Calls-in-Arrear A/c, To Equity Share Second and Final Call A/c, , Dr., Dr., , 38,800, 200, , (For application money received), , (ii), , Amount, , `, , `, , 10,000, 10,000, , (For application money transferred to Share Capital A/c), , (iii), , (For allotment due on 10,000 shares @ ` 2 per share), , (iv), , (For allotment money received and calls-in-arrear on 100 shares of, Ram), , (v), , 20,000, , 20,000, , 200, 100, , (For forfeited 100 shares for non-payment), , (vi), , (For first call due on 9,900 shares), , (vii), , (For first call money received with exception of 150 shares), , (viii), , 29,700, , 29,700, 450, 450, , (For 150 shares forfeited), , (ix), , (For second and final call money due on 9,750 shares), , (x), , (For second and final call money received with exception of 50 shares), , 39,000, , 39,000, , 93
Page 580 :
SBPD Publications Accountancy (XII), (xi), , Share Capital A/c, To Calls-in-Arrear A/c, To Forfeited Shares A/c, , Dr., , 500, , Bank A/c, Forfeited Share A/c, To Equity Share Capital A/c, , Dr., Dr., , 2,700, 300, , Forfeited Shares A/c, To Capital Reserve A/c, , Dr., , 550, , (For 50 shares forfeited for non-payment of final call money), , (xii), , (For all 300 forfeited shares re-issued), , (xiii), , (For excess amount after adjustment transferred to Capital Reserve), , 200, 300, , 3,000, 550, , Illustration 16, Pallav Hotels Ltd. offered 1,00,000 Equity Shares of nominal value ` 10 each for, public subscription at ` 12. The amounts payable on the shares were :, `, , On Application, 4.50, On Allotment (including premium), 4.50, On First and Final Call, 3.00, The actual subscription was only for 90,000 shares. All money payable by, shareholders was received except from Mr. Sudhakar who had taken 100 shares but failed, to pay the first and final call. His shares were forfeited and re-sold at a discount and re-issued, to Prabhakar at ` 6 each., Show Journal entries in the books of the company and prepare the Balance Sheet of, the company., (J.A.C., 2011), Solution, Journal Entries, Dr., Cr., S.No., (i), , Particulars, Bank A/c, To Share Application A/c, , L.F. Amount, Dr., , `, , 4,05,000, , Amount, `, , 4,05,000, , (For application money received on 90,000 shares at @ ` 4.50 per share), , (ii), , Share Application A/c, To Share Capital A/c, , Dr., , 4,05,000, , Share Allotment A/c, To Share Capital A/c, To Securities Premium A/c, , Dr., , 4,05,000, , Bank A/c, To Share Allotment A/c, , Dr., , 4,05,000, , Share First and Final Call A/c, To Share Capital A/c, , Dr., , 2,70,000, , Bank A/c, To Share First and Final Call A/c, , Dr., , 2,69,700, , Share Capital A/c, To Forfeited Shares A/c, To Share First and Final Call A/c, , Dr., , 1,000, , (For application money transferred to Share Capital A/c), , (iii), , (For share allotment money and premium on shares due on 90,000, shares at ` 2.50 and ` 2 per share respectively), , (iv), , (For allotment money received on 90,000 shares), , (v), , (For first and final call money due on 90,000 shares at ` 3 per share, as per Board's Resolution dated ............ ), , (vi), , (For first and final call money received except 100 shares), , (vii), , (For forfeiture of 100 shares for non-payment of first and final call), , 94, , 4,05,000, 2,25,000, 1,80,000, , 4,05,000, 2,70,000, , 2,69,700, 700, 300
Page 581 :
Forfeiture and Re-issue of Shares, (viii), , Bank A/c, Forfeited Shares A/c, To Share Capital A/c, , Dr., Dr., , 600, 400, , Forfeited Shares A/c, To Capital Reserve A/c, , Dr., , 300, , (For the re-issue of 100 shares at ` 6 each as fully paid), , (ix), , 1,000, 300, , (For transfer of the balance on Forfeited Shares A/c to Capital, Reserve A/c), , Balance Sheet of Pallav Hotels Ltd., (as on ......), Particulars, I. EQUITY AND LIABILITIES, Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, , Note No., , `, , 1, 2, , 9,00,000, 1,80,300, 10,80,300, , `, , II. ASSETS, Current Assets :, Cash and Cash Equivalents, (Cash at Bank), , 10,80,300, 10,80,300, , Notes to Accounts, 1. Share Capital :, Issued Capital :, , `, , `, , 10,00,000, , 1,00,000 Shares of ` 10 each, Subscribed, Called and Paid-up Capital :, 90,000 Shares of ` 10 each, fully called and paid-up, , 9,00,000, , 2. Reserves and Surplus :, Securities Premium, Capital Reserve, , 1,80,000, 300, 1,80,300, , ❏ Short Answer Type Questions, Illustration 17 (When all Forfeited Shares are not issued e.g. Partial Re-issue, of Forfeited Shares), X Ltd. forfeited 1,000 shares of ` 10 due to non-payment of final call of ` 4 each. Out of, these only 600 shares are re-issued at ` 7 each as fully paid. Give Journal entries for, forfeiture and re-issue., Solution, In the Books of X Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Share Capital A/c, To Share Final Call A/c, To Forfeited Shares A/c, , (Being 1,000 shares of ` 10 each forfeited due to non-payment, of final call), , L.F. Amount, Dr., , Amount, , `, , 10,000, , `, , 4,000, 6,000, , 95
Page 582 :
SBPD Publications Accountancy (XII), Bank A/c, Forfeited Shares A/c, To Share Capital A/c, , Dr., Dr., , Forfeited Shares A/c, To Capital Reserve A/c, , Dr., , 4,200, 1,800, , 6,000, , (Being re-issue of 600 shares of ` 10 each at ` 7 fully paid), , 1,800 1, , 1,800, , (Being profit on re-issue of forfeited shares transferred to Capital, Reserve A/c), Working Note :, , No. of Issue of Forfeited Share s, 600, = ` 6,000´, =, No. of Forfeited Shares, 1,000, Less : Loss on re-issue of 600 forfeited shares (600 ´ ` 3) adjusted, (Transfer to) Capital Reserve, Forfeited Amount ´, , `, 3,600, 1,800, 1,800, , Illustration 18 (Partial Forfeiture of Shares Originally Issued at a Premium, and Partial Re-issue at Par), L Ltd. forfeited 200 shares of ` 10 each issued at a premium of ` 3 per share, for the, non-payments of the first call money of ` 3 per share. The final call of ` 2 per share has not, been made. 100 of the forfeited shares were re-issued at ` 1,000 fully paid. Record the, Journal entries for the forfeiture and re-issue of shares., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, , Share Capital A/c (200 ´ ` 8), To Share First Call A/c (200 ´ ` 3), To Share Forfeiture A/c, , Dr., , Bank A/c, To Share Capital A/c (100 ´ ` 10), , Dr., , Share Forfeiture A/c, To Capital Reserve A/c, , Dr., , (Being forfeiture of 200 shares for non-payment of first call), , `, , 1,600, , 1,000, , (Being re-issue of 100 shares), , 500 1, , (Being profit on 100 forfeited shares transferred to Capital Reserve), , Amount, `, , 600, 1,000, 1,000, 500, , 1. Calculation of Capital Reserve :, Profit on 200 Shares = ` 1,000, \ Profit on 1,000 Shares = 1, 000´ 100 / 200 = ` 500., , Illustration 19 (Re-issue of Forfeited Shares and Preparation of Share Forfeited A/c), Cemto Ltd. forfeited 6,000 shares of ` 10 each issued at a premium of ` 2 per share for, the non-payment of final call of ` 3 per share. 300 of the forfeited shares were re-issued for, ` 8 per share as fully paid-up., Pass necessary Journal entries for the forfeiture and re-issue of shares. Also prepare, share forfeited account., (C.B.S.E., 2017), Solution, In the Books of Cemto Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Share Capital A/c (6,000 ´ ` 10), To Share Final Call A/c (6,000 ´ ` 3), To Forfeited Shares A/c (6,000 ´ ` 7), , (Being the forfeiture of 6,000 shares), Bank A/c (300 × ` 8), Forfeited Shares A/c (300 × ` 2), To Share Capital A/c (300 ´ ` 10), (Being the re-issue of 300 forfeited shares @ ` 8 fully paid-up), , 96, , L.F. Amount, Dr., , Dr., Dr., , `, , 60,000, , 2,400, 600, , Amount, `, , 18,000, 42,000, , 3,000
Page 583 :
Forfeiture and Re-issue of Shares, Forfeited Shares A/c, To Capital Reserve A/c, , Dr., , 1,500, , (Being the transfer of gain on re-issue to Capital Reserve A/c), , 1,500, , Working Note :, Calculation of Gain on Re-issue of Shares, Total amount forfeited on 6,000 shares @ ` 7 per share, \ Amount forfeited on 300 shares re-issued @ ` 7 per share, Less : Discount allowed on re-issue of forfeited share (300 × ` 2), Gain on re-issue of forfeited shares trans. to Capital Reserve, , `, 42,000, 2,100, 600, 1,500, , Share Forfeited Account, , Cr., , Dr., Date, , Particulars, , Amount, , Date, , Particulars, , Amount, , `, , To Share Capital A/c (300 × ` 2), To Capital Reserve A/c, To Balance c/d, , 600, 1,500, 39,900, 42,000, , `, , By Share Capital A/c, (6,000 × ` 7), , 42,000, 42,000, , ❏ Long Answer Type Questions, ❏ Forfeiture and Re-issue of Forfeited Shares in case of Pro-rata Allotment, , Illustration 20, Bajaj Ltd. made an issue of 1,00,000 Equity Shares of ` 10 each payable as follows :, On Application, ` 2.50 per share, On Allotment, ` 2.50 per share, On First and Final Call, Balance amount, Members holding 400 shares did not pay the call money and the shares were duly, forfeited. 200 of the forfeited shares were re-issued as fully paid at ` 5 per share., Draft necessary Journal entries and prepare Share Capital and Forfeited Shares, Accounts in the books of the company., Solution, Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To Equity Share Application A/c, , L.F. Amount, `, , Dr., , 2,50,000, , Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 2,50,000, , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 2,50,000, , Bank A/c, To Equity Share Allotment A/c, , Dr., , 2,50,000, , Equity Share First & Final Call A/c, To Equity Share Capital A/c, , Dr., , 5,00,000, , Bank A/c, To Equity Share First and Final Call A/c, , Dr., , 4,98,000, , Amount, `, , 2,50,000, , (Being application money received), , (For application money transferred), , (Being allotment money due), , 2,50,000, , 2,50,000, , 2,50,000, , (Being allotment money received), , (For first and final call money due), , 5,00,000, , 4,98,000, , (For first and final call money received), , 97
Page 584 :
SBPD Publications Accountancy (XII), Equity Share Capital A/c, To Equity Share First and Final Call A/c, To Forfeited Shares A/c, , Dr., , 4,000, , Dr., Dr., , 1,000, 1,000, , 2,000, 2,000, , (For the forfeiture of 400 shares), , Bank A/c, Forfeited Shares A/c, To Equity Share Capital A/c, , (For 200 shares re-issued at ` 5 per share), , Equity Share Capital Account, , Dr., Particulars, , Amount, , Cr., , Particulars, , Amount, , `, , To Equity Share First & Final Call A/c, To Forfeited Shares A/c, To Balance c/d, , `, , 2,000 By Equity Share Application A/c, 2,000 By Equity Share Allotment A/c, 9,98,000 By Equity Share First & Final Call A/c, By Bank A/c, By Forfeited Shares A/c, 10,02,000, , Forfeited Shares Account, , Dr., Particulars, , Amount, , 2,50,000, 2,50,000, 5,00,000, 1,000, 1,000, 10,02,000, , Cr., , Particulars, , Amount, , `, , To Equity Share Capital A/c, To Balance c/d2, , 2,000, , `, , 1,000 By Equity Share Capital A/c, 1,000, 2,000, , 2,000, 2,000, , Working Notes :, 1. No amount will be transferred to Capital Reserve because profit on forfeiture relating to 200 shares, equals loss on their re-issue is nil., All Profits on the Forfeiture of 400 Shares = ` 2,000, `, 2, 000, Therefore, Profit on 200 Re-issued Shares =, ´ 200, 1,000, 400, Less : Loss on the Re-issue of 200 Shares (200 ´ ` 5), 1,000, Transfer to Capital Reserve, Nil, 2. Balance left in Forfeited Shares Account :, As Profit on Forfeiture of 400 Shares = ` 2,000, 2, 000, Therefore, Profit on 200 Un-issued Shares =, ´ 200 = ` 1,000., 400, , Illustration 21 (Pro-rata Allotment of Shares and their Forfeiture and Re-issue), Mr. Ganesh applied for 3,000 shares of ` 10 each at a premium of ` 2.50 per share. He, was allotted 2,000 shares. After having paid ` 5 on application, he did not pay the, allotment money of ` 5 (including premium) and on the final call of ` 2.50 per share; his, shares were forfeited. Later these shares were re-issued to Mahesh as fully paid for ` 9 per, share. Pass Journal entries to record forfeiture and re-issue of shares., Solution, Journal Entries, Dr., Cr., Date, , Particulars, Share Capital A/c (2,000 ´ ` 10), Securities Premium A/c (2,000 ´ ` 2.50), To Forfeited Shares A/c (3,000 ´ ` 5), To Share Allotment A/c (Note 1), To Share Final Call A/c (2,000 × ` 2.5), , L.F. Amount, Dr., Dr., , (Being 2,000 shares forfeited for non-payment of allotment and final, call money), , 98, , `, , 20,000, 5,000, , Amount, `, , 15,000, 5,000, 5,000
Page 585 :
Forfeiture and Re-issue of Shares, Bank A/c (2,000 × ` 9), Forfeited Shares A/c, To Share Capital A/c, , Dr., Dr., , Forfeiture Shares A/c, To Capital Reserve A/c, , Dr., , 18,000, 2,000, , (Being re-issue of 2,000 shares @ ` 9 per share, fully paid-up), , 13,000, , 20,000, 13,000, , (Being the gain on re-issue transferred to Capital Reserve), Working Notes :, 1. (A) Excess Amount received from Mr. Ganesh on Allotment :, Amount received on 300 applications = 3,000 × ` 5, Less : Application money Payable on Allotted Applications = 2,000 × ` 5, Excess amount paid by Mr. Ganesh on Application, , `, 15,000, 10,000, 5,000, , (B) Amount Payable by Mr. Ganesh on Allotment :, 2,000 share × ` 5, 10,000, Less : Excess amount paid on application adjusted towards Allotment, 5,000, Allotment money actually not received from Mr. Ganesh, 5,000, 2. Since the question is silent as to the utilisation of excess application money of ` 5,000 (received from, Mr. Ganesh) between share capital and securities premium. It has been assumed that the entire excess, of ` 5,000 is exclusively for Share Capital. Hence, Securities Premium A/c has been debited in the entry, of forfeiture., , Illustration 22 (Partial Re-issue of Forfeited Shares), Divyansh Ltd. issued 2,00,000 shares of ` 10 each. The amount was payable as, follows : On Application ` 3, On Allotment ` 5, On First and Final Call ` 2., Applications were received for 3,00,000 shares and pro-rata allotment was made to all, the applicants. Gaurav to whom 3,000 shares were allotted failed to pay allotment and call, money and his shares were forfeited. Out of the forfeited shares 2,500 shares were, re-issued as fully paid-up @ ` 8 per share., Pass the necessary Journal entries by showing the workings clearly., Solution, Working Notes :, 1. Shares Issued, 2,00,000, , Shares Applied, 3,00,000, , Pro-rata Allotment, 3,00,000, , 1,00,000 shares adjusted to allotment, Refund : Nil, (i.e., 1,00,000 × 3 = ` 3,00,000), Pro-rata Allotment, 2. (a) No. of Shares applied by Gaurav =, × No. of Shares Allotted to Gaurav, Actual Shares Issued, 3, 00, 000, =, × 3,000 = 4,500 shares., 2, 00, 000, `, (b) Money paid by Gaurav on Allotment (4,500 × 3), 13,500, (c) Money to be paid on Allotment by Gaurav (3,000 × 3), 9,000, Excess Application Money for Adjustment, 4,500, (d) Allotment money due on 3,000 shares (3,000 × 5), 15,000, Less : Excess application money adjusted, 4,500, Amount unpaid on Allotment by Gaurav, 10,500, (e) Amount Received on Allotment :, Total amount due (2,00,000 × 5), 10,00,000, Less : Amount already adjusted to allotment, 3,00,000, 7,00,000, Less : Amount unpaid by Gaurav, 10,500, Amount received on Allotment, 6,89,500, 3. Calculation of Share Forfeiture Amount :, Amount received from Gaurav (4,500 × 3) = ` 13,500, , 99
Page 586 :
SBPD Publications Accountancy (XII), 4. Calculation of Capital Reserve :, , `, , 13, 500, × 2,500, 3, 000, Less : Loss on Re-issue of 2,500 Shares (2,500 × 2), Amount forfeited on Re-issued Shares =, , 11,250, Capital Reserve, , Journal Entries in the Books of Divyansh Ltd., S.No., (i), , Particulars, , Dr., , L.F. Amount, `, , Bank A/c (3,00,000 × ` 3), To Share Application A/c, , Dr., , 9,00,000, , Share Application A/c (3,00,000 × ` 3), To Share Capital A/c (2,00,000 × ` 3), To Share Allotment A/c (1,00,000 × ` 3), , Dr., , 9,00,000, , Share Allotment A/c (2,00,000 × ` 5), To Share Capital A/c, , Dr., , Bank A/c, To Share Allotment A/c, , Dr., , 6,89,500, , Share First and Final Call A/c (2,00,000 × ` 2), To Share Capital A/c, , Dr., , 4,00,000, , Bank A/c (1,97,000 × ` 2), To Share First and Final Call A/c, , Dr., , 3,94,000, , Share Capital A/c (3,000 × ` 10), To Share Allotment A/c, To Share First and Final Call A/c, To Share Forfeiture A/c, , Dr., , 30,000, , Bank A/c (2,500 × ` 8), Share Forfeiture A/c (2,500 × ` 2), To Share Capital A/c, , Dr., Dr., , Share Forfeiture A/c, To Capital Reserve A/c, , Dr., , (Being share application money received on 3,00,000 shares at, @ ` 3 per share), , (ii), , (Being share application money transferred to Share Capital A/c, and adjusted towards allotment), , (iii), , 10,00,000, , (Being share allotment money due on 2,00,000 shares @ ` 5 each), , (iv), , (Being share allotment money received on 1,97,000 shares), , (v), , (Being share first call money due on 2,00,000 shares @ ` 2 each), , (vi), , (Being first call money received on 1,97,000 @ ` 2 each), , (vii), , (Being 3,000 shares forfeited for non-payment of allotment and, first call money), , (viii), , 20,000, 5,000, , (Being 2,500 forfeited shares re-issued at ` 8 per share fully paid-up), , (ix), , (Being profit on re-issue transferred to Capital Reserve A/c), , 6,250, , 5,000, 6,250, , Cr., Amount, `, , 9,00,000, , 6,00,000, 3,00,0001, , 10,00,000, , 6,89,500, , 4,00,000, , 3,94,000, , 10,5002, 6,000, 13,5003, , 25,000, , 6,2504, , Illustration 23, N.S. Ltd. invited applications for 5,000 shares of ` 10 each. Applications were received, for 7,000 shares. Allotment was made proportionately. The amount was payable as follows :, On Application ` 3 per share, on Allotment ` 5 per share, on Final Call ` 2 per share., The shareholders paid all the amounts except Mohan to whom 20 shares were allotted, failed to pay the allotment and final call money. His shares were forfeited. These shares, were subsequently re-issued at a discount of 10%. Give Journal entries and prepare, Balance Sheet., , 100
Page 587 :
Forfeiture and Re-issue of Shares, Solution, , In the Books of N. S. Ltd., Journal Entries, , S. No., (1), , Dr., , Particulars, , Cr., , L.F. Amount, `, , Bank A/c, To Equity Share Application A/c, , Dr., , 21,000, , Equity Share Application A/c, To Equity Share Capital A/c, To Equity Share Allotment A/c, , Dr., , 21,000, , (Being share application money received for 7,000 shares), , (2), , Amount, `, , 21,000, 15,000, 6,000, , (Being allotment was made on pro-rata and excess money adjusted, towards allotment), , (3), , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 25,000, , Bank A/c, To Equity Share Allotment A/c, , Dr., , 18,924, , Equity Share Final Call A/c, To Equity Share Capital A/c, , Dr., , 10,000, , Bank A/c, To Equity Share Final Call A/c, , Dr., , 9,960, , Equity Share Capital A/c, To Equity Share Allotment A/c, To Equity Share Final Call A/c, To Share Forfeiture A/c, , Dr., , 200, , Bank A/c, Share Forfeiture A/c, To Equity Share Capital A/c, , Dr., Dr., , 180, 20, , Dr., , 64, , (Being allotment money due on 5,000 shares), , (4), , (Being allotment money received on 4,980 shares and excess received, on application adjusted), , (5), , (Being final call money due), , (6), , (Being final call money received on 4,980 shares), , (7), , 25,000, 18,924, , 10,000, 9,960, 76, 40, 84, , (Being Mohan’s shares forfeited), , (8), , 200, , (Being Mohan’s shares re-issued at 10% discount), , (9), , Share Forfeiture A/c, To Capital Reserve A/c, , 64, , (Being balance of Share Forfeiture A/c transferred to Capital Reserve), , Balance Sheet of N. S. Ltd., Particulars, , Note No., , `, , `, , I. EQUITY AND LIABILITIES, Shareholders’ Funds :, (a) Share Capital, , 1, , 50,000, , (b) Reserves and Surplus, , 2, , 64, 50,064, , II. ASSETS, Current Assets :, Cash and Cash Equivalents (Cash at Bank), , 50,064, 50,064, , 101
Page 588 :
SBPD Publications Accountancy (XII), Notes to Accounts, 1. Share Capital :, , `, , `, , Authorised :, ........... Shares of ` 10 each, , .........., , Issued, Subscribed, Called and Paid-up :, 5,000 Shares of ` 10 each fully paid-up, , 50,000, , 2. Reserves and Surplus :, 64, , Capital Reserve, , Working Notes :, (i) Calculation of Allotment Money not paid by Mohan :, Applied for 7,000 shares, allotment made 5,000 shares, \ Therefore, Ratio 7 : 5, Mohan is allotted 20 shares, 20´ 7, Hence, Shares applied for by Mohan =, = 28, 5, Amount received from Mohan on Application (28 × 3), Less : Amount adjusted on application (20 × 3), Excess Amount adjusted towards Allotment, Allotment money due on Mohan’s 20 shares (20 × 5), Less : Excess application money received adjusted on allotment, Amount unpaid on Allotment, (ii) Calculation of Money received on Allotment :, Money due on allotment on 5,000 shares (5,000 × 5), Less : Excess money received on application adjusted towards allotment, Less : Allotment money not paid by Mohan, Amount received on Allotment, , `, 84, (60), 24, `, 100, (24), 76, `, 25,000, (6,000), 19,000, (76), 18,924, , Illustration 24 (Pro-rata Allotment), Moti Ltd. invited applications for issuing 10,00,000 Equity shares of ` 10 each at a, premium of ` 2 per share. The amount was payable as follows :, On Application, ` 5 (including premium), On Allotment, ` 4, On First and Final Call, ` 3, Applications for 15,00,000 shares were received. Applications for 3,00,000 shares, were rejected and pro-rata allotment was made to the remaining applicants. Excess, application money was utilized towards sums due on allotment. Giri, who had applied for, 24,000 shares failed to pay the allotment and call money. His shares were forfeited. Out of, the forfeited shares 10,000 shares were re-issued for ` 8 per share fully paid-up. Pass, necessary Journal entries in the books of Moti Ltd., (C.B.S.E., O.D., 2011), Solution, In the Books of Moti Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To Equity Share Application A/c, (Being application money received), , 102, , L.F. Amount, Dr., , `, , 75,00,000, , Amount, `, , 75,00,000
Page 589 :
Forfeiture and Re-issue of Shares, Equity Share Application A/c, To Equity Share Capital A/c, To Securities Premium A/c, To Bank A/c, To Equity Share Allotment A/c, , Dr., , 75,00,000, , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 40,00,000, , Bank A/c, To Equity Share Allotment A/c, , Dr., , 29,40,000, , Equity Share First and Final Call A/c, To Equity Share Capital A/c, , Dr., , 30,00,000, , Bank A/c, To Equity Share First and Final Call A/c, , Dr., , 29,40,000, , (Being application money transferred to share capital and adjusted on, allotment and money for 3,00,000 shares refunded), , (Being allotment money due), , 30,00,000, 20,00,000, 15,00,000, 10,00,000, , 40,00,000, 29,40,000, , (Being allotment money received), , (Being first and final call due), , 30,00,000, 29,40,000, , (Being money received on first and final call except on 20,000 shares, of Giri), , Equity Share Capital A/c, To Equity Share Allotment A/c, To Equity Share First and Final Call A/c, To Forfeited Shares A/c, , Dr., , 2,00,000, , Bank A/c, Forfeited Shares A/c, To Equity Share Capital A/c, , Dr., Dr., , 80,000, 20,000, , Forfeited Shares A/c, To Capital Reserve A/c, , Dr., , 20,000, , (Being 20,000 equity shares forfeited), , (Being 10,000 forfeited shares re-issued), , 60,000, 60,000, 80,000, , 1,00,000, 20,000, , (Being amount transferred to Capital Reserve), Analysis Table, , Working Notes :, 1, Number of, Shares Applied, 12,00,000, 3,00,000, 15,00,000, , 2, Number of, Shares Alloted, 10,00,000, —, 10,00,000, , 3, 4, Amount received Amount adjusted, on Application, on Application, ` 2, ` 2.00, 60,00,000, 30,00,000, 15,00,000, 75,00,000, 30,00,000, , 5, Excess, Amount, 10,00,000, , 6, Amount Adjusted on Allotment, `3, 10,00,000, 10,00,000, , Amount not received from Giri :, Shares Applied by Giri = 24,000, Shares allotted to Giri (24,000 ´ 10,00,000/12,00,000) = 20,000, Application money received = 24,000 × 5 = ` 1,20,000, Amount Adjusted on Application = 20,000 × 5 = ` 1,00,000, Excess amount of Giri on Application = ` 20,000 (1,20,000 – 1,00,000), `, Amount receivable from Giri on Allotment (20,000 × 4), 80,000, Less : Excess on Application adjusted, 20,000, Amount not received from Giri, 60,000, Amount Received on Allotment :, Total due on Allotment (10,00,000 × 4), 40,00,000, Less : Excess on Application, 10,00,000, 30,00,000, Less : Not received from Giri, 60,000, Amount Received, 29,40,000, , 103
Page 590 :
SBPD Publications Accountancy (XII), Illustration 25, Sudershan Ltd. invited applications for 1,00,000 Equity Shares of ` 10 each. The, shares were issued at a premium of ` 5 per share. The amount was payable as follows :, On Application and Allotment ` 8 per share (including premium ` 3), Balance including premium on the first and final call., Application for 1,50,000 shares were received. Applications for 10,000 shares were rejected and pro-rata allotment was made to the remaining applications on the following basis :, (i) Applicants for 80,000 shares were allotted 60,000 shares, and, (ii) Applicants for 60,000 shares were allotted 40,000 shares., X, who belonged to the first category and was allotted 300 shares, failed to pay the, first call money. Y, who belonged to the second category and was allotted 200 shares also, failed to pay the first call money. Their shares were forfeited. The forfeited shares were, re-issued at ` 12 per share fully paid-up. Pass necessary Cash Book and Journal entries., Solution, Sudershan Ltd., Dr., Cash Book (Bank Column Only), Cr., Particulars, , Amount, , Particulars, , Amount, , `, , `, , To Share Application & Allotment A/c, By Share Application & Allotment A/c, (Application and Allotment money, (Refund of Application money on, received for 1,50,000 shares, 10,000 unsuccessful applications), 80,000, @ ` 8 per share), 12,00,000 By Balance c/d, 15,04,100, To Share First & Final Call A/c, (First and Final Call Money, received except on 500 shares), 3,78,100, To Share Capital A/c, (Amount received on re-issue, of forfeited shares), 5,000, To Securities Premium A/c, 1,000, 15,84,100, 15,84,100, , Journal Entries, Date, , Dr., , Particulars, Share Application & Allotment A/c, To Share Capital A/c (1,00,000´ ` 5), To Securities Premium A/c (1,00,000´ ` 3), To Calls-in-advance A/c (40,000´ ` 8), , L.F. Amount, Dr., , (For transfer of application and allotment money to Share Capital, A/c and Securities Premium A/c and surplus transferred to Callsin-advance A/c), Share First & Final Call A/c (1,00,000´ ` 7), Dr., To Share Capital A/c (1,00,000´ ` 5), To Securities Premium A/c (1,00,000´ ` 2), [For first and final call money of ` 7 per share (` 2 thereof being, premium) due on 1,00,000 shares)], , Share Capital A/c (500´ ` 10), Dr., Securities Premium A/c (500´ ` 2), Dr., To Share First & Final Call A/c, To Forfeited Shares A/c [(300´ ` 5) + 800 + 200´ ` (5 + 4)], , (For forfeiture of 300 shares of X and 200 shares of Y for non-payment, of call money), , 104, , `, , 11,20,000, , 7,00,000, , 5,000, 1,000, , Cr., Amount, `, , 5,00,000, 3,00,000, 3,20,000, , 5,00,000, 2,00,000, , 1,900, 4,100
Page 591 :
Forfeiture and Re-issue of Shares, Calls-in-advance A/c, To Share First & Final Call A/c, , Dr., , 3,20,000, 3,20,000, , (For adjustment of calls-in-advance towards First and Final Call A/c), , Bank A/c (500´ ` 12), To Share Capital A/c (500´ ` 10), To Securities Premium A/c (500´ ` 2), , Dr., , Forfeited Shares A/c, To Capital Reserve A/c, , Dr., , 6,000, 5,000, 1,000, , (For re-issue of forfeited shares as fully paid-up at ` 12 per share), , 4,100, 4,100, , (For profit on re-issue transferred to Capital Reserve A/c), Working Notes :, (1), Analysis of Application Money :, , Shares Applied, Shares Allotted, Surplus to Calls-in-advance for Adjustment, Adjustment per Share, (2), , First Category, No. of, Shares, 80,000, 60,000, , `, , Second Category, , Amount, `, 6,40,000, 4,80,000, 1,60,000, , No. of, Shares, 60,000, 40,000, , 1,60,000, 8, =`, 60,000, 3, , `, , Amount, `, 4,80,000, 3,20,000, 1,60,000, , 1,60,000, =`4, 40,000, , Calls-in-arrear on First & Final Call :, , `, , Amount due on 500 Shares (500´ ` 7), Less : Adjustment from Application Money :, 300´ ` 8/3 = ` 2,400 ¸ 3, 200´ ` 4, , 3,500, `, 800, 800, , 1,600, 1,900, , (3), , Amount received on First & Final Call :, Amount due (1,00,000´ ` 7), Less : Calls-in-advance Adjusted, Less : Calls-in-arrear, Amount received on First and Final Call, , 7,00,000, 3,20,000, 3,80,000, 1,900, 3,78,100, , Disclosure of Share Capital in Balance Sheet, Illustration 26, XYZ Ltd., issued 60,000 shares of ` 10 each. On these shares payments are to be made, as follows :, 20% on application, 30% on allotment and 50% on first and final call. A, the holder of, 16,000 shares, did not pay the call money, hence his shares have been forfeited by the, company. Prepare Balance Sheet of the company., (U.S.E.B., 2013), Solution, Balance Sheet of XYZ Ltd., (as at .......), Particulars, I. EQUITY AND LIABILITIES, Shareholders’ Funds :, Share Capital, , Note No., , 1, , `, , `, , 5,20,000, 5,20,000, , 105
Page 592 :
SBPD Publications Accountancy (XII), II. ASSETS, Current Assets :, Cash and Cash Equivalents, , 2, , 5,20,000, 5,20,000, , Notes to Accounts :, 1. Share Capital :, , `, , `, , Issued and Subscribed Capital :, 60,000 Shares of ` 10 each, , 6,00,000, , Paid-up Capital :, 44,000 Shares of ` 10 each fully called and paid-up, Add : Share Forfeited A/c, , 4,40,000, 80,000, , 5,20,000, , 2. Cash and Cash Equivalents, Cash at Bank, , 5,20,000, , Illustration 27, Asian Paints Ltd. is registered with an authorised capital of ` 10,00,000 divided into, 1,00,000 equity shares of ` 10 each. The company offered 80,000 shares for subscription to, the public, out of which 75,000 shares were subscribed for ` 8 per share were called and, received except a call of ` 2 per share on 1,000 shares held by Anubhav. His shares were, forfeited and re-issued immediately for ` 11 fully paid-up. Show ‘Share Capital’ in the, Balance Sheet of Asian Paints Ltd. Also Prepare ‘Notes to Accounts’., Balance Sheet of Asian Paints Ltd., Solution, (as at .......), Particulars, , Note No., , `, , I. EQUITY AND LIABILITIES, Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, , 1, 2, , 6,02,000, 7,000, 6,09,000, , II. ASSETS, Current Assets :, Cash and Cash Equivalents, , 3, , 6,09,000, , Notes to Accounts :, 1. Share Capital :, Authorised Capital :, 1,00,000 Equity Shares of ` 10 each, , `, 10,00,000, , Issued Capital :, 80,000 Equity Shares of ` 10 each, Subscribed Capital :, Subscribed and fully paid, 1,000 Equity Shares of ` 10 each, fully paid, Subscribed and not fully paid, 74,000 Equity Shares of ` 10 each, ` 8 called-up, , 106, , 8,00,000, , 10,000, 5,92,000, 6,02,000
Page 593 :
Forfeiture and Re-issue of Shares, 2. Reserves and Surplus :, Securities Premium Reserve (1,000 × ` 1), Capital Reserve (1,000 × ` 6), , 1,000, 6,000, 7,000, , 3. Cash and Cash Equivalent, Cash at Bank, , 6,09,000, , 4.6 Surrender of Shares, Sometimes a shareholder feels that he cannot pay further calls. In such a situation he, may surrender his shares to the company. When shares are voluntarily surrendered by the, shareholder to the company for cancellation, this is called surrender of shares., These shares are then cancelled by the company provided it is authorised by its, Articles. In case of surrender of shares, entries are passed just like forfeiture of shares., Circumstances to Accept Surrender of Shares, Surrender of shares may be accepted in any one of the following circumstances :, (1) When shares are surrendered in exchange of new issue of the same face value., (2) When all circumstances of forfeiture of shares have arisen, possibility of, surrender of shares may be searched out instead of making forfeiture of shares., , 4.7 Difference between Surrender of Shares and, Forfeiture of Shares, (i) Forfeiture of shares is made by the company whereas surrender of shares is made, by the shareholders., (ii) In case of surrender of shares, some facility is provided to the shareholder, e.g.,, return of some money out of received amount but no such facility is provided in, case of forfeiture of shares., ❏ Miscellaneous and Boards’ Questions, Illustration 28, Hema Ltd. invited applications for issuing 30,000 Equity Shares of ` 100 each at a, premium of ` 20 each. The amount was payables as follows :, On Application and Allotment ` 40 (including premium ` 10) per share,, On First Call ` 50 (including premium ` 10) per share,, On Second and Final Call — Balance., Applications for 75,000 shares were received. Applications for 15,000 shares were, rejected and the money received from them were refunded. Shares were allotted on, pro-rata to the remaining applicants. All calls were made. A, who had applied for 2,000, shares, failed to pay the first and second and final call on the shares allotted to him. B, who, was allotted 1,000 shares, failed to pay the second and final call. The shares of both A and B, were forfeited. The forfeited shares were re-issued at ` 160 per share fully paid-up., Pass necessary Journal entries in the books of the company for the above transactions., Solution, Working Notes :, Shares Issued, 30,000, , Application Received, 75,000, , Adjustment to First and, Final Call, 60,000 – 30,000 = 30,000 Shares, , Pro-rata Allotment, 60,000, , Applications Rejected, 15,000., , 107
Page 594 :
SBPD Publications Accountancy (XII), 1. Calculation and Adjustment of Amount received on Application :, Pro-rata Allotment = 60,000 Shares, Excess money received on Application and Allotment adjusted, on First Call = 30,000 ´ ` 40 = ` 12,00,000, Money to be refunded (15,000 ´ ` 40) = ` 6,00,000, 30, 000, 2. No. of Shares Allotted to A = 2,000 ´, = 1,000 Shares., 60, 000, Application and Allotment money received from A, (2,000 Shares ´ ` 40), Less : Amount utilised for Application and Allotment, Amount received in Advance for First Call with Application, Amount of First Call due from A (1,000 ´ ` 50), Less : Amount received in Advance, Amount not received of First Call, 3. Calculation of Amount received on First Call :, Total amount due on First Call (30,000 Shares ´ ` 50), Less : Amount of First Call received in Advance, , `, 15,00,000, 12,00,000, 3,00,000, 10,000, 2,90,000, , Less : Amount of First Call not received from A, , Journal Entries, Date, , Dr., , Particulars, , L.F. Amount, `, , Bank A/c, To Share Application and Allotment A/c, , `, 80,000, 40,000, 40,000, 50,000, 40,000, 10,000, , Dr., , Cr., Amount, `, , 30,00,000, 30,00,000, , (Being application and allotment money received for 75,000 shares, @ ` 40 per share), , Share Application and Allotment A/c, To Equity Share Capital A/c, To Securities Premium A/c, To Equity Share First Call A/c, To Bank A/c, , Dr., , 30,00,000, 9,00,000, 3,00,000, 12,00,000, 6,00,000, , (Being application and allotment money on 30,000 shares transferred to, Equity Share Capital A/c and excess application money refunded, and adjusted), , Equity Share First Call A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , 15,00,000, 12,00,000, 3,00,000, , (Being first call money due on 30,000 shares @ ` 50 each, including, premium of ` 10), , Bank A/c, To Equity Share First Call A/c, , Dr., , 2,90,000, 2,90,000, , (Being first call money received), , Equity Share Second and Final Call A/c, To Equity Share Capital A/c, , Dr., , 9,00,000, 9,00,000, , (Being share second and final call money due), , Bank A/c, To Equity Share Second and Final Call A/c, , Dr., , 8,40,000, 8,40,000, , (Being second and final call money received on 28,000 shares @ ` 30, each), , Equity Share Capital A/c, Securities Premium A/c, , 108, , Dr., Dr., , 2,00,000, 10,000
Page 595 :
Forfeiture and Re-issue of Shares, To Share Forfeiture A/c, To Equity Share First Call A/c, To Equity Share Second and Final Call A/c, , 1,40,000, 10,000, 60,000, , (Being forfeiture of 2,000 shares), , Bank A/c, To Equity Share Capital A/c, To Securities Premium A/c, , Dr., , 3,20,000, 2,00,000, 1,20,000, , (Being re-issue of 2,000 shares @ ` 160 per share), , Share Forfeiture A/c, To Capital Reserve A/c, , Dr., , 1,40,000, 1,40,000, , (Being balance of Share Forfeiture A/c transferred to Capital Reserve, A/c), , 4.8. FAST REVISION, l Forfeiture of Shares : Forfeiture of shares means the cancellation of allotment due to, failure of the shareholders to pay one or more instalments on shares allotted to them. The, amount already received on forfeited shares is forfeited by the company., l Re-issue of Forfeiture of Shares : Forfeiture of shares may be re-issued to the public subject, to the terms and conditions in the Articles of Association relating to the same. Forfeited shares, may be re-issued at par, at premium and at discount., l Transfer to Capital Reserve : If all the forfeited shares are re-issued, any credit balance, of Forfeited Shares Account is transferred to Capital Reserve Account. In case of partial, re-issue of shares, only profit on re-issued shares is transferred to Capital Reserve., , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6/8 Marks Questions), , 1. How and when the shares issued to the public can be forfeited ? Explain with examples., 2. What do you mean by forfeiture of shares ? How are shares forfeited ? Can forfeited shares, be re-issued at discount ? If so, to what extent ?, 3. What is forfeiture of shares ? What Journal entries are passed in the case of forfeiture and, re-issue of forfeited shares ? Give example., 4. What do you understand by the term ‘Forfeiture of Shares’ ? Can forfeited shares be, re-issued at discount ? If so, to what extent ? Where would you transfer the balance left in, the Share Forfeited Account after the re-issue of such shares ?, 5. Explain forfeiture of shares. Explain the procedure of forfeiture. How shares are forfeited, and re-issued ?, (J.A.C., 2010), 6. (a) In what ways forfeited shares are re-issued ?, (b) Show the entries to be passed at the time of re-issue., (U.S.E.B., 2012), , (B) Short Answer Type Questions, , (3/4 Marks Questions), , 1., 2., 3., 4., 5., 6., , What do you mean by forfeiture of shares ?, Define forfeiture of shares., On what conditions forfeited shares be re-issued ?, At what price may a company re-issue shares which have been forfeited ?, In what way, if any, can Forfeited Shares Account be used ?, Can the forfeited shares be re-issued at a discount ? How much discount can be allowed on, re-issue of shares at a discount ?, (U.S.E.B., 2013), 7. What is a Forfeited Shares Account ? How and when it is closed ?, 8. Where would you transfer the balance left in Share Forfeited Account after the re-issue of, forfeited shares ?, 9. What do you mean by forfeiture of shares ? What entries are passed in the event of, (a) forfeiture of shares, and (b) re-issue of forfeited shares ? Give illustrations., , 109
Page 596 :
SBPD Publications Accountancy (XII), 10. What do you mean by Forfeiture of Shares ? Write Journal entries of share forfeiture when the, shares have been issued (i) at par, (ii) at premium, (iii) at discount., 11. What entries are made for the forfeiture and re-issue of shares ?, , (C) Very Short Answer Type Questions, , (1/2 Marks Questions with Answers), , 1. What is meant by forfeiture of shares ?, [Ans. When shareholders fail to pay allotment or instalment money on shares allotted to them,, the company has authority to forfeit shares of the defaulters. This is called ‘forfeiture of, shares'. In case of forfeiture of shares, the amount already paid by defaulting shareholder, is forfeited by the company.], 2. Can forfeited share be re-issued ? If yes, what is the maximum discount that can, be allowed on re-issue of share., [Ans. Yes. (i) It can be re-issued to the extent of amount credited to Forfeited Share Account,, if originally issued at par or premium., (ii) If originally issued at discount, then the maximum discount allowed on re-issue, will be the amount credited to Share Forfeited A/c + Amount of discount, allowed on such original shares.], 3. Where would you transfer the balance left in the Share Forfeited Account after, re-issue of such shares ?, Or, Where would you transfer the profit on re-issue of forfeited shares ?, [Ans. After the re-issue of forfeited shares, the credit balance left (or profit on re-issue) in the, Share Forfeited Account is transferred to Capital Reserve Account. The reason is that, such balance (or profit) represents capital profit.], 4. When does a company forfeit its shares ?, [Ans. If a member fails to pay a valid call within the stimulated time, the company can forfeit, the share for non-payment of calls, provided the Articles of Association permits it.], 5. What is a Forfeited Share Account ?, (J.A.C., 2011), [Ans. When shares of a shareholder are forfeited, Share Capital Account of such shareholder is, closed and the amount already received on such shares is put into a newly opened account, which is called Forfeited Share Account., 6. Distinguish between forfeiture of shares surrender of shares., (U.S.E.B., 2016), [Ans. Surrender and forfeiture of shares have paractically the same effect. However, the, following difference may be noted :, (i) The surrender of shares is done with the assent of the shareholder while the forfeiture, is done at the instance of the company., (ii) In case of surrencer of shares, the company can refund some of the amount received on, shares to shareholder whereas in case of forfeiture, forfeited amount is not refunded., , (D) Objective Type Questions, I. Select the correct alternative :, 1. Balance of Forfeited Shares Account after re-issue of forfeited shares is transferred to :, (a) Profit & Loss Account, (b) Capital Reserve Account, (c) General Reserve Account, (d) None of these, (J.A.C., 2019), 2. Shares can be forfeited :, (N.C.E.R.T.), (a) For failure to attend meetings, (b) For non-payment of call money, (c) For failure to repay the loan to the bank (d) For which shares are pledged as a security, 3. Balance of Share Forfeited Account is shown in the Balance Sheet under the item :, (a) Current Liabilities and Provisions, (b) Reserve and Surplus, (c) Share Capital Account, (d) Unsecured Loans, (N.C.E.R.T.), 4. Share Forfeiture Account is shown in the Balance Sheet with :, (a) Non-current Liabilities, (b) General Reserve, (c) Paid-up Capital, (d) None of these, 5. Discount allowed on re-issue of forfeited shares is debited :, (a) Share Capital A/c, (b) Share Forfeiture A/c, (c) Statement of P/L, (d) General Reserve A/c, [Ans. 1. (b), 2. (b), 3. (b), 4. (c), 5. (b).], , 110
Page 597 :
Forfeiture and Re-issue of Shares, II., 1., 2., 3., 4., 5., , State whether the following statements are True or False :, A company can transfer the balance of Forfeited Shares Account to Capital Reserve Account., The balance on Forfeited Shares Account is transferred to the Profit and Loss Statement., The balance on Forfeited Shares Account represents a capital loss., (J.A.C., 2019), Forfeiture of shares results in the reduction of share capital., Forfeited shares cannot be re-issued., [Ans. 1. True, 2. False, 3. False, 4. True, 5. False.], , PRACTICAL PROBLEMS, ❏ Very Short Answer Type Numerical Questions, 1. Z Ltd. forfeited 1,000 equity shares of ` 10 each for the non-payment of the first call of ` 2, per share. The final call of ` 3 per share was yet to be made., Calculate the maximum amount of discount at which these shares can be re-issued., [Ans. The maximum amount of discount at which these shares can be re-issued is` 5 per share.], 2. Jyoti Ltd. forfeited 1,000 equity shares of ` 100 each for the non-payment of first call of, ` 20 per share and final call of ` 25 per share. State :, (a) Can these shares be re-issued ?, (b) If yes, state the minimum amount at which these shares can be re-issued., (c) If these shares were re-issued at ` 50 per share fully paid-up, what will be the amount, of Capital Reserve ?, Calculate the maximum amount of discount at which these shares can be reissued., [Ans. (a) Yes, (b) ` 45,000, (c) Capital Reserve = ` 5,000.], 3. Patliputra Ltd. forfeited 900 shares of ` 10 each on which a shareholder has paid only ` 2, on application but has failed to pay ` 3 on allotment and ` 5 on first and final call. Pass, Journal entry for forfeiture only., [Ans. Dr. Equity Share Capital A/c ` 9,000, Cr. Share forfeiture A/c ` 1,800.], 4. On 500 shares of ` 10 each fully called-up, the Company received only ` 8 per share., Consequently shares were forfeited. Give the Journal entry for forfeiture and recommend, the minimum price at which there shares can be re-issued., [Ans. Share Forfeiture ` 4,000, Minimum Price ` 2 per share.], 5. X Ltd. forfeited 500 shares of Munna of ` 10 each fully called-up for non-payment of first, call of ` 2 per share and final call of ` 2 per share. 300 of these shares were re-issued at ` 9, per share fully paid-up. Pass Journal entries and find out amount of capital reserve., [Ans. Capital Reserve ` 1,500.], 6. Give Journal entries to record the following transactions of forfeiture and re-issue of shares, and open share forfeited account., L Ltd. forfeited 470 Equity Shares of ` 10 each issued at a premium of ` 5 per share for, non-payment of allotment money of ` 8 per share (including share premium ` 5 per share), and the first and final call of ` 5 per share. Out of these 60 Equity Shares were, subsequently re-issued at ` 14 per share., (C.B.S.E., 2011), [Ans. Capital Reserve ` 120.], ❏ Pro-rata Allotment, Forfeiture and Re-issue of Share Originally Issued at par, 7. Jyoti Ltd. invited application from public for 50,000 shares of ` 10. Applications were, received for 60,000 shares. Allotment was made proportionatery to the applicants. The, amount payable on shares was as follows : On Application ` 3 per share, On Allotment ` 5, per share, on First & Final Call ` 2 per share., Shyam to whom 200 shares were allotted, failed to pay allotment and call money and for, this reason, his shares were forfeited by the company. These shares were subsequently, re-issued at a discount of 10%., Pass Journal entries relating to forfeiture and re-issue of shares., [Ans. Amount not received Share Allotment on 200 Shares ` 880, Transfer to Capital Reserve, ` 520.], ❏ Long Answer Type Numerical Questions, I. Forfeiture of Shares, ❏ Forfeiture of Shares Issued at Par, 1. A Ltd. forfeited 200 shares of ` 10 each fully called-up, held by Swati for non-payment of, allotment money of ` 3 per share and final call of ` 4 per share. She paid the application, money at ` 3 per share., , 111
Page 598 :
SBPD Publications Accountancy (XII), Give Journal entries for the forfeiture of shares., [Ans. J/E, Shares Forfeiture A/c ` 600], 2. The Directors of a company decided to forfeit 5,000 shares of ` 100 per share on which, called-up money was ` 80. The bearer of these shares did not pay ` 30 per share on first, call and ` 20 per share on final call. Make Journal entry for forfeiture of the shares., [Ans. Share Forfeiture A/c ` 1,50,000], (B.S.E.B., 2012), 3. New Company Ltd. was registered with 5,000 Equity Shares of ` 25 each payable as ` 5 per, share on application, ` 10 on allotment, ` 5 on first call and the balance on final call. The, shares were issued to the public and were fully taken up. When cash was received, it was, found that one shareholder holding 100 shares in the company failed to pay the final call, money. After completion of the appropriate procedure, the Directors forfeited these shares. You, are required to give the necessary Journal entries to record the above transactions., [Ans. J/E, Shares Forfeiture A/c ` 2,000], 4. Surya Ltd. with a registered capital of ` 10,00,000 divided into equity shares of ` 10 each, issued 1,00,000 equity shares payable ` 3 on application ` 2 on allotment, ` 3 on first call, and ` 2 on second and final call. The amount due on allotment was duly received except, Sandhya holding 6,000 shares. Her shares were immediately forfeited. On the first call, being made, Abhijit holding 5,000 equity shares paid the entire balance on his holding., Second call was not made., Pass necessary Journal Entries to record the transaction., [Ans. Share Forfeited A/c (Cr.) ` 18,000, Calls-in-advance ` 10,000.], ❏ Forfeiture of Shares Issued at Premium, 5. X Ltd. issued 10,000 Equity Shares of ` 10 each at ` 11 per share. The amount was payable, as follows :, ` 2 on Application, ` 4 on Allotment (including Premium), ` 3 on First Call, and, ` 2 on Final Call, A, a holder of 100 shares, failed to pay first and final call money. Directors forfeited his shares., Give Journal entries regarding the forfeiture of shares., [Ans. J/E, Shares Forfeiture A/c ` 500], 6. Sehgal Ltd. issued 10,000 shares of ` 10 each at ` 12 per share. The amount was payable as, follows :, ` 1 on Application, ` 5 on Allotment (including Premium), ` 3 on First Call, and, ` 3 on Final Call, The company did not make the final call. Sahil, holder of 50 shares, failed to pay allotment, and first call money. Directors forfeited his shares., Give Journal entries regarding the forfeiture of Sahil's shares., [Ans. J/E, Share Forfeiture A/c ` 50], 7. A company forfeits the shares held by two shareholders Ajay and Vijay., (i) Ajay holds 100 shares of ` 10 each on which he has paid ` 5 per share (` 3 on, application and ` 2 on allotment including ` 1 as premium payable on allotment) as, application and allotment money but has failed to pay the call of ` 6 per share., (ii) Vijay holds 200 shares of ` 10 each on which he has paid ` 3 per share as application, money. He has failed to pay the allotment money of ` 2 and call money of ` 5 per share., Pass necessary Journal entries., [Ans. J/E. (a) Share Forfeiture A/c ` 400; (b) Share Forfeiture A/c ` 600.], 8. Nama Ltd. invited the public to subscribe 1,00,000 equity shares of ` 10 each at a premium, of ` 2 per share payable on allotment. Payment to be made as follows :, On Application, ` 2, On Allotment, ` 6, On first & final call, Balance amount, Applications were received for 80,000 shares, call was made and all the money were, received except on 5,000 shares which were forfeited. Give Journal entries. (J.A.C., 2016), [Ans. J/E, Share Forfeiture A/c ` 30,000], ❏ Forfeiture of Shares Issued at Premium, 9. Kedia Ltd. was formed for purchasing Ashoka Ltd. with an authorised capital of ` 5,00,000, divided into 5,000 shares of ` 100 each. 3,000 shares were issued as fully paid-up to Ashoka, , 112
Page 599 :
Forfeiture and Re-issue of Shares, Ltd. It issued remaining shares to public at a premium of ` 10 per share payable ` 30 on, application, ` 50 on allotment (including premium) and balance on first call., All the money was received except a shareholder holding 100 shares failed to pay the call, money. Company forfeited his shares., Pass necessary Journal entries in the books of Kedia Ltd. (J.A.C., 2018, Figures amended), [Ans. Share Forfeited ` 7,000], 10. P.K. Ltd. invited applications for issuing 70,000 equity shares of ` 10 each at a premium of, ` 35 per share. The amount was payable as follows :, On Application ` 15 (including ` 12 premium), On Allotment ` 10 (including ` 8 premium), On First and Final Call—Balance, Applications for 65,000 shares were received and allotment was made to all the applicants., A shareholder Ram, who was allotted 2,000 shares failed to pay the allotment money. His, shares were forfeited immediately after allotment. Afterwards, the first and final call was, made. Mohan who has 3,000 shares failed to pay the first and final call. His shares were, also forfeited., Pass necessary Journal entries for the above transactions in the books of P.K. Ltd., [Ans. Share Forfeited ` 15,000], ❏ Forfeiture in Case of Pro-rata Allotment, 11. Gunadhar Ltd. invited the public to subscribe 10,000 equity shares of ` 100 each at a, premium of ` 10 per share payable on allotment. Payments were to be made as follows :, On Application, ` 20, On Allotment, ` 40, On First Call, ` 30, On Final Call, ` 20, Applications were received for 13,000 shares, applications for 2,000 shares were rejected and, allotment was made proportionately to the remaining applicants. Both the calls were made, and all the money were received except the final call on 300 shares which were forfeited., Give Journal entries., (J.A.C., 2015), [Ans. Forfeited Shares A/c (Cr.) ` 24,000], II. Forfeiture and Re-issue of Shares, ❏ Re-issue of All Forfeited Shares, 12. Bharat Ltd. forfeited 200 shares of ` 10 each, fully called-up, held by Naveen for nonpayment of allotment money of ` 3 per share and first call of ` 4 per share. He paid the, application money of ` 3 per share. These shares were re-issued to Amit for ` 8 per share., Give Journal entries for the forfeiture and re-issue of shares., [Ans. Capital Reserve ` 200], 13. Niku Ltd. forfeited 5,000 shares of ` 10 each, fully called upon which Mrs. Anna has paid, only application and allotment money of ` 6 per share. All the shares were reissued to Mr., Abhi at ` 9 as fully paid up., Pass Journal Entries., (J.A.C., 2016), [Ans. Capital Reserve ` 25,000], 14. A Limited Company forfeited 100 Equity Shares of the face value of ` 10 each, ` 6 per share, called-up, for non-payment of first call of ` 2 per share. The forfeited shares were, subsequently re-issued as fully paid @ ` 7 each., Give necessary Journal entries in company's Journal., [Ans. Capital Reserve ` 100], 15A. Z Ltd. forfeited 2,000 shares of ` 10 each (fully called up) for the non-payment of the, allotment money of ` 6 per share including ` 2 as premium. All these share were re-issued, to X at ` 9 per share fully paid. Give Journal Entries., [Ans. Total of Journal 54,000], 15B. On 1st April, 2016, Golu Ltd. was the holder of 500 shares of ` 10 each. He has paid ` 4 per, share. At a meeting of the directors held on that date his shares were forfeited for, non-payment of the first & final calls of ` 2 and ` 4 per share respectively. On 1st May,, 2016; these shares were re-issued fully paid to Maganlal for 4,500. Give Journal entries in, the books of the company., [Ans. Capital Reserve ` 1,500], 16. A company forfeited 100 shares of ` 10 each issued at 20% premium (to be paid at the time of, allotment) on which first call money of ` 3 was not received, the final call money of ` 2 is not, yet called. These shares were subsequently re-issued at ` 7 per share as ` 8 paid-up., Give necessary Journal entries regarding forfeiture and re-issue of shares., [Ans. Capital Reserve ` 400], , 113
Page 600 :
SBPD Publications Accountancy (XII), 17. A company forfeited 100 Equity Shares of ` 100 each issued at a premium of 50% (to be, paid at the time of allotment) on which first call money of ` 30 per share was not received;, final call of ` 20 is yet to be made. These shares were subsequently re-issued at ` 70 per, share as ` 80 paid-up., Give necessary Journal entries regarding forfeiture and re-issue of shares., [Ans. Capital Reserve ` 4,000], 18. ‘X Ltd.’ invited applications for issuing 10,000 equity shares of ` 100 each at a premium of, ` 100 per share. The amount was payable as follows :, On application and allotment : ` 100 per share (including ` 50 premium), On first and final call : The balance, The issue was fully subscribed. A shareholder, holding 500 shares paid the full share, money with application. Another shareholder, holding 200 shares failed to pay the first and, final call money. His shares were forfeited. The forfeited shares were re-issued for ` 19,000, as fully paid-up., Pass necessary Journal entries for the above transactions in the books of the company., [Ans. Capital Reserve ` 9,000], (C.B.S.E., 2015, Set II), ❏ Partial Re-issue of Forfeited Shares, 19. The Directors of D Ltd., resolved on 1st May, 2015 that 2,000 Equity Shares of ` 10 each,, ` 7.50 paid be forfeited for non-payment of final call of ` 2.50. On 10th June, 2015, 1,800 of, these shares were re-issued at ` 6 per share. Give necessary Journal entries regarding, forfeiture and re-issue of shares., (J.A.C., 2009, 11), [Ans. Capital Reserve ` 6,300], 20. National Heavy Chemicals Ltd. issued 5,000 shares of ` 10 each at a premium of ` 2 per, share public subscription, payable as ` 5 on Application and ` 7 on Allotment (including, premium). Ramesh, who was allotted 200 shares by the company, failed to pay the, allotment amount and his shares were forfeited by the company. 100 out of these forfeited, shares were allotted to Brajesh as fully paid-up for ` 8 per share., Record the transactions relating to Forfeiture and Re-issue of Shares., [Ans. Capital Reserve ` 300], 21. Om Ltd. issued 10,000 equity shares of ` 10 each at a premium of ` 2 per share, payable at, ` 5 on application, ` 5 on allotment (including premium) and balance in first and final call., Mukesh who had 1,000 shares could not pay first and final call and his shares were, forfeited. Out of these 600 shares were re-issued to Madan @ ` 11 per share fully paid-up., Give necessary Journal entries regarding share forfeiture and re-issue. (Raj. Board, 2013), [Ans. Capital Reserve ` 4,800], 22. Western Ltd. issued a prospectus offering 10,000 equity shares of ` 10 each at par payable, as follows :, On application and allotment ` 2; on first call ` 4 and on final call ` 4. Sameer, the holder, of 500 equity shares did not pay the amount due on both the calls. These 500 shares were, forfeited by the Board of Directors and of these 300 shares were subsequently re-issued at, ` 9 per share. Pass necessary Journal entries in the books of Western Ltd. (U.S.E.B., 2009), [Ans. J/E, Capital Reserve ` 300], 23. Prayuj Ltd. forfeited 2,000 shares of ` 10 each, fully called-up, on which they had received, only ` 14,000. 50 of the forfeited shares were re-issued for ` 9 per share fully paid-up., Pass necessary Journal entries for forfeiture and re-issue of shares. Also prepare share, forfeited account., [Ans. Forfeited Shares A/c (Cr.), Gain on Re-issue of Forfeited Shares Trans. to Capital, Reserve ` 300, Forfeited Shares A/c (Cr. Bal.) ` 13,650.], ❏ Forfeiture and Re-issue of Shares issued at Premium in Case of Pro-rata Allotment, 24. A shareholder applied for 10,000 shares of ` 10 each at a premium of ` 2 per share. He was, allotted 8,000 shares. After having paid ` 6 per share (including premium), he did not pay, the allotment money of ` 6 per share and his shares were forfeited. Later on the forfeited, shares were re-issued for ` 70,000 as fully paid-up., Pass necessary Journal entries in the books of the company., [Ans. Amount not received on 8,000 Shares on Allotment, Forfeited Shares A/c Transferred in, Capital Reserve ` 34,000.], 25. Delhi Cloth Mills Ltd. invited application for 10,000 equity shares of ` 10 each at a, premium of ` 10 each payable as ` 50 on Application, ` 35 on Allotment (including, premium) and ` 25 on final call., , 114
Page 601 :
Forfeiture and Re-issue of Shares, Mr. Alam, who had applied for 500 shares, was allotted 400 shares. He failed to pay the, amount due on allotment and call money. The company forfeited his shares and, subsequently re-issued at ` 105 per share., Pass Journal entries for forfeiture and re-issue of shares in the books of the company., [Ans. Securities Premium Reserve A/c Dr. ` 4,000, Allotment Money not Received on 400, Shares ` 9,000, Transfer of Share Forfeiture A/c to Capital Reserve A/c ` 25,000.], 26. Mohini Ltd. invited applications for the issue of 10,000 equity shares of ` 10 each at 10%, premium. The amount was payable as follows :, On application ` 4 (including premium), on allotment ` 4 and remaining on first and final, call. Applications were received for 25,000 shares. Incomplete applications of 5,000 shares, were cancelled and amount refunded. Remaining applications were allotted on pro-rata, basis. Excess application money is used for allotment. Mohan, who applied for 2,000 shares, could not pay allotment and first and final call money and his shares were forfeited. All, these shares were re-issued @ ` 8 per share as fully paid-up. Give necessary Journal entries, in the books of the company., [Ans. Refund ` 20,000, Transfer to Capital Reserve ` 5,000.], 27. Sunrise Company Limited offered for public subscription 10,000 shares of ` 10 each at ` 11, per share. Money was payable as follows :, On Application ` 3, On Allotment, ` 4 (including Premium), On First & Final Call ` 4, Applications were received for 12,000 shares and the Directors made pro-rata allotment., Mr. Ahmad, an applicant for 120 shares, could not pay the allotment and call money, and, Mr. Basu, a holder of 200 shares, failed to pay the call. All these shares were forfeited., Out of the forfeited shares, 150 shares (the whole of Mr. Ahmad's shares being included), were issued at ` 8 per share. Record Journal entries for the above transactions and prepare, the Share Forfeited Account., (J.A.C., 2019; N.C.E.R.T.), [Ans. Balance of Share Forfeiture A/c (Cr.) ` 900, Capital Reserve ` 360.], 28. Bharat Tyres Ltd. invited applications for 1,00,000 Equity Shares of ` 10 each issued at a, premium of ` 4 per share. The amount was payable as follows :, On Application, ` 6 (including Premium ` 2), On Allotment, ` 6 (including Premium ` 2), Balance on First and Final Call., Applications for 1,50,000 shares were received. Allotment was made to all the applications, on pro-rata basis., Subodh, to whom 200 shares were allotted, failed to pay allotment and call money. Vikram,, to whom 100 shares were allotted, failed to pay the call money. Their shares were forfeited, and afterwards re-issued @ ` 8 per share fully paid-up., Pass necessary Journal entries., [Ans. Capital Reserve ` 1,600], 29. Benolac Paints Ltd. invited application for issuing 1,20,000 equity shares of ` 10 each at a, premium of ` 2 per share. The amount was payable as follows :, On Application, ` 3 per share (including Premium ` 1), On Allotment, ` 3 per share., On first and final call, ` 6 per share. (including Premium ` 1), Applications for 1,40,000 shares were received. Applications for 10,000 shares were rejected, and pro-rata allotment was made to the remaining applicants. Over payments on, application were adjusted towards sums due on allotment. All calls were made and were, duly received except allotment and final call on 6,000 shares allotted to Sharvi. These, shares were forfeited. Afterwards, half of the forfeited shares were re-issued for ` 33,000 as, fully paid-up., Pass necessary Journal entries for the above transactions in the books of Benolac Paints Ltd., [Ans. Share Forfeiture A/c (Cr.) ` 13,500, Transfer of Share Forfeiture to Capital Reserve, ` 6,750, Amount not paid by Sharvi on Allotment ` 16,500.], (C.B.S.E. A.I., 2017), ❏ Disclosure of Share Capital in Balance Sheet, 30. X Ltd. has an authorised capital of ` 10,00,000 divided into equity shares of ` 10 each. The, company invited applications for 50,000 shares. Applications for 40,000 shares were, received. All calls were made and duly received except the final call of ` 2 per share on, 1,000 shares. 500 of the shares on which the final call was not received were forfeited., , 115
Page 602 :
SBPD Publications Accountancy (XII), Show how share capital will appear in the Balance Sheet of the company as per Schedule, III and Part I of the Companies Act, 2013., [Ans. Balance Sheet : Paid-up Capital ` 3,94,000 + 4,000 = ` 3,98,000], 31. Fidasa Ltd. offered 64,000 equity shares of ` 100 each to the public at a premium of ` 20, per share. The amount was payable as ` 20 : On application; ` 40 (including premium) : on, allotment and the balance on first and final call. 60,000 shares were subscribed by the public., All the money was duly received except from a shareholder holding 8,000 shares, who failed, to pay the first and final call money. His shares were forfeited. Show ‘Share Capital’ in the, Balance Sheet of Fidasa Ltd. Also, prepare ‘Notes to Accounts’., (C.B.S.E. A.I., 2017), [Ans. Subscribed and Fully paid Capital ` 52,00,000 + Forfeited Shares, Total ` 56,60,000,, Reserve and Surplus ` 4,60,000.], 32. A limited company issued a prospectus inviting applications for 2,00,000 shares of ` 10 each, at a premium of ` 2 per share payable as follows : On Application ` 3; On Allotment ` 4, (including premium) : On First Call ` 3 and On Second Call ` 2., Applications were received for 3,00,000 shares and allotment was made on pro-rata basis., Money overpaid on applications was employed on account of sums due on allotment., R, to whom 400 shares were allotted failed to pay the allotment money and on his, subsequent failure to pay the First Call his shares were forfeited. M, the holder of 600, shares failed to pay the two calls and his shares were forfeited after the Second Call. Of the, shares forfeited, 800 shares were sold to K as fully paid, K paying ` 9 per share, the whole, of R’s share being included., Give journal entries, prepare Bank Account and show how the Share Capital will be shown, in the Company’s Balance Sheet., [Ans. Capital Reserve ` 3,000, Total of ` 24,01,200 Bank A/c.], ❏ Miscellaneous and Boards' Questions, 33. A company issued 500 shares of ` 10 each at ` 12 to X; ` 3 payable on application, ` 4 on, allotment and the balance on first and final call (including premium). X failed to pay the, amount due on first and final call and his shares were forfeited and subsequently re-issued, at ` 8 per share fully paid., Make Journal entries for the forfeiture and re-issue of shares., (U.S.E.B., 2012), [Ans. J/E, Capital Reserve ` 2,500], 34. Record the Journal entries for forfeiture and re-issue in the following cases :, (a) X Ltd. forfeited 200 shares of ` 100 each ` 70 called-up, on which the shareholders had, paid application and allotment money of ` 50 per share. Out of these, 150 shares were, re-issued to Naresh as ` 70 paid-up for ` 80 per share., (b) Y Ltd. forfeited 180 shares of ` 10 each, ` 8 called-up, issued at a premium of ` 2 per, share to R for non-payment of allotment money of ` 5 per share (including premium)., Out of these, 160 shares were re-issued to Sanjay at ` 8 called-up for ` 10 per share, fully paid-up., (C.B.S.E., All India, 2013, Set I), [Ans. (i) Capital Reserve ` 7,500, (ii) Capital Reserve ` 480.], 35. The Directors of X Ltd. decided to forfeit 1,000 shares of ` 10 each. The company had made, upto final call. The company did not receive the amount of first call ` 2 per share and final, call ` 1.50 per share., These forfeited shares were re-issued at ` 8 per share, ` 10 fully paid., Pass Journal entries in the books of the company., (J.A.C., 2012), [Ans. Capital Reserve ` 4,500], 36. Manan holds 25 Equity shares of ` 10 each, of which he paid ` 2 on application, but fails to, pay allotment money ` 3 and first call of ` 2. Director forfeits his shares after first call., Pass Journal entries related to forfeiture of shares., [Ans. Share Forfeiture A/c ` 50], 37. Hritik Ltd. forfeited 30 shares of ` 10 each fully called-up held by a shareholder. This, shareholder has paid ` 3 on application but was unable to pay ` 4 on allotment and ` 3 on, final call. These forfeited shares were re-issued to Nishchal for ` 10 per share. Pass Journal, entries for forfeiture and re-issue of shares., [Ans. Capital Reserve ` 90], , l, , 116
Page 603 :
5, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 5.1 Meaning of Debenture, , 118, , 5.2 Difference between Share and Debenture, , 118, , 5.3 Types of Debentures, , 119, , 5.4 Issue of Debentures, , 120, , 5.5 Issue of Debentures as Collateral Security, , 136, , 5.6 Different Terms of Issue and Redemption of Debentures, , 141, , 5.7 Interest on Debentures and Income-tax Thereon, , 146, , 5.8 Writing-off of Discount and Loss on Issue of Debentures, , 148, , 5.9 Zero Interest Bond and Deep Discount Bond, , 153, , 5.10 Fast Revision, , 153, , ❑ Useful Questions, , 154, , ❑ Practical Problems, , 157, , 117
Page 604 :
SBPD Publications Accountancy (XII), , 5.1 Meaning of Debenture, Debenture is one of the important sources of raising long-term loan by a company., The term ‘debenture’ has been derived from the Latin word ‘DEBERE’ which means ‘to, borrow’. In common sense, by debenture we mean that document which creates loan., Debentures carry interest at a certain percent. They are redeemable after a specified, period. Thus, debenture is a document or certificate issued by a company acknowledging a, debt and containing a contract for the payment of the principal at a specified time and for, the payment of interest at a fixed date., ❏ Definitions of Debenture, According to Justice Chiffy, ‘‘Debenture is a document (containing the terms of interest, and capital repayment) which either creates a debt or acknowledges it.’’, According to Topham, ‘‘Debenture a document given by a company as evidence of debt, to the holder usually arising out of a loan and most commonly secured by a charge.’’, According to Section 2(30) of the Indian Companies Act 2013, ‘‘Debentures include, stock, bonds and any other securities of a company, whether constituting a charge on the, asset of the company or not.’’, ❏ Special Features (Characteristics) of Debenture, Following are the special features of a debenture :, (1) Debenture is an instrument of long-term loan taken by the company., (2) It is an acknowledgement of debt from a particular person., (3) It carries a fixed rate of interest., (4) It carries the promise to pay interest after regular intervals., (5) Debenture has to be refunded after a prescribed period., (6) It may be secured or unsecured., (7) It does not carry voting right., (8) In a secured debenture, the bond may have ‘afixed charge’ or a floating charge., Meaning of Bond, Bond is similar to that of debenture, both in terms of contents and texture. Bonds are, generally issued by the Government. But these days bonds are being issued by the semigovernment and non-government organisations too as an acknowledgement of debt., The significant difference between bonds and debentures is with regard to the issue, condition, i.e., bonds can be issued without pre-determined rate of interest as in the case of, deep discount bonds. The terms, ‘Debentures’ and ‘Bonds’ are now being used inter changeably., , 5.2 Difference between Share and Debenture, The following table indicates the difference between a share and a debenture :, Basis of Difference, , Share, , 1. Symbol, , A share is the symbol of ownership. It, represents a portion of capital., 2. Nature of Security It is ownership security., 3. Voting Right, A shareholder enjoys the voting right.*, 4. Nature of Return Dividend is paid on shares. It is an, appropriation of profits., 5. Rate of Return, Payment of dividend is made only, when there is a profit. There is no, fixed rate of dividend on equity, shares., , 118, , Debenture, A debenture is the symbol of loan. It, represents debt of a company., It is creditorship security., A debentureholder does not have, voting right.*, Interest is paid on debentures. It is a, charge against profit., Interest on debentures is a compulsory payment whether the company earns a profit or not. There is a, fixed rate of interest on debentures, agreed by the company.
Page 605 :
Issue of Debentures, 6. Refund of Capital Normally the amount of shares is not, returned during the life-time of the, company., 7. Priority of, In case of winding-up of the comRepayment, pany, the shareholders are the last, persons to get back their capital., 8. Security, A share is unsecured., , Debentures are issued for a definite, period. Hence, the amount of debenture is returned after that period., In case of winding-up the amount of, debentures is repaid prior to the, shareholders., A debenture is secured on the fixed or, floating charge, 9. Issue at Discount Restrictions have been imposed on There is no legal restriction on issue, issue of shares at a discount., of debentures at a discount., 10. Convertibility, Shares cannot be converted., Debentures can be converted into, shares., *As such a shareholder has control *As such a debentureholder has no, over the administration of company control over the administration of the, company., , Distinction between Shareholder and Debentureholder, Basis of, Difference, , Shareholder, , Debentureholder, , 1 Status, , Shareholders are the owners of the Debentureholders are creditors of the, company., company., 2. Return, on Shareholders get dividend out of profit. Debentureholders get interest at a fixed, Investment, rate whether these are profits or not., 3. Voting Right Shareholders enjoy voting right in the Generally debentureholders have no, general meeting of the company., right to attend general meeting of the, company. So they have no voting right., 4. Repayment On liquidation of company, shareholders Debentureholders are repayable in, are paid after the payment of all external accordance with terms of issue and too,, liabilities., after payment of liquidation expenses, and liquidator’s remuneration., , 5.3 Types of Debentures, There are various types of Debentures. They may be classified on the basis of, (1) Record, (2) Security, (3) Redemption, (4) Convertibility, and (5) Coupon Rate as shown, below :, Types or Kinds of Debentures, , On the Basis, of Record, , On the Basis, of Security, , On the Basis of, Redemption, , Registered, Debentures, , Secured, Debentures, , Redeemable, Debentures, , Bearer, Debentures, , Unsecured, Debentures, , Irredeemable, Debentures, , On the Basis of, Convertibility, , On the Basis of, Coupon Rate, , Convertible, Debentures, , Non-convertible, Debentures, , Specific, Coupon Rate, , Zero Coupon, Rate, , 119
Page 606 :
SBPD Publications Accountancy (XII), 1. Registered Debentures : The debentures which are recorded in the Register of, Debentureholders are called registered debentures. Payment of interest or repayment of, the principal sum will be made only to the registered holder. Such debentures are transferable only by transfer deed. In other words, it cannot be transferred by mere delivery., 2. Bearer Debentures : Bearer debentures are those which are payable to the, bearer or holder. Such debentures are transferable by delivery. The payment of interest, is made to the person who produces coupons attached with the debenture. No register is, maintained for bearer debentures., 3. Mortgage or Secured Debentures : Mortgage debentures are those debentures, which are secured by creating a fixed or floating charge on the assets of the company., This means that if the company commits any default in paying interest or in repaying the, principal sum, the debentureholders have the right to recover their dues from the, mortgaged property. Mortgage debentures are also known as ‘Secured Debentures’., Secured debentures are those that are secured against some particular assets of the, company. Mortgage debentures may be classified as :, (a) First Debentures : These are debentures which are repayable in priority to, other debentures., (b) Second Debentures : These are debentures which are repayable only after, the redemption of first debentures., 4. Simple, Nacked or Unsecured Debentures : The debentures for which the, company does not offer anything by way of security are called simple or nacked, debentures. They are also called ‘Unsecured Debentures’. These debentures carry a fixed, rate of interest and are repayable after a specified period., 5. Redeemable Debentures : Redeemable debentures are those debentures which are, repayable by the company on a specified date or within a specified period. Repayment of, these debentures may be in lump-sum or in instalments, depending upon the terms of issue., 6. Irredeemable Debentures : Irredeemable debentures are those debentures, which are not payable during the life period of the company. Such debentures become, repayable only on liquidation of the company., 7. Convertible Debentures : Convertible debentures are those debentures which, can be converted into shares at a specified date or within/after a specified period., Conversion takes place as per the terms of issue., 8. Non-convertible Debentures : There are the debentures, the holders of which, have no right to convert them into equity shares., 9. From Coupon Rate (Interest) Point of View : From coupon rate (interest), point of view debentures may be classified into two categories :, (a) Debentures Issued with Coupon Rate : Debentures issued with specified, rate of interest, e.g., 12% or 14% is called as coupon rate., (b) Debentures Issued without Coupon Rate : A debenture without coupon, rate is one which does not carry a specified rate of interest. It is also called as, a ‘Zero Coupon Bond’ or ‘Deep Discount Bond’., , 5.4 Issue of Debentures, Companies, now-a-days, raise substantial amount of long-term funds through issue, of debentures. Debentures are issued for the following purposes :, , 120
Page 607 :
Issue of Debentures, (a) Setting-up of a New Projects, (b) Expansion and Diversification of Existing Projects, Purposes of, Issue of Debentures, , (c) For Modernisation of the Plant, (d) Amalgamation of the Companies, (e) For increasing Long-term Resources of, Company for Working Capital Requirements., , the, , ❏ Procedure for the Issue of Debentures, The procedure for the issue of debentures is exactly the same as in the case of issue of, shares. A prospectus is issued in which terms and conditions of the issue of debentures are given., The debentures may be issued (i) at par, (ii) at a premium, or (iii) at a discount., (i) Debentures Issued at Par : When the amount collected for the debenture is, equal to the nominal value of the debenture, debenture is said to be issued at par., (ii) Debentures Issued at Premium : When the debenture is sold at more than its, nominal value, debenture is said to be issued at premium. Premium is credited to, ‘Securities Premium A/c.’, (iii) Debentures Issued at Discount : When a debenture is issued at less than its, nominal value, debenture is said to be issued at discount. No maximum limit has been laid, down by the law for discount on debentures. Discount on issue of debentures is debited to, ‘Discount on Issue of Debentures A/c.’, Accounting Treatment : Accounting treatment of the issue of debentures is similar to, that of the issue of shares. The only difference is that the word ‘Share’ is replaced by the word, ‘Debenture’. Similarly ‘Share Capital Account’ is replaced by ‘Debentures Account’. In other, words, Debentures Account will be opened in place of Share Capital Account., Prefix the Rate of Interest of Debentures : It is usual to prefix the rate of interest to, the debentures. Thus, if the rate of interest is 9% the name given will be ‘9% Debentures'., Similarly 10% debenture will mean that the debenture carries interest @ 10%., 5.4.1 Debentures Issued for Cash, ❏ Journal Entries for Debentures, (a) Issue of Debentures for Cash in lump-sum when Full Amount is Collected with, Application :, (i) On receipt of Application Money :, Bank A/c, Dr., To % Debenture Application A/c, (For debenture application money received), , (ii) On transferring Application Money to Debenture Account :, % Debenture Application A/c, Dr., To % Debentures A/c, (For transfer of application money to Debentures A/c), Note : Students are advised to prefix rate of interest of debentures, if any, 9% Debentures., , (b) Issue of Debentures for Cash in Instalments :, 1. On receipt of Application Money :, Bank A/c, To % Debenture Application A/c, , Dr., , (For debentures of application money received on.... Debentures @ ` ....each), , 121
Page 608 :
SBPD Publications Accountancy (XII), 2. (a) On transfer of Application Money into Debentures Account :, % Debenture Application A/c, Dr., To % Debentures A/c, (For transfer of application money to Debentures A/c), , (b) For refund of Application Money in case of Over-subscription :, % Debenture Application A/c, Dr., To Bank A/c, (For excess application money on.....debentures returned), , (c) In case of Pro-rata Allotment excess Application Money will be Adjusted, towards Allotment :, % Debenture Application A/c, Dr., To % Debenture Allotment A/c, (For excess application money transferred to Debenture Allotment A/c), , 3. On Allotment Money due :, % Debenture Allotment A/c, Discount on Issue of Debentures A/c, To % Debentures A/c, To Securities Premium A/c, , Dr., Dr. (With the amount of Discount), (With the amount of Premium), , (For allotment money due on.......debentures @ `.....per debenture), , 4. On receipt of Allotment Money :, Bank A/c, To % Debenture Allotment A/c, , Dr., , (For allotment money received on.....debentures @ ` ......per debenture), , 5. On making Calls due :, % Debenture First Call A/c, To % Debentures A/c, , Dr., , (For first call money due on.....debentures @ ` .....per debenture), , 6. On receipt of Call Money :, Bank A/c, To % Debenture First Call A/c, , Dr., , (For first call money received), Notes : 1. It is usual to prefix ‘debentures’ with the rate of interest. Thus 8% Debentures denote that the rate of, interest is 8%., 2. Generally, entry for ‘Premium’ or ‘Discount on Issue of Debentures’ is made along with the entry to, be made for allotment money due. However, if the question requires that premium money be paid, along with application money or call money, the entry should be made accordingly., , ❏ Calls in Advance and Calls in Arrears, Calls-in-advance and calls-in-arrears relating to debentures are treated in the same, manner as they are treated in case of issue of shares. (See Illus. 6), ❏ Interest on Calls-in-arrear, Generally interest is charged on calls-in-arrear. This interest is income for the, company., Entry for Charging Interest :, Bank A/c, Dr., To Interest on Calls-in-arrear A/c, (For interest received on calls-in-arrear), , 122
Page 609 :
Issue of Debentures, ❏ Interest on Calls-in-advance, Debentureholders are paid interest on the amount paid as calls-in-advance; such, interest is expense for the company., Interest on Calls-in-advance A/c, Dr., To Bank A/c, (For interest paid on calls-in-advance), , ❏ Expenditure on Issuing of Debentures, Journal Entry :, Expenses on Issue of Debentures A/c, To Bank A/c, , Dr., , (For payment of expenses on issue of debentures), Note : Any expenditure incurred on the issue of debentures is treated as capital expenditure., , ❏ For Writing-off ‘Expenses on Issue of Debentures A/c against Securities, Premium A/c :, Securities Premium (Reserve) A/c, Dr., To Expenses on Issue of Debentures A/c, (Being expenses on issue of debentures written-off), , Presentation of Debentures in Balance Sheet : Debentures are long-term, liabilities. They are shown on the equity and liabilities side of the Balance Sheet under the, main heading ‘‘Non-current Liabilities’’ under sub-heading ‘‘Long-term Borrowings.’’, Balance Sheet of ..................., (as on ............), Particulars, , Note No., , I. EQUITY AND LIABILITIES, Non-current Liabilities :, (a) Long-term Borrowings, (......... % Debentures), , `, , `, , ............., ............, , II. ASSETS, Current Assets :, Cash and Cash Equivalents, (Cash at Bank), , ............, ............, , ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustrations No., , 1(A), (B), (C), 2(A), (B), 3(A), (B), 4, 5, 6, 7, 8 to 11, 12 to 14, , Details, Very Short Answer Type Numerical Questions, Long Answer Type Numerical Questions, Receipt of full Amount with Application, Debentures Issued at Par, Debentures Issued at Preimum, Debentures Issued at Discount, Calls-in-Arrear and Calls-in-Advance, Over-subscription of Debentures, Issue of Debentures for Consideration other than Cash, Issue of Debentures as Collateral Security, , Practical, Problem No., 1 to 8, —, 1, 2 to 4, 5 to 9, 10 to 12, 13, 14 to 18, 19 to 22, 23 to 25, , 123
Page 610 :
SBPD Publications Accountancy (XII), 15, 16, 17, 18, 19, 20 to 25, 25, , Different Terms of Issue and Redemption of Debentures, Interest on Debentures and Income-tax thereon, Writing off of Discount and Loss on Issue of Debentures, Miscellaneous & Boards' Questions, Total, , 26 to 29, 30, 31, 32 to 34, 35 to 42, 8 + 42, , ❏ Very Short Answer Type Questions, Illustration 1(A) (Issue of Debentures at par Payable in Lump-sum), Ganpati Ltd. issued 4,000, 12% debentures of ` 100 each at par. Full amount was, payable on application. Applications were received for all the debentures and were duly, allotted. Pass necessary Journal entries in the books of the company., Solution, In the Books of Ganpati Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Bank A/c, To 12% Debenture Application & Allotment A/c, , Dr., , 4,00,000, , 12% Debenture Application & Allotment A/c, To 12% Debentures A/c, , Dr., , 4,00,000, , (Being the receipt of application money on 4,000 Debentures, @ ` 100 each), , (Being the application money transferred to Debentures A/c), , Amount, `, , 4,00,000, , 4,00,000, , Illustration 1(B) (Issue of Debentures at Discount), Bihar Cement Ltd. issued 10,000, 10% Debentures of ` 100 each at a discount of 4%., Full amount was payable on allotment. Pass necessary Journal entries., Solution, In the Books of Bihar Cement Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To 10% Debenture Application & Allotment A/c, , L.F. Amount, `, , Dr., , 9,60,000, , Dr., Dr., , 9,60,000, 40,000, , Amount, `, , 9,60,000, , (Being the application money received on 10,000 Debentures), , 10% Debenture Application & Allotment A/c, Discount on Issue of Debentures A/c, To 10% Debentures A/c, , 10,00,000, , (Being debenture application money adjusted), , Illustration 1(C) (Issue of Debentures at Premium Payable in Lump-sum), Shiva Ltd. issued 2,000, 15% debentures of ` 100 each at a premium of ` 50 per, debenture. Full amount was payable on application. Applications were received for 3,000, debentures. Applications for 1,000 debentures were rejected and application money was, refunded. Debentures were allotted to the remaining applicants., Pass necessary Journal entries in the books of the company., Solution, In the Books of Shiva Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To 15% Debenture Application & Allotment A/c, (Being application money received on 3,000 Debentures), , 124, , L.F. Amount, Dr., , `, , 4,50,000, , Amount, `, , 4,50,000
Page 611 :
Issue of Debentures, 15% Debenture Application & Allotment A/c, To 15% Debentures A/c (2,000 × ` 100), To Securities Premium Reserve A/c (2,000 × ` 50), To Bank A/c (1,000 × ` 150), , Dr., , 4,50,000, , 2,00,000, 1,00,000, 1,50,000, , (Being application money adjusted and on 2,000 debentures and, refunded on 1,000 debentures), , Illustration 2(A) (Debentures Issued at Par), Oscar Co. Ltd. issued 10,000 debentures of ` 10 each, payable as follows :, ` 2 on Application, ` 3 on Allotment, ` 5 on First and Final Call., All the debentures were applied for and allotted. All money due were received. Pass, necessary Journal entries., Solution, In the Books of Oscar Co. Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, , Amount, , `, , Bank A/c, To Debenture Application A/c, , Dr., , Debenture Application A/c, To Debentures A/c, , Dr., , 20,000, , Debenture Allotment A/c, To Debentures A/c, , Dr., , 30,000, , 20,000, , (For application money on 10,000 Debentures @ ` 2 per debenture, received), , (For application money transferred to Debentures A/c), , `, , 20,000, , 20,000, 30,000, , (For allotment money due on 10,000 Debentures @ ` 3 per debenture), , Bank A/c, To Debenture Allotment A/c, , Dr., , 30,000, , Debenture First & Final Call A/c, To Debentures A/c, , Dr., , 50,000, , Bank A/c, To Debenture First & Final Call A/c, , Dr., , 50,000, , (For allotment money received), , (For first and final call money due on 10,000 debentures @ ` 5 per, debenture), , (For first and final call money received), , 30,000, 50,000, , 50,000, , Illustration 2(B), Santosh Ltd. offered for public subscription 10,000 debentures of ` 100 each payable as, ` 30 per debenture on application, ` 50 per debenture on allotment and the balance on a call., Applications were received for 8,000 debentures and these were issued. All the calls were duly, made and money due thereon realised in full. Show the Cash Book and Journal., Solution, In the Books of Santosh Ltd., Dr., Cash Book (Bank Column), Cr., Date, , Particulars, To Debenture Application A/c, (Application money received on 8,000 debentures, @ ` 30 each), , J., F. Amount Date, `, , Particulars, By Balance c/d, , J., F. Amount, `, , 8,00,000, , 2,40,000, , 125
Page 612 :
SBPD Publications Accountancy (XII), To Debenture Allotment A/c, (Allotment money received on 8,000 debentures, @ ` 50 each), To Debenture Call A/c, (Call money received, @ ` 20 each), , 4,00,000, 1,60,000, 8,00,000, , 8,00,000, , Journal Entries, Date, , Dr., , Particulars, , L.F. Amount, , Debenture Application A/c, To Debentures A/c, , Dr., , Debenture Allotment A/c, To Debentures A/c, , Dr., , Debenture Call A/c, To Debentures A/c, , Dr., , `, , 2,40,000, , (For the application money on 8,000 debentures transferred to Debentures A/c), , 4,00,000, , (For allotment money due on 8,000 debentures @ ` 50 per debenture), , 1,60,000, , (For call money due on 8,000 debentures @ ` 20 per debenture), , Cr., Amount, `, , 2,40,000, , 4,00,000, 1,60,000, , Issue of Debentures at Premium, ❂ When debentures are issued at more than their face value, they are said to have been, issued at premium., ❂ The amount of premium is a capital profit. It is used to write off the capital losses like, discount on issue of shares or debentures, preliminary expenses, goodwill etc., ❂ Share Premium and Premium on Issue of Debentures are now written as Securities, Premium A/c and is shown in the Balance Sheet, under the head Reserves and, Surplus in ‘Notes to Accounts’., ❂ In the absence of any information, Journal entry for Premium on Issue of Debentures, is passed at the time of Allotment., ❂ Journal Entry, Debenture Allotment A/c, Dr., To % Debentures A/c, To Securities Premium A/c, (Being allotment money due with premium on............ debentures @ ........... per debentures), , Illustration 3(A) (Debentures Issued at Premium), A Ltd. issued 2,000, 5% Debentures of ` 100 each at a premium of 10%, payable ` 20 on, application and the balance with premium on allotment. Expenses on issue of debentures, amounted to ` 200. Pass the necessary Journal entries in the books of the company., (U.S.E.B., 2011, 12), Solution, In the Books of A Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To 5% Debenture Application A/c, (For application money received on 2,000 debentures @ ` 20 each), , 126, , L.F. Amount, Dr., , `, , 40,000, , Amount, `, , 40,000
Page 613 :
Issue of Debentures, 5% Debenture Application A/c, To 5% Debentures A/c, , Dr., , 40,000, , 5% Debenture Allotment A/c, To 5% Debentures A/c, To Securities Premium A/c, , Dr., , 1,80,000, , Bank A/c, To 5% Debenture Allotment A/c, , Dr., , 1,80,000, , Dr., , 200, , Dr., , 200, , 40,000, , (For transfer of application money to Debentures A/c), , (For allotment money due on 2,000 debentures together with, premium), , 1,60,000, 20,000, , 1,80,000, , (For allotment money received), , Expenses on Issue of 5% Debentures A/c, To Bank A/c, , 200, , (For payment of expenses on issue of debentures), , Securities Premium A/c, To Expenses on Issue of 5% Debentures A/c, , 200, , (For expenses on issue of debentures written-off), , Illustration 3(B), A Ltd. issued 5,000, 10% debentures of ` 100 each, at a premium of ` 10 per, debenture payable as follows :, On Application, ` 25, On Allotment, ` 45 (including premium), On First and Final Call ` 40, The debentures were fully subscribed and all money was duly received. Record the, necessary Journal entries in the books of the company. Show how the amounts will, appear in Balance Sheet., Solution, In the Books of A Limited, Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Bank A/c, To 10% Debenture Application A/c, , Dr., , 1,25,000, , 10% Debenture Application A/c, To 10% Debentures A/c, , Dr., , 1,25,000, , 10% Debenture Allotment A/c, To 10% Debentures A/c, To Securities Premium A/c, , Dr., , 2,25,000, , (Being application money on 10% debentures received), , (Being transfer of application money 10% Debentures A/c), , Amount, `, , 1,25,000, , 1,25,000, , 1,75,000, 50,000, , (Being allotment money due on debentures including the premium), , Bank A/c, To 10% Debentures Allotment A/c, , Dr., , 2,25,000, , Dr., , 2,00,000, , 2,25,000, , (Being allotment money received), , 10% Debentures First & Final Call A/c, To 10% Debentures A/c, , 2,00,000, , (Being first and final call money due on debentures), , 127
Page 614 :
SBPD Publications Accountancy (XII), Bank A/c, To 10% Debentures First & Final Call A/c, , Dr., , 2,00,000, , 2,00,000, , (Being first and final call money received), , Balance Sheet of A Limited, (as on ........), Particulars, I. EQUITY AND LIABILITIES, Shareholders’ Funds :, Reserves and Surplus (Securities Premium), Non-current Liabilities :, Long-term Borrowings (10% Debentures), II. ASSETS, Current Assets :, Cash and Cash Equivalents, (Cash at Bank), , Note No., , `, , `, , 50,000, 5,00,000, 5,50,000, , 5,50,000, 5,50,000, , Issue of Debentures at Discount, ❂ When the company issues debentures at a price less than their face value, the, debentures are said to be issued at discount., There are no legal restrictions as regard to maximum limit for discount on, debentures as in the case of shares., ❂ When debentures are issued at a discount, the amount of discount is debited to, Discount on Issue of Debentures A/c. The Discount on Issue of Debentures is a, capital loss and is normally recorded at the time of allotment money due., ❂ Discount or Loss should be written off as early as possible but within the loan period,, i.e., life of the debentures., ❂ As per AS-16 (Borrowing costs) discount on issue of debentures should be amortised, (written off) over period of benefit i.e., 3-5 years. It is written off in equal instalments, with capital profits like Capital Reserve A/c, Securities Premium A/c or from, Statement of Profit and Loss gradually., ❂ If Discount on Issue of Debentures is written off against Statement of Profit and, Loss, the following disclosure requirements must be followed :, (i) The particular portion of the discount due for the year is written off from the, Satement of Profit and Loss., Note : As per Revised Schedule III of Companies Act, 2013, Profit and Loss Account is now called, Statement of Profit and Loss., , (ii) The proportion of the discount to be written off within 12 months from the date of, Balance Sheet must be disclosed as Other Current Assets under the head Current, Assets in the Balance Sheet., (iii) The remaining portion of discount to be written off after 12 months of the, Balance Sheet date must be disclosed as Other Non-current Asset under the head, Non-current Assets in the Balance Sheet., ❂ Entry for Writing off Discount at the end of the year :, Statement of Profit and Loss, Dr., To Discount on Issue of Debentures A/c, (Being discount on issue of debentures written off), , 128
Page 615 :
Issue of Debentures, Disclosure of Discount in the Balance Sheet, Discount on Issue of Debentures is now shown in the assets part of the Balance, Sheet partially as Other Non-current Asset and partially as Other Current, Assets., Illustration 4, Shakti Ltd. issued 5,000, 10% debenture of ` 100 each at a discount of 5% payable ` 40, on application and the balance on allotment. Give the necessary Journal entries for issue, of debentures. Debentures are redeemable after 5 years., Solution, In the Books of Shakti Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, `, , Bank A/c, To 10% Debenture Application A/c, , Dr., , 2,00,000, , 10% Debenture Application A/c, To 10% Debentures A/c, , Dr., , 2,00,000, , 10% Debenture Allotment A/c, Discount on 10% Debentures A/c, To 10% Debentures A/c, , Dr., Dr., , 2,75,000, 25,000, , Dr., , 2,75,000, , (For amount received on application on 5,000 debentures @ ` 40 per, debenture), , (For debenture application money transferred to 10% Debentures A/c), , Amount, `, , 2,00,000, , 2,00,000, , 3,00,000, , (For allotment money due on 5,000 debentures), , Bank A/c, To 10% Debenture Allotment A/c, , 2,75,000, , (For amount received on allotment), , Illustration 5 (Debentures Issued at Discount), A Limited Company issued 8,000 debentures of ` 100 each at a discount of 10%, payable as ` 10 on application, ` 30 on allotment and ` 50 on first call and final call. All the, amounts were duly received. Pass necessary Journal entries in the books of the company., Record discount with allotment., Solution, In the Books of A Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Bank A/c, To Debenture Application A/c, , L.F. Amount, `, , Dr., , 80,000, , Dr., , 80,000, , Dr., Dr., , 2,40,000, 80,000, , Dr., , 2,40,000, , Amount, `, , 80,000, , (For application money received on 8,000 debentures @ ` 10 per, debenture), , Debenture Application A/c, To Debentures A/c, , 80,000, , (For transfer of debenture application money to Debentures A/c), , Debenture Allotment A/c, Discount on Issue of Debentures A/c, To Debentures A/c, , 3,20,000, , (For allotment money due on 8,000 debentures @ ` 30 each and, discount on issue of debentures @ ` 10 each), , Bank A/c, To Debenture Allotment A/c, , 2,40,000, , (For allotment money received), , 129
Page 616 :
SBPD Publications Accountancy (XII), Debenture First and Final Call A/c, To Debentures A/c, , Dr., , Bank A/c, To Debenture First and Final Call A/c, , Dr., , 4,00,000, , (For first and final call money due on 8,000 debentures @ ` 50 each), , 4,00,000, , 4,00,000, 4,00,000, , (For first call money received), , Illustration 6 (Calls-in-Arrear and Calls-in-Advance), A Ltd. issued 500, 6% debentures of ` 100 each at ` 95 per debenture payable as, under : ` 15 on application, ` 40 (including discount ` 5) on allotment, ` 10 on 1st call and, balance of ` 35 on 2nd call., One of the conditions of issue of 6% debentures was that whole of the amount of 6%, debentures can be paid at the time of allotment of 6% debentures and in this case,, interest @ 12% per annum will be paid by A Ltd. on the advance money received and this, interest will be paid on the due date of payment of last call. Holders of 200, 6%, debentures paid whole of the amount of 6% debentures on allotment in accordance with, this condition. Date of issue is 1st January, 2016, date of allotment is 1st February,, 2016, date of 1st call is 1st March, 2016 and date of 2nd call is 1st June, 2016. Pass the, necessary Journal entries in the books of A Ltd., Solution, In the Books of A Ltd., Journal Entries, Dr., Cr., Date, 2016, Jan. 1, , Particulars, , L.F. Amount, `, , Bank A/c, To 6% Debenture Application A/c, , Dr., , 7,500 1, , 6% Debenture Application A/c, To 6% Debentures A/c, , Dr., , 7,500, , 6% Debenture Allotment A/c, Discount on 6% Debentures A/c, To 6% Debentures A/c, , Dr., Dr., , 17,5004, 2,500 3, , (For receipt of application money on 500, 6% debentures @ ` 15 per, debenture), , (For transfer of application money), , Feb. 1, , Amount, `, , 7,500, , 7,500, , 20,0002, , (For the amount of allotment due on 500, 6% debentures @ ` 35 per, debenture and discount at 5%), , Bank A/c, To 6% Debentures Allotment A/c, To Calls-in-advance A/c, , Dr., , 26,500, , 6% Debenture First Call A/c, To 6% Debentures A/c, , Dr., , 5,000, , Dr., Dr., , 3,000, 2,000, , (For amount received on allotment and also receipt of call-in-advance, on 200, 6% debentures @ ` 10 + 35 per debenture), , Mar. 1, , 17,500, 9,000 5, , 5,000, , (For amount due on first call on 500, 6% debentures @ ` 10 per, debenture), , Bank A/c, Calls-in-advance A/c, To 6% Debenture First Call A/c, , 5,000, , (For amount received on first call and Calls-in-advance A/c is adjusted, to the extent of ` 2,000), , June 1, , 6% Debenture Second Call A/c, To 6% Debentures A/c, , (For amount due on second call @ ` 35 per debenture), , 130, , Dr., , 17,500, , 17,500
Page 617 :
Issue of Debentures, Bank A/c, Calls-in-advance A/c, To 6% Debentures Second Call A/c, , Dr., Dr., , 10,500, 7,000, , (For amount of second call received on 300, 6% debentures and Callsin-advance A/c adjusted), , Interest on Calls-in-advance of Debentures A/c, To Bank A/c, , 17,500, , 300 6, , Dr., , 300, , (For one month's interest on ` 9,000 and 3 month's interest on ` 7,000, @ 6% per annum paid), Working Notes :, 1 500´ ` 15 = ` 7,500;, 2 500 ´ ` 40 = ` 20,000;, 3 500 ´ ` 5 = ` 2,500;, 4 ` 20,000 – 2,500 = ` 17,500;, 5 200 Debentures ´ (` 10 First Call + ` 35 Second Call) = ` 9,000;, 2,000´ 1´ 12, 7,000´ 4´ 12, 6, = ` 20;, = ` 280; ` 20 + 280 = 300., 12 ´ 100, 12´ 100, , Over-subscription of Debentures, Sometimes the applications received from the public are more than the number of, debentures offered. Such a situation is called ‘over-subscription'., ❏ Treatment in case of Over-subscription—Three Alternatives, (i) Generally, the excess application money on over applied debentures is refunded to the, applicants. In other words, excess applications are rejected and money is returned thereon., (ii) Excess applications money may be retained for adjustments towards allotment, and call money. In such a case, applicants get pro-rata allotment. In other words, the, applicants are allotted lesser number of debentures than applied for., (iii) Some applications may be rejected out right and application money on such, applications is returned. On some applications pro-rata allotment may be made and the, excess application money may be utilised towards allotment and subsequent call, if any., Journal Entries :, (i) For excess Application Money returned :, Debenture Application A/c, Dr., To Bank A/c, (For application money on....debentured refunded), , (ii) For transfer of excess Application Money to Allotment and Call for Adjustment :, Debenture Application A/c, Dr., To Debenture Allotment A/c, To Calls-in-Advance A/c, (For excess application money adjusted to Debenture Allotment, and Call-in-advance), , Illustration 7(A) (Over-subscription of Debentures), Saket Ltd. issued 5,000, 10% Debentures of ` 100 each at a discount of 10% payable in, full on application., Applications were received for 6,000 Debentures. Debentures were allotted on 30th, June, 2019. Excess money were refunded on the same date., Pass journal entries., Solution, In the Books of Saket Ltd., Journal Entries, Dr., Cr., Date, 2019, , Particulars, Bank A/c, To 10% Debenture Application A/c, , (Being money received on 6,000 debentures @ ` 90 each), , L.F., Dr., , `, , 5,40,000, , `, , 5,40,000, , 131
Page 618 :
SBPD Publications Accountancy (XII), June 30 10% Debentures Application A/c, To Bank A/c, , Dr., , 90,000, , Dr., Dr., , 4,50,000, 50,000, , (Being excess money on 1,000 debentures @ ` 90 each refunded), , 10% Debenture Application A/c, Discount on Issue of Debentures A/c, To 10% Debenture A/c, , (Being the allotment of 5,000 debentures of ` 100 each at a discount, of ` 10 each), , 90,000, , 5,00,000, , Illustration 7(B) (Over-subscription of Debentures), Jeloka Ltd. issued 1,000, 8% Debentures of ` 100 each, payable as to ` 20 on, application and balance on allotment. Applications were received for 1,500 debentures out, of which applications for 900 were allotted fully. Applications for 400 were allotted 100, debentures and the remaining rejected. All sums due were received., Journalise these transactions in the books of Jeloka Ltd. Also show the Balance Sheet., Solution, In the Books of Jeloka Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, , Amount, , `, , Bank A/c, To 8% Debenture Application A/c, , Dr., , 30,000, , 8% Debenture Application A/c, To Bank A/c, , Dr., , 4,000, , 8% Debenture Application A/c, To 8% Debentures A/c, To 8% Debenture Allotment A/c, , Dr., , 26,000, , 8% Debenture Allotment A/c, To 8% Debentures A/c, , Dr., , 80,000, , Dr., , 74,000, , (For application money received on 1,500 debentures ` @ 20 each), , (For application money on 200 debentures @ ` 20 per debenture, returned), , (For transfer of application money on 1,000 debentures to 8%, Debentures A/c and excess application money received on 300, debentures adjusted to 8% Debenture Allotment A/c), , `, , 30,000, 4,000, , 20,000, 6,000, , 80,000, , (For allotment money due on 1,000, 8% Debentures at ` 80 per, debenture), , Bank A/c, To 8% Debenture Allotment A/c, , 74,000, , (For balance of debenture allotment money received in full), , Balance Sheet of Jeloka Ltd. (as on......), Particulars, I. EQUITY AND LIABILITIES, Non-current Liabilities :, Long-term Borrowings (8% Debentures), II. ASSETS, Current Assets :, Cash and Cash Equivalents, (Cash at Bank), , Note No., , `, , 1,00,000, 1,00,000, , 1,00,000, 1,00,000, , 132, , `
Page 619 :
Issue of Debentures, 5.4.2 Issue of Debentures for Consideration other than Cash, ❏ Issue of Debentures to Vendors, (A) Sometimes a company purchases some business as assets from the vendor(s). If, the company decides to issue debentures to the vendor(s) in payment of purchase price, (consideration), such an issue of debentures is known as issue of debentures for, consideration other than cash., Debentures can be issued to vendors at par, at a premium or at a discount., Accounting Entries, (1) For Purchase or Acquisition of Asset/Business :, Asset or Business Purchase A/c, Dr., To Vendor's A/c, (For purchases of asset/business), , (2) For Issue of Debentures to Vendor at Par :, Vendor's A/c, To Debentures A/c, , Dr., , (For issue of debentures as payment for purchase price), , (3) For Issue of Debentures to Vendor at Premium :, Vendor's A/c, Dr., To Debentures A/c, To Securities Premium A/c, (For issue of debentures at premium to pay off the purchase price), , (4) For Issue of Debentures to Vendor at Discount :, Vendor's A/c, Dr., Discount on Issue of Debentures A/c, Dr., To Debentures A/c, (For issue of debentures at discount in satisfaction of purchase price), , (B) If assets and liabilities of a business entity are purchased by the company and the, purchase price for acquisition of business is to be discharged by issue of debentures, the, Journal entries will be as follows :, (1) For Purchase of Business :, Assets A/c, To Liabilities A/c, , Dr. (Value of Individual Assets), (Value of Individual, Liabilities), To Vendor's A/c, (Amount payable to Vendor, as Purchase Price), (2) For Issue of Debentures to Discharge Purchase Price :, Vendor's A/c, Dr., To Debentures A/c, Number of Debentures, To ascertain the Number of debentures to be issued, the following formula may be, applied :, Number of Debentures, Amount Payable to Vendor, =, ´ Discount or + Security Premium (if any), Face Value of Debenture, Calculation of Goodwill or Capital Reserve, Sometimes, a company purchases a running business (i.e., assets and liabilities, both) and issues the company’s debentures to vender in settlement., , 133
Page 620 :
SBPD Publications Accountancy (XII), In such a case, there may be two situations :, (i) When Purchase Consideration is greater than Net Assets : In this case, difference, between purchase consideration and the net assets is treated as goodwill (i.e., purchased goodwill) and is debited., Goodwill = Purchase Consideration – Net Assets, (ii) When Purchase Consideration is less than Net Assets : In this case, the difference, between net assets and purchase consideration is treated as Capital Reserve and, is credited., Capital Reserve = Net Assets – Purchase Consideration, Net Assets = Sundry Assets – Sundry Liabilities, Illustration 8, Give Journal entries :, (i) A Company purchased the assets of X Ltd. for ` 2,00,000 and in payment, issued 6% Debentures of ` 100 each., (ii) A Company purchased the assets worth ` 2,20,000 of Y Ltd. The purchase, price was paid by issuing 6% Debentures of ` 100 each at 10% premium., (iii) A Company purchased the assets worth ` 1,80,000 of Z Ltd. The Company, issued debentures of ` 100 each at 10% discount in full satisfaction., Solution, Journal Entries, S.No., (i), , Dr., , Particulars, , L.F. Amount, `, , Sundry Assets A/c, To X Ltd., , Dr., , 2,00,000, , X Ltd., To 6% Debentures A/c, , Dr., , 2,00,000, , Sundry Assets A/c, To Y Ltd., , Dr., , 2,20,000, , Y Ltd., To 6% Debentures A/c (2,000´ 100)1, To Securities Premium A/c (2,000´ 10), , Dr., , 2,20,000, , Sundry Assets A/c, To Z Ltd., , Dr., , 1,80,000, , Z Ltd., Discount on Issue of Debentures A/c (2,000´ 10), To Debentures A/c (2,000´ 100)2, , Dr., Dr., , 1,80,000, 20,000, , (For the purchase of assets), , (For issue of 2,000, 6% debentures of ` 100 each in satisfaction of, purchase price), , (ii), , (For assets purchased), , Cr., Amount, `, , 2,00,000, , 2,00,000, , 2,20,000, , 2,00,000, 20,000, , (For issue of 2,000 debentures at 10% premium), , (iii), , (For assets purchased), , (For issue of 2,000 debentures at a discount of 10% in full satisfaction, of the purchase price), , 2,20,000, = 2,000., 100 + 10, 1,80,000, 2. No. of New Debenture Issued =, = 2,000., 100 – 10, , Notes : 1. No. of New Debenture Issued =, , 134, , 1,80,000, , 2,00,000
Page 621 :
Issue of Debentures, Illustration 9, Radha Ltd. purchased machinery worth ` 4,00,000 from Krishna Ltd. on 1.1.2016,, ` 1,00,000 were paid immediately and the balance was paid by issue of ` 2,80,000, 12%, debentures in Radha Ltd. Pass the necessary Journal entries for recording the, transactions in the books of Radha Ltd., (J.A.C., 2009), Solution, In the Books of Radha Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , 2016, Jan. 1 Machinery A/c, To Bank A/c, To Krishna Ltd., , L.F. Amount, `, , Dr., , 4,00,000, , Dr., , 3,00,000, , (For machinery purchased from Krishna Ltd. and part payment, made), , Jan. 1 Krishna Ltd., To 12% Debentures A/c, To Securities Premium A/c, , Amount, , (For the balance of ` 3,00,000 settled by the issue of ` 2,80,000, debentures), , `, , 1,00,000, 3,00,000, , 2,80,000, 20,000, , Illustration 10, Shruti Ltd. bought the business of Shinkey Ltd. on 1.4.2016 consisting of Sundry, Assets ` 5,60,000 and Creditors ` 1,00,000 for a purchase consideration of ` 5,00,000., ` 1,00,000 paid in cash on 3.4.2016 and for balance 6% debentures of 100 each were issued, at a premium of 25% on 5.4.2016., Pass necessary Journal entries in the books of Shruti Ltd. for the above transactions., Solution, In the Books of Shruti Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , 2016, April 1 Sundry Assets A/c, Goodwill (Bal. fig.), To Creditors A/c, To Shinkey Ltd., , L.F. Amount, `, , Dr., Dr., , 5,60,000, 40,000, , April 3 Shinkey Ltd. A/c, To Bank A/c, , Dr., , 1,00,000, , Apirl 5 Shinkey Ltd. A/c, To 6% Debentures A/c, To Securities Premium A/c, , Dr., , 4,00,000, , Amount, `, , 1,00,000, 5,00,000, , (Being purchase of business of Shinkey Ltd. for ` 5,00,000), , (Being cash paid to vendor), , 1,00,000, , 3,20,000, 80,000, , (Being issue of 3,200 debentures of ` 100 each at 25% premium to, vendor), , Illustration 11, Sumit Ltd. purchased assets of Vijay Ltd. as under : Plant and Machinery of, ` 20,00,000 at ` 18,00,000; Land and Building of ` 30,00,000 at ` 42,00,000, for purchase, consideration of ` 55,00,000. ` 10,00,000 was paid in cash and remaining by issue of 8%, debentures of ` 100 each at a premium of 20%. Record necessary Journal entries in the, books of Sumit Ltd., , 135
Page 622 :
SBPD Publications Accountancy (XII), Solution, , In the Books of Sumit Ltd., Journal Entries, , Date, , Dr., , Particulars, , L.F. Amount, `, , Plant & Machinery A/c, Land & Buildings A/c, To Capital Reserve A/c (Bal. fig.), To Vijay Ltd., , Dr., Dr., , 18,00,000, 42,00,000, , Vijay Ltd., To Bank A/c, , Dr., , 10,00,000, , Vijay Ltd., To 8% Debentures A/c, To Securities Premium A/c, , Dr., , 45,00,000, , (For purchase of assets from Vijay Ltd.), , (For part payment made to Vijay Ltd.), , (For the issue of 37,500 debentures of ` 100 each at 20% premium), , Cr., Amount, `, , 5,00,000, 55,00,000, 10,00,000, 37,50,000, 7,50,000, , 5.5 Issue of Debentures as Collateral Security, Collateral security means additional security, i.e., in addition to the principal, security. This security is treated as subsidiary or secondary security. Hence, collateral, security is to be realised when the principal security fails to pay off the loan., Sometimes a company issues its own debentures as a collateral security against a, loan taken from bank or any other party. The company incurres no liability against such, debentures (since they are in the nature of a contingent liability). On repayment of the, loan, it can take its debentures back. If the company fails to pay off the loan as per, agreement or in the event of liquidation, such debentures become actual liability., If the company makes a default in the repayment of loan at proper time, the lender, will first of all realise its amount of loan from the principal or primary security. If the, realisable value of principal security is insufficient to clear the dues, the lender has the, right to invoke the benefit of collateral security. In that case the debentures may either be, presented for redemption or sold in the market. If the lender has any surplus from sale of, security after meeting the dues, he is under obligation to return the same to the borrower., ❏ Important Points to be Noted, The following points should be remembered in connection with debentures issued as, collateral security :, 1. Lender will simply be the custodian of these debentures., 2. No interest is payable on the debentures as collateral security because, interest on loan is being paid., 3. The liability of the company is for the amount of loan and not for the face, value of debentures issued., ❏ Accounting Treatment, Issue of debentures as collateral security can be treated in the following two ways :, First Method : In this method, no entry is passed for issue of debentures as collateral, security. Only a note in this respect is given in the Balance Sheet under the loan. This, indicates that the loan is secured by the issue of debentures as a collateral security., Journal Entries :, (1) For taking loan from Bank :, Bank A/c, Dr., To Bank Loan A/c, (For the amount of loan taken on the collateral security, of debentures of ` .....), , 136
Page 623 :
Issue of Debentures, (2) On issuing of Debentures as Collateral Security :, No Entry., Second Method : In this method, the entry for issuing debentures as collateral, security is also recorded with the entry of taking loan., Journal Entries :, (1) For taking loan from Bank :, Bank A/c, Dr., To Bank Loan A/c, (For the amount of loan taken on the collateral security, of debentures of ` .....), , (2) On issuing of Debentures as Collateral Security :, Debenture Suspense A/c, Dr., To Debentures A/c, (For issue of debentures as collateral security), , Until the loan is paid, Debentures A/c is shown on equity and liabilities side under the, main heading ‘‘Non-current Liabilities’’ and sub-heading ‘‘Long-term Borrowings’’ and, Debentures Suspense is shown under the same head as deduction from Debentures A/c., Illustration 12 (Debentures as Collateral Security), A company took a loan of ` 2,00,000 from a Bank and placed with the Bank, debentures for ` 2,50,000 as collateral security. Show how they will appear in the, Company's Balance Sheet., Solution, First Method :, Balance Sheet, Particulars, , Note No., , I. EQUITY AND LIABILITIES, Non-current Liabilities :, (a) Long-term Borrowings :, Bank Loan (Debentures of the value ` 2,50,000, deposited as Collateral Security), , `, , `, , 2,00,000, , II. ASSETS, Current Assets :, Cash and Cash Equivalents, (Cash at Bank), , Second Method :, , 2,00,000, , Balance Sheet, Particulars, , I. EQUITY AND LIABILITIES, Non-current Liabilities :, (a) Long-term Borrowings :, Debentures, Less : Debentures Suspense A/c, Bank Loan (Secured against Debentures of ` 2,50,000), II. ASSETS, Current Assets :, Cash and Cash Equivalents, (Cash at Bank), , Note No., , `, , 2,50,000, (2,50,000), , `, , Nil, 2,00,000, , 2,00,000, , 137
Page 624 :
SBPD Publications Accountancy (XII), Illustration 13, National Company Ltd. issued 4,000, 12% Mortgage Debentures of ` 100 each secured, on the fixed assets of the company. Of these, 3,000 Debentures were issued to the public at, a premium of 2% while the remaining 1,000 Debentures were issued to the company, bankers by way of collateral security against a loan of ` 75,000., Show how these transactions will be recorded in the company's books and how they, will appear in the Balance Sheet., Solution, First Method :, In the Books of National Co. Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, , Amount, , `, , Debenture Application and Allotment A/c, To 12% Mortgage Deb. A/c, To Securities Premium A/c, , Dr., , 3,06,000, , Bank A/c, To Deb. App. & Allot. A/c, , Dr., , 3,06,000, , Dr., , 75,000, , (Being amount dues), , `, , 3,00,000, 6,000, 3,06,000, , (Being Amount received), , Bank A/c, To Bank Loan A/c, , (For the taking of loan from a Bank and issuing 1,000 debentures as, collateral security), , 75,000, , Balance Sheet of National Co. Ltd. (Extracts), (as on.......), Particulars, , Note No., , I. EQUITY AND LIABILITIES, Shareholders’ Funds :, Reserves & Surplus (Securities Premium), Non-current Liabilities :, (a) Long-term Borrowings : 12% Mortgage Debentures, (Secured on Fixed Assets of the Company), Bank Loan, (Issue of 1,000, 12% Mortgage Debentures by way of, Collateral Security), , `, , `, , 6,000, , 3,00,000, , 75,000, 3,81,000, , II. ASSETS, Current Assets :, Cash and Cash Equivalents, (Cash at Bank), , 3,81,000, , Second Method :, Besides the above two entries (as in first method) one more entry will be passed :, Journal Entry, Dr., Cr., Date, , Particulars, Debenture Suspense A/c, To 12% Debentures A/c, , (For issue of 12% Debentures as a collateral security), , 138, , L.F. Amount, Dr., , `, , 1,00,000, , Amount, `, , 1,00,000
Page 625 :
Issue of Debentures, Balance Sheet of National Co. Ltd. (Extracts), ( as on..............), Particulars, , Note No., , I. EQUITY AND LIABILITIES, Shareholders’ Funds :, Reserves & Surplus (Securities Premium), Non-current Liabilities :, (a) Long-term Borrowings :, 12% Mortgage Debentures, Less : Debentures Suspense, Bank Loan (Secured by Debentures), , `, , `, , 6,000, , 4,00,000, (1,00,000), , 3,00,000, 75,000, 3,81,000, , II. ASSETS, Current Assets :, Cash and Cash Equivalents, (Cash at Bank), , 3,81,000, , Illustration 14 (Issue of Debentures for Different Purposes), Mokshraj Ltd. Company issued debentures of ` 1,00,000 which were issued as, follows :, 1. For Cash at 90%, ` 50,000 (Nominal), 2. For Creditor for ` 20,000 Capital expenditure in, satisfaction of his claim, ` 25,000 (Nominal), 3. To Banker for a loan of ` 15,000 as Collateral, Security, ` 25,000 (Nominal), The issue (1) and (2) are redeemable at the end of 10 years at par. Pass necessary, Journal entries and show these items in the Balance Sheet of the company at the end of, the year., Solution, In the Books of Mokshraj Ltd., Journal Entries, Dr., Cr., S.No., 1., , Particulars, , L.F., , Amount, `, , Debenture Application & Allotment A/c, Discount on Debentures A/c, To Debenture A/c, , Dr., Dr., , 45,000, 5,000, , Bank A/c, To Deb. App. & Allot. A/c, , Dr., , 45,000, , Fixed Assets A/c, To Vendor's (Creditors) A/c, , Dr., , 20,000, , Dr., Dr., , 20,000, 5,000, , (Being amount due), , (Being Amount received), , 2. I., , Amount, `, , 50,000, , 45,000, 20,000, , (Being assets purchased), , II., , Vendor's A/c, Discount on Issue of Debentures A/c, To Debentures A/c, , (Being debentures issued to vendors at discount), , 25,000, , 139
Page 626 :
SBPD Publications Accountancy (XII), 3. I., , Bank A/c, To Bank Loan A/c, , Dr., , 15,000, , Debentures Suspense A/c, To Debentures A/c, , Dr., , 25,000, , (Being Bank loan taken), , II., , 15,000, 25,000, , (Being the issue of debentures as collateral security), , Statement of Profit & Loss, To Discount on Issue of Debentures A/c, , Dr., , 1,000*, , (Being the transfer of 1/10 of discount to Statement of P. & L.), , 1,000, , *Note : Since the debentures are redeemable after 10 years, 1/10 of discount on issue of debentures will be, written off from Profit & Loss Account every year., , Balance Sheet of Mokshraj Ltd. Company (Extracts), (as on ..............), Particulars, I. EQUITY AND LIABILITIES, Shareholders’ Funds :, Reserves & Surplus, Non-current Liabilities :, Long-term Borrowings, , Note No., , `, , 1, , (1,000), , 2, , 90,000, , 3, , 20,000, 8,000, , 4, 5, , 60,000, 1,000, , `, , 89,000, , II. ASSETS :, Non-current Assets :, (a) Fixed Assets, (b) Other Non-current Assets, Current Assets :, Cash and Cash Equivalents, Other Current Assets, , 89,000, , Notes to Accounts :, Particulars, 1. Reserves & Surplus :, Statement of Profit & Loss, 2. Long-term Borrowings :, Debentures, Less : Debentures Suspense, Bank Loan (on Collateral Security of ` 25,000), 3. Other Current Assets :, Unamortised Discount on Issue of Debenture (9/10th ), Less : To be shown in Other Current Assets (1/10th), 4. Cash and Cash Equivalents :, Cash at Bank, 5. Other Current Assets :, Unamortised Discount on Issue of Debentures (To be written off in next 12, months, i.e., 1/10 of ` 10,000), Note : Items in bracket represent negative balance., , 140, , `, , `, , (1,000), 1,00,000, (25,000), 75,000, 15,000, , 90,000, , 9,000, (1,000), , 8,000, 60,000, , 1,000
Page 627 :
Issue of Debentures, , 5.6 Different Terms of Issue and Redemption of Debentures, Like issue of debentures at par, premium or discount, the redemption of debentures, can also be : (a) at par, (b) at a premium, (c) at a discount., There may be following six cases on the basis of terms of issue and redemption of, debentures :, Case, Conditions of Issue, Conditions of Redemptions, (1), Issued at Par, Redeemable at Par, (2), Issued at Par, Redeemable at Premium, (3), Issued at Discount, Redeemable at Par, (4), Issued at Discount, Redeemable at Premium, (5), Issued at Premium, Redeemable at Par, (6), Issued at Premium, Redeemable at Premium, ❏ Redemption at Premium, When debentures are redeemable at a premium, amount payable at the time of, redemption will be more than the face value of debentures by the amount of premium on, redemption. Premium on redemption is treated as loss on issue and so it is debited to ‘Loss, on Issue of Debentures Account' and credited to ‘Premium on Redemption on Debentures, Account’. While ‘Loss on Issue of Debentures A/c’ is debited, ‘Premium on Redemption of, Debentures A/c’, being liability is credited., Premium on Redemption of Debentures is shown on equity and liabilities side under, the head ‘Reserves and Surplus’ and Loss on Issue of Debentures is shown as negative, figure under the head ‘Reserves and Surplus’., ❂ Premium on Redemption Account is a personal account. It represents liability of, the company at a future., ❂ If Premium on Redemption Account has been raised at the time of issue of, debentures, this account will continue to appear along with the debentures in, successive Balance Sheet until the debentures are redeemed., Accounting Entries, 1. At the time of Issue of Debentures, when amount is received in lump-sum :, Bank A/c, Dr. (With Face Value), Loss on Issue of Debentures A/c, Dr. (With Premium Payable), To Debentures A/c, (With Face Value), To Premium on Redemption of, (With Amount of Premium, Debentures A/c, Payable), (For amount received on issue of debentures redeemable at premium), , 2. At the time of redemption :, (i) Debentures A/c, Debenture Redemption Premium A/c, To Debentureholders A/c, (For payment becoming due), , (ii) Debentureholders A/c, To Bank A/c, To Share Capital A/c, To Securities Premium A/c, , Dr., Dr., Dr., , (If paid in Cash), (If paid in Shares), (If Shares issued at Premium), , (For debentureholders discharged in cash or by issue of shares), Notes : 1. Thus, Premium on Redemption of Debentures A/c or Debenture Redemption Premium A/c is closed., 2. Loss on Issue of Debentures A/c will be written-off against Capital Profit/Capital Reserve or Securities, Premium., , 141
Page 628 :
SBPD Publications Accountancy (XII), ❏ Writing-off of Premium on Redemption of Debentures, Premium on redemption of debenture is in the nature of capital loss. It is prudent to, write it off as early as possible. A company can write it off against the following :, (i) Capital Profit, (ii) Capital Reserve, (iii) Securities Premium., If none of the above items appears in the Balance Sheet, it is written-off against the, revenue profits during the life of debentures., ❏ Redemption of Debentures at Discount, When debentures are redeemable at ‘discount’, amount payable at the time of, redemption will be less than the face value of debentures by the amount of discount on, redemption. It is treated as profit on issue and so it is credited to Profit on Redemption, Account. Usually, debentures are not redeemed at discount., Conditions of redemption affect accounting treatment of issue of debentures. The, following is the accounting treatment of issue of debentures in different cases :, ❏ Accounting for Issue of Debentures Considering Terms and Conditions of, Redemption, Journal Entries, Case 1 : Issue of Debentures at Par and Redemption at Par :, (A) Bank A/c, Dr., To Debenture Application and Allotment A/c, (Being debenture application and allotment money received on ....... debentures @ ` each), , (B), , Debenture Application and Allotment A/c, To Debentures A/c, , Dr., , (Being debenture application money transferred to debentures A/c), , Case 2 : Issue at Par and Redemption at Premium :, (A), , Bank A/c, To Debenture Application and Allotment A/c, , Dr., , (Being application money received on ....... debentures @ ....... ` each), , (B), , Debenture Application and Allotment A/c, To Debentures A/c, , Dr., , Loss on Issue of Debentures A/c, To Premium on Redemption of Debentures A/c, , Dr., , (Being application money transferred to debentures account), , (C), , (Being premium on redemption of debentures), , Note : Students should not that, instead of passing separate entries as shown in (b) and (c) above, a combined, entry can be passed :, Debenture Application and Allotment A/c, Dr., Loss on Issue of Debentures A/c, Dr., To Debentures A/c, To Premium on Redemption of Debentures A/c, Remember : Where debentures are to be redeemed at a Premium, an extra entry is to be made at the time of, issue and allotment of debentures. This extra entry is to be passed for providing premium payable, at redemption., , Case 3 : Issue at Discount and Redemption at Premium :, (A), , Entry for Issue, Bank A/c, To Debenture Application and Allotment A/c, , Dr., , (Being debenture application money received), , (B), , Debenture Application and Allotment A/c, Discount on Issue of Debentures A/c, To Debentures A/c, , (Being the issue of debentures at a discount of ......... %), , 142, , Dr., Dr.
Page 629 :
Issue of Debentures, Case 4 : Issue of Debentures at Discount and Redemption at Premium :, (A) Bank A/c, , Dr., , To Debentures Application and Allotment A/c, , (Being debenture application money received), , (B), , Debentures Application and Allotment A/c, Dr., Loss on Issue of Debentures A/c [Amount Discount + Amount of Premium on Redemption] Dr., To Debentures A/c, To Premium on Redemption A/c, (Being debenture Application money transferred to Debentures Account), , Case 5 : Issue of Debentures at Premium, Redeemable at Par :, (A) Bank A/c, , Dr., , To Debenture Application and Allotment A/c, , (Being debenture application money received, including premium), , (B), , Debentures Application and Allotment A/c, To Debentures A/c, To Securities Premium Reserve A/c, , Dr., , (Being debenture application transferred to Debentures A/c and Securities Premium A/c), , Case 6 : Issue of Debenture at Premium, Redeemable at Premium :, (A), , Bank A/c, To Debenture Application and Allotment A/c, , Dr., , (Being debenture application money received including premium), , (B), , Debentures Application and Allotment A/c, Loss on Issue of Debentures A/c, To Debentures A/c, To Securities Premium Reserve A/c, To Premium on Redemption of Debentures A/c, , Dr., Dr., , (Being debenture application money transferred to Debentures A/c), , Illustration 15, X Ltd. issued 5,000, 9% Debentures of ` 100 each. Give Journal entries for issue of, debentures in the following cases :, (i) If the debentures are issued at par and are repayable at par., (ii) If the debentures are issued at a premium of 10% and are repayable at par., (J.A.C., 2014), (iii) If the debentures are issued at a discount of 5% and are repayable at par., (J.A.C., 2014), (iv) If the debentures are issued at par and are repayable at a premium of 10%., (J.A.C., 2014), (v) If the debentures are issued at a discount of 5% and are repayable at a premium, of 10%., (J.A.C., 2014), (vi) If the debentures are issued at a premium of 5% and are redeemable at a, premium of 5%., Solution, In the Books of X Ltd., Journal Entries, Dr., Cr., S.No., (i), , Particulars, Bank A/c, To 9% Debentures Application A/c and Allotment A/c, , L.F., Dr., , Amount, `, , 5,00,000, , Amount, `, , 5,00,000, , (For application money received on 5,000 debentures), , 143
Page 630 :
SBPD Publications Accountancy (XII), , (ii), , 9% Debenture Application and Allotment A/c, To 9% Debentures A/c, (For issue of debenture at par), , Dr., , 5,00,000, , Bank A/c, To 9% Debentures Application and Allotment A/c, , Dr., , 5,50,000, , Dr., , 5,50,000, , Dr., , 4,75,000, , Dr., Dr., , 4,75,000, 25,000, , Dr., , 5,00,000, , 9% Debenture Application and Allotment A/c, Loss on Issue of Debentures A/c, To 9% Debentures A/c, To Premium on Redemption of Debentures A/c, , Dr., Dr., , 5,00,000, 50,000, , Bank A/c, To 9% Debentures Application and Allotment A/c, , Dr., , 4,75,000, , 9% Debenture Application and Allotment A/c, Loss on Issue of Debentures A/c, To 9% Debentures A/c, To Premium on Redemption of Debentures A/c, , Dr., Dr., , 4,75,000, 75,000, , 5,00,000, , 5,50,000, , (For debentures application money received), , 9% Debenture Application and Allotment A/c, To 9% Debentures A/c, To Securities Premium A/c, (For debenture application money adjusted), , (iii) Bank A/c, To 9% Debentures Application and Allotment A/c, (For debenture issued at 5% discount), , 9% Debenture Application and Allotment A/c, Discount on Issue of Debentures A/c, To 9% Debentures A/c, , 5,00,000, 50,000, , 4,75,000, , 5,00,000, , (For issue of debentures at discount), , (iv) Bank A/c, To 9% Debenture Application and Allotment A/c, (For debenture application money received), , (For debentures issued at par but payable at 10% premium), , (v), , (For debenture application money received), , 5,00,000, , 5,00,000, 50,000, , 4,75,000, , 5,00,000, 50,000, , (For debenture issued at 5% discount but payable at 10% premium), , (vi) Bank A/c, To 9% Debenture Application and Allotment A/c, , Dr., , 5,25,000, 5,25,000, , (For debenture application money received), , 9% Debenture Application and Allotment A/c, Loss on Issue of Debentures A/c, To 9% Debentures A/c, To Securities Premium A/c, To Premium on Redemption of Debentures A/c, , Dr., Dr., , 5,25,000, 25,000, 5,00,000, 25,000, 25,000, , (For debentures issued at 5% premium and redeemable at 5% premium), , Illustration 16, Journalise the transactions for issue of debentures as given below :, (i) A debenture issued at ` 95, repayable at ` 100., (ii) A debenture issued at ` 95, repayable at ` 105., (iii) A debenture issued at ` 100, repayable at ` 105., (iv) A debenture issued at ` 105, repayable at ` 100., The face value of debenture in each of the above case is ` 100., , 144, , (J.A.C., 2011)
Page 631 :
Issue of Debentures, Solution, S. No., (i), , Journal Entries, , Dr., , Particulars, , Cr., , L.F. Amount, , Bank A/c, To Debentures Application and Allotment A/c, , Dr., , Debenture Application and Allotment A/c, Discount on Issue of Debentures A/c, To Debentures A/c, , Dr., Dr., , Bank A/c, To Debentures Application and Allotment A/c, , Dr., , Amount, , `, , `, , 95, , 95, , (For debenture application money received), , 95, 5, , 100, , (For issue of debenture at discount redeemable at par), , (ii), , 95, , 95, , (For debenture application money received), , Debenture Application and Allotment A/c, Loss on Issue of Debentures A/c, To Debentures A/c, To Premium on Redempation of Debentures A/c, , Dr., Dr., , 95, 10, 100, 5, , (For issue of debenture at discount redeemable at premium), , (iii), , Bank A/c, To Debenture Application and Allotment A/c, , Dr., , 100, , 100, , (For debenture application money received), , Debenture Application and Allotment A/c, Loss on Issue of Debentures A/c, To Debentures A/c, To Premium on Redemption of Debentures A/c, , Dr., Dr., , 100, 5, 100, 5, , (For issue of debenture at par redeemable at premium), , (iv), , Bank A/c, To Debentures Application and Allotment A/c, , Dr., , 105, 105, , (For debenture application as money received), , Debenture Application and Allotment A/c, To Debentures A/c, To Securities Premium Reserve A/c, , Dr., , 105, 100, 5, , (For issue of debenture at premium redeemable at par), , Illustration 17, Pass necessary Journal entries for ‘Issue of Debentures' for the following :, (i) Jain Ltd. issued ` 750, 12% Debentures of ` 100 each at a discount of 10%, redeemable at a premium of 5%., (ii) Sohan Ltd. issued 800, 9% Debentures of ` 100 each at a premium of ` 20 per, debenture redeemable at a premium of ` 10 per debenture., (iii) Vinod Limited issued 1,000, 7% Debenture of ` 100 each at a discount of 5%, redeemable at par., Solution, Journal Entries, Dr., Cr., S. No., , Particulars, , L.F., , Amount, `, , (i), , Bank A/c, To 12% Debenture Application and Allotment A/c, , Dr., , 67,500, , Amount, `, , 67,500, , (Being debenture application and allotment money received on, 750 debentures @ ` 90 each), , 145
Page 632 :
SBPD Publications Accountancy (XII), 12% Debenture Application and Allotment A/c, Dr., Loss on Issue of Debentures A/c ( ` 7,500 + 3,750), Dr., To 12% Debentures A/c (750 × ` 100), To Premium on Redemption of Debentures A/c (750 × ` 5), , 67,500, 11,250, , 75,000, 3,750, , (Being issue of 750 debentures of ` 100 each at a discount of 10%, redeemable at a premium of 5%), , (ii), , Bank A/c, To 9% Debenture Application and Allotment A/c, , Dr., , 96,000, , 9% Debenture Application and Allotment A/c, Loss on Issue of Debentures A/c, To 9% Debentures A/c, To Securities Premium A/c, To Premium on Redemption A/c, Bank A/c, To 7% Debenture Application and Allotment A/c, , Dr., Dr., , 96,000, 8,000, , Dr., , 95,000, , 96,000, , (Being application and allotment money received on 800 debentures, @ ` 120 each), , (iii), , 80,000, 16,000, 8,000, 95,000, , (Being application money received on 1,000 debentures @ ` 95 each), , 7% Debenture Application and Allotment A/c, Discount on Issue of Debentures A/c, To 7% Debentures A/c, , Dr., Dr., , 95,000, 5,000, , 1,00,000, , (Being debentures issued at 5% discount, repayable at par), , 5.7 Interest on Debentures and Income-tax thereon 1, Interest on debentures is paid periodically as per terms of agreement. Usually it is, payable half-yearly. Interest on debentures is a charge against the profits of the company. It, is payable irrespective of the fact whether there are profits or not. The amount of interest, payable on debentures is always calculated on the nominal value of the debentures and, not on their issue price., The company paying interest on debentures is under an obligation to deduct, income-tax at the prescribed rate from the amount of debenture interest. The net amount, is paid to the debentureholders. The amount of income-tax so deducted is known as Tax, Deducted at Source (TDS). It must be paid to the Central Government Account on behalf of, the debentureholders. The receipt of deposit of tax on interest must be sent to the, debentureholders for their record., Remember, 1. Interest on debentures is a charge against the profits. It is payable whether there, are profits or not., 2. Interest on debentures is payable at a fixed rate of interest on the face value (F.V.)., 3. Interest is not payable on debentures issued as collateral security., 4. The balance of Interest on Debentures A/c is transferred to Statement of Profit, and Loss at the end of the year., 5. Interest accrued and due or Interest Outstanding is shown as Other Current, Liabilities under Current Liabilities., Journal Entries, 1. For Interest Due, , Debenture Interest A/c, To Debentureholders A/c, To Income-tax Payable A/c, , (For interest due and income-tax deducted), 1. Not Prescribed in J.A.C. Syllabus, , 146, , Dr.
Page 633 :
Issue of Debentures, 2. For Payment of Interest, , Debentureholders A/c, To Bank A/c (with Int.– Income-tax), , Dr., , (For payment of net interest to debentureholders), , 3. For Payment of Income-tax (TDS), , Income-tax Payable A/c, or TDS Payable A/c, To Bank A/c, , Dr., Dr., , Statement of Profit & Loss, To Debenture Interest A/c, , Dr., , (For income-tax paid), , 4. For Transfer of Interest on Debentures i.e.,, For Closing of Debenture Interest, , (For transfer of debenture interest), , Illustration 18 (Half-yearly Interest on Debentures), Singh and Jha Ltd. issued 1,000, 10% debentures of ` 100 each on 1st April, 2015. The, issue was fully subscribed. According to the terms of issue, interest on debentures is, payable half-yearly on 30th September and 31st March., Pass the necessary Journal entries related to the debenture interest for the halfyearly ending on 31st March, 2016 and transfer of interest on debentures to Statement of, Profit and Loss., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , 2015, Sept. 30 Debenture Interest A/c, To Debentureholders A/c, , L.F. Amount Amount, `, , Dr., , 5,000, , Dr., , 5,000, , Dr., , 5,000, , Debentureholders A/c, To Bank A/c, , Dr., , 5,000, , Statement of Profit and Loss, To Debenture Interest A/c, , Dr., , 10,000, , `, , 5,000, , (Being the interest payable to debentureholders), , Debentureholders A/c, To Bank A/c, , 5,000, , (Being debenture interest paid), , 2016, March 31 Debenture Interest A/c, To Debentureholders A/c, , 5,000, , (Being the interest payable to debentureholders), , (Being debenture interest paid), , 5,000, 10,000, , (Being debenture interest transferred to Statement of Profit and Loss), , Illustration 19 (Interest on Debentures and Income-tax thereon), A Ltd. issues 5,000, 8% debentures of ` 100 each at par. Company deducts income-tax, from the interest of these debentures at source. Interest is paid on these debentures, half-yearly on 30th June and 31st December. Amount of income-tax deducted half-yearly, is ` 800. Pass the necessary Journal entries for interest and income-tax in the books of A Ltd., Solution, In the Books of A Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , June 30 Debenture Interest A/c, To Debentureholders A/c, To Income-tax Payable or TDS A/c, , L.F. Amount Amount, Dr., , `, , 20,000, , `, , 19,200, 800, , (For interest due on ` 5,00,000 for 6 months and tax deducted at source), , 147
Page 634 :
SBPD Publications Accountancy (XII), Debentureholders A/c, To Bank A/c, , Dr., , 19,200, , Income-tax Payable A/c, To Bank A/c, , Dr., , 800, , Dr., , 20,000, , Debentureholders A/c, To Bank A/c, , Dr., , 19,200, , Income-tax Payable or TDS Payable A/c, To Bank A/c, , Dr., , 800, , Dr., , 40,000, , (For payment of interest to debentureholders), , 19,200, 800, , (For income-tax paid to the Government), , Dec. 31 Debenture Interest A/c, To Debentureholders A/c, To Income-tax Payable or TDS A/c, , 19,200, 800, , (For interest due on debentures for 6 months and tax deducted at, source), , (For interest paid to debentureholders), , 19,200, 800, , (For income-tax paid to the Government), , Statement of Profit and Loss, To Debenture Interest A/c, , (For transfer of debenture interest to Statement of Profit and Loss), , 40,000, , 5.8 Writing-off of Discount and Loss on Issue of Debentures1, ❂ Discount on Issue of Debentures or ‘‘Loss on Issue of Debentures’’ is a capital loss., ❂ It must be written off during the life time of debentures i.e., within loan period or, normally in 3 to 5 years (if life time is not mentioned)., ❂ ‘‘Discount on Issue of Debentures’’ or Loss on Issue of Debentures may be written, off against the capital profit or Securities Premium A/c or Capital Reserve. If there, is no such profit or reserve available to the company, it is written off in equal, instalments against the Statement of Profit and Loss., Journal Entry :, Securities Premium A/c, Dr., Or, Capital Reserve A/c, Dr., Or, Statement of Profit & Loss, Dr., To Discount on Issue of Debentures A/c, (Being discount on issue of debentures written off), , Treatment of Loss on Issue of Debentures, From accounting paint of view Loss on Issue of Debentures the following losses :, (1) Discount on issue of Debentures (Being the excess of Face Value over Issue Price)., (2) Premium Payable on Redemption of Debentures., Loss on Issue of Debentures represents capital loss. It should be written off as far, as possible to Securities Premium Reserve Account or Surplus in Profit and Loss, during the life of debentures before the redemption of debentures., Journal Entry to write off Loss on Issue of Debentures :, Securities Premium Reserve A/c, Dr., Surplus in Profit and Loss Statement, Dr., To Loss on Issue of Debentures A/c, (Being Loss on Issue to Debentures A/c written off), 1. Not Prescribed in J.A.C. Syllabus, , 148
Page 635 :
Issue of Debentures, Effect on Balance Sheet, Until the Discount on Issue of Debentures or Loss on Issue of Debentures is, completely written off, its balance will be included in ‘‘Other Current Assets/Other, Non-current Assets’’ on the assets side in the Balance Sheet., How to write off discount or loss on issue of debentures ?, If a company decides to write off discount or loss on issue of debentures against the, profits, it may be done in two ways :, (1) Fixed Instalment Method/Writing off Equal Amount Each Year, Under this method, the total amount of discount is spread over the life of, debentures equally since each of these years enjoys the benefit derived from the issue, of debentures equally., Total Discount/Loss, Yearly Amount be Written-off =, Life of the Debentures, This method is used when debentures are redeemed at the expiry of fixed period. Let, us clarify this point with example. Suppose, total amount of discount to be written off is, ` 6,000 and debentures are to be redeemed after 5 years. In such a case, the amount to be, written off annually will be ` 1,200 (i.e., ` 6,000 ¸ 5)., Illustration 20, On 1st April, 2020 a company issued 10%, 2,000 debentures of ` 100 each at 10%, discount which will be redeemable at per after four years. Write Journal entries for issue, and discount written off only for first year., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , 2020, Apr. 1 Debenture Application & Allotment A/c, Discount on Issue of Debenture A/c, To 10% Debenture A/c, , L.F., , `, , Dr., Dr., , 1,80,000, 20,000, , Dr., , 1,80,000, , (Being amount dues), , Bank A/c, To Debenture Application & Allotment A/c, , `, , 2,00,000, , 1,80,000, , (Being amount received), , Statement of Profit and Loss, To Discount on Issue of Debentures A/c, , Dr., , 5,000, 5,000, , (Being 1/4th of discount on issue of debentures written off), , Illustration 21, 1,000, 10% Debentures of ` 100 each were issued at 10% premium by Poonam Ltd. but, redeemable at 5% premium. Pass necessary Journal entries in the books of company if loss, on issue of debentures is to be written off., Solution, Journal Entries in the Books of Poonam Ltd., Dr., Cr., Date, , Particulars, Bank A/c, To Debenture Application and Allotment A/c, , L.F., Dr., , `, , `, , 1,10,000, 1,10,000, , (Being application money received on 1,000 debentures including, premium), , Debenture Application and Allotment A/c, Loss on Issue of Debentures A/c, , Dr., Dr., , 1,10,000, 5,000, , 149
Page 636 :
SBPD Publications Accountancy (XII), To 10% Debentures A/c, To Securities Premium A/c, To Premium on Redemption of Debentures A/c, , 1,00,000, 10,000, 5,000, , (Being issue of 1,000, 10% debentures of ` 100 each at a premium of, 10% redeemable at 5% premium), , Securities Premium A/c, To Loss on Issue of Debentures A/c, , Dr., , 1,000, 1,000, , (Being 1/5th of loss on issue of debentures written off), , Illustration 22 (Writing off of Discount on Debentures), On 1st April, 2016 Roopa Ltd. issued 10% ` 1,00,000 debentures at a discount of 6%,, repayable at the end of 5 years. Show ‘Discount on Issue of Debentures Account’ for 5, years., Solution, Discount on Issue of Debentures Account, , Dr., Date, 2016, April 1, , Particulars, , Amount, `, , To 10% Debentures A/c, , 6,000, , Date, , Particulars, , 2017, March 31 By Statement of Profit &, Loss (1/5 of ` 6,000), By Balance c/d, , 6,000, 2017, April 1, , To Balance b/d, , 4,800, , 2018, March 31 By Statement of Profit &, Loss, By Balance c/d, , 4,800, 2018, April 1, , To Balance b/d, , 3,600, , 2019, March 31 By Statement of Profit &, Loss, By Balance c/d, , 3,600, 2019, April 1, , To Balance b/d, , 2,400, 2,400, , 2020, April 1, , To Balance b/d, , 1,200, 1,200, , 2020, March 31 By Statement of Profit &, Loss, By Balance c/d, 2021, March 31 By Statement of Profit &, Loss, , Cr., Amount, `, , 1,200, 4,800, 6,000, 1,200, 3,600, 4,800, , 1,200, 2,400, 3,600, 1,200, 1,200, 2,400, 1,200, 1,200, , Working Notes :, (i) Total Discount for writting off = 1,00,000 ´, (ii) Annual discount writting off =, , 6, = ` 6,000;, 100, , 6,000, = ` 1,200., 5, , Illustration 23, On 1st April, 2016 A Ltd. issued 5,000, 10% debentures of ` 100 each at a discount of, 4% redeemable after 5 years at a premium of 6%., Prepare loss on issue of 10% Debentures A/c., , 150
Page 637 :
Issue of Debentures, Solution, (A) Discount allowed : (` 5,000 × 100 × 4/100), Add : Premium on Redemption (` 5,00,000 × 6/100), Total Loss on Issue of Debentures, (B) Redemption period, æ, 1ö, (C) Amount of Loss to be written off each year = çç50,000 ´ ÷÷÷, çè, 5÷ø, Dr., Date, 2016, April 1, , 2017, April 1, , =, =, =, =, , ` 20,000, ` 30,000, ` 50,000, , 5 years, , = ` 10,000, , Loss on Issue of Debentures Account, Particulars, , Amount, `, , To 10% Debentures A/c, To Premium on, Redemption of, Debentures A/c, , To Balance b/d, , 20,000, , 30,000, 50,000, 40,000, , Date, , Particulars, , 2017, March 31 By Statement of Profit, and Loss, By Balance c/d, , To Balance b/d, , 30,000, , 2019, March 31 By Statement of Profit &, Loss, By Balance c/d, , 30,000, 2019, April 1, , To Balance b/d, , 20,000, 20,000, , 2020, April 1, , To Balance b/d, , 10,000, 10,000, , `, , 10,000, 40,000, 50,000, , 2018, March 31 By Statement of Profit &, Loss, By Balance c/d, , 40,000, 2018, April 1, , Cr., Amount, , 2020, March 31 By Statement of Profit &, Loss, By Balance c/d, 2021, March 31 By Statement of Profit &, Loss, , 10,000, 30,000, 40,000, , 10,000, 20,000, 30,000, 10,000, 10,000, 20,000, 10,000, 10,000, , (2) Proportionate Method : Writing off Proportionate Amount Each Year, When debentures are redeemed in instalments, the discount or loss on issue of, debentures should be written off each year in the ratio in which the amount of, debentures has been used/availed. In other words, total discount or loss is written off, during the life time of debentures in proportion to the debentures outstanding in the, beginning of each year. Hence, this method is called as ‘Proportionate Method’ or, ‘Variable Instalment Method’., Illustration 24, X Ltd. issued ` 10,00,000 debentures at a discount of 6% repayable by annual, drawings of ` 2,00,000 each year, beginning with the end of first year. The Directors, decided to write-off discount based on debentures outstanding each year. Give Journal, entry for issue and calculate the amount of discount to be written off annually., , 151
Page 638 :
SBPD Publications Accountancy (XII), Solution, , In the Books of X Ltd., Journal Entry, , Date, , Particulars, , L.F., , Dr., , Cr., , Amount, , Amount, , `, , Bank A/c, Discount on Issue of Debentures A/c, To Debentures A/c, , Dr., Dr., , 9,40,000, 60,000, , (For issue of ` 10,00,000 Debentures at 6% discount), , `, , 10,00,000, , Calculation of the Amount of Discount on Issue of, Debentures to be Written-off each year, Amount, Outstanding, , Year, , Ratio of Amount, Outstanding, , I, , ` 10,00,000, , 5, , II, , ` 8,00,000, , 4, , III, , ` 6,00,000, , 3, , IV, , `, , 4,00,000, , 2, , V, , ` 2,00,000, , 1, , Total, , Discount to be Written off, 5 60,000, ´, = ` 20,000, 15, 1, 4 60,000, ´, = ` 16,000, 15, 1, 3 60,000, ´, = ` 12,000, 15, 1, 2 60,000, ´, = ` 8,000, 15, 1, 1 60,000, ´, = ` 4,000, 15, 1, ` 60,000, , 15, , Illustration 25, Maneesh Ltd. issued 10,000, 12% Debentures of ` 100 each at a discount of 6% to be, redeemed as follows : 1st Year : Nil; 2nd Year : ` 5,00,000; 3rd Year : Nil; 4th Year :, ` 5,00,000., Show the Discount on Issue of Debentures Account for the period of 4 years., Solution, 6, Total Discount = (10,000 ´ 100) ´, = ` 60,000, 100, Total Debenture Value = 10,000 ´ 100 = ` 10,00,000, Table Showing Amount of Discount to be Written-off, Period, , Debentures Amount O/S, , Ratio of Amount O/S, , 1st Year, , 10,00,000, , 2, , 2nd Year, 3rd Year, , 10,00,000, 5,00,000, , 2, 1, , 4th Year, , 5,00,000, , 1, , Discount to be Written off, 60,000´ 2 / 6 = 20,000, 60,000´ 2 / 6 = 20,000, 60,000´ 1 / 6 = 10,000, 60,000´ 1 / 6 = 10,000, , Discount on Issue of Debentures Account, , Dr., Date, , Particulars, , Beginning, of, Ist year, , 152, , To 12% Debentures A/c, , Amount, , Date, , `, , End, of, , 60,000, , Ist year, , Particulars, , Cr., Amount, `, , By Statement of Profit &, Loss, , 20,000
Page 639 :
Issue of Debentures, By Balance c/d, 60,000, IInd year To Balance b/d, , IIIrd year To Balance b/d, , 40,000, , 60,000, IInd year By Statement of Profit &, Loss, , 20,000, , By Balance c/d, , 20,000, , 40,000, , 40,000, , 20,000 IIIrd year By Statement of Profit &, Loss, , 10,000, , By Balance c/d, IVth year To Balance b/d, , 40,000, , 10,000, , 20,000, , 20,000, , 10,000 IVth year By Statement of Profit &, Loss, , 10,000, , 10,000, , 10,000, , 5.9 Zero Interest Bond and Deep Discount Bond, The bonds or debentures which do not carry any rate of interest alongwith their, names are called Zero Interest Bonds or Zero Coupon Bonds., It should be noted that interest is the main source of income for the investor. If there, is no specified rate of interest then investors are not interested in buying them. To make, such bonds more attractive, the companies, therefore issues such debentures at a very, heavy discount but payable at par. The issue of debentures without coupon rate and at, heavily discounted price is called as Deep Discount Bonds., It needs to be mentioned that in case of deep discount bonds, the companies get a very, small part of the face value of debentures. But they have to pay the full face value at, maturity. Hence, the amount paid on maturity includes interest payment. The difference, between the face value (FV) and issue price (P.V.) is the total amount of interest to be spread, over the duration of the bond., 5.10 FAST REVISION, l Debenture : Debenture is a document or certificate issued by a company acknowledging a debt, at specified rate of interest. A person or holder of such a document is called ‘debentureholder’., l Types of Debentures : Debentures are of various types, such as : secured and unsecured, debentures, redeemable and irredeemable debentures, convertible and non-convertible, debentures, registered and bearer debentures, zero coupon rate and specific rate debentures., l Issue of Debentures : Debentures, like issue of shares, can be issued a par, at premium or, at discount. A debenture is said to be issued at premium when the price charged is more than, its nominal value. When a debenture is issued at a price below its nominal value, it is said to, be issued at discount. A debenture is said to be issued at par when the amount to be collected, on them is equal to their nominal or face value., l Issue of Debentures other than for Cash : When debentures are issued to the vendor or, suppliers of assets, copy right etc., it is said to be issue of debentures other than for cash., l Collateral Debentures : Collateral debentures are those debentures which are issued by, the company to banks or financial institutions as an additional or subsidiary security in, addition to certain principal security., l Deep Discount Bonds : When debentures are issued without pre-determined rate of, interest and issue price is heavily discounted, the issue of debenture is said to have been, made as a Deep Discount Bond., , 153
Page 640 :
SBPD Publications Accountancy (XII), USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6/8 Marks Questions), , 1. Define debenture ? Describe various kinds of debentures., 2. What is the meaning of debenture ? How many types of debentures are there ? Explain., 3. What is the meaning of debentures issued as collateral securities ? Explain the accounting, treatment of debentures issued as collateral securities ? How it will be shown in the Balance Sheet ?, 4. How would you treat discount on issue of debentures ?, , (B) Short Answer Type Questions, , (3/4 Marks Questions), , 1. What is a debenture ?, 2. What are the kinds of debentures ?, 3. Give any four points of distinction between shares and debentures., Or, Distinguish between Share and Debenture., 4. Write a short note on issue of debentures as a collateral security., 5. Difine Debenture. Name any two types of debentures., 6. What is the difference between Registered Debentures and Bearer Debentures ?, 7. State any three differences between shareholders and debentureholders., 8. What options are available to a company for allotment of debentures in case of over, subscriptions ?, , (C) Very Short Answer Type Questions, , (1/2 Marks Questions with Answers), , 1. What is meant by debenture ?, (J.A.C., 2011), [Ans. Debenture is a written instrument (document) issued by a company acknowledging a, debt. It contains provision as regards the repayment of principal and the payment of, interest at a fixed rate. Debentures include ‘‘debenture stock, bonds and other securities’’.], 2. What is a Bond ?, [Ans. A bond like a debenture, is an acknowledgement of debt where the rate of interest is not, pre-determined.], 3. Give two main points of distinction between a share and debenture. (U.S.E.B., 2014), [Ans. (i) Share is a ownership security whereas a debenture is a creditorship security., (ii) Dividend is paid on shares whereas interest is paid on debentures., (iii) Share is a symbol of ownership whereas a debenture is a symbol of loan.], 4. What does a bearer debenture mean ?, [Ans. A bearer debenture is the debenture which is payable to its bearer or holder. It can be, transferred by way of delivery.], 5. What do you mean by registered debentures ?, [Ans. Registered debentures are those debentures which are recorded in the register kept by, the company with details. Such debentures are transferable only by ‘Transfer Deed’.], 6. What are redeemable debentures ?, [Ans. Redeemable debentures are those debentures which are repayable by the company on a, specified date or within a specified period.], 7. What is meant by irredeemable debentures ?, [Ans. Irredeemable debentures are those debentures which are not payable during the life time, of the company. These debentures are payable on the winding-up (or liquidation) of a, company.], 8. What is meant by ‘Secured or Mortgage Debenture' ?, Or, State the meaning of Secured Debentures., [Ans. Mortgage or secured debentures are those debentures where a charge is created on the, assets of the company. The charge may be fixed or floating.], , 154
Page 641 :
Issue of Debentures, 9. What do you mean by ‘fixed charge’ and ‘floating charge’ ?, [Ans. A charge created on a specific asset of the company is known as fixed charge. A charge, created on the general assets of the company is called as floating charge.], 10. What is meant by Unsecured Debentures ?, [Ans. Unsecured debentures are those debentures that have no security. In other words,, unsecured debentures do not have a specific charge on the assets of the company.], 11. What is meant by ‘Convertible Debentures’ ?, [Ans. Convertible debentures are those debentures which are convertible into equity shares or, in any other securities. Debentures are convertible either at the option of the company or, the debentureholders.], 12. What is meant by ‘Non-convertible Debentures’ ?, [Ans. The debentures which cannot be converted into shares or in any other securities are, called non-convertible debentures.], 13. What is meant by fully convertible debentures and partly convertible debentures ?, [Ans. When the full amount of debentures is convertible into shares or other securities, such, debentures are called ‘fully convertible debentures’. When only a part of the amount of, debentures is convertible into shares or other securities, such debentures are called, ‘partly convertible debentures’.], 14. What is Coupon Rate ?, [Ans. Coupon Rate is that rate of interest at which rate the company gives interest on its, debentures.], 15. What is Zero Coupon Bond ?, [Ans. The bonds (or debentures) which do not carry a specific rate of interest is called Zero, Coupon Bond (or Zero Coupon Rate Debentures). To compensate the investors, such, bonds (or debentures) are issued at a substantial discount.], 16. What is meant by Deep Discount Bond ?, [Ans. Zero coupon bond is known as Deep Discount Bond. The reason being that such, debenturers do not carry specific rate of interest. To compensate the investors, such, bonds are issued at a substantial discount.], 17. What do you mean by Specific Coupon Rate Debentures ?, [Ans. The debentures issued with a specified rate of interest is called the specific coupon rate, debentures. The specified rate may either be fixed or fluctuating (tagged with Bank rate).], 18. What is the difference between Registered Debentures and Bearer Debentures ?, [Ans. Registered debentures are not freely transferable whereas bearer debentures are, transferable merely by delivery.], 19. What is the nature of interest on debentures ?, [Ans. Interest on debentures is a charge on Profit and Loss Account. So it is always to be paid, whether profits are sufficient or not.], 20. What is meant by issue of debentures as ‘‘purchase consideration’’ ?, [Ans. Sometimes the company purchases some assets/services and instead of making the, payment in cash to the vendor, issues its fully paid debentures. Such issue of debentures, is called as the issue of debentures for consideration other than cash.], 21. Classify debentures from the point of view of security., [Ans. (i) Secured Debentures, (ii) Unsecured Debentures.], 22. Give any one point of difference between shareholders and debentureholders., [Ans. Shareholders are the owners of the company whereas the debentureholders are lenders, of the company.], 23. What is meant by Issue of Debentures as Collateral Security ? (C.B.S.E., A.I., 2011, 13), Or, What is meant by ‘issue of debentures’ as collateral security ?, [Ans. When a company takes loan, it may issue debentures as a secondary or subsidiary, security in addition to the principal security. Such issue of debentures is known as ‘‘Issue, of Debentures as Collateral Security’’.], , 155
Page 642 :
SBPD Publications Accountancy (XII), 24. What Journal entry may be passed when debentures are issued as Collateral Security ?, [Ans. Debenture Suspense A/c, Dr., To Debentures A/c, (Debentures issued as a collateral security)], , 25. What is meant by issue of debentures at discount ?, [Ans. When a debenture is issued at a price below its nominal value, it is known as issue of, debentures at a discount.], 26. What is meant by issue of debentures at premium ?, (M.P. Board, 2016), [Ans. A debenture is said to have been issued at premium when the issue price is more than the, face value of debenture. The excess of issue price over the face value of debentures is the, premium. For example, a debenture of ` 100 is issued for ` 120, ` 20 is premium.], 27. What is meant by loss on issue of debentures ?, [Ans. When a debenture is issued at a price below its nominal value and/or a debenture is, redeemable at premium, it is known as loss on issue of debentures.], 28. What do you mean by ‘Trust Deed’ in the context of debentures ?, (N.C.E.R.T.), [Ans. Trust Deed is a document created by the company whereby trustees are appointed to, protect the interest of debentureholders before they are offered for public subscription.], 29. Name the head under which ‘‘Discount on Issue of Debentures’’ appears in the, Balance Sheet of the company ?, [Ans. It is shown as negative figure on equity and liabilities side under the head ‘Reserve &, Surplus’], 30. State the circumstances under which debentures are issued for consideration, other than cash ?, [Ans. (i) Issue of debentures to the vendor(s)., (ii) Issue of debentures for purchase consideration., (iii) Issue of debentures as a collateral security.], 31. What is cum-interest quotation ?, [Ans. When the price quoted includes the interest of the expired period, the quotation is called, as cum-interest.], 32. What is ex-interest quotation ?, [Ans. When the price quoted does not include the interest of the expired period, the quotation is, said to be ex-interest.], 33. What will be the entery when the debentures are issued as collateral security ?, [Ans. Debenture Suspense A/c, Dr., To Debentures A/c, (Being issue of ..... debentures as collateral security), , 34. Write two distinction between share and Debenture., [Ans. See Page 118.], 35. Explain the rules regarding interest on Debentures., [Ans. See Page 146.], , (U.S.E.B., 2016), (U.S.E.B., 2016), , (D) Objective Type Questions, I. Select the correct alternative :, 1. Debentureholders are the :, (J.A.C., 2016), (a) Customers of the Company, (b) Owners of the Company, (c) Creditors of the Company, (d) None of these, 2. If debentures of ` 4,50,000 are issued for the consideration of net assets of ` 5,00,000,, balance ` 50,000 will be credited to :, (a) Profit & Loss Account, (b) Goodwill Account, (c) General Reserve Account, (d) Capital Reserve Account, 3. Discount on issue of debentures is :, (a) Fixed Asset, (b) Current Asset, (c) Real Asset, (d) Capital Loss, , 156
Page 643 :
Issue of Debentures, 4. In case of issue of debentures as a collateral security for loan from the bank which account, will be debited :, (a) Bank Account, (b) Bank Loan Account, (c) Debentures Account, (d) Debentures Suspense Account, 5. Debenture is a :, (a) Loan Certificate, (b) Cash Certificate, (c) Credit Certificate, (d) None of these, 6. Debentureholders receive :, (J.A.C., 2019), (a) Dividend, (b) Interest, (c) Profit, (d) None of these, 7. Rate of interest on Debentures is at :, (a) 12% p.a., (b) 20% p.a., (c) Fixed Rate, (d) 15% p.a., 8. Debentures are exhibited under the heading :, (J.A.C. Mock Test Paper), (a) Share Capital, (b) Reserve, (c) Long-term borrowing (d) None of these, [Ans. 1. (c), 2. (d), 3. (d), 4. (d), 5. (a), 6. (b), 7. (c), 8. (c).], II. State whether the following statements are True or False :, 1. A debentureholder is an owner of the company., 2. No company shall issue any debenture carrying voting rights., 3. A debentureholder receives interest when the company earns profit., 4. Debentures cannot be issued at premium., (J.A.C., 2018), 5. Interest on debentures is calculated at the fixed percentage on the face value of the debentures., 6. Discount on issue of debentures is shown in Balance Sheet partially as Other Non-current, Assets and partially as Other Current Assets., 7. Debentures can be forfeited., (J.A.C., Mock Test Paper), [Ans. 1. False, 2. True, 3. False, 4. False, 5. True, 6. True, 7. False.], , PRACTICAL PROBLEMS, ❏ Very Short Answer Type Numerical Questions, 1. On 15-4-2016 A Ltd. invited applications for issue of 1,00,000, 9% debentures of ` 100 each, at a discount of 6%, redeemable at par after 3 years. The full amount was payable on, application. Detentures were issued on 15-5-2016., Pass the Journal entries for the above transactions., [Ans. Discount on Issue of Debentures ` 6,00,000], 2. Durga Ltd. issued 5,000, 10% Debentures of ` 100 each at a discount of 10% payable in full, on application by 1st April, 2018. Applications were received for 6,000 debentures., Debentures were allotted on 20th April, 2018. Excess money were refunded on the same date., Pass necessary Journal entries., [Ans. Discount on Issue of Debentures ` 50,000], 3. Rama Ltd. purchased machinery worth ` 2,88,000. The company issued 12% Debentures of, ` 100 each at a discount of 4% in satisfaction of purchase price., Pass the required Journal entries., [Ans. No. of Debentures Issued 3,000], 4. D Ltd. purchased machinery worth ` 2,00,000 from E Ltd. on 1.1.2016. ` 50,000 were paid, immediately and the balance was paid by issue of ` 1,60,000, 12% debentures in D Ltd., Pass the necessary Journal entries for recording the transactions in the books of D Ltd., [Ans. Discount on Debentures ` 10,000], 5. Romi Ltd. acquired assets of ` 20 lakh and took over creditors of ` 2 lakh from Kapil, Enterprises. Romi Ltd. issued 8% debentures of ` 100 each at par as purchase, consideration. Record necessary Journal entries in the books of Romi Ltd., [Ans. No. of Debentures 18,000], (N.C.E.R.T.), 6. Umendra Ltd. acquired as sets of ` 20 lakh and took over creditors of ` 2 lakh from Vineet, Enterprises. Umendra Ltd. issued 8% debentures of ` 100 each at a premium of 20% as, purchase consideration. Re cord nec es sary Jour nal en tries in the books of Umendra Ltd., [Ans. No. of Debentures 15,000, Securities Premium ` 3,00,000.], , 157
Page 644 :
SBPD Publications Accountancy (XII), 7. X Ltd. issued 500, 8% Debenture of ` 100 each at par and redeemable at 10% premium., Give Journal entries on issue., (J.A.C., Mock Test Paper), [Ans. Total of Journal ` 1,05,000.], 8. ABC Co. Ltd. issued 5,000, 10% Redeemable Debentures of ` 100 each at a discount of 5%, redeemable after 5 years at a premium of 5%., Show the Journal entries for the issue of debentures., [Ans. Loss on Issue of Debentures ` 50,000.], 9. X Ltd. issued 3,000, 15% Debentures of ` 100 each at a premium of 10%. Full amount was, payable on applications. All debentures were subscribed and allotment was made to all the, applicants. Pass necessary Journal entries in the books of the company., [Ans. Debit Bank A/c ` 3,30,000, Credit Securities Premium Reserve A/c ` 30,000], ❏ Long Answer Type Numerical Questions, 1. A Ltd. issued 2,000, 5% Debentures of ` 100 each payable ` 10 on application and the, balance on allotment. All amounts were duly realized. Pass the necessary journal entries in, the books of A Ltd., (USEB, 2019), [Ans. Cash at Bank ` 2,00,000.], ❏ Debentures Issued at Par, 2. Mahesh Enterprises Ltd. issued 1,000, 10% Debentures of ` 100 each payable as ` 40 on, application, ` 30 on allotment and the balance on a call. Assuming that all the calls were, made and money due thereon realised, show the Journal entries., [Ans. Total of Journal ` 2,00,000], 3. Satyam Ltd. issued 15,000 debentures of ` 10 each payable as follows :, ` 2 on application ` 3 on allotment, ` 5 on first and final calls. All the debentures were, applied for and allotted. All money due were received. Pass necessary Journal entries., [Ans. Cash at Bank ` 1,50,000], 4. Escon Ltd. offered for public subscription 5,000, 8% Debentures of ` 100 each payable as, 25% on application, 60% on allotment and 15% on a call per debenture. Applications were, received for 4,000 debentures which were duly allotted. All the calls were made and money, realised. Expenses on issue of debentures amount to ` 500. Show the Journal and Cash, Book entries., [Ans. Cash Book Balance ` 3,99,500], ❏ Debentures Issued at Premium, 5. Shri Laxmi Ltd. issued 10,000, 12% Debentures of ` 100 each at a premium of ` 5, payable, as ` 40 (including premium) on application and ` 65 on allotment. All the debentures were, applied for and the money was duly received. Pass necessary Journal entries in the books of, the company., [Ans. Securities Premium Reserve A/c ` 50,000], 6. Mona Ltd. issued 4,000, 8% debentures of ` 100 each at a premium of 10% payable ` 20 on, application and the balance with premium on allotment. Expenses on issue of debentures, were ` 500. Pass necessary Journal entries., [Ans. Securities Premium (Cr.) ` 40,000, Expenses on Issue of Debentures ` 500 transferred, to Securities Premium A/c.], 7. Mohan Ltd. issued 6,000, 10% Debentures of ` 100 each at a premium of 10% Amount was, payable as follows :, On Application, ` 20, On Allotment, Balance amount (including premium), All debentures were allotted and amounts were duly received. Expenses on issue of, debentures ` 1,800 which were written off against securities premium reserve., Give necessary Journal entries., (J.A.C., 2017), [Ans. Securities Premium Reserve A/c (Cr.) ` 60,000, Securities Premium Reserve A/c (Dr.), ` 1,800.], 8A. R Ltd. issued 3,000, 8% debentures of ` 100 each at a premium of 5% payable as ` 10 on, application, ` 30 on allotment including premium and balance on first call. Pass the, necessary Journal entries in the books of R Ltd., (U.S.E.B., 2013), [Ans. Securities Premium ` 15,000], , 158
Page 645 :
Issue of Debentures, 8B. Tripathi Enterprises Ltd. issued 1,000 debentures of ` 100 each at a premium of 10%. The, amount was payable at ` 25 on application, ` 35 (including premium) on allotment and the, balance on first call. A holder of 100 debentures did not pay the 1st call money. The rest of, amount was received. Pass necessary Journal entries., [Ans. Securities Premium ` 10,000; Total of Journal ` 2,15,000], 9. Ranchi Ltd. issued 6,000, 10% debentures of ` 100 each at a premium of 10 per debenture, payable as follows :, On Application ` 25, On Allotment ` 45 (including premium)., On First and Final Call ` 40., The debentures were fully subscribed and all money was duly received. Prepare Cash Book, and Balance Sheet in the books of Ranchi Ltd., (J.A.C., 2018), [Ans. Cash Book Dr. Balance 6,60,000; Balance Sheet Total 6,60,000.], ❏ Debentures Issued at Discount, 10. X Limited issued 4,000, 5% Debentures of ` 100 each at a discount of 10% payable ` 30 on, application and the balance on allotment. Pass the necessary Journal entries in the books of, X Limited., (J.A.C., 2017), [Ans. Discount on Issue of Debenture ` 40,000], 11. Shri Ram Fibres (SRF) Ltd. issued 1,000 debentures of ` 100 each at a discount of 5%., Debentures are payable as ` 50 on application and the balance on allotment. Show the Journal, entries the Books of SRF Ltd., [Ans. Discount an Debentures ` 5,000], 12. Viram Ltd. issued 50,000, 5% debentures of ` 100 each at a discount of 10% payable ` 30 on, application and the balance on allotment., (J.A.C., 2016), [Ans. Cash at Bank ` 90,00,000 Discount on Issue of Debentures ` 10,00,000 B/S Total, ` 1,00,00,000], ❏ Calls-in-Arrear and Calls-in-Advance, 13. A Co. Ltd. is registered with an Authorised Capital of ` 1 crore. The company issued 4,000, debentures of ` 100 each which were duly applied for and allotted. The debenture moneys, are payable as follows :, ` 30 on Application, ` 40 on Allotment, ` 20 on First call and ` 10 on Second call. A person who, holds 100 debentures fails to pay the amount due on first call. He, however, pays this amount, with the second call money. Another person, who is holding 400 debentures, has paid 2nd call, money with the 1st call. Pass the necessary Journal entries in the books of the company., [Ans. Calls-in-arrears ` 2,000; Calls-in-advance ` 4,000], ❏ Over-subscription of Debentures, 14. Atul Ltd. issued 20,000, 12% debentures of ` 100 each payable ` 40 on application and ` 60, on allotment. Applications were received for 22,000 debentures. Applications of 20,000 were, accepted in full and remaining applications were rejected and application money was, refunded. All money was duly received. Journal there transactions., [Ans. Refund of Application Money ` 80,000.], 15. X Ltd. issued 15,000, 9% debentures of ` 100 each at a discount of 10% payable in full on, application by 30.11.2019., Applications were received for 18,000 debentures. Debentures were allotted on 25th, January. Excess money were refunded on the same date., Pass necessary journal entries., [Ans. Discount on Issue of Debentures ` 1,50,000, Refund of application money ` 2,70,000.], 16. Shiv Ltd. issued 1,000 15% debentures of ` 100 each at a premium of 10% payable as follows :, ` 25 On Application (including premium of ` 5), ` 25 On Allotment (including premium of ` 5), ` 60 on first and final call, Applications were received for 1,400 debentures and the allotment was made to all, applicants proportionately. Money overpaid on application was utilised towards allotment., Pass necessary journal entries in the books of the company. (U.S.E.B., 2016; J.A.C., 2019), [Ans. Securities Premium A/c (Cr.) ` 5,000 + 5,000; Cash at Bank ` 1,10,000.], , 159
Page 646 :
SBPD Publications Accountancy (XII), 17. Garvit Ltd. invited applications for issuing 3,000, 11% Debentures of ` 100 each at a, discount of 6%. The full amount was payable on application. Applications were received for, 3,600 debentures. Applications for 600 debentures were rejected and the application money, was refunded. Debentures were allotted to the remaining applicants., Pass the necessary journal entries for the above transactions in the books of Garvit Ltd., (C.B.S.E. A.I., 2019), [Ans. Discount on Issue of Debentures ` 18,000, Refund of application money ` 56,400.], 18. Jharia Coal Company Ltd. issued 20,000, 10% debentures of ` 10 each, payable as ` 3 on, application and the balance on allotment. Applications were received for 30,000 debentures, out of which applications for 15,000 debentures were allotted fully, applications for 10,000, were allotted 5,000 debentures and the remaining being rejected and money returned, thereon. All sums due were duly received. Pass Journal entries., [Ans. Adjustment of Excess Application Money ` 15,000 on Allotment and ` 15,000 refunded], ❏ Issue of Debentures for Consideration other than Cash, 19. Ashoka Ltd. purchased machinery costing ` 1,35,000. It was agreed that the purchase, consideration be paid by issuing 15% debentures of ` 100 each. Assume debentures have, been issued (i) at par, and (ii) at a discount of 10%. Give necessary Journal entries., [Ans. No. of Debentures Issued (i) 1,350, (ii) 1,500], 20. Z Ltd. purchased building for ` 4,40,000. Half the payment was made in cash and the, remaining by issue of 12% debentures of ` 100 each at a premium of 10%. Pass the, necessary Journal entries., [Ans. Premium on Debentures ` 20,000], 21. Ram Banshi Ltd. purchased an established business for ` 50,000, payable ` 14,000 in cash, and the balance by issue of 9% debentures of ` 100 each at a discount of 10%. Give Journal, entries in the books of Ram Banshi Ltd., [Ans. J/E, Issue of 9% Debentures 400, Discount on Debentures ` 4,000.], 22. Suppliers Ltd. purchased machinery worth ` 1,98,000 from Suvidha Ltd. The payment was, made by issue of 12% debentures of ` 100 each., Pass the necessary Journal entries for the purchase of machinery and issue of debentures when :, (i) Debentures are issued at par; (ii) Debentures are issued at 10% discount; (iii) Debentures, are issued at 10% premium., [Ans. Face Value of Debentures Issued (i) ` 1,98,000, (ii) ` 2,20,000, (iii) ` 1,80,000], ❏ Debentures Issued as Collateral Security, 23. X Ltd. had ` 12,00,000 11% Debentures outstanding on 1st April, 2016. During the year it, book a loan of ` 4 lakh from Axis Bank for which company deposited debentures of ` 5 lakh, as ccollateral security., Pass Journal entries and show how the debentures and bank loan will appear in the, company’s Balance Sheet ?, [Ans. In Balance Sheet on 31.3.2017 on Liab. Side non-current Liabilities : Long-term, Borrowings ` 16,00,000; Alternatively, Debenture Suspence A/c Dr. ` 5,00,000, Non-current Liabilities ` 16,00,000], 24. Garima Ltd. obtained a term loan from IDBI of ` 4,00,00,000 for a period of 6 years @ 11%, p.a. The loan is secured by a mortgage of plant and machinery. Since IDBI was not, satisfied with security of plant and machinery, the company issued 1,00,000, 10%, debentures of ` 100 each as collateral security. Record necessary entries for first year in the, books of Garima Ltd. including payment of interest on loan taken from IDBI. How this loan, from IDBI and issue of debentures as collateral security will be recorded in the Balance, Sheet of company., (N.C.E.R.T.), [Ans. Interest on Bank Loan ` 44,00,000 p.a. will be paid for 6 years till the redemption of, debenture takes place.], 25. A company took a loan of ` 2,00,000 from a Bank and placed with the Bank debentures for, ` 2,50,000 as collateral securities. Show how they will appear in the company’s Balance Sheet., [Ans. Debenture Suspense A/c ` 2,50,000], (J.A.C., 2016), ❏ Different Terms of Issue and Redemption of Debentures, 26. Give Journal entries for the issue of Debentures in the following conditions :, (i) Issued 2,000-10% debentures of ` 100 each at a premium 5% redeemable at par., , 160
Page 647 :
Issue of Debentures, (ii) Issued 5,000-12% debentures of ` 100 each at a premium 5%, redeemable at a premium 10%., [Ans. (i) Securities Premium A/c ` 10,000, (ii) Credit Securities Premium A/c ` 25,000, Premium on, Redemption of Debentures A/c ` 50,000, Loss on Issue of Debentures A/c ` 50,000.], 27. Sweta Shivam Ltd. issued 25,000, 10% debentures of ` 100 each. Give Journal entries in, the following cases when :, (i) The de ben tures were is sued at a pre mium of 20%., (ii) The de ben tures were is sued as a col lat eral se cu rity to Bank against a loan of ` 20,00,000., (iii) The debentures were issued to a supplier of machinery cost ing ` 28,00,000 as his full, and fi nal pay ment., [Ans. (i) Securities Premium (Cr.) ` 5,00,000, (ii) Debenture Suspense A/c ` 25,00,000,, (iii) Discount Received ` 3,00,000 transferred to Statement of Profit & Loss.], 28. Pass the necessary Journal entries in the books of B Ltd. in the following cases :, (i) 2,000, 7% debentures of ` 100 each have been issued at par and are redeemable at par., (ii) 2,000, 7% debentures of ` 100 each have been issued at par and are redeemable at 4%, premium., (U.S.E.B., 2016), (iii) 2,000, 7% debentures of ` 100 each have been issued at 5% discount and are redeemable, at par., (iv) 2,000, 7% debentures of ` 100 each are issued at 5% discount and are redeemable at, 1, 2 % premium., (U.S.E.B., 2016), 2, , (v) 2,000, 7% debentures of ` 100 each are issued at 4% premium and are redeemable at par., [Ans. (i) 7% Debentures ` 2,00,000, (ii) Loss on Issue of Debentures ` 8,000, (iii) Discount on, Issue of Debentures ` 10,000, (iv) Loss on Issue of Debentures ` 15,000, (v) Premium on, Issue of Debentures ` 8,000], ❏ Debentures Issued at par Redeemable at Premium, 29. ABC Ltd. issued 1,00,000, 10% debentures of ` 100 each payable as follows :, On Application, ` 30, On Allotment, ` 70, The debentures were fully subscribed and all money was duly received. As per terms of, issue debentures are redeemable at ` 110. Record entries regarding issue of debentures., [Ans. Dr. Loss on Issue of Debentures ` 10,00,000; Profit Premium on Redemption of, Debentures A/c ` 10,00,000.], ❏ Interest on Debentures and T.D.S., 30. Eron Ltd. issued 10,000, 10% debentures of ` 100 each on 1st April, 2015. The issue was fully, subscribed. Interet is payable at the end of the financial year., Pass entries for issue of debentures and interest payment assuming tax deducted at source, is 10%., [Ans. Application and Allotment Money ` 10,00,000, Debenture Interest ` 1,00,000, T.D.S., ` 10,000], 31. Tata Ltd. issued 5,000, 10% debentures of ` 100 each on 1st April, 2015. The issue was, fully subscribed. According to the terms of issue, interest on debentures is payable, half-yearly on 30th September and 31st March and tax deducted at source is 10%., Pass the necessary Journal entries related to the debenture interest for the half-yearly, ending on 31st March, 2016 and transfer of interest on debentures to Statement of Profit, and Loss., (C.B.S.E., 2014, All India), [Ans. Half-yearly Interest ` 25,000, T.D.S. ` 2,500], ❏ Writing-off of Discount and Loss on Issue of Debentures, 32. A Limited company issued ` 1,00,000 debentures at a discount of 15% writting off discount, an issue at debentures repayable at the end of 5 years. Pass Journal entries for issue of, debentures. Show the amount of Discount that of should be written off each year., [Ans. Total Discount ` 15,000, Discount to be Written-off ` 3,000 annually.], 33. On 1.4.2016, Voltas Ltd. issued 1,000, 10% debentures of ` 100 each at a discount of 10%., How should the amount of discount be written off, if :, (i) Debentures are redeemable at the end of 4 years., , 161
Page 648 :
SBPD Publications Accountancy (XII), (ii) Terms of issue provided the redemption of debentures by annual drawings of ` 25,000, over a period of 4 years., [Ans. (i) Discount written off ` 2,500 each year, (ii) 1st year ` 4,000, 2nd year ` 3,000, 3rd, year ` 2,000 & 4th year ` 1,000], 34. On 1st April, 2017 P Ltd. issued 6,000 12% debentures of ` 100 each at par redeemable at a, premium of 7%. The debentures were to be redeemed at the end of third year. Prepare loss, on issue of 12% debentures account., (C.B.S.E. AI, 2019), [Ans. Loss on issue of debentures = ` 42,000, Amount to be written off ` 14,000 per year.], ❏ Miscellaneous and Boards’ Questions, 35. Disha Ltd. purchased machinery from Nisha Ltd. and paid to Nisha Ltd. as follows :, (i) By issuing 10,000, equity share of ` 10 each at a premium of 10%., (ii) By issuing 200, 9% debentures of ` 100 each at a discount of 10%., (iii) Balance by accepting a bill of exchange of ` 50,000 payable after one month., Pass necessary Journal entries in the books of Disha Ltd. for the purchase of machinery, and making payment of Nisha Ltd., (C.B.S.E. A.I., 2017), [Ans. Machinery A/c (Dr.) ` 1,78,000, Equity Share Capital ` 1,00,000, Discount on Issue of, Debentures ` 2,000.], 36. Pass the necessary Journal entries in the books of S Ltd. in the following cases :, (a) 6,000, 9% debentures of ` 100 each are issued and redeemable at par., (b) 8,000, 7% debentures of ` 100 each are issued at par and redeemable at 10% premium., (c) 4,000, 6% debentures of ` 100 each have been issued at 6% discount and are redeemable at par., (U.S.E.B., 2012, 19), [Ans. (a) 9% Debentures ` 6,00,000; (b) Loss on Issue of Debentures ` 80,000; (c) Discount on, Issue of Debentures ` 24,000.], 37. Pass the necessary Journal entries in the books of B Ltd. in the following cases :, (a) 2,000, 7% Debentures of ` 100 each have been issued at 5% discount and are redeemable at par., (b) 2,000, 7% Debentures of ` 100 each have been issued at 4% premium and are redeemable, at par., (U.S.E.B., 2009, 16), [Ans. (a) Discount on Issue ` 10,000, (b) Premium on Issue ` 8,000], 38. On 1st January, 2016, X Ltd. issued 10,00,000, 8% debentures @ ` 10 each at a discount of, 4% redeemable at a premium of 6% after three years. The amount was payable as follows :, on application ` 4, on allotment ` 4 (Excluding Discount) and balance on first and final call., Record necessary Journal entries for issue of debentures., (J.A.C., 2010), [Ans. Total of Journal ` 2,02,00,000.], 39. Ajay Ltd. issued 2,000, 14% Debentures of ` 100 each to the Public at a discount of 10%., The company also took a loan of ` 4,00,000 from the Bank of India and deposited ` 5,000,, 14% Debentures with the Bank as a collateral security. How will you deal with the issue of, Debentures in the Books of the company journal ? If entry is being passed for issue of, debentures as collateral security., [Ans. Cash at Bank ` 5,80,000; Discount on Issue of Deb. ` 20,000], 40. 2,000, 12% debentures of ` 100 each were issued at 10% premium by X Ltd, but redeemable, at 5% premium. Pass necessary Journal entries in the books of company if loss on issue of, debentures is to be written off., [Ans. Loss on Issue of Debentures ` 10,000, Loss to be written off in the first year ` 2,000.], 41. Sonia Ltd. issued 4,000, 6% debentures of ` 100 each money was called as ` 10 on, application, ` 30 on allotment and ` 60 on call, all money was received on time., Pass Journal entries in the books of the company., [Ans. Total of Journals ` 8,00,000.], 42. M/s Tiwari Company issued 1,600, 12% Debentures of ` 100 each at a discount of 10%, payable as ` 30 on application and balance of allotment., Pass necessary Journal entries in the books of the company., [Ans. Discount on Issue Debenture ` 16,000.], , l, , 162
Page 649 :
6, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 6.1 Meaning of Redemption of Debentures, , 164, , 6.2 Sources of Funds (Finance) for Redemption of Debentures, , 164, , 6.3 Methods of Redemption of Debentures, , 165, , ●, , Lump-sum, , Payment, , on, , Maturity/Redemption, , in, , Lump-sum, , ● Redemption by Annual Drawings/by Draw of Lots ● Redemption by, , Purchase of Own Debentures in the Open Market ● Redemption or, Payment by Conversion, 6.4 Fast Revision, , 211, , ❑ Useful Questions, , 212, , ❑ Practical Problems, , 215, , 163
Page 650 :
SBPD Publications Accountancy (XII), In the last chapter we discussed various issues relating to issue of debentures. We also, discussed various cases of issue of debentures from the point of view of redemption. In this, chapter we shall focus our attention on sources of funds for redemption of debentures and, methods of redemption of debentures., , 6.1 Meaning of Redemption of Debentures, Redemption of debentures means discharge of liability on account of debentures., Usually, debentures are redeemed at the expiry of their life in accordance with the terms, and conditions. The terms are clearly stated in Debenture Certificate. So a company is, under obligation to make payment of the amount due on debentures to the debentureholders., The following three major issues should be dealt with by a company regarding, redemption of debentures :, (i) Determination of Time of Redemption;, (ii) Computation of Amount of Redemption;, (iii) Determination of the Sources of Redemption of Debentures., (i) Determination of Time of Redemption : Debentures are normally redeemed at, the expiry of their life by making payment of the amount promised for. But quite often the, company reserves the right in the Articles of Association to redeem them even before the, expiry of their life., (ii) Computation of Amount of Redemption : The amount to be paid on redemption, of debentures depends upon the terms and conditions as stated in the Debenture Certificate., Therefore, if the debentures are to be paid at the expiry of life, the amount to be paid must be, equal to that which was promised by the company. In other words, they may be paid at par, at, premium as the case may be. If the debentures are to be redeemed by purchasing them in the, open market, the amount payable will depend upon the market quotation., (iii) Determination of the Sources of Redemption of Debentures : It is one of the, major issues that should be considered regarding redemption of debentures. Redemption of, debentures generally involves large sum of money. The source should therefore, be, adequate to discharge the liability. There are various sources of funds, for redemption of, debentures. They may be used according to convenience and requirements., , 6.2 Sources of Funds (Finance) for Redemption of Debentures, Following are the sources of redemption of debentures :, 1. Out of Capital,, 2. Out of Profits,, 3. Conversion of Debentures into Shares or New Debentures,, 4. Out of Proceeds of Fresh Issue of Shares or/and Debentures,, 5. Out of Sale Proceeds of Fixed Assets., (1) Redemption Out of Capital : When profits are not transferred from Profit and, Loss Appropriation Account to the Debenture Redemption Reserve Account, it is called, Redemption out of Capital. When the company is not using profits, it is using capital or any, other source, other than profits. As per SEBI Guidelines and Section 71(4) of the Companies, Act, 2013 it is necessary to create DRR before starting redemption of debentures. At least, 25%/10% of outstanding debenture (As per New Amendment rule) of face value of, debentures issued must be redeemed out of profits by creating DRR. So, now it is not possible, to redeem debentures purely out of capital., When debentures are redeemed out of capital, following entries are made :, (i) On Debentures becoming due for redemption (Payment) :, % Debentures A/c, Dr. (with nominal value), Premium on Redemption of Debentures A/c Dr. (with premium on redemption), To Debenturesholders A/c, (nominal value + premium), , 164
Page 651 :
Redemption of Debentures, (ii) On Payment of Redemption :, Debentureholders A/c, To Bank A/c, , Dr. (with the amount paid), , The following financial institutions are allowed to redeem debentures out of Capital :, (i) All India Financial Institutions or other financial institutions regulated by R.B.I., (ii) Banking Companies., (iii) Housing Finance Companies registered with the National Housing Bank., (2) Redemption Out of Profits : When the amount specified in Section 71(4) of the, Companies Act, 2013 or equal to face value of debentures is transferred from Profit to the, Debenture Redemption Reserve (DRR) Account before the redemption of debentures, such, redemption is called ‘Redemption Out of Profits’. This method does not affect liquid, resources., (3) Conversion of Debentures into Shares or New Debentures : In case of, convertible debentures, debentures are converted into shares or new debentures as per, terms and conditions of issue of debentures., (4) Redemption out of Proceeds of Fresh Issue of Shares/Debentures, Securities : This is one of the important sources of funds for redeeming debentures. In this, case, the company offers shares/debentures to the public for subscription and redeems the, debentures out of the funds so raised., (5) Redemption out of Sale Proceeds of Fixed Assets : Another source of, redemption of debentures is to utilise the sale proceeds of fixed assets of the company., , 6.3 Methods of Redemption of Debentures, The possible methods of redemption of debentures are as follows :, 1. Lump-sum Payment on Maturity,, 2. Draw of Lots or Annual Drawings, Payment in Instalments,, 3. Purchase of Own Debentures in Open Market,, 4. Redemption by Conversion in Shares or Debentures., The following chart gives a snapshot view of various methods of redemption of, debentures :, Methods of Redemption of Debentures, , Lump-sum Method, , Draw of Lots or, Annual Drawings, Method, , Purchase of Own, Debentures Method, , Conversion Method, , 1. Lump-sum Payment on Maturity : Under this method, the total amount of, debentures is paid to the debentureholders in one lump-sum, that is, in one instalment, on, their maturity, i.e., after expiry of a fixed period. The company can pay the amount even, before maturity, provided the debenture deed so provides. Under this method, debentures, can be redeemed at par, or at a premium., Under this method, a company may adopt any of the following two options for the, redemption of debentures :, (i) Redemption of Debentures out of Capital., (ii) Redemption of Debentures out of Profit., , 165
Page 652 :
SBPD Publications Accountancy (XII), 2. Draw of Lots or Annual Drawings/Payments in Instalments : Under this method,, debentures are redeemed in instalments by selecting the debentures by drawing a lot annually., Hence, this method is also known as annual drawings method. The amount of annual drawings, need not be equal., 3. Purchase of Own Debentures in Open Market : Under this method, a company, discharges the liability of debentures in full or in a part by purchasing its own debentures in, the open market. The debentures purchased in the open market are either (i) Cancelled, Immediately, or (ii) Kept as Investments., ● Generally, the company is interested in purchasing its own debentures when the interest, rate of the debentures is considerably higher than the current market rate of interest., 4. Redemption by Conversion : Under this method, the debentures are redeemed by, converting them into shares or new class of debentures. The option of conversion is given to, the debentureholders either at the time of issue of debentures or subsequently at the time of, redemption. Debentureholders may or may not accept the offer of conversion. If the, debentureholders feel that the offer is beneficial to them, they will take advantage of the, offer. These shares or debentures may be issued at par, at a premium or at a discount. It, should be noted that only convertible debentures are redeemed by this method., Let us discuss them one by one in detail :, 6.3.1. Lump-sum Payment on Maturity/Redemption in Lump-sum, Under this method, the company redeems full amount of debentures in one lump-sum, at the expiry of a specified period, that is, at maturity date of the debentures. The company, can pay the amount even before maturity as per the terms of issue., ● The redemption may be at par or at premium according to the terms of issue., ● Under this method, debentures can be redeemed either (i) out of capital or (ii) out of, profits. But a company cannot redeem debentures purely out of capital. At least, 25%/10% of outstanding debenture (As per New Amendment Rule) of the face value of, debentures issued must be redeemed out of profits (or Surplus in Statement of Profit &, Loss ) by creating Debenture Redemption Reserve (DRR) before the commencement of, redemption of debentures. If the company so likes, the entire amount of debentures, may be paid out of profits. Such payment does not affect the financial position of the, company adversely., ❏ Journal Entries on Redemption of Debentures, Any method may be used for the redemption of debentures. However, entries regarding, redemption of debentures are the same. The following entries are made on redemption of, debentures :, 1. Redemption of Debentures at Par, (i), , For transfer of Debentures, Debentures A/c, A/c to Debentureholders’ A/c, To Debentureholders A/c, , Dr., , (Being amount due to debentureholders on redemption at par), , (ii) For payment made to, Debentureholders, , Debentureholders A/c, To Bank A/c, , Dr., , (Being payment made to debentureholders at par), , 2. Redemption of Debentures at Premium, (i), , For transfer of Debentures, A/c to Debentureholders’ A/c, including premium on, Redemption), (ii) For payment made to, Debentureholders), , 166, , Debentures A/c, Premium on Redemption of Debentureholders A/c, To Debentureholders A/c, , Dr., Dr., , Debentureholders A/c, To Bank A/c, , Dr., , (Being amount due on redemption including premium), , (Being payment made to debentureholders at par)
Page 653 :
Redemption of Debentures, 3. Redemption of Debentures at Discount, (i), , For transfer of Debentures, Debentures A/c, A/c to Debentureholders’ A/c, To Debentureholders’ A/c, including discount), To Gain/Profit on Redemption of Debentures A/c, , Dr., , (Being amount due on redemption of debentures), , (ii) For payment made to, Debentureholders), , Debentureholders A/c, To Bank A/c, , Dr., , (Being payment made to debentureholders), , ❏ Legal Provisions Relating to Redemption of Debentures, ❏ Provision of Sec. 71(4) of Companies Act, 2013, Main Contents, 1., , Creation of DRR : The company shall create a Debenture Redemption Reserv e, (DRR) for the redemption of debentures., , 2., , Creation out of Current Profit : The DRR shall be created out of the Profit of the, Company available for payment of dividend., , 3., , Utilisation of DRR : The company shall not utilise the amount credited to the, DRR for any purpose other than the redemption of debentures., , 4., , A company shall pay interest and redeem the debentures in accordance with the, terms and conditions of their issue., [Sec. 71(8)], , ❏ Guidelines for Creation of Debenture Redemption Reserve (DRR), As per Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014, and, guidelines of Securities Exchange Board of India or SEBI. A company is required to create, Debenture Redemption Reserve (DRR) of an amount that is at least 25% of the total nominal, (face) value of debentures that are redeemable by it. The DRR should be created out of, profits before redemption of debentures commences., According to New Amendment Rule, DRR is required 10% of outstanding debentures, for unlisted companies. DRR is not required for NBFCs, HFCs and listed companies., It is required to create Debenture Redemption Reserve (DRR) only for nonconvertible debentures and non-convertible portion of partly convertible debentures., Exemptions to the Creation of DRR, Following categories of companies are exempt from creating DRR :, 1. All India Financial Institutions (AIFIs) regulated by Reserve Bank of India,, 2. Other Financial Institutions regulated by Reserve Bank of India,, 3. Banking Companies for both public as well as privately placed debentures, and, 4. Housing Finance Companies registered with the National Housing Bank., Thus, above mentioned companies are not required to create DRR., ❏ Debenture Redemption Investment, As per Rule 18(7)(c) of the Companies (Share Capital and Debentures) Rules 2014 :, ‘‘Every company is required to create/maintain DRR shall on or before the 30th, April of each year, deposit or invest, as the case may be a sum which shall not be, less than 15% of the amount of its debentures maturing during the year ending on, the 31st March of the next year.’’, , 167
Page 654 :
SBPD Publications Accountancy (XII), ❏ SEBI Guidelines relating to Redemption of Debentures, Securities and Exchange Board of India (SEBI) has provided some guidelines for, redemption of debentures with a view to protect the interest of debentureholders. The focal, points of these guidelines are :, (i) The creation of Debenture Redemption Reserve is obligatory for non-convertible, debentures and non-convertible portion of partly convertible debentures., (ii) A company shall create a ‘Debenture Redemption Reserve (DRR) Account', equivalent to 25%/10% of outstanding Debenture (As per New Amendment Rule) of the, amount of debentures issued before redemption of debentures commences., In Brief : Remember, 1. As per Rule 18(7) of the Companies Rules, 2014 and guidelines issued by SEBI,, Company cannot redeem debentures purely out of Capital. Creation of Debenture, Redemption Reserve Account (DRRA) is compulsory in which 25%/10% of, outstanding debenture (As per New Amendment Rule) of the face value of, debentures issued must be transferred before the commence of redemption of, debentures., 2. If Debenture Redemption Reserve Account is created, under section 71(4),, redemption of debentures is termed as redemption out of profits, otherwise it is, treated as redemption out of capital., 3. A Company can redeem its debentures purely out of profits. In that case DRR can, be created upto 100% of the face value of redeemable debentures before, commencement of redemption., 4. As per Rule 18(7) of the Companies Rules, 2014, ‘‘every company required to create, DRR shall on or before the 30th April of each year, deposit or invest, a sum of, atleast 15% of the amount maturing during the year ending 31st March of the next, year., ❏ Securities Specified for Investment, This can be done in any one or more of the following methods, namely :, (a) In deposits with any Scheduled Bank, free from charge or lien, or, (b) In unencumbered securities of the Central Government or of any State Government., (c) In unencumbered securities mentioned in clauses (a) to (d) and (ee) of section 20 of, the Indian Trusts Act, 1882., (d) In unencumbered bonds issued by any other company which is notified under, clause (f) of section 20 of the Indian Trusts Act, 1882., ● The amount so deposited or invested, as the case may be, above shall not be, utilised for any purpose other than for the repayment of debentures, maturing during the year referred above. [Provided that the amount remaining, deposited or invested, as the case may be, shall not at any time fall below 15% of the, amount of debentures maturing during the 31st March of that year.], Accounting Treatment, The following entries are passed at the time of redemption :, 1. On Investment made @ 15% of the Face Value of Debentures to be Redeemed :, Debenture Redemption Investment A/c, Dr., To Bank A/c, 2. On Investment Encashed :, Bank A/c, Dr., To Debenture Redemption Investment A/c, To Interest Earned A/c, é, ù, Rate Months/ Period, êInterest = Investment/ Deposit ´, ´, as the case may beú, êë, úû, 100, 12 or 365, , 168
Page 655 :
Redemption of Debentures, 3. On transfer of Profits from Surplus in Statement of Profit & Loss :, Surplus in Statement of Profit & Loss, Dr. (With 25%/10% of outstanding Debenture (As, per New Amendment, Rule) of F.V. of Debentures or adequate, adequate amount, To Debenture Redemption Reserve A/c, trans. to DRR), 4. On Redemption of Debentures at Par :, (i) Debentures A/c, Dr. (With face value), To Debentureholders A/c, (ii) Debentureholders A/c, Dr., To Bank A/c, 5. Redemption of Debentures at Premium :, (i) Debentures A/c, Dr. (With face value), Premium on Redemption of Debentures A/c, Dr. (With Premium on, Redemption), To Debentureholders A/c, (Total amount, payable), (ii) Debentureholders A/c, Dr. (with total amount, paid to Debentureholder], To Bank A/c, 6. On Transfer of DRR to General Reserve A/c when all debentures are redeemed :, Debenture Redemption Reserve A/c, Dr., To General Reserve A/c, Note : If the company has in its Debenture Redemption Reserve Account a balance which is not equal to, 25%/10% of outstanding Debenture (As per New Amendment Rule) of the redeemable amount then the, amount required to be transferred to DRR A/c will be :, `, Amount required for transfer to Debenture Redemption Reserve i.e .,, 25%/10% of outstanding Debenture (As per New Amendment Rule) of Face Value of Debentures, √√, Less : Existing Balance of DRR, √√, Amount now required to be transferred to DRR, √√, , (See Illustration No. 4, 7), When Debentures are to be redeemed purely (or fully), out of Surplus/Profits, Journal Entries at the time of Redemption of Debentures, If the company has the required balance in Debenture Redemption Reserve Account, (DRR), an amount equal to the face value of total amount of debentures (i.e., 100%) will be, transferred to DRR A/c., Surplus in Statement of Profit & Loss, Dr. (Entire face value or, To Debenture Redemption Reserve A/c, nominal value of debentures), Other entries with remain the same as stated earlier., (See Illustration No. 8, 9), ❏ Disclosure of Debenture Redemption Reserve in Balance Sheet, ➤ Debenture Redemption Reserve Account (DRR) would be shown as Shareholders’, Funds on the ‘‘Equity and Liabilities Side’’ of the Balance Sheet under the, sub-head, ‘‘Reserves and Surplus’’., ➤ After the redemption of debentures, the amount of DRR is transferred to General, Reserve A/c and as such DRR is closed., , 169
Page 656 :
SBPD Publications Accountancy (XII), ILLUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Illustration No., , 1(A), (B), 2, 3, 4 to 10, 11 to 16, 17(A) to 19, 20 to 25, 20 to 22, 23 to 25, 26(A) to 33, 34, 34, , Details, , Practical Problem No., , Very Short Answer Type Numerical Questions, Long Answer Type Numerical Questions, Redemption of Debentures in different cases, Company (Share Capital and Debenture) As per, Amendment Rule 2019, 1. Redemption of Debentures as per the Companies, (Share Capital and Debentures) Rules, 2014, Redemption by Sinking Fund Method (Excluded, from CBSE Syllabus), 2. Redemption by Annual Drawings/Draw of Lots, 3. Redemption by Purchase of Own Debentures in, the Open Market, (a) Purchase of Own Debentures for Immediate Cencellation, (b) Purchase of Own Debentures as Investments, 4. Redemption of Debentures by Conversion, (Excluded from CBSE Syllabus), Miscellaneous and Boards' Questions, Total, , 1 to 5, —, , 1 to 10, 11 to 14, 15(A) to 16, 17 to 22, 17 to 19, 20 to 22, 23 to 25, 26 to 30, 30 + 5, , Illustration 1(A) (Redemption of Debentures in different Cases), Show Journal entries in the following cases relating to redemption of debentures., Ignore debenture redemption reserve., (i) A company issues 10,000, 10% debentures of ` 100 each at par and to be redeemed, at par., (ii) A company issues 10,000, 10% debentures of ` 100 each at ` 100 each a premium of 5%,, to be redeemed at par., (iii) A company issues 10,000, 10% debentures of ` 100 each at a discount of 5%, to be, redeemed at par., Solution, Journal Entries, Dr., Cr., S. No., , (a), , Particulars, At the time of Redemption :, In case (i), (ii) and (iii) Same Entries, 10% Debentures A/c, To Debentureholders A/c, , L.F. Amount, `, , Dr., , 10,00,000, , Dr., , 10,00,000, , Amount, `, , 10,00,000, , (Being amount due to debentureholders on redemption), , (b), , Debentureholders A/c, To Bank A/c, , 10,00,000, , (Being payment made to Debentureholders), , Illustration 1(B), Give Journal entries relating to redemption of debentures in the following conditions, ignoring debenture redemption reserve., (i) A company issues 10,000, 10% debentures of ` 100 each at par, redeemable at a, premium of 4%., (ii) A Company issues 10,000, 10% debentures of ` 100 each issued at a discount of 5%,, redeemable at a premium of 5%., (iii) A company issues 10,000, 10% debentures of ` 100 each at a premium of 5%,, redeemable at 10% premium., , 170
Page 657 :
Redemption of Debentures, Solution, , Journal Entries, , S. No., , Dr., , Particulars, , L.F. Amount, `, , (i) (a), , 10% Debentures A/c, Premium on Redemption of Debentures A/c, To Debentureholders A/c, , Dr., Dr., , 10,00,000, 40,000, , Dr., , 10,40,000, , Dr., Dr., , 10,00,000, 50,000, , Dr., , 10,50,000, , Dr., Dr., , 10,00,000, 1,00,000, , Dr., , 11,00,000, , Cr., Amount, `, , 10,40,000, , (Being amount due to debentureholders on redemption), , (b), , Debentureholders A/c, To Bank A/c, , 10,40,000, , (Being payment made to debentureholders), , (ii) (a) 10% Debentures A/c, Premium on Redemption of Debentures A/c, To Debentureholders A/c, , 10,50,000, , (Being amount due to debentureholders on redemption), , (b) Debentureholders A/c, To Bank A/c, , 10,50,000, , (Being payment made to debentureholders), , (iii) (a) 10% Debentures A/c, Premium on Redemption A/c, To Debentureholders A/c, , 11,00,000, , (Being amount due to debentureholders on redemption), , (b) Debentureholders A/c, To Bank A/c, , 11,00,000, , (Being payment made to debentureholders), , Illustration 2 [Issue and Redemption of Debentures], ABC Ltd. issued 50,000; 10% Debentures of ` 10 each on 1st April, 2019 redeemable at, par on 30th June, 2020. The company received applications for 55,000 debentures and the, allotment was made to the applicants on pro rata. The debentures were redeemed on due, date. Assume that required investment was made on 1st April of the financial year in which, redemption is due. Pass Journal entries for issue and redemption of debentures, DRR and, investment., Solution, Journal Entries, Dr., Cr., Date, , Particulars, , 2019, April 1 Bank A/c, To Debentures Application and Allotment A/c, , L.F. Amount, `, , Dr., , 5,50,000, , Dr., , 5,50,000, , Amount, `, , 5,50,000, , (Being the receipt of application money), , April 1 Debentures Application and Allotment A/c, To 10% Debentures A/c, To Bank A/c, , 5,00,000, 50,000, , (Being the debentures allotted and debentures application money, return), , 2020 Surplus, i.e., Balance in Statement of Profit and Loss A/c Dr., March, To Debenture Redemption Reserve A/c, 31, (Being the DRR created of amount equal to 10 per cent of the value of, , 50,000, , 50,000, , debentures), , 171
Page 658 :
SBPD Publications Accountancy (XII), April 1 Debentures Redemption Investment A/c, To Bank A/c, , 75,000, , Dr., , 75,000, , (Being the investment made of 15% of ` 5,00,000, nominal (face) value of, debentures to be redeemed), , June, 30, , Bank A/c, To Debentures Redemption Investment A/c, , Dr., , 75,000, , Dr., , 5,00,000, , 75,000, , (Being the investment realised on redemption of debentures), , June, 30, , 10% Debentures A/c, To Debentureholders A/c, (Being the payment, debentureholders), , June, 30, , on, , redemption, , of, , debentures, , Debentureholders’ A/c, To Bank A/c, , due, , 5,00,000, , to, , Dr., , 5,00,000, , Dr., , 50,000, , 5,00,000, , (Being the payment due to debentureholders discharged), , Debenture Redemption Reserve A/c, To General Reserve A/c, , (Being the transfer of DRR to General Reserve), , 50,000, , Illustration 3, Janta Welfare Company Limited issued 5,000, 10% Redeemable Debentures of ` 100, each at a discount of 5% redeemable after 5 years at a premium of 5%. It was decided to, invest the required amount in Debenture Redemption Investment. How much amount of, Debenture Redemption Reserve should be created before the redemption of debentures, begins ? Show the Journal entries for issue and redemption of debentures. As per New, Amendment Rule., Solution, In the Books of Janta Welfare Co. Ltd., Journal Entries, Dr., Cr., S. No., (i), , Particulars, At the time of Issue of Debentures :, Bank A/c, Loss on Issue of Debentures A/c, To 10% Debentures A/c, To Premium on Redemption of Debentures A/c, , L.F., , Amount, `, , Dr., Dr., , 4,75,000, 50,000, , Dr., , 75,000, , Amount, `, , 5,00,000, 25,000, , (For the issue of 10% Debentures of ` 100 each at a discount of 5%, payable at a premium of 5%), , (ii), , For Investment in Debenture Redemption Investment :, Debenture Redemption Investment A/c, To Bank A/c, , 75,000, , (Being investment made @ 15% of the face value of debentures to be, redeemed), , (iii), , Bank A/c, To Debenture Redemption Investment A/c, , Dr., , 75,000, , Dr., , 50,000, , 75,000, , (Being investment encashed), , (iv), , For Creation of Debenture Redemption Reserve :, Surplus in Statement of Profit & Loss, To Debenture Redemption Reserve A/c, , 50,000, , (For creation of Debenture Redemption Reserve equal to 10% of, ` 5,00,000), , (v), , At the time of Redemption :, 10% Debentures A/c, Premium on Redemption of Debentures A/c, To Debentureholders A/c, , (For total amount payable to debentureholders), , 172, , Dr., Dr., , 5,00,000, 25,000, , 5,25,000
Page 659 :
Redemption of Debentures, (vi), , Debentureholders A/c, To Bank A/c, , Dr., , 5,25,000, 5,25,000, , (For payment made to debentureholders), , (vii), , Debenture Redemption Reserve A/c, To General Reserve A/c, , Dr., , 50,000, 50,000, , (For transfer of DRR A/c to General Reserve A/c), , Illustration 4 (When DRR A/c Balance is given), Alpha Ltd. has 5,000, 8% Debentures of ` 100 each due for redemption on 31st March,, 2018. Assume that Debenture Redemption Reserve has a balance of ` 90,000 on that date. It, was decided to invest the required amount towards Debenture Redemption Investment., Record the necessary Journal entries at the time of redemption of debentures., (J.A.C., 2019), Solution, , In the Books of Alpha Ltd., Journal Entries, , Date, , Particulars, , 2017, April 30 Debenture Redemption Investment A/c, To Bank A/c, , Dr., , Cr., , L.F. Amount, , Amount, , `, , Dr., , `, , 75,000, 75,000, , (Being investment made @ 15% of the face value of debentures to be, redeemed), , 2018, Mar. 31 Bank A/c, To Debenture Redemption Investment A/c, , Dr., , 75,000, 75,000, , (Being investment encashed), , Mar. 31 Surplus in Statement of Profit & Loss (Note 2), To Debenture Redemption Reserve A/c, , Dr., , 35,000, , Mar. 31 8% Debentures A/c, To Debentureholders A/c, , Dr., , 5,00,000, , Mar. 31 Debentureholders A/c, To Bank A/c, , Dr., , 5,00,000, , Mar. 31 Debenture Redemption Reserve A/c, To General Reserve A/c, , Dr., , 1,25,000, , (Being transfer of profit to DRR as Companies Rules, 2014), , 35,000, 5,00,000, , (Being amount due to debentureholders on redemption), , (Being payment made to debentureholders), , (Being DRR transferred to General Reserve), , Working Notes :, 1. Interest on Investment has not been calculated because rate of interest is not given., 2. Total amount required for transfer to Debenture Redemption Reserve :, 25% of ` 5,00,000, Less : Existing Balance, Amount now required to be transferred to DRR, , 5,00,000, , 1,25,000, , `, 1,25,000, 90,000, 35,000, , Illustration 5(A), Bharat Bank Ltd. had issued 20,000, 12% Debentures of ` 100 each redeemable on, March 31, 2020. How much amount of Debenture Redemption Reserve is required before, the redemption of debenture and how much amount should it invest in specified securities., , 173
Page 660 :
SBPD Publications Accountancy (XII), Solution, According to Section 71(4) of Companies Act, 2013 and Rule 18(7) there is no need for, the banking company to create redemption of debentures. Since there is no need for Bharat, Bank Ltd. to create DRR therefore, there is no need to invest in referred securities., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , 2020, Mar. 31 12% Debentures A/c, , Dr., , Amount, , Amount, , `, , `, , 20,00,000, , To Debentureholders A/c, , 20,00,000, , (Being the amount due to debentureholders on redemption), , Debentureholders A/c, , Dr., , 20,00,000, , To Bank A/c, , 20,00,000, , (Being payment more to debentureholders), , Illustration 5(B) (Redemption of Debentures by Banking Company), Punjab National Bank issued 10,000, 8% Debentures of ` 100 each at a premium of 10%, on 30th June, 2010 redeemable on 30th June, 2020. The issue was fully subscribed. Record, necessary entries for issue and redemption of debentures. How much amount of Debenture, Redemption Reserve is to be created before redemption of debentures ?, Solution, In the Books of Punjab National Bank, Journal Entries, Dr., Cr., Date, 2010, , Particulars, , L.F. Amount, , (a) For Issue of Debentures, , June 30 Bank A/c, To 8% Debenture Application & Allotment A/c, , `, , Dr., , 11,00,000, , Dr., , 11,00,000, , Dr., , 10,00,000, , Dr., , 10,00,000, , Amount, `, , 11,00,000, , (Being the receipt of application money), , June 30 8% Debentures Application & Allotment A/c, To 8% Debentures A/c, To Securities Premium Reserve A/c, , (Being transfer of application to 8% Debentures A/c), , 2020 (b) For Redemption of Debentures, June 30 8% Debentures A/c, To Debentureholders A/c, , 10,00,000, 1,00,000, , 10,00,000, , (Being amount due on redemption), , Debentureholders A/c, To Bank A/c, , 10,00,000, , (Being Payment made to debentureholders), Working Notes :, 1.As per Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014 a Banking Company, is not required to create Debenture Redemption Reserve., 2.A company which is not required to create DRR is exempted from investing 15% amount also., , Illustration 6 (Redemption of Debentures by All India Financial Institution), On 1.4.2016 an All India Financial Institution regulated by RBI issued 30,000, 12%, debentures of ` 100 each at par and redeemable at 10% premium at the end of 4 years. The, issue was fully subscribed. Record necessary entries for issue and redemption of, debentures. How much amount of Debenture Redemption Reserve should be created before, redemption of such debentures., , 174
Page 661 :
Redemption of Debentures, Solution, Date, 2016, April 1, , Journal Entries, Particulars, , For Issue of Debentures, , Dr., , Cr., , L.F. Amount, , Amount, , `, , Bank A/c, To Debenture Application & Allotment A/c, , Dr., , 30,00,000, , Debentures Application & Allotment A/c, Loss on Issue of Debentures A/c, To 12% Debentures A/c, To Premium on Redemption of Debentures A/c, , Dr., Dr., , 30,00,000, 3,00,000, , Dr., Dr., , 30,00,000, 3,00,000, , Dr., , 33,00,000, , (Being the receipt of application money), , (Being transfer of application money to 12% Debentures A/c), , 2020 For Redemption of Debentures, Mar. 31 12% Debentures A/c, Premium on Redemption of Debentures A/c, To Debentureholders A/c, (Being the amount due on redemption), , Debentureholders A/c, To Bank A/c, , (Being the payment made to debentureholders), , `, , 30,00,000, , 30,00,000, 3,00,000, , 33,00,000, , 33,00,000, , Working Notes :, 1. As per Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014 All India Financial, Institutions regulated by Reserve Bank of India is not required to create DRR., 2. A company which is not required to create DRR is exempted from investing 15% of redeemable, amount also., , Illustration 7 (Half the Amount of Debentures due for Redemption), Gati Ltd. had ` 80,000, 10% debentures of ` 100 each of which half the amount is due for, redemption on 31st March, 2020. It was decided to invest the required amount towards, Debenture Redemption Investment. The company had a balance of ` 13,40,000 in its, Debenture Redemption Reserve Account. Record the necessary Journal entries at the time, of redemption of debentures., Solution, In the Books of Gati Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F. Amount, , 2019, April 30 Debenture Redemption Investment A/c, To Bank A/c, , Dr., , 6,00,000, , 2020, Mar. 31 Bank A/c, To Debenture Redemption Investment A/c, , Dr., , 6,00,000, , Dr., , 6,60,000, , `, , (Being investment made @ 15% of ` 40,00,000), , (Being investment encashed), , Mar. 31 Surplus in Statement of Profit & Loss, To Debenture Redemption Reserve A/c, , `, , 6,00,000, , 6,00,000, , 6,60,000, , (Being transfer of profit to DRR to make DRR equal to 25% of face, value of debentures issued), , Mar. 31 10% Debentures A/c, To Debentureholders A/c, , Amount, , Dr., , (Being amount due to debentureholders on redemption of debentures), , 40,00,000, , 40,00,000, , 175
Page 662 :
SBPD Publications Accountancy (XII), Mar. 31 Debentureholders A/c, To Bank A/c, , Dr., , 40,00,000, 40,00,000, , (Being payment made to debentureholders), Working Notes :, 1, 1. Amount due for Redemption, ., = ` 80,00,000 ´ = ` 40,00,000, [80,000 ´ ` 100 = ` 80,00,000]., 2, 2. 15% of ` 40,00,000 required for Investment = ` 40,00,000 ´ 15/100 = ` 6,00,000., 3. Total amount required for transfer to DRR :, 25% of ` 80,00,000, Less : Existing Balance, , Amount now required to be transferred to DRR, , `, 20,00,000, 13,40,000, 6,60,000, , 4. Debenture Redemption Reserve will be transferred to General Reserve when all debentures are, redeemed. Since only half amount of debentures have been redeemed, transfer of DRR to General, Reserve has not been made in 2018., , Illustration 8 (Redemption Out of Profits), On 1.4.2011 Ananya Ltd. issued 20,000, 10% Debentures of ` 100 each at par which, were redeemable on 31.3.2018. The company invested the required amount in fixed deposit, in a Bank on 30th April, 2017 earning interest @ 8% p.a. On the date of maturity, the, company decided to redeem 10% debentures out of profits. The Statement of Profit & Loss, had a credit balance of ` 25,00,000 on this date., Pass the necessary Journal entries in the books of the company for the redemption of, debentures., (J.A.C., 2018), Solution, In the Books of Ananya Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , 2017, April 30 Debenture Redemption Investment A/c, To Bank A/c, , L.F. Amount, `, , Dr., , 3,00,000, , Amount, `, , 3,00,000, , (Being investment made @ 15% of the face value of debentures to be, redeemed), , 2018, Mar. 31 Bank A/c, TDS A/c, To Debenture Redemption Investment A/c, To Interest Earned A/c, , Dr., Dr., , 3,19,800, 2,200, , Dr., , 20,00,000, , Dr., Dr., , 20,00,000, 2,00,000, , Debentureholders A/c, To Bank A/c, , Dr., , 22,00,000, , Debenture Redemption Reserve A/c, To General Reserve A/c, , Dr., , 20,00,000, , 3,00,000, 22,000, , (Being F.D. encashed, interest earned and T.D.S. charged), , Mar. 31 Surplus in Statement of Profit & Loss (Note 2), To Debenture Redemption Reserve A/c, (Being transfer of profit to DRR A/c), , 10% Debentures A/c, Premium on Redemption of Debentures A/c, To Debentureholders A/c, , 20,00,000, , 22,00,000, , (Being amount due to debentureholders on redemption), , (Being payment made to debentureholders), , (Being the transfer of balance of DRR to General Reserve), , 176, , 22,00,000, , 20,00,000
Page 663 :
Redemption of Debentures, Working Notes :, 8, 11, 1. Interest on Bank Deposit, ., = ` 3,00,000 ´, ´, = ` 22,000., 100 12, 2. Since the debenture are redeemable fully out of profits, an amount equal to the total amount of, debentures redeemed, i.e., ` 20,00,000 has been transferred to DRR., , Illustration 9 (Redemption of Debentures in case of Infrastructure Company), Bihar Road Construction Co., an infrastructure company, had issued 20,000, 10%, Debentures of ` 100 each on 1.4.2011 redeemable at par on 31st March, 2020. It was decided, on 30th April, 2019 to invest the required amount in securities earning 10% p.a. interest., How much amount of Debenture Redemption Reserve should be created before the, redemption of debentures begins. Give necessary entries for issue and redemption of, debentures., Solution, In the Books of Bihar Road Construction Co., Journal Entries, Dr., Cr., Date, 2011, , Particulars, , L.F., , At the time of Issue of Debentures :, , April 1 Bank A/c, To Debenture Application and Allotment A/c, , Amount, `, , Dr., , 20,00,000, , Dr., , 20,00,000, , Dr., , 3,00,000, , Amount, `, , 20,00,000, , (Being application money received), , April 1 Debenture Application and Allotment A/c, To 10% Debentures A/c, , 20,00,000, , (Being application money transferred to 10% Debentures A/c), , 2019, , Before Redemption :, , April 30 Debenture Redemption Investment A/c, To Bank A/c, , 3,00,000, , (Being investment made equal to 15% of the face value of debentures, to be redeemed), , 2020, Mar. 31 Bank A/c, To Debenture Redemption Investment A/c, To Interest Earned A/c, , Dr., , 3,27,500, , Mar. 31 Surplus in Statement of Profit & Loss, To Debenture Redemption Reserve A/c, , Dr., , 5,00,000, , Mar. 31 10% Debentures A/c, To Debentureholders A/c, , Dr., , 20,00,000, , Mar. 31 Debentureholders A/c, To Bank A/c, , Dr., , 20,00,000, , Dr., , 5,00,000, , (Being investment encashed), , (Being transfer of profit equal to 25% of the face value of debentures, issued), , 3,00,000, 27,500, , 5,00,000, , At the time of Redemption of Debentures :, , (Being the amount due to debentureholders on redemption), , (Being amount due to debentureholders paid), , Debenture Redemption Reserve A/c, To General Reserve A/c, , 20,00,000, , 20,00,000, , 5,00,000, , (Being transfer of DRR on redemption of all the debentures to General, Reserve), , 177
Page 664 :
SBPD Publications Accountancy (XII), Working Notes :, 1 Interest Earned = `. 3,00,000 ´ 10 ´ 11 = ` 27,500., 100 12, 2.As per new guidelines, infrastructure companies are also required to create Debenture Redemption, Reserve @ 25% of the face value of debenture to be redeemed., , Illustration 10, On April 1, 2011 Escon Ltd. acquired assets of the value of ` 65,00,000 and liabilities, worth ` 12,60,000 from Sunflower Ltd. at an agreed value of ` 55,00,000 and issued 10,000,, 8% debentures of ` 500 each at a premium of 10% in full satisfaction of purchase, consideration. The debentures were redeemable on 31st March, 2020 at a premium of 6%., Pass necessary Journal entries in the books of Escon Ltd. for redemption of debentures., Solution, In the Books of Escon Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , 2019, April 30 Debenture Redemption Investment A/c, To Bank A/c, , L.F., Dr., , Amount, , Amount, , `, , `, , 7,50,000, 7,50,000, , (Being investment made @ 15% of the face value of redeemable, debentures), , 2020, Mar. 31 Bank A/c, To Debenture Redemption Investment A/c, , Dr., , 7,50,000, 7,50,000, , (Being debenture redemption investment encashed), , Mar. 31 Surplus in Statement of Profit & Loss, To Debenture Redemption Reserve A/c, , Dr., , 12,50,000, 12,50,000, , (Being DRR created @ 25% of the face value of debentures issued), , Mar. 31 8% Debentures A/c, Premium on Redemption of Debentures A/c, To Debentures A/c, , Dr., Dr., , 50,00,000, 3,00,000, 53,00,000, , (Being amount due on redemption), , Mar. 31 Debentureholders A/c, To Bank A/c, , Dr., , 53,00,000, 53,00,000, , (Being payment made to debentureholders), , Debenture Redemption Reserve A/c, To General Reserve A/c, , Dr., , 12,50,000, 12,50,000, , (Being transfer of balance of DRR to General Reserve), Working Note :, , Purchase Consideration, Market Value, 55,00,000 55,00,000, =, =, = 10,000 Debentures, 500 + 50, 550, , Debenture Issued =, , Redemption of Debentures by Sinking Fund or Redemption Fund Method*, Provision of funds for the redemption of debentures may be made by creating a Sinking, Fund. A sinking fund is a fund which is created out of profits every year and invested in, marketable securities (guilt-edged securities), carrying fixed rate of interest. Interest earned, on the investment is also invested in such securities. On the date of redemption,, investments so made are sold in the market. Money thus realised is utilised for the, redemption of debentures., * Excluded from the Revised Syllabus of CBSE and Rajasthan Board., , 178
Page 665 :
Redemption of Debentures, For determining the amount of annual contribution (or annual instalment), Sinking, Fund Table is consulted. Sinking Fund is also termed as Debenture Redemption Fund., It is to be noted that when redemption is made by creating Sinking Fund or Debenture, Redemption Fund, then creation of Debenture Redemption Reserve is not required., Types of Sinking Fund : There are two types of Sinking Fund :, (i) Cumulative Sinking Fund,, (ii) Non-cumulative Sinking Fund., Cumulative Sinking Fund*, Cumulative Sinking Fund is a sinking fund which is maintained on accumulative, basis. Every year a fixed amount is taken from Surplus of Profit and Loss. This amount is, invested outside the business in some good securities. Interest received on sinking fund, investments is again invested. The investments are sold when debentures are due for, redemption and amount so received is used for paying the debentureholders., Following steps are undertaken in case of cumulative sinking fund method :, (i) A fixed amount is set aside out of company's profits as per sinking fund table., Following is the specimen of Sinking Fund Table :, Years, , 3%, , 31 %, 2, , 4%, , 41 %, 2, , 5%, , 3, , 0.323539, , 0.321933, , 0.320348, , 0.318773, , 0.317208, , 4, , 0.239028, , 0.237251, , 0.235490, , 0.233774, , 0.232012, , 5, , 0.188354, , 0.186481, , 0.184627, , 0.182792, , 0.180975, , 6, , 0.154597, , 0.152668, , 0.150761, , 0.148878, , 0.147017, , 7, , 0.130506, , 0.128544, , 0.126609, , 0.124701, , 0.122819, , 8, , 0.112306, , 0.110476, , 0.108527, , 0.106609, , 0.104721, , 9, , 0.098433, , 0.096466, , 0.094493, , 0.092574, , 0.090690, , 10, , 0.087230, , 0.085241, , 0.083291, , 0.081378, , 0.079504, , However the following formula may be used in case Sinking Fund Table is not, available :, é, ù, i, ú, A = P´ ê, ê (1 + i) n - 1ú, ë, û, Where, i = Per unit rate of interest, n = Number of years, P = Amount to be paid, A = Annual appropriation., If the debentures are to be redeemed at a premium, annual instalment is calculated for, total amount payable to debentureholders i.e., face value of debentures and premium on, redemption of debentures., (ii) The amount so set aside is invested in outside securities., (iii) Interest received on investments is ploughed back alongwith the annual, instalment., (iv) The above process is continued till the time of redemption of debentures., (v) At the time of redemption, investments are sold and debentures are redeemed., * Excluded from the Revised Syllabus of C.B.S.E., , 179
Page 666 :
SBPD Publications Accountancy (XII), Accounting Entries, Year, I., , First year, , Transactions, , Entries, , 1. For setting aside the annual Surplus in Statement of Profit & Loss Dr., instalment from profit, To Sinking Fund A/c, Or, To Debenture Redemption Fund A/c, (For the amount of profit transferred to Sinking, Fund A/c), , 2. For investment, , Sinking Fund Investment A/c, Or, Debenture Redemption Fund, Investment A/c, To Bank A/c, , Dr., , Bank A/c, To Interest on Sinking Fund, Investment A/c, , Dr., , Dr., , (For the investment made), , II., , In Second &, Subsequent, years, , 1. For receiving Interest, (or Receipt of Interest on, Investment), , (For interest received on investment), , 2. For transferring Interest to, Sinking Fund A/c, , Interest on Sinking Fund Investment A/c Dr., To Sinking Fund A/c, (For transfer of interest to Sinking Fund A/c), , Note : Compound entry for 1 & 2 Bank A/c, above :, , Dr., , To Sinking Fund A/c, , (For the receipt of interest on investment transferred to Sinking Fund A/c), , 3. For setting aside annual, instalment, , Surplus in Statement of P. & L., To Sinking Fund A/c, , Dr., , (For the amount of profit transferred from, Statement of P. & L. to Sinking Fund A/c), , 4. For making Investment, (including interest), , Sinking Fund Investment A/c, To Bank A/c, , Dr., , (For the investment made), , III. In Last year, or year of, Redemption, , 1. For receiving interest, (or Interest received on, Investment A/c), , Bank A/c, To Sinking Fund A/c, , Dr., , 2. For setting aside annual, instalment, , Surplus in Statement of P. & L., To Sinking Fund A/c, , Dr., , 3. For Sale of Investment or, Assets realised, , Bank A/c, To Sinking Fund Investment A/c, , Dr., , Debentureholders A/c, To Bank A/c, , Dr., , 4. For Redemption of Debentures :, (i) at Par, , (For interest transferred to Sinking Fund A/c), , (For the amount of profit transferred to Sinking, Fund A/c), , (For the amount realised on sale of investment), , (For debentures paid off), , 180
Page 667 :
Redemption of Debentures, (ii) at Premium, , Debentures A/c, Premium on Redemption of, Debentures A/c, To Bank A/c, , Dr., , Debentures A/c, To Bank A/c, To Profit on Redemption of, Debentures A/c, , Dr., , Dr., , (For debentures paid off at premium), , (iii) at Discount, , (For debentures redeemed at discount), , 5. For transfer of balance of, (i) On Profit :, Sinking Fund Investment A/c, Sinking Fund Investment A/c, To Sinking Fund A/c, , Dr., , (For profit made on sale of investment transferred to Sinking Fund A/c), , (ii) On Loss :, Sinking Fund A/c, Dr., To Sinking Fund Investment A/c, (For loss made on sale of investment transferred, to Sinking Fund A/c), , 6. For closing the Sinking, Fund A/c, (For transfer of balance of, Sinking Fund to General, Reserve A/c), , Sinking Fund A/c, To General Reserve A/c, , Dr., , (For transfer of balance of Sinking Fund to, General Reserve A/c), , Note : Remember that no entry is made for investment in the last year. Profit on sale of investment is capital, profit and is transferred to Capital Reserve A/c., , Illustration 11 (Redemption by Sinking Fund), A Company issued 6% debentures of ` 6,00,000 with a condition that they should be, redeemed after 3 years at 10% premium. The amount set aside for the redemption of, debenture is invested in 5% Government Securities. The sinking fund table shows that, 0.31720855 at 5% compound interest in three years will become ` 1., Give Journal entries., Solution, `, , Amount of Debentures, Add : Premium Payable (6,00,000 ´, , 10, 100, , 6,00,000, ), , 60,000, , Total Payable Amount, Annual Amount to be set aside = 0.31720855 ´ 6,60,000, ~ ` 2,09,358, = ` 2,09,357.643 Journal Entries, Dr., Year, , Particulars, , 1st Year Bank A/c, Loss on Issue of Debentures A/c, To 6% Debentures A/c, To Premium on Redemption of Debentures A/c, , L.F. Amount, `, , Dr., Dr., , 6,00,000, 60,000, , Dr., , 2,09,358, , 6,60,000, , Cr., Amount, `, , 6,00,000, 60,000, , (For issue of 6% debentures, redeemable at 10% premium), , Surplus in Statement of Profit & Loss, To Sinking Fund A/c, , 2,09,358, , (For sinking fund created out of Profit & Loss Statement), , 181
Page 668 :
SBPD Publications Accountancy (XII), Sinking Fund Investment A/c, To Bank A/c, , Dr., , 2,09,358, , Dr., , 10,468, , (For amount invested), , 2nd Year Bank A/c, To Sinking Fund A/c, , 2,09,358, , 10,468, , (For interest received on Sinking Fund Investment of ` 2,09,358 @ 5%), , Surplus in Statement of Profit & Loss, To Sinking Fund A/c, , Dr., , 2,09,358, 2,09,358, , (For amount transferred to Sinking Fund out of P. & L. Statement), , Sinking Fund Investment A/c, To Bank A/c, , Dr., , 2,19,826, 2,19,826, , (For amount invested), , 3rd Year Bank A/c, To Sinking Fund A/c, , Dr., , 21,459, 21,459, , (For interest received on Sinking Fund Investment of ` 4,29,184 @ 5%), , Surplus in Statement of Profit & Loss, To Sinking Fund A/c, , Dr., , 2,09,357, 2,09,357, , (For amount transferred to Sinking Fund A/c), , Bank A/c, To Sinking Fund Investment A/c, , Dr., , 4,29,184, 4,29,184, , (For Sinking Fund Investment sold), , Sinking Fund A/c, To General Reserve A/c, , Dr., , 6,60,000, 6,60,000, , (For balance of Sinking Fund transferred to General Fund A/c), , 6% Debentures A/c, Premium on Redemption of Debentures A/c, To Debentureholders A/c, , Dr., Dr., , 6,00,000, 60,000, 6,60,000, , (For amount due to debentureholders on redemption of debentures), , Debentureholders A/c, To Bank A/c, , Dr., , 6,60,000, 6,60,000, , (For debentures paid off), , Illustration 12, TELCO had issued 6% Debentures for ` 2,00,000. They were redeemable at 5% premium, on 31st December, 2018. On that date the other concerned ledger accounts showed the, following balances :, `, Debenture Redemption Fund Account, , 2,10,000, , Debenture Redemption Fund Investment (in 5%, Bihar Govt. Loan, of the face value of ` 1,85,000), , 1,81,000, , Bank Account, , 2,21,500, , Premium on Redemption of Debentures, , 10,000, , On 31st December, 2018 the investments were sold at 101% and all the Debentures, were duly redeemed., Write up the concerned Ledger Accounts and show the Redemption of Debentures., , 182
Page 669 :
Redemption of Debentures, Solution, Dr., Date, , In the Books of TELCO, Debenture Redemption Fund Account, Particulars, , Amount, , Date, , Particulars, , Cr., Amount, , `, , 31-12-2018 To General Reserve, (Balance transferred), To Capital Reserve, , `, , 31-12-2018 By Balance b/d, 2,10,000, By Investments, 5,850, (Profit transferred), 2,15,850, , 2,10,000, 5,850, 2,15,850, , Debentureholders Account, , Dr., Date, , Particulars, , Amount, , Date, , Cr., Particulars, , `, , 31-12-2018 To Bank A/c, , 2,10,000 31-12-2018 By 6% Debentures A/c, By Premium on, Redemption of, Debentures A/c, 2,10,000, , Amount, `, , 2,00,000, 10,000, 2,10,000, , Debenture Redemption Investment Account, , Dr., Date, , Particulars, , Amount, , Date, , Particulars, , `, , Cr., Amount, `, , 31-12-2018 To Balance b/d, 31-12-2018 By Bank A/c (Sold at 101%, (Face Value ` 1,85,000) 1,81,000, æ1,85,000´ 101÷ö, ÷÷, i.e. çç, 1,86,850, To Deb. Redemption Fund, çè, ÷ø, 100, A/c (Profit transferred), 5,850, 1,86,850, 1,86,850, , 6% Debentures Account, , Dr., Date, , Particulars, , 31-12-2018 To Bank A/c (Repayment), , Amount, , Date, , Cr., Particulars, , Amount, , 2,10,000 31-12-2018 By Balance b/d, By Premium on, Redemption of, 2,10,000, Debentures A/c, , 2,00,000, , `, , `, , 10,000, 2,10,000, , Premium on Redemption of Debentures Account, , Dr., Date, , Particulars, , 31-12-2018 To 6% Debentures A/c, (Transfer), , Amount, `, , 10,000, 10,000, , Date, , Particulars, , 31-12-2018 By Balance b/d, , Cr., Amount, `, , 10,000, 10,000, , Bank Account, , Dr., Date, , Particulars, , Amount, , Date, , Cr., Particulars, , `, , 31-12-2018 To Balance b/d, To Investments, (Realisation), , 2,21,500 31-12-2018 By 6% Debentures A/c, (Redemption), 1,86,850, By Balance c/d, 4,08,350, , Amount, `, , 2,10,000, 1,98,350, 4,08,350, , 183
Page 670 :
SBPD Publications Accountancy (XII), Illustration 13, On 31st March, 2016 Nitin Ltd. has following balances in the books :, 10% Debenture : ` 10,00,000, Debenture Redemption Fund : ` 10,00,000., Debenture Redemption Fund Investments are as follow :, (i) ` 6,00,000, 9% debenture in ` 5,00,000., (ii) ` 4,00,000, 8% Govt. Loan in ` 5,00,000., On above date investments were sold as following :, 9% debenture at 10% discount, 8% Govt. loan at 20% premium. The debenture were, redeemed., Prepare Debenture Redemption Fund Account and Debenture Redemption Fund, Investment Account., Solution, In the Books of Nitin Ltd., Dr., Debenture Redemption Fund Account, Cr., Date, , Particulars, , `, , Date, , Particulars, , 2016, 2016, Mar. 31 To Capital Reserve A/c, Mar. 31 By Balance b/d, (Transfer of Profit on Sale, Mar. 31 By Debenture Redemption, of Investment), 20,000, Fund Investment A/c, Mar. 31 To General Reserve A/c, (Profit on Sale), (Transfer of Bal. fig.), 10,00,000, 10,20,000, , `, , 10,00,000, , 20,000, 10,20,000, , Debenture Redemption Fund Investment Account, , Dr., Date, , Particulars, , `, , Date, , Particulars, , Cr., `, , 2016, 2016, Mar. 31 To Balance b/d :, `, Mar. 31 By Bank A/c :, `, 9% Debenture 5,00,000, 9% Deb., 5,40,0001, 8% Govt. Loan 5,00,000 10,00,000, 8% Govt. Loan 4,80,0002 10,20,000, To Debenture Redemption, Fund A/c (Profit on Sale, transferred), 20,0003, 10,20,000, 10,20,000, Working Notes :, , `, 6,00,000, 60,000, 5,40,000, , 1. Face Value, Less : Discount 10%, , 3. Amount Realised, Less : Cost, , Profit, , 2. Face Value, Add : Premium 20%, , `, 4,00,000, 80,000, 4,80,000, , `, 10,20,000, 10,00,000, 20,000, , Illustration 14 (Sinking Fund), The following balances appeared in the books of a company on 1st January, 2017 :, `, , 12% Debentures, 12% Debenture Sinking Fund, 12% Debenture Sinking Fund Investment, (Represented by 10%, ` 4,00,000 Secured Bonds of Govt. of India), , 184, , 4,00,000, 3,00,000, 3,00,000
Page 671 :
Redemption of Debentures, Annual contribution to the sinking fund was ` 60,000 made on 31st December each, year. On 31st December, 2017 Balance at Bank was ` 3,00,000 after receipt of interest on, debenture sinking fund investment. The company sold the investment at a loss of 18% and, the debentures were paid off. You are required to prepare the following accounts for the year, 2017 :, (i) Debentures Account,, (ii) Debenture Sinking Fund Account,, (iii) Debenture Sinking Fund Investment Account,, (iv) Bank Account., (N.C.E.R.T.), Solution, Dr., 12% Debentures Account, Cr., Date, , Particulars, , Amount, , Date, , Particulars, , Amount, , `, , 31.12.2017 To Debentureholders A/c, , `, , 4,00,000, 4,00,000, , 1.1.2017, , By Balance b/d, , 4,00,000, 4,00,000, , Debentureholders Account, , Dr., Date, , Particulars, , Amount, , Date, , Cr., Particulars, , `, , 31.12.2017 To Bank A/c, , Amount, `, , 4,00,000 31.12.2017 By 12% Debentures A/c, , 4,00,000, , 4,00,000, , 4,00,000, , Debenture Sinking Fund Account, , Dr., Date, , Particulars, , Amount, , Date, , Particulars, , `, , 31.12.2017 To Capital Reserve A/c, (Transfer of Profit on, Sale), 31.12.2017 To General Reserve A/c, (Transfer), , 4,00,000, , Amount, `, , 1.1.2017 By Balance b/d, 28,000, , Cr., , 3,00,000, , 31.12.2017 By Bank A/c (Interest, @ 10% on ` 4,00,000), , 40,000, , 31.12.2017 By Surplus in Statement, of Profit & Loss, , 60,000, , 31.12.2017 By Debenture Sinking, Fund Investment A/c, , 28,000, , 4,28,000, , 4,28,000, , Debenture Sinking Fund Investment Account, , Dr., Date, , Particulars, , Amount, , Date, , Particulars, , `, , 1.1.2017 To Balance b/d (Represented by 10% of, ` 4,00,000 Secured, Bonds), 31.12.2017 To Debenture Sinking, Fund A/c (Profit on, Sale), , Cr., Amount, `, , 31.12.2017 By Bank A/c (82% of, ` 4,00,000), , 3,28,000, , 3,00,000, 28,000, 3,28,000, , 3,28,000, , 185
Page 672 :
SBPD Publications Accountancy (XII), Bank Account, , Dr., Date, , Particulars, , Amount, , Date, , Cr., Particulars, , Amount, , `, , 31.12.2017 To Balance b/d, 31.12.2017 To 12% Debenture Sinking Fund Invest. A/c, 1.1.2018 To Balance b/d, , `, , 3,00,000 31.12.2017 By Debentureholders A/c, By Balance c/d, 3,28,000, 6,28,000, 2,28,000, , 4,00,000, 2,28,000, 6,28,000, , Illustration 15, The Balance Sheet of Sun Ltd. disclosed the following information on 1.1.2017 : `, 16% Debentures, 10,00,000, Debenture Redemption Fund, 8,00,000, 15% Debenture Redemption Fund Investment, 8,00,000, The annual contribution to the debenture redemption fund was ` 80,000 for the year, 2017. The debentures were redeemable on 31.12.2017. On the same date investments were, sold for ` 8,20,000 and the debentures were redeemed. The Bank balance as on 31.12.2017, prior to the receipt of interest was ` 90,000. Prepare 16% Debentures Account, Debenture, Redemption Fund Account, Debenture Redemption Fund Investment Account and Bank, Account for the year ended on 31.12.2017., Solution, In the Books of Sun Ltd., Dr., 16% Debentures Account, Cr., Date, , Particulars, , 2017, Dec. 31 To Bank A/c, , Dr., Date, , Amount, , Date, , `, , 2017, , 10,00,000 Jan. 1, 10,00,000, , Particulars, , `, , By Balance b/d, , Debenture Redemption Fund Account, Particulars, , 2017, Dec. 31 To General Reserve A/c, To Capital Reserve, , Amount, , Date, , Particulars, , `, 2017, 10,00,000 Jan. 1 By Balance b/d, 20,000 Dec. 31 By Bank A/c (Interest), , Dec. 31 By Surplus in Statement of, P. & L., Dec. 31 By Debenture Redemption, Fund Investment A/c, 10,20,000, , Dr., Date, , 15% Debenture Redemption Fund Investment Account, Particulars, , 2017, Jan. 1 To Balance b/d, Dec. 31 To Debenture Redemption, Fund A/c, , 186, , Amount, , Date, , Amount, , Particulars, , `, 2017, 8,00,000 Dec. 31 By Bank A/c (Investment, Sold), 20,000, 8,20,000, , 10,00,000, 10,00,000, , Cr., Amount, `, , 8,00,000, 1,20,000, 80,000, 20,000, 10,20,000, , Cr., Amount, `, , 8,20,000, 8,20,000
Page 673 :
Redemption of Debentures, Bank Account, , Dr., Date, , Particulars, , 2017, Dec. 31 To Balance b/d, Dec. 31 To Debenture Redemption, Fund A/c (Interest), Dec. 31 To Debenture Redemption, Fund Investment A/c, , Amount, , Date, , Cr., Particulars, , `, 2017, 90,000 Dec. 31 By 16% Debentures A/c, Dec. 31 By Balance c/d, 1,20,000, , 8,20,000, 10,30,000, , Amount, `, , 10,00,000, 30,000, , 10,30,000, , Non-cumulative Sinking Fund, Under this method, the interest on Sinking Fund Investments do not accumulate in, Sinking Fund. So interest incomes are not re-invested in securities. Only annual, instalments are invested. Interest is simply transferred to Statement of Profit & Loss., The following Journal entry is passed :, Interest on Sinking Fund Investment A/c, Dr., To Statement of Profit & Loss, Under this system, the amount of annual instalment (that is, appropriation from, Statement of Profit & Loss) is more than that of the cumulative system., ❏ Difference between Cumulative Sinking Fund and Non-cumulative Sinking, Fund, There is no basic difference between Cumulative and Non-cumulative Sinking Fund., However, a non-cumulative sinking fund differs from cumulative sinking fund in the, following respects :, (i) In cumulative sinking fund, interest is credited to Sinking Fund Account whereas in, non-cumulative sinking fund, interest is credited to Statement of Profit & Loss., (ii) In cumulative sinking fund, interest is re-invested in securities alongwith annual, instalment while in non-cumulative sinking fund, interest is not invested., (iii) Cumulative sinking fund method is generally adopted by the companies., Non-cumulative sinking fund method is rarely used., Illustration 16 (Redemption of Debentures with Non-cumulative Sinking Fund), On April 1, 2015 a company issued 8,000, 10% Debentures of ` 100 each. Redemption of, these debentures will take place after 4 years. A non-cumulative debenture sinking fund, was created for the redemption of these debentures. Debenture sinking fund investments, were sold for ` 5,80,000 on 31st March, 2019. Before this the Bank balance was ` 2,50,000., Interest received on Debenture Sinking Fund Investments during the year 2016-17,, 2017-18 and 2018-19 respectively was ` 16,000, ` 32,000 and ` 48,000. Prepare necessary, accounts in the books of the company., Solution, 8,000 ´ ` 100 = ` 8,00,000, 8,00,000, Annual Instalment =, = ` 2,00,000, 4, Dr., Debenture Sinking Fund Account, Cr., Date, , Particulars, , 2016, Mar. 31 To Balance c/d, , Amount, , Date, , Particulars, , 2016, `, 2,00,000 Mar. 31 By Surplus in Statement of, Profit & Loss, 2,00,000, , Amount, `, , 2,00,000, 2,00,000, , 187
Page 674 :
SBPD Publications Accountancy (XII), 2017, Mar. 31 To Balance c/d, , 2018, Mar. 31 To Balance c/d, , 2019, Mar. 31 To Debenture Sinking Fund, Investment A/c, To General Reserve A/c, , Dr., Date, 2016, April 1, 2017, April 1, , 2018, April 1, , Particulars, To Bank A/c, , To Balance b/d, To Bank A/c, , To Balance b/d, To Bank A/c, , 2,00,000, 4,00,000, 4,00,000, 2,00,000, 6,00,000, 6,00,000, 2,00,000, 8,00,000, , Amount, , Date, , Particulars, , `, 2017, 2,00,000 Mar. 31 By Balance c/d, 2,00,000, 2018, 2,00,000 Mar. 31 By Balance c/d, 2,00,000, 4,00,000, , 2019, 4,00,000 Mar. 31 By Bank A/c, 2,00,000, By Debenture Sinking, Fund A/c (Loss), 6,00,000, , Cr., Amount, `, , 2,00,000, 2,00,000, 4,00,000, 4,00,000, 5,80,000, 20,000, 6,00,000, , 6% Debentures Account, Particulars, , 2016, Mar. 31 To Balance c/d, 2017, Mar. 31 To Balance c/d, 2018, Mar. 31 To Balance c/d, 2019, Mar. 31 To Bank A/c, , 188, , 2,00,000, , Debenture Sinking Fund Investment Account, , Dr., Date, , 2016, 4,00,000 April 1 By Balance b/d, 2017, Mar. 31 By Surplus in Statement of, Profit & Loss, 4,00,000, 2017, 6,00,000 April 1 By Balance b/d, 2018, Mar. 31 By Surplus in Statement of, Profit & Loss, 6,00,000, 2018, April 1 By Balance b/d, 20,000 2019, 7,80,000 Mar. 31 By Surplus in Statement of, Profit & Loss, 8,00,000, , Amount, `, , Date, , Cr., Particulars, , 2015, , 8,00,000 April 1 By Bank A/c, , Amount, `, , 8,00,000, , 2016, 8,00,000 April 1 By Balance b/d, , 8,00,000, , 2017, 8,00,000 April 1 By Balance b/d, , 8,00,000, , 2018, 8,00,000 April 1 By Balance b/d, , 8,00,000
Page 675 :
Redemption of Debentures, Bank Account, , Dr., Date, , Particulars, , Amount, , 2019, Mar. 31 To Balance b/d, To Debenture Sinking Fund, Investment A/c, , Cr., , Date, , Particulars, , Amount, , 2019, 2,50,000 Mar. 31 By 6% Debentures A/c, By Balance c/d, 5,80,000, 8,30,000, `, , `, , 8,00,000, 30,000, 8,30,000, , 6.3.2 Redemption by Annual Drawings/by Draw of Lots, Under this method, redemption of debentures is made by drawing lots or by annual, instalments as per lot system., Accounting Entries : In this method, accounting entries for redemption are the same, as stated in the case of redemption of debentures in lump-sum method., ● The debentures may be redeemed either at par or at a premium or at discount., ● As per the SEBI rules, DRR must be created out of profit equivalent to 25% of, debenture issued before commencing redemption of debentures under this method., If on the redemption of debentures under this method any profit is earned, Debentures, Account is debited and Profit on Redemption of Debentures Account is credited. In other words,, (i) On Profit of Redemption :, Debentures A/c, Dr. (with Amount of Profit), To Profit on Redemption of Debentures A/c, (For profit made on redemption of debentures), , (ii) For transfer of Profit on Redemption to Capital Reserve :, Profit on redemption on debentures is transferred to Capital Reserve by passing the, following entry :, Profit on Redemption of Debentures A/c Dr., To Capital Reserve A/c, (For transfer of profit to Capital Reserve A/c), , Illustration 17(A) (Redemption by drawing of lot), Bansal Ltd. redeemed ` 1,60,000, 10% debentures out of profits by drawing of lot on, 31.3.2020. Pass necessary Journal entries., Solution, In the Books of Bansal Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , 2019, Mar. 31 Surplus in Statement of Profit & Loss, To Debenture Redemption Reserve A/c, , L.F., , Amount, `, , Dr., , Amount, `, , 1,60,000, 1,60,000, , (Being the transfer of profits to DRR A/c), , 2019, April 30 Debenture Redemption Investment A/c, To Bank A/c, , Dr., , 24,000, 24,000, , (Being investment made @ 15% of the face value of debentures), , 2020, Mar. 31 Bank A/c, To Debenture Redemption Investment A/c, , Dr., , 24,000, 24,000, , (Being investment encashed), , 189
Page 676 :
SBPD Publications Accountancy (XII), 10% Debentures A/c, To Debentureholders A/c, , Dr., , 1,60,000, 1,60,000, , (Being amount due to debentureholders), , Debentureholders A/c, To Bank A/c, , Dr., , 1,60,000, 1,60,000, , (Being payment made to debentureholders), Note : The balance of Debenture Redemption Reserve, after all the debentures are redeemed, will be transferred to, General Reserve Account., , Illustration 17(B), Krishna Ltd. had outstanding 20,000, 9% debentures of ` 100 each on 1st April, 2019., These debentures were redeemable at a premium of 10% in two equal instalments starting from, 31st March, 2020. The company had a balance of ` 4,00,000 in Debenture Redemption Reserve on, 31st March, 2019., Pass necessary journal entries for redemption of debentures in the books of Krishna, Ltd. for the year ended 31st March, 2020., Solution, , In the Books of Krishna Ltd., Journal Entries, , Date, , Dr., , Particulars, , 2019, April 1 Surplus in Statement of Profit & Loss, To Debenture Redemption Reserve A/c, , L.F., Dr., , Amount, `, , 1,00,000, , Cr., Amount, `, , 1,00,000, , (Being DRR created to made 25% of the nominal value of debentures), , April 30 Debenture Redemption Investment A/c, To Bank A/c, , Dr., , 1,50,000, 1,50,000, , (Being investment made equal to 15% the nominal value of debentures,, i.e., ` 10,00,000 × 15/100), , 2020 On Redemption :, Mar. 31 9% Debentures A/c, Premium on Redemption of Debentures A/c, To Debentureholders A/c, , Dr., , 10,00,000, , Dr., , 1,00,000, 11,00,000, , (Being amount due on redemption), , Debentureholders A/c, To Bank A/c, , Dr., , 11,00,000, 11,00,000, , (Being payment made to debentureholders), Note :, , Section 71(4) of the Companies Act, 2013 read with Rule 18(7) of the Companies (Share capital and, debentures) Rule, 2014 requires that a company should invest at least 15% of the nominal value of, debentures to be redeemed by 31st March of next year in specified securities on or before 30th April of, current year. In the present case, the company has made investment on 30th April, 2017 which, remains invested till the last lot is redeemed, i.e., 31.3.2019., , Illustration 18 (Payment in Instalments), Skanda Ltd. has 30,000, 10% Debentures of ` 100 each due for redemption in three, equal instalments starting from 31st March, 2018. The company complied with the, requirements with respect to investment in Government Securities on 30th April, 2017., Debenture Redemption Reserve has a balance of ` 5,00,000 on that date. Record necessary, Journal entries., , 190
Page 677 :
Redemption of Debentures, Solution, , In the Books of Skanda Ltd., Journal Entries, , Date, , Dr., , Particulars, , 2017, April 30 Debenture Redemption Investment A/c, To Bank A/c, , (` in lakh), Cr., , L.F. Amount, `, , Dr., , Amount, `, , 1.5, 1.5, , (Being investment made in Govt. Securities equal to 15% of face value of, debentures to be redeemed, i.e ., 10,00,000 ´ 15/100 = ` 1,50,000), , 2018, Mar. 31 Interest on Debentures A/c (Note 1), To Bank A/c, , Dr., , 3.0, , Dr., , 3.0, , Mar. 31 Surplus of Profit and Loss Statement, To Debenture Redemption Reserve A/c (Note 3), , Dr., , 2.5, , Mar. 31 10% Debentures A/c, To Debentureholders A/c, , Dr., , 10.0, , Dr., , 10.0, , Dr., , 2.0, , Mar. 31 Statement of Profit and Loss, To Interest on Debentures A/c, , Dr., , 2.0, , Mar. 31 10% Debentures A/c, To Debentureholders A/c, , Dr., , 10.0, , Dr., , 10.0, , Dr., , 1.5, , Dr., , 1.0, , Statement of Profit and Loss, To Interest on Debentures A/c, , Dr., , 1.0, , 10% Debentures A/c, To Debentureholders A/c, , Dr., , 10.0, , 3.0, , (Being interest paid on debentures), , Mar. 31 Statement of Profit and Loss, To Interest on Debentures A/c, , 3.0, , (Being interest transferred to Statement of P. & L.), , (Being transfer of profit to DRR A/c), , 2.5, , 10.0, , (Being payment due on redemption), , Mar. 31 Debentureholders A/c, To Bank A/c, , (Being payment made to debentureholders), , 2019, Mar. 31 Interest on Debentures A/c (Note 4), To Bank A/c, (Being interest paid on debentures), , (Being interest transferred to Statement of P. & L.), , 10.0, , 2.0, 2.0, 10.0, , (Being payment due to debentureholders on redemption), , Mar. 31 Debentureholders A/c, To Bank A/c, , (Being payment made to debentureholders), , 2020, Mar. 31 Bank A/c, To Debenture Redemption Investment A/c, (Being investment encashed), , Mar. 31 Interest on Debentures A/c (Note 5), To Bank A/c, , 10.0, , 1.5, 1.0, , (Being interest on debentures paid), , (Being interest transferred to Statement of Profit and Loss), , (Being payment due to debentureholders on redemption), , 1.0, 10.0, , 191
Page 678 :
SBPD Publications Accountancy (XII), Debentureholders A/c, To Bank A/c, , Dr., , 10.0, , (Being payment made to debentureholders), , Debenture Redemption Reserve A/c, To General Reserve A/c, , Dr., , 7.5, , 10.0, 7.5, , (Being balance of DRR transferred to General Reserve A/c), Working Notes :, 1. Interest = (30,000 ´ 100) ´, 2. DRR = 30,00,000 ´, , 10, = 30,00,000 ´ 10/100 = ` 3,00,000., 10, , 25, = ` 7,50,000., 100, , 3. 25% of ` 30,00,000, Less : Existing DRR, , ` 7,50,000, ` 5,00,000, `, , 2,50,000, , 4. Debentures due after 1st Redemption = ` 30,00,000 – 10,00,000 = ` 20,00,000, 10, Interest = 20,00,000 ´, = ` 2,00,000., 100, 5. Debentures due after 2nd Redemption = ` 20,00,000 – 10,00,000 = ` 10,00,000, 10, Interest = 10,00,000 ´, = ` 1,00,000., 100, Note : In case of redemption in instalments, investment is made for first instalment and it remains invested till, the last investment. In this question, the company has made investment on 30.4.2017. It remains invested, till the last instalment. Hence, it will be encashed on 31.3.2020., , Illustration 19 (Payment in Instalments), On 1-1-2011 P Ltd. issued 5,000, 10% Debentures of ` 100 each at a premium of 10%,, interest being payable in two half-yearly instalments, i.e., on 30th June and 31st December, every year. These Debentures are to be redeemed in three years starting from 31-12-2017, and drawing lots for ` 1,00,000, ` 2,00,000 and ` 2,00,000 respectively. Investment was made, in fixed deposit of the Bank as per Companies (Share Capital and Debentures) Rules, 2014., Pass necessary Journal entries at the time of issue and redemption. Ignore entries for, payment of interest., Solution, In the Books of P Ltd., Journal Entries, Dr., Cr., Date, 2011, Jan. 1, , Particulars, , L.F., , Amount, `, , Bank A/c, To Debenture Application & Allotment A/c, , Dr., , Amount, `, , 5,50,000, 5,50,000, , (Being receipt of application money on 5,000 debentures), , Debenture Application & Allotment A/c, To 10% Debentures A/c, To Securities Premium A/c, , Dr., , 5,50,000, 5,00,000, 50,000, , (Being transfer of application money to 10% Debentures A/c), , 2017, April 30 Debenture Redemption Investment A/c, To Bank A/c, (Being investment made equal to 15% of ` 1,00,000), , 192, , Dr., , 15,000, 15,000
Page 679 :
Redemption of Debentures, Dec. 31 Surplus in Statement of Proft & Loss, To Debenture Redemption Reserve A/c, , Dr., , 1,25,000, 1,25,000, , (Being transfer of profits to DRR), , Dec. 31 10% Debentures A/c, To Debentureholders A/c, , Dr., , 1,00,000, 1,00,000, , (Being the amount due on redemption), , Dec. 31 Debentureholders A/c, To Bank A/c, , Dr., , 1,00,000, 1,00,000, , (Being redemption of ` 1,00,000 debentures), , Bank A/c, To Debenture Redemption Investment A/c, , Dr., , 15,000, 15,000, , (Being Debenture Redemption Investment realised), , 2018, April 30 Debenture Redemption Investment A/c, To Bank A/c, , Dr., , 30,000, 30,000, , (Being Investment Made equal to 15% of Deb. Payable in F.D.), , Dec. 31 Bank A/c, To Debenture Redemption Investment A/c, , Dr., , 30,000, 30,000, , (Being Investment Realised), , 2018, Dec. 31 10% Debentures A/c, To Debentureholders A/c, , Dr., , 2,00,000, 2,00,000, , (Being the amount due on redemption), , Dec. 31 Debentureholders A/c, To Bank A/c, , Dr., , 2,00,000, 2,00,000, , (Being payment made to debentureholders), , 2019, April 30 Debenture Redemption Investment A/c, To Bank A/c, , Dr., , 30,000, 30,000, , (Being Investment made in F.D. equal to 15% of ` 2,00,000, Redemption Debenture), , Dec. 31 Bank A/c, To Debenture Redemption Investment A/c, , Dr., , 30,000, 30,000, , (Being investment encashed before redemption of last instalment), , 10% Debentures A/c, To Debentureholders A/c, , Dr., , 2,00,000, 2,00,000, , (Being the amount due on redemption of last instalment), , Dec. 31 Debentureholders A/c, To Bank A/c, , Dr., , 2,00,000, 2,00,000, , (Being payment made to debentureholders), , Dec. 31 Debenture Redemption Reserve A/c, To General Reserve A/c, , Dr., , 1,25,000, 1,25,000, , (Being DRR transferred to General Reserve on the redemption of all, debentures), , 6.3.3 Redemption by Purchase of Own Debentures in the Open Market, If a company is authorised by its Articles of Association, it may redeem debentures by, purchasing its own debentures from the open market. Debentures may be purchased by the, , 193
Page 680 :
SBPD Publications Accountancy (XII), company either (i) for immediate cancellation, or (ii) as an investment to be cancelled in, future when required., Further, debentures may be purchased :, (i) On due date of interest, or (ii) on any date other than due date of interest., Meaning of Redemption by Purchase in the Open Market, When a company purchases its own debentures in the open market for the purpose of, cancellation or as an investment, such an act of purchasing and cancelling the debentures, refers to redemption by purchase in the open market., Objects of Purchasing Own Debentures, (1) For immediate cancellation of debentures,, (2) For keeping as investment., Advantages of Redemption by Purchase in the Open Market, 1. Reduction in Interest Burden : Purchasing of debentures in the open market, enables the company to reduce the interest burden., 2. Savings equal to the Amount of Discount : Purchasing the debentures in the, open market, when they are available at discount, enables the company to save money equal, to the amount of discount., 3. Savings equal to Premium Payable on Redemption : Purchasing the, debentures in the open market also enables the company to save money equal to the, premium, which otherwise would have been payable on regular redemption in case of, debentures redeemable at premium., Creation of Debenture Redemption Reserve, It is obligatory for all the companies issuing debentures to create a ‘Debenture, Redemption Reserve' upto at least 25%/10% of outstanding Debenture (As per New, Amendment Rule) of the amount of debentures issued before the commencement of, redemption of debentures., 1., 2., 3., 4., , Important Note, Creation of DRR is necessary if the debentures have been purchased for, cancellation., Unless otherwise stated in the question, it is assumed that the company has, sufficient amount (i.e. 25% of redemag debentures) in Debenture Redemption, Reserve (DRR) before initiating the purchase of Debentures for cancellation., It is also assumed that required investment (i.e. 15% of value of debentures to be, redeemed) has been made., Profit on cancellation of debentures is capital profit., , When this Method is Used ?, Generally, the company is interested to purchase its own debentures., ● When the interest rate on the debentures is considerably higher than the current, market rate of interest., ● When they are quoted below par i.e., at a discount on the Stock Exchange., Purchase of debentures in this way will reduce the liability of the company against, debentures. Cancellation of debentures will also mean their redemption., ❏ Accounting Treatment, (A) Journal Entries for Purchase of Debentures for Immediate Cancellation, of Debentures :, (1) When Debentures are purchased and cancelled at par :, (i) For purchase of Own Debentures :, Own Debentures A/c, Dr. (with Purchase Price of, Own Debentures), To Bank A/c, , 194
Page 681 :
Redemption of Debentures, (ii) On cancellation of Own Debentures :, Debentures A/c, Dr. (with Nominal Value), To Own Debentures A/c, (with Cost of Own Debentures), Alternatively, Note : Above two entries may be combined into one entry which is as follows :, When Debentures are purchased and cancelled at Par :, Debentures A/c, Dr.(with Purchase Price including, Brokerage, if any), To Bank A/c, (For debentures cancelled by purchasing from the open market), , (iii) On creation of Debenture Redemption Reserve :, Surplus in Statement of Profit and Loss Dr., To Debenture Redemption Reserve A/c, (2) When Debentures are purchased at a price below Nominal Value of Debentures (i.e.,, purchase at discount) :, (i) When Debentures are Purchased :, Own Debentures A/c, Dr. (with payment made for, purchase of Own Debentures), To Bank A/c, (ii) For cancellation of Own Debentures :, Debentures A/c, Dr. (with Nominal Value), To Own Debentures A/c, (with Purchase Price), To Profit on Cancellation of Debentures A/c, (Being own debentures cancelled and profit on cancellation), , Alternatively, Note : Composite Entry for above two entries may be as follows :, Purchase and cancellation of Debentures :, Debentures A/c, Dr. (Nominal Value), To Bank A/c, (Actual Payment), To Profit on Cancellation of Debentures A/c, Or, To Profit on Redemption of Debentures A/c, (For debentures cancelled by purchasing from the open market), , (iii) For transferring Profit on Redemption to Capital Reserve :, Profit on Redemption of Debentures A/c, Dr., To Capital Reserve A/c, (For transfer of profit on redemption to Capital Reserve A/c), , (3) For Purchase at Premium and Cancellation of Debentures :, (a) Debentures A/c, Dr., Loss on Redemption on Debentures A/c, Dr., To Bank A/c, (For debentures cancelled by purchasing from the open market at premium), , (b) For transferring Loss on Redemption to Capital Reserve A/c :, Capital Reserve A/c or Securities Premium A/c, Dr., To Loss on Redemption of Debentures A/c, , Note : Profit on redemption of debentures or profit on cancellation of debentures is a capital profit. So it should, be transferred to Capital Reserve Account., Similarly loss on redemption of debentures is a capital loss. Hence, it should be transferred to Capital, Reserve Account or it may be written-off against Securities Premium Account., , (4) On creation of Debenture Redemption Reserve :, Surplus in Statement of Profit & Loss, To Debenture Redemption Reserve A/c, , Dr., , 195
Page 682 :
SBPD Publications Accountancy (XII), Illustration 20 (Redemption by Purchase of Own Debentures in the Open, Market), LCM Ltd. purchased for cancellation its own 10,00,000, 9% Debentures of ` 500 each at, ` 480 each. Record necessary Journal entries., Solution, In the Books of LCM Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , Amount, , Amount, , `, , `, , Own Debentures A/c, To Bank A/c, , Dr., , 48,00,00,000, , 9% Debentures A/c, To Own Debentures A/c, To Profit on Cancellation of Debentures A/c, , Dr., , 50,00,00,000, , Profit on Cancellation of Debentures A/c, To Capital Reserve A/c, , Dr., , 2,00,00,000, , (For purchased its own debentures @ ` 480 each), , (For own debentures purchased being cancelled), , 48,00,00,000, , 48,00,00,000, 2,00,00,000, , (For profits on cancellation of debentures transferred to, Capital Reserve), , 2,00,00,000, , Illustration 21, X Ltd. decided to redeem ` 25,000, 12% debentures. It purchased ` 20,000 debentures in, the open market at ` 98.50 each, the expenses being ` 100, and redeemed the balance of, ` 5,000 debentures by draw of lots. Journalise., (N.C.E.R.T.), Solution, In the Books of X Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , Debenture Redemption Investment A/c, To Bank A/c, , Dr., , 3,750, , Amount, `, , 3,750, , (Being investment made @ 15% of the face value of debentures to, be redeemd), , Bank A/c, To Debenture Redemption Investment A/c, , Dr., , 3,750, , Own Debentures A/c, To Bank A/c (200 ´ ` 98.50 + ` 100 Expenses), , Dr., , 19,800, , 12% Debentures A/c, To Own Debentures A/c, To Profit on Redemption of Debentures A/c, , Dr., , 3,750, , (Being Investment encashed), , 19,800, , (Being purchase of 200 debentures @ ` 98.50 plus ` 100 for, expenses), , 20,000, , 19,800, 200, , (Being cancellation of own debentures), , 12% Debentures A/c, To Debentureholders A/c, , Dr., , 5,000, 5,000, , (Being payment due on redemption of debentures by drawing lot), , Debentureholders A/c, To Bank A/c, (Being payment made to debentureholders), , 196, , Dr., , 5,000, 5,000
Page 683 :
Redemption of Debentures, Profit on Redemption of Debentures A/c, To Capital Reserve A/c, , Dr., , 200, 200, , (Being transfer of profit on redemption to Capital Reserve A/c), Working Notes :, 1.It has been assumed that the company has sufficient funds in the DRR A/c. Hence, no further entry i s, required., 2.Entries for Debenture Redemption Investment should be passed when in addition to purchase in the, open market, debentures are redeemed by draw of lots., , Illustration 22 (Redemption of Debentures by Purchase in the Open Market for, Immediate Cancellation), On 1.1.2012 Seemanchal Ltd. issued 4,000, 12% debentures of ` 100 each at par. Of, these debentures of the face value of ` 1,00,000 are to be redeemed every year commencing, from the end of the year 2016, either by purchase or by drawing at par at the company’s, option. The company created DRR and invested the required amount as per law., On 31.12.2016 the company purchased debentures of the face value of ` 60,000 at ` 95, and ` 40,000 at ` 90 for immediate cancellation. The expenses of purchases amounted to, ` 1,000., Make necessary Journal entries in 2016 for redemption of debentures., Solution, In the Books of Seemanchal Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , 2016, April 30 Debenture Redemption Investment A/c, To Bank A/c, , L.F. Amount, `, , Dr., , Amount, `, , 15,0001, 15,000, , (Being investment made @ 15% of the face value of debentures to be, redeemed), , Dec. 31 Surplus in Statement of Profit & Loss, To Debenture Redemption on Reserve A/c, , Dr., , 1,00,000, 1,00,000, , (Being transfer of profit equal to 25% of face value of redeemable, debentures), , Dec. 31 Own Debentures A/c, To Bank A/c, , Dr., , 94,0002, 94,000, , (Being purchase of own debentures ` 60,000 @ ` 95 + ` 40,000 @ ` 90 plus, ` 100 expenses for purchase), , Dec. 31 12% Debentures A/c, To Own Debentures A/c, To Profit on Redemption of Debentures A/c, , Dr., , 1,00,000, 94,000, 6,000 3, , (Being cancellation of own debentures), , Dec. 31 Profit on Redemption of Debentures A/c, To Capital Reserve A/c, , Dr., , 6,000, 6,000, , (Being transfer of profit on redemption to Capital Reserve A/c), Working Notes :, 1. ` 1,00,000 ´ 15/100 = ` 15,000., 2. Amount Paid for the Purchase of Debentures :, 600 Debentures ´ ` 95, 400 Debentures ´ ` 90, Add : Expenses, 3. Profit on Redemption :, Face Value of Debentures, Less : Amount Paid, , Total Payment, , `, 57,000, 36,000, 93,000, 1,000, 94,000, , Profit on Redemption, , 1,00,000, 94,000, 6,000, , 197
Page 684 :
SBPD Publications Accountancy (XII), 4.The company has decided to redeem debentures of ` 1,00,000 every year. Hence, the amount of, investment ` 15,000 will remain invested till the last instalment. It will be encashed in the last year., , (B) Purchase of Own Debentures as Investment : Sometimes own debentures are, purchased by the company to be held as investment. In future, such debentures may be sold, in the market in case the company is in the need of additional funds. Such debentures may, be cancelled even. When a company purchases its own debentures as investment, an, account named ‘‘Investment in Own Debentures Account’’ is debited instead of ‘‘Own, Debentures Account’’., Reasons for Purchasing Own Debentures as Investment, When a company has surplus funds, instead of investing these funds in the securities of, other companies, it buys its own debentures as investment. The reasons are as under :, 1. Sometimes, the own debentures are available in the open market at less than the, nominal or face value., 2. It would be saving the interest which would otherwise have been payable on such, debentures., 3. Such debentures are kept alive and can again be sold off in the market, when their, price rises., ❏ Accounting Treatment, (i) When Own Debentures are purchased :, Investment in Own Debentures A/c, Dr. (with actual amount paid), To Bank A/c, (For purchase of own debentures is investment), Notes : 1. It should be noted that profit or loss on the purchase of such debentures is not recorded at the time of, purchase, because in this case, the company purchases its own debentures as an asset and profit or, loss arises on the purchase of asset., 2. However, profit or loss on cancellation or re-sale of own debentures will be recorded., , (ii) When Own Debentures are sold at Par :, Bank A/c, To Investment in Own Debentures A/c, , Dr., , (For own debentures sold), , (iii) When Own Debentures are sold resulting in Profit :, Bank A/c, Dr. (with Sale Price of Own, Debentures, To Investment in Own Debentures A/c, (with Cost), To Profit on Sale of Own Debentures A/c, (excess of Sale Price, over Cost), (For sale of own debentures and profit earned), , (iv) When Own Debentures are sold resulting in Loss :, Bank A/c, Dr., Loss on Sale of Own Debentures A/c, Dr. (excess of Cost over, Sale Price), To Investment in Own Debentures A/c, (For sale of own debentures and loss sustained), Note : When ‘Own Debentures’ are sold, the profit earned or loss sustained, if any, is treated as revenue profit, or revenue loss, as the case may be., , Hence, profit or loss on sale of investments is transferred to Statement of Profit and Loss., (v) On transfer of Profit/Gain on Sale of Investments :, Profit/Gain on Sale of Investments A/c, Dr., To Statement of Profit and Loss, Or, On transfer of Loss on Sale of Investments :, Statement of Profit and Loss, Dr., To Loss on Sale of Invesments A/c, , 198
Page 685 :
Redemption of Debentures, (vi) On Cancellation of Own Debentures later on :, (A) When Own Debentures are cancelled at No Profit/No Loss :, Debentures A/c, Dr. (with Nominal Value), To Investment in Own Debentures A/c, (For own debentures cancelled), , (B) When Own Debentures are cancelled and Profit is earned :, Debentures A/c, Dr. (Nominal Value), To Investment in Own Debentures A/c, (Purchase Price/Cost), To Profit on Cancellation of Debentures, A/c, (with Gain on cancellation), (For own debentures cancelled and profit earned), , (C) When Own Debentures are cancelled and Loss is sustained :, Debentures A/c, Dr. (Nominal Value), Loss on Cancellation of Debentures A/c Dr., To Investment in Own Debentures A/c, (Purchase Price), Notes : 1. Profit on cancellation (or redemption) of own debentures is transferred to Capital Reserve Account., Profit on Cancellation (or Redemption) of, Own Debentures A/c, Dr., To Capital Reserve A/c, 2. Loss on Redemption of Debentures Account may be written-off either from Securities Premium, Account or Profit & Loss Statement, failing the existence of these accounts, against Surplus in, Statement of Profit & Loss., , (vii) Interests accruing on Own Debentures from the Date of Investment to the date, of cancellation or sale need not be paid. Such Interest is transferred to Statement of, P. & L. :, (a) Interest on Debentures A/c, Dr. (with the Amount of Interest), To Interest on Own Debentures A/c, (b) Interest on Own Debentures A/c, Dr., To Statement of Profit & Loss, 1., 2., 3., 4., , Please Remember, When a company purchases its own debentures as an investment and not for, cancellation an account named, ‘‘Investment in own Debentures Account’’ is, debited instead of ‘‘Own Debentures Account.’’, Investment in own debentures A/c is shown in Balance Sheet on Assets side under, the heat ‘‘Investment’’ at purchase price., Profit or loss on sale of investment is transferred to Statement of Profit & Loss., Compliance of provisions of Section 71(4) are not required for purchase and sale of, investment in own debentures but it is essential at the time of cancellation of, debentures., , Illustration 23 (Purchase of Own Debentures as Investment), Madhwan Ltd. purchased 5,000 of its own debentures of ` 1,000 each at ` 990 per, debenture. The debentures were purchased in the open market as investment. Give Journal, entries if these debentures were cancelled two months later., Solution, In the Books of Madhwan Ltd., Journal Entries, Dr., Cr., Date, , Particulars, Investment in Own Debentures A/c, To Bank A/c, , (Being purchase of own debentures 5,000 @ ` 990 each), , L.F., Dr., , Amount, , Amount, , `, , `, , 49,50,000, , 49,50,000, , 199
Page 686 :
SBPD Publications Accountancy (XII), Debentures A/c, To Investment in Own Debentures A/c, To Profit on Cancellation of Debentures A/c, , Dr., , 50,00,000, , Dr., , 50,000, , 49,50,000, 50,000, , (Being investment in own debentures cancelled), , Profit on Cancellation of Debentures A/c, To Capital Reserve A/c, , (Being profit on cancellation of own debentures transferred to Capital, Reserve), , 50,000, , Note : It is assumed that Debenture Redemption Reserve has already been created., , Illustration 24 (Purchase, Sale and Cancellation), A Company had 10,000, 12% Debentures of ` 100 each. On 31st December, 2015 it, purchased 2,000 of its own debentures at ` 95 in the open market and kept them as investment. On 31st December, 2016 half of these debentures were cancelled and the remaining, half were sold at ` 105. The Company prepares its annual accounts on December 31., Required : Give Journal entries for purchase, cancellation and re-sale of the, debentures., Solution, Date, 2015, Dec. 31, , Journal Entries, , Dr., , Particulars, For Purchase of Own Debentures :, Investment in Own Debentures A/c, To Bank A/c, , L.F. Amount, `, , Dr., , 1,90,000, , Dr., , 1,00,000, , Dr., , 5,000, , Dr., , 1,05,000, , Dr., , 10,000, , Cr., Amount, `, , 1,90,000, , (For 2,000 own debentures of ` 100 each purchased at ` 95), , 2016, Dec. 31, , For Cancellation of Debentures :, 12% Debentures A/c, To Investment in Own Debentures A/c, To Profit on Cancellation of Own Debentures A/c, (For cancellation of 1,000 own debentures), , Profit on Cancellation of Own Debentures A/c, To Capital Reserve A/c, (For transfer of profit on cancellation), , For Re-sale of the Debentures :, Bank A/c, To Investment in Own Debentures A/c, To Profit on Sale of Own Debentures A/c, , 95,000, 5,000, , 5,000, , 95,000, 10,000, , (For sale of 1,000 own debentures @ ` 105 per debenture), , Profit on Sale of Own Debentures A/c, To Statement of Profit & Loss, , 10,000, , (For transfer profit on sale of own debentures to P. & L. Statement), , Illustration 25 (Cancellation and Calculation of Interest), Excel Ltd. has 2,00,000, 12% Debentures of ` 100 each outstanding on Jan. 1, 2019. It, purchased ` 5,000 own debentures at ` 94 as an investment on June 30, 2019. It kept these, debentures till December 31, 2019 on which date it cancelled them as it could not sell them., Interest is paid on June 30 and December 31. Give Journal entries., Solution, Working Notes :, , 2, 00, 000, 5,000, = 2, 000. Purchase of Own Debentures =, = 50., 100, 100, 2. Interest on debentures on June 30 will be paid ` 2,00,000 (i.e., on 2000 debentures) and on December 31,, 2019 interest will be paid on 1,950 debentures only., 1. No. of Debentures =, , 200
Page 687 :
Redemption of Debentures, 3. The interest on the debentures purchased and kept for 6 months will be treated both as an expense, ‘‘Interest on Debentures’’ and as an income ‘‘Interest on Own Debentures’’., 4. Amount equal to the amount paid for own debentures will be appropriated to ensure that the redemption, is out of profits., , In the Books of Excel Ltd., Journal Entries, Date, , Dr., L.F., , Particulars, , 2019, June 30 Investment in Own Debentures A/c, To Bank A/c, , Dr., , Amount, `, , 4,700, , (Being 50 own debentures purchased at ` 94 as investment), , June 30 Interest on Debentures A/c, To Debentureholders A/c, , Dr., , 12,000, , Dr., , 12,000, , Debenture Interest A/c, To Debentureholders A/c, , Dr., , 11,700, , Debentureholders A/c, To Bank A/c, , Dr., , 11,700, , Debenture Interest A/c, To Interest on Own Debenture A/c, , Dr., , 300, , 12% Debentures A/c, To Investment in Own Debentures A/c, To Gain on Cancellation of Own Debentures A/c, , Dr., , 5,000, , Gain on Cancellation of Own Debentures A/c, To Capital Reserve A/c, , Dr., , 300, , Cr., Amount, `, , 4,700, 12,000, , (Being interest due for 6 months to debentureholders), , June 30 Debentureholders A/c, To Bank A/c, , 12,000, , (Being interest paid to all debentures), , Dec. 31, , (Being interest due to debentureholders on 1,950 debentures 12% for, 6 months), , (Being interest amount paid to debentureholders), , Dec. 31, , (Being interest on Own Debentures held for 6 months), , Dec. 31, , (Being the cancellation of own debentures), , 11,700, , 11,700, 300, 4,700, 300, 300, , (Being the gain transferred to Capital Reserve), Note : It is assumed that the Company has sufficient amount in the Debenture Redemption Reserve. Hence, no, further entry has been passed in this regard., , 6.3.4 Redemption or Payment by Conversion, This is a popular method of redemption of debentures. Under this method, debentureholders are given the right to exercise the option to convert their debentures into shares or, new class of debentures. But this option is to be exercised on or before the stipulated date or, within a specified period but before the actual date of redemption. An option for converting, their holdings into shares gives debentureholders a privilege to enjoy the right of becoming, the proprietors of the company. It must be noted that at the time of conversion, the company, should ensure that provisions of the Companies Act are not violated in the process of, conversion. New debentures may be issued at par, at premium or at discount. There is,, infact, no prohibition to issue debentures at discount like that of shares which cannot be, issued at discount. But when debentures are convertible into equity or preference shares, the, conversion should be at par or at premium., SEBI'S Guidelines, ❂ When the conversion is to be made at or after 18 months from the date of, allotment but before 36 months, any conversion in part or whole shall be optional, on the part of the shareholders., , 201
Page 688 :
SBPD Publications Accountancy (XII), ❂ The premium amount and the time of conversion shall be fixed at the time of issue., ❂ In case of listed company, if the value of convertible portion exceeds ` 50 lakhs and, , the conversion price was not fixed at the time of issue, the debentureholders will, be given an option of not converting into share., ❂ Conversion shall be made only on receipt of positive consent by the, debentureholder and not on the basis of their negative reply., Important Points, 1., 2., 3., 4., 5., , There is no requirement of creating ‘Debenture Redemption Reserve’ in case of, convertible debentures because no cash flow takes place., In case of partly convertible debentures, DRR is created only for, non-convertible part of the debentures., Investment in specified securities is made only for non-convertible amount of, debentures., As per the Companies Act, non-convertible portion of a debenture cannot be, redeemed by conversion., The debentureholders cannot demand the conversion of the unpaid interest, into shares unless such right is given expressly., Journal Entries, , 1., , On Payment becoming due, (i) at Par, , Debentures A/c (with Nominal Value of Debentures), To Debentureholders A/c, , Dr., , (Being transfer of convertible debentures to Debentureholders A/c), , (ii) at Premium, 2., , On Issue of Shares/Debentures for Redemption :, (i) at Par, , Debentures A/c (Nominal Value), Premium on Redemption of Debentures A/c, To Debentureholders A/c, , Dr., Dr., , Debentureholders A/c, To Share Capital A/c/New Debentures A/c, , Dr., , (Being issue of shares/debentures to debentureholders), , (ii) at Prmeium, , Debentureholders A/c, To Share Capital A/c/New Debentures A/c, To Securities Premium Reserve A/c, , Dr., , Debentureholders A/c, Discount on Issue of Shares/Debentures A/c, To Share Capital A/c/New Debentures A/c, , Dr., Dr., , (Being issue of shares/debentures at premium), , (iii) at Discount, , (Being issue of shares/debentures at discount), , Notes :, 1. It should be noted that those debentureholders who do not opt for conversion will be paid off in cash on, the date of maturity., 2. When the debentures are convertible into shares (or debentures), the conversion process is based on, either conversion ratio or conversion price., 3. In case of redemption by conversion, creation of Debenture Redemption Reserve is not required. So, at the, time of conversion of convertible debentures into shares or debentures no transfer is required to be made, from Surplus in Statement of Profit and Loss to Debenture Redemption Reserve A/c., 4. For conversion of debentures into shares or new debentures, there must be special resolution of the, company which should duly be approved by the Central Government., 5. The debentureholder cannot demand the conversion of the unpaid interest into shares unless such right, is expressly given., ., , 202
Page 689 :
Redemption of Debentures, Illustration 26(A) (Redemption by Conversion into Shares/Debentures at par), Swati Detergents Ltd. issued 90,00,000, 6% debentures of ` 100 each redeemable after, 4 years by converting them into equity shares of ` 10 each. Record Journal entries for issue, and redemption of debentures. Ignore entries for payment of interest., Solution, In the Books of Swati Detergents Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , On the date of Issue :, , Amount, `, , Bank A/c, Dr., To Debenture Application and Allotment A/c, , 90,00,00,000, , Debenture Application and Allotment A/c, To 6% Debentures A/c, , 90,00,00,000, , (For debenture application money received), , Dr., , Amount, `, , 90,00,00,000, , 90,00,00,000, , (For application money transferred to 6% Debentures A/c, consequent upon allotment), , On the date of Redemption :, 6% Debentures A/c, To Debentureholders A/c, , Dr., , 90,00,00,000, , Debentureholders A/c, To Equity Share Capital A/c, , Dr., , 90,00,00,000, , (For amount due to debentureholders on redemption), , 90,00,00,000, , 90,00,00,000, , (For amount due to debentureholders discharge by issue, of equity share), , Illustration 26(B) (Redemption of Debentures Issued at Par by Issue of Shares at, Premium), Rishi & Nishi Ltd. issued 88,00,000, 8% debentures of ` 50 each at a premium of 5% on, July 1, 2014 redeemable at par by conversion of debentures into shares of ` 20 each at a, premium of ` 2 per share on June 30, 2019. Record necessary Journal entries for issue and, redemption of debentures., Solution, In the Books of Rishi & Nishi Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , 2014, July 1 Bank A/c, To Debentures Application A/c, , L.F., , Amount, `, , Dr., , 46,20,00,000, , Dr., , 46,20,00,000, , (For debenture application money received), , July 1 Debenture Application A/c, To 8% Debentures A/c, To Securities Premium Reserve A/c, , (For transfers of debenture application to 8% Debentures, consequent upon allotment), , 2019, June 30 8% Debentures A/c, To Debentureholders A/c, , (For amount due to debentureholders on redemption), , Dr., , 44,00,00,000, , Amount, `, , 46,20,00,000, , 44,00,00,000, 2,20,00,000, , 44,00,00,000, , 203
Page 690 :
SBPD Publications Accountancy (XII), June 30 Debentureholders A/c, To Equity Share Capital A/c, To Securities Premium Reserve A/c, , Dr., , 44,00,00,000, , 40,00,00,000, 4,00,00,000, , (For payment due to debentureholders discharged by, issuing shares at premium), , Illustration 26(C) (Conversion of Debentures Issued at Premium into Shares, at Premium), Dhara Construction Ltd. had an outstanding balance of ` 7,50,000, 8% debentures of, ` 150 each redeemable at a premium of 5%. According to the terms of redemption, the, company redeemed 25% of the above debentures by converting them into shares of ` 10 each, at a premium of 50%. Record the entries for redemption of debentures in the books of Dhara, Construction Ltd., [C.B.S.E., 2013 (Delhi)], Solution, In the Books of Dhara Construction Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , 8% Debentures A/c, Premium on Redemption of Debentures A/c, To Debentureholders A/c, , Dr., Dr., , Debentureholders A/c, To Share Capital A/c, To Securities Premium Reserve A/c, , Dr., , Amount, `, , 1,87,500, 9,375, , (Being amount of 8% debentures transferred to Debentureholders A/c), , 1,96,875, , (Being issue of 13,125 shares at premium by conversion of, debentures), , Amount, `, , 1,96,875, , 1,31,250, 65,625, , Working Notes :, 25, (i), 25% of Total Debentures = ` 7, 50,000´, = ` 1,87,500., 100, Amount Payable, 1,96,875, (ii) No. of Equity Shares to be Issued =, =, = 13,125 Shares., Issue Price per Share, (10 + 5), , Illustration 27(A) (Conversion of Debentures Issued at Par and Redeemable at, Discount), X Ltd. redeemed 9,400, 10% debentures of ` 100 each by converting them into 12% new, debentures of ` 100 each at a discount of 6%. Give necessary Journal entries regarding, redemption in the books of the company., Solution, In the Books of X Ltd., Journal Entries, Dr., Cr., S. No., , 1., , Particulars, 10% Debentures A/c, To Debentureholders A/c, , L.F., Dr., , Amount, `, , 9,40,000, , (Being the amount due to debentureholders on conversion), , 2., , Debentureholders A/c (10,000 ´ ` 94), Dr., Discount on Issue of Debentures A/c (10,000 ´ ` 6) Dr., To 12% Debentures A/c (10,000 ´ 100), , (Being conversion of 9,400, 10% debentures into 12% new, debentures), Working Note :, Amount Payable, No. of Debentures to be Issued =, Issue Price per Debenture, 9,40,000, =, = 10,000 Debentures, 94, , 204, , 9,40,000, 60,000, , Amount, `, , 9,40,000, , 10,00,000
Page 691 :
Redemption of Debentures, Illustration 27(B) (Redemption of Debentures Payable at Premium by Issue of, Shares at a Discount), Tuteja Construction Ltd. had an outstanding balance of ` 1,26,00,000, 9% debentures of, ` 200 each redeemable at a premium of 3%. According to the terms of redemption, the, company redeemed 50% of the above debentures by converting them into shares of 10 each, at a discount of 10%. Record the entries for redemption of debentures in the books of Tuteja, Construction Ltd., (C.B.S.E., A.I., 2013), Solution, In the Books of Tuteja Construction Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , `, , 9% Debentures A/c, , Dr., , 1,26,00,000, , Premium on Redemption A/c, To Debentureholders A/c, , Dr., , 3,78,000, , Debentureholders A/c, , Dr., , 64,89,000, , Discount on Issue of Shares A/c, To Share Capital A/c, , Dr., , 7,21,000, , `, , 1,29,78,000, , (Being payment due on redemption of debentures at, premium), , 72,10,000, , (Being payment of 50% debentures due to debentureholders, by issue of 72,100 shares of 100 each at a discount of, 10%), Working Note :, 50% of ` 1,29,78,000 = ` 64,89,000 payable by issue of shares., Discount 10%, Therefore actual issue price = 100 – 10 = ` 90, New 64,89,000 ¸ 90 = 72,100 shares, Face Value of 72,100 shares @ ` 100 each = ` 72,10,000, 10, Discount = ` 72,10,000 ×, = ` 7,21,000., 100, , Illustration 28 (Conversion of Debentures Issued at Par by Issue of Shares at, Premium), Arjun Plastic Limited redeemed 1,000, 15% debentures of ` 100 each by converting, them into equity shares of ` 10 each at a premium of ` 2.50 per share. The company also, redeemed 500 debentures by utilising ` 50,000 out of profit. Give the necessary Journal, entries., (N.C.E.R.T.), Solution, In the Books of Arjun Plastic Limited, Journal Entries, Dr., Cr., Date, , Particulars, 15% Debentures A/c, To Debentureholders A/c, , L.F., , Amount, , Amount, , `, , `, , Dr., , 1,00,000, , Dr., , 1,00,000, , 1,00,000, , (Being amount due to debentureholders), , Debentureholders A/c, To Equity Share Capital A/c, To Securities Premium Reserve A/c, , 80,000, 20,000, , (Being issue of 8,000 equity shares at a premium of ` 2.50, per share), , 205
Page 692 :
SBPD Publications Accountancy (XII), Surplus in Statement of Profit & Loss, To Debenture Redemption Reserve A/c, , Dr., , 50,000, 50,000, , (Being transfer of profit to Debenture Redemption Reserve), , 15% Debentures A/c, To Debentureholders A/c, , Dr., , 50,000, 50,000, , (Being amount due to debentureholders), , Debentureholders A/c, To Bank A/c, , Dr., , 50,000, , (Being payment made to debentureholders), Note : No. of Equity Shares to be Issued =, , 50,000, , 1,00,000, = 8,000 Shares., 12.50, , Illustration 29 (Conversion of Debentures into Equity Shares at Premium &, Purchase of Own Debentures for Cancellation), Mohan Ltd. redeemed 2,000, 10% Debentures of ` 100 each by converting them into, equity shares of ` 10 each at 25% premium and 5,000, 10% Debentures of ` 100 each by, purchasing from market for immediate cancellation at ` 95 a debenture. Give Journal, entries., Solution, In the Books of Mohan Ltd., Journal Entries, Dr., Cr., S. No., 1., , Particulars, 10% Debentures A/c, To Debentureholders A/c, , L.F., , `, , Dr., , 2,00,000, , Debentureholders A/c, To Equity Share Capital A/c, To Securities Premium Reserve A/c, , Dr., , 2,00,000, , 10% Debentures A/c, To Own Debentures A/c, To Profit on Redemption of Debentures A/c, , Dr., , `, , 2,00,000, , (Being amount due to debentureholders), , 2., , (Being issue of 16,000 equity shares of ` 10 each at a premium, of 25%), , 3., , 5,00,000, , 1,60,000, 40,000, , 4,75,000, 25,000, , (Being purchase of own debentures for cancellation @ ` 95 per, debenture), , 4., , Profit on Redemption of Debentures A/c, To Capital Reserve A/c, , Dr., , 25,000, , 25,000, , (Being transfer of profit on redemption to Capital Reserve), 2,00,000, = 16,000 Shares., 12.50, 1. It is assumed that the company has adequate balance in DRR before commencing the purchase of own, debentures., 2. It is also assumed that the company has also investment of 15% of the face value of debentures to be, redeemed as required by the Companies Rules., , Notes : No. of Equity Shares to be Issued =, , Illustration 30 (Debenture Redeemed at Premium by Converting into Shares, Issued at Premium), Abhay Taneja Constructions Ltd. have an outstanding balance of 45,00,000, 7%, debentures of ` 100 each redeemable at premium of 10%. According to the terms of, redemption, the company redeemed 20% of the above debentures by converting them into, shares of ` 50 each at a premium of 10%. Record Journal entries for the redemption in the, books of Abhay Taneja Constructions Ltd., , 206
Page 693 :
Redemption of Debentures, Solution, Date, , In the Books of Abhay Taneja Constructions Ltd., Journal Entries, Dr., Particulars, , 7% Debentures A/c, Debenture Redemption Premium A/c, To Debentureholders A/c, , L.F., , Cr., , Amount, , Amount, , `, , `, , Dr., Dr., , 45,00,00,000, 4,50,00,000, , Dr., , 9,90,00,000, , 49,50,00,000, , (For payment due to debentureholders on redemption of, debentures at premium), , Debentureholders A/c, To Share Capital A/c, To Securities Premium Reserve A/c, , (For payment of 20% debentures due to debentureholders, discharged by issuing shares at premium), , 9,00,00,000, 90,00,000, , ❏ Redemption of Debentures Originally Issued at Discount by Conversion into, Shares, Debentures can be issued at a discount. But when debentures issued at discount are, converted into shares, the provisions of the Companies Act will have to be considered properly., Discount on issue of debentures must be written off before the maturity. Hence, at the, time of conversion of such debentures into shares, following two situations may emerge., Two Situations, , Conversion before Maturity, , Conversion on Maturity, , 1. Conversion before Maturity : In case of conversion before maturity, net amount, received, i.e., Net of Discount amount (i.e., Face Value – Discount) on issue of such, debentures, should be the amount to be converted into shares and not the face value of such, debentures. Thus the net amount received will be the basis for determining the number of, shares to be issued otherwise it would lead to issue of shares at a discount indirectly without, complying with the provision of the Companies Act,., Accounting Entries, (1) For conversion of debentures originally issued at discount and redeemable at par, into shares before maturity :, (i) For amount due to debentureholders :, Debentures A/c, Dr., (with Face Value), To Discount on Issue of Debentures, (with Discount not, at Discount, yet written off), To Statement of Profit & Loss, (with Discount already, written off), To Debentureholders A/c, (with Net Amount due), (Being amount due to debentureholders on conversion of debentures), , (ii) For Issue of Shares :, Debentureholders A/c, To (Equity) Share Capital A/c, , Dr., , (with Net Amount due), , (Being...... shares of ` ....... each issued to debentureholders on conversion) [See Illust. 31(A)], (2) Conversion of Debentures which were originally issued at discount and are, redeemable at a premium, into shares before maturity :, (i) For amount due to debentureholders :, Debentures A/c, Dr. (with Face Value), , 207
Page 694 :
SBPD Publications Accountancy (XII), Premium on Redemption of Debentures A/c, To Discount on Issue of Debentures A/c, , Dr., , To Statement of Profit & Loss, To Debentureholders A/c, , (with Premium Payable), (with discount of Debentures, not written off), (with Discount already, written off), (with Net Amount), , (Being amount due to debentureholders on conversion of debentures), , (ii) For Issue of Shares :, Debentureholders A/c, To Share Capital A/c, , Dr., , (Being ...... shares of `....... each issued to debentureholders on conversion), Note : If the original term/period of redemption of debentures and actual period of conversion before maturity, are not given, ‘‘Discount on Issue of Debentures A/c’’ should be credited with the total amount of discount, on debentures offered for conversion., , In order to calculate the number of shares to be issued on conversion, the following, formula will be used :, The Amount received on Issue of Debentures, No. of Shares to be Issued =, Issue Price of the Shares, Illustration 31(A) (Conversion of Debentures before Maturity), On 1-4-2014 Ashoka Paper Mills Ltd. issued 2,000, 10% Debentures of ` 100 each at a, discount of 10% redeemable after 5 years. The whole amount is payable on application. It, offered the holders option to get their holdings converted into equity shares of ` 10 each after, 2 years. On 1-4-2016, debentureholders holding 500 debentures exercised their option of, conversion., Give the necessary Journal entries for issue and conversion of debentures., Solution, No. of Equity Shares to be Issued on Conversion of Debentures :, `, Face Value of 500 Debentures to be converted (500 × ` 100), 50,000, Less : Discount @ 10% on Issue, 5,000, Amount received to be Converted into Shares, 45,000, Amount Payable to Debentureholders, No. of Equity Shares to be Issued =, Issue Price of Shares, ` 45,000, =, = 4,500 Shares., ` 10, In the Books of Ashoka Paper Mills Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , 2014 On Issue of Debentures :, April 1 Bank A/c (2,000 × ` 90), To Debenture Application and Allotment A/c, , L.F., Dr., , `, , `, , 1,80,000, 1,80,000, , (Being application money received on 2,000 shares @ ` 90 each), , Debenture Application and Allotment A/c, Discount on Issue of Debentures A/c, To 10% Debentures A/c, , Dr., Dr., , 1,80,000, 20,000, 2,00,000, , (Being issue of 2,000, 10% debentures at a discount of 10%), , On Redemption by Conversion :, 10% Debentures A/c (500 × ` 100), To Discount on Issue of Debentures A/c, , 208, , Dr., , 50,000, 3,000 1
Page 695 :
Redemption of Debentures, To Statement of Profit and Loss, To Debentureholders A/c (500 × ` 90), , 2,000 2, 45,000, , (Being the amount due to debentureholders on conversion of 500, debentures into shares), , Debentureholders A/c, To Equity Share Capital A/c, , Dr., , 45,000, 45,000, , (Being issue of 4,500 Equity Shares of 10 each on conversion), Working Notes :, 3, 1. Discount on Issue of Debentures not written off = 5,000 ´ = ` 3,000., 5, 2, 2. Written off portion in 2 years with Statement of Profit and Loss = 5,000 ´ = ` 2,000., 5, , Illustration 31(B), 4,000, 12% Debentures of ` 100 each issued at a discount of 5% and redeemable at par, after 5 years were converted into Equity Shares of ` 10 each issued at a premium of 25%, before maturity. Journalise the issue and redemption of debentures., Solution, , Journal Entries, , Date, , Dr., , Particulars, On Issue of Debentures :, Bank A/c, To Debenture Application and Allotment A/c, , L.F. Amount, `, , Dr., , Cr., Amount, `, , 3,80,000, 3,80,000, , (Being the amount received on application), , Debenture Application and Allotment A/c, , Dr., , 3,80,000, , Discount on Issue of Debentures A/c, To 12% Debentures A/c, , Dr., , 20,000, 4,00,000, , (Being transfer of application money to 12% Debentures A/c), , On Redemption of Debentures :, 12% Debentures A/c, To Discount on Issue of Debentures A/c, , Dr., , 4,00,000, 20,000, , To Debentureholders A/c, , 3,80,000, , (Being the amount due on redemption of debentures), , Debentureholders A/c, To Equity Share Capital A/c, To Securities Premium Reserve A/c, , Dr., , 3,80,000, 3,04,000, 76,000, , (Being the issue of 30,400 Equity Shares of ` 10 each at a premium of 25%), Working Notes :, , ` 3, 80,000, = 30,400 Equity Shares., ` 10 + 2.5, 2. It has been assumed that no portion of ‘Discount on Issue of Debentures’ has yet been written off., 1. No. of Shares to be Issued =, , Illustration 32, On 1st January, 2019, Ritu Ltd. issued 400, 10% debentures of ` 1,000 each at ` 950., Holders of these debentures have an option to convert their holding to 12% preference, shares of ` 100 each at a premium of ` 25 per share at any time within three years. On 31st, Dec., 2019 one year's interest had accrued on the debentures and remained unpaid and on, that date a holder of 40 debentures notified his intention to exercise his options to Ritu Ltd., Pass necessary Journal entries. Ignore income-tax., , 209
Page 696 :
SBPD Publications Accountancy (XII), Solution, Date, , In the Books of Ritu Ltd., Journal Entries, , Dr., , Particulars, , Cr., , L.F. Amount, , 2019, Jan. 1 Bank A/c, Discount on Issue of Debentures A/c, To 10% Debentures A/c, , Amount, , `, , `, , Dr., Dr., , 3,80,000, 20,000, , Debenture Interest A/c, To Debenture Interest Outstanding A/c, , Dr., , 40,000, , 10% Debentures A/c, To Discount on Issue of Debentures A/c, To 12% Preference Share Capital A/c, To Securities Premium Reserve A/c, , Dr., , 40,000, , Statement of Profit & Loss, To Debenture Interest A/c, , Dr., , 4,00,000, , (Being debentures issued at discount), , Dec. 31, , (Being interest due on debentures), , Dec. 31, , (Being 40 debentures converted into 304* preference shares of ` 100, each at ` 125), , Dec. 31, , 40,000, , (Being debenture interest transferred to Profit & Loss Statement), , 40,000, 2,000, 30,400, 7,600, , 40,000, , * Working Note :, Amount received on 40 debentures @ ` 950 each = ` 38,000, Issue Price of Preference Share = ` 125, ` 38,000, \, No. of Preference Shares to be Issued =, = 304., ` 125, , 2. Conversion of Debentures on Maturity : If debentures issued at discount are, converted into shares on maturity, the debentures will be converted on the basis of Face, Value/Nominal Value of the debentures and not on the basis of net proceeds received on such, debentures. In such cases, provisions of the Companies Act shall not be violated. The reason, is that the discount on issue of debentures has already been written off., Illustration 33 (Redemption of Debentures Originally Issued at Discount), On April 1, 2015 Ankit Hardware Ltd. issued 20,00,000, 9% debentures of ` 100 each at, a discount of 10% redeemable after 5 years by converting them into equity shares. Record, necessary Journal entries for the issue and redemption of debentures., Solution, In the Books of Ankit Hardware Ltd., Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , 2015, For Issue of Debentures :, April 1 Bank A/c, Dr., To Debenture Application and Allotment A/c, , Amount, , Amount, , `, , `, , 18,00,00,000, , 18,00,00,000, , (For debenture application money received), , April 1 Debenture Application and Allotment A/c, Discount on Issue of Debentures A/c, To 9% Debentures A/c, , Dr., Dr., , 18,00,00,000, 2,00,00,000, , Dr., , 20,00,00,000, , 20,00,00,000, , (For debentures issued at discount transferred to 9%, Debentures A/c consequent upon allotment), , 2020, For Redemption of Debentures :, April 1 9% Debentures A/c, To Debentureholders A/c, , (For payment to debentureholders due on redemption), , 210, , 20,00,00,000
Page 697 :
Redemption of Debentures, Debentureholders A/c, To Equity Share Capital A/c, , Dr., , 20,00,00,000, , (For payment due to debentureholders being paid), , 20,00,00,000, , Miscellaneous and Boards' Questions, Illustration 34 (Redemption by Conversion), Alfa Ltd. issued 4,000, 6% debentures of ` 100 each at ` 105. The debentureholders have, the option of converting within one year debentures into 8% Preference Shares of ` 100 each, at ` 125. At the end of the first year the interest on debentures was outstanding. Holders of, 200 debentures decided to take the advantages of the option. Give Journal entries., Solution, In the Books of Alfa Ltd., Journal Entries, Dr., Cr., Date, Date of, Issue, , Particulars, Bank A/c, To 6% Debentures A/c, To Securities Premium Reserve A/c, , L.F. Amount, `, , Dr., , 4,20,000, , Dr., , 24,000, , 20,000, , Amount, `, , 4,00,000, 20,000, , (For debentures issued at premium), , End of, First, Year, , Debenture Interest A/c, To Debenture Interest Outstanding A/c, , End of, First, Year, , 6% Debentures A/c, To 8% Preference Share Capital A/c, To Securities Premium Reserve A/c, , Dr., , Statement of Profit & Loss, To Debenture Interest A/c, , Dr., , 24,000, , (For one year's interest due on debentures), , (For conversion of 200 debentures of ` 100 each into preference, shares at a premium of ` 25 per share), , 24,000, , 16,000, 4,000, , 24,000, , (For interest charged to P. & L. Statement), , 6.4 FAST REVISION, l Meaning of Redemption of Debentures : Redemption of debentures means repayment of the, , amount of debentures to the debentureholders. In short, it means discharging the liability on, account of debentures., l Sources of Funds for the Redemption of Debentures : A company may adopt any one or, more of the following sources in order to provide funds for redemption of debentures :, (i) Redemption Out of Capital : When the debentures are paid out of capital, it is known as, redemption out of capital. In this case, assets of the company are reduced by the amount, paid on debentures. In this case, no Debenture Redemption Reserve is created by the, company. But as per new Guidelines, companies cannot redeem debentures purely out of, capital. At least 25%/10% of outstanding Debenture (As per New Amendment Rule) of the, face value of debentures should be redeemed out of profits., (ii) Redemption Out of Profits : When a part of the retained profits is utilised in the, repayment of debentures, it is said to be out of profits. As per new Guidelines an amount, equal to 25% of the debentures issued should be transferred from Surplus of Statement of, Profit and Loss to newly opened account called Debenture Redemption Reserve Account, before the redemption starts. Debentures can be redeemed purely out of profits., l It is required to create DRR only for non-convertible debentures and non-convertible portion of, partly convertible debentures., l As per Rule 18(7) of the Companies Rules, 2014 every company required to maintain DRR shall, deposit or invest in specified securities on or before 30th April of each year, at least 15% of the, amount of its debentures redeeming (maturing) during the year ending on 31st March of the, next year., , 211
Page 698 :
SBPD Publications Accountancy (XII), l Methods of Redemption of Debentures :, , (i), , Payment in Lump-sum : In this method, debentures are redeemed by paying the whole, amount in one lump-sum to the debentureholders as per the terms and conditions of the, issue. Such, redemption may be made either out of profit or capital., (ii) Payment in Instalment or by Annual Drawings : Under this method, redemption of, debentures is made in instalments at the end of each year during the tenure of the, debentures., (iii) Purchase of Own Debentures in the Open Market : A company, if authorised by its, Articles of Association, can redeem its own debentures by purchasing them in the open, market. After purchasing the debentures, the company may use these debentures as other, investments or may cancell them lateron. Any profit on cancellation of own debentures will, be transferred to Capital Reserve., (iv) Conversion of Debentures : Redemption of debentures by conversion means converting, the existing debentures into shares or new class of debentures. Whenever debentures are, redeemed by conversion, the debentureholders have to apply for the same., , USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6 Marks Questions), , 1., 2., 3., 4., , How are debentures paid ? Explain in brief., What are the various methods of redemption of debentures ? Explain., Set out the accounting procedure for redemption of debentures by the creation of Sinking Fund., Write short notes on :, (i) Redemption of Debentures by Conversion, (ii) Redemption by Sinking Fund Method., 5. Describe the accounting entries relating to redemption of debentures., 6. What is Sinking Fund ? How and why Sinking Fund Account is prepared ?, 7. State the various methods of redemption of debentures. Explain the various Journal entries, under the method of Debenture Sinking Fund., 8. Discuss various methods of redemption of debentures. Describing their characteristics,, explain their effects on books of accounts of the company., (B) Short Answer Type Questions, (3/4 Marks Questions), 1. What do you understand by redemption of debentures ? Write various method of, redemption., (J.A.C. Mock Test Paper), 2. Enumerate the various sources of funds for redemption of debentures., 3. Explain the methods of redemption of debentures :, (a) Out of Capital, (b) Out of Profits., 4. What is meant by redemption of debenture by conversion ?, (N.C.E.R.T.), 5. What is meant by redemption of debentures by ‘Purchase in the Open Market’ ? (N.C.E.R.T.), 6. What is meant by ‘Redemption out of Capital ?, (N.C.E.R.T.), 7. How would you deal with ‘Premium on Redemption of Debentures' ?, (N.C.E.R.T.), 8. What is meant by ‘Redemption out of Profits' ?, , (C) Very Short Answer Type Questions, , (1/2 Marks Questions with Answers), , 1. What is meant by Redemption of Debentures ?, [Ans. Redemption of debentures means repayment of the amount of debentures to the, debentureholders. Debentures are normally redeemed on due date.], 2. Name two sources of finance for redemption of debentures., [Ans. (i) Redemption out of profits. (ii) Redemption out of proceeds of fresh issue of securities.], 3. Name out the ways of redemption of debentures., [Ans. (i) Lump-sum payment method, (ii) Annual drawings method, (iii) Conversion of, debentures method, (iv) Purchase of own debentures.], , 212
Page 699 :
Redemption of Debentures, 4. State the meaning of redemption of debentures out of profits., Or, What is meant by redemption of debentures out of profits ?, [Ans. When debentures are redeemed out of profits, it is referred as redemption out of profits. In, this case an adequate amount of profit is required to be transferred from Surplus of, Statement of Profit & Loss to Debenture Redemption Reserve Account.], 5. What is meant by redemption out of capital ?, (N.C.E.R.T.), [Ans. When adequate profits are not transferred from Surplus of Statement of Profit and Loss to, the Debenture Redemption Reserve Account, at the time of redemption of debentures,, such redemption is said to be out of capital.], 6. State in brief, SEBI guidelines relating to creation of ‘Debenture Redemption, Reserve Account’., [Ans. As per SEBI guidelines, a company is required to create a Debentures Redemption, Reserve Account equivalent to 25% of the amount of debenture issued before redemption, of debentures commences.], 7. Which companies are exempted from creating Debenture Redemption Reserve, Account by the SEBI ?, [Ans. (1) Infrastructure companies are exempted from creating Debenture Redemption Reserve, Account., (2) A company issuing debentures with maturity period of not more than 18 months.], 8. Where is ‘Debenture Redemption Reserve' transferred after the redemption of all, debentures ?, [Ans. When all the debentures are redeemed DRR A/c is closed by transferring it to the General, Reserve Account.], 9. Name any two methods for redemption of debentures., [Ans. (i) Lump-sum method, (ii) Conversion of debentures method.], 10. What is lump-sum payment method of redemption ?, [Ans. Under this method, the total amount of debentures is paid to the debentureholders in, lump-sum on the maturity date.], 11. What is meant by redemption of debentures by conversion ?, [Ans. Under this method, the debentures are redeemed by converting them into shares or other, securities. This is done after the expiry of specific period but before the actual date of, redemption.], 12. What is meant by redemption of debentures by draw of lots ?, Or, What is annual drawing method of redemption of debentures ?, [Ans. Under this method, debentures are redeemed in instalments each year. Debentures to be, redeemed by draw of lots, i.e., lottery. (Lottery is drawn out of outstanding debentures.)], 13. What is meant by redemption of debentures by purchase of own debentures ?, Or, What is meant by redemption by purchase of own debentures in the open market ?, [Ans. Under this method, debentures company discharges the liability of debentures in full or in, a part by purchasing its own debentures in the open market. The debentures purchased in, the open market are either cancelled immediately or kept as investments.], 14. How would you treat profit on cancellation of own debentures purchased by the, company in the open market ?, (N.C.E.R.T.), [Ans. Profit on cancellation of own debentures is a capital profit. It should be used to write off, capital loss, if any, and the balance will be tansferred to capital reserve., Profit on Redemption of Debentures A/c, Dr., To Capital Reserve A/c], , 213
Page 700 :
SBPD Publications Accountancy (XII), 15. What is meant by Debenture Sinking Fund ?, [Ans. Debenture Sinking Fund is a fund which is created out of profits for the redemption of, debentures on maturity date.], 16. Profit on redemption of debentures should be transferred to which account ?, [Ans. It should be transferred to Capital Reserve Account.], 17. Can debentures be redeemed out of capital only ?, [Ans. No. Debentures cannot be redeemed purely out of capital. As per companies (Share Capital, and Debentures) Rules, 2014 and SEBI guidelines, now it is compulsory to create, Debenture Redemption Reserve Account equal to at least 25% of the face value of, debentures issued to be redeemed.], 18. From how much amount ‘Debenture Redemption Reserve’ will be created in case, of a redemption of debentures by conversion ?, [Ans. In case of redemption of debentures by conversion, Debenture Redemption Reserve A/c is, not created. The reason is that the payment is not made in cash.], 19. Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance, Sheet ?, (N.C.E.R.T.), [Ans. Debenture Redemption Reserve is shown in the Balance Sheet under the head ‘‘Reserve, and Surplus’’ (on Liabilities side).], 20. Rupak Ltd. converted its ` 22,00,000, 10% debentures into equity shares of ` 100, each at a premium of 10%, with what amount Equity Share Capital Account, would be credited., ` 22,00,000, [Ans. Equity Share Capital =, ´ 100 = ` 20,00,000.], 100 + 10, , (D) Objective Type Questions, I. Select the correct alternative :, 1. According to Companies (Share Capital and Debentures) Rules, 2014 by which percent of a, Company will have to create Debenture Redemption Reserve of the amount of the, debenture to be redeemed :, (a) 50%, (b) 25%, (c) 70%, (d) 100%, 2. The balance of ‘Sinking Fund Account’ after the redemption of debentures is transferred to :, (a) Profit & Loss Statement, (b) Surplus in Statement of Profit & Loss, (c) General Reserve Account, (d) Sinking Fund Account, 3. Profit on cancellation of own debentures is transferred to :, (a) Statement of Profit & Loss, (b) Surplus in Statement of Profit & Loss, (c) General Reserve Account, (d) Capital Reserve Account, 4. If debentures of ` 1,00,000 were issued for discount ` 10,000, which are redeemable after, four years. Then amount of discount to be written off from Profit & Loss Statement each year, is :, (a) ` 3,000, (b) ` 4,000, (c) ` 2,500, (d) ` 5,000, 5. Loss on Issue of Debenture Account is shown :, (a) On Assets side of Balance Sheet, (b) On Liabilities side of Balance Sheet, (c) On Credit side of P. & L. Statement, (d) None of these, 6. Profit on sale of Sinking Fund Investments is transferred to :, (a) Profit & Loss Statement, (b) General Reserve, (c) Sinking Fund Account, (d) Capital Reserve, , 214
Page 701 :
Redemption of Debentures, 7. Debentures can be redeemed out of :, (a) Profit, (b) Capital, (c) Provision, (d) All of these, 8. Premium on redemption of debentures is a :, (a) Personal A/c, (b) Real A/c, (c) Nominal A/c, (d) Suspense A/c, 9. After the redemption of debentures ‘Debenture Redemption Reserve’ is transferred to :, (a) Capital Reserve Account, (b) General Reserve Account, (c) Statement of Profit & Loss, (d) None of these, 10. Profit on redemption of debenture is transferred to which account ?, (a) Capital Reserve Account, (b) General Reserve Account, (c) Statement of Profit & Loss, (d) Sinking Fund Account, [Ans. 1. (b), 2. (c), 3. (d), 4. (c), 5. (a), 6. (c), 7. (d), 8. (a), 9. (b), 10. (a).], II. State whether the following statements are True or False :, 1. According to Companies (Share Capital and Debentures) Rules, 2014, debentures cannot be, redeemed fully out of capital., 2. A company cannot purchase its own debentures., 3. As per Companies Act, the company shall create a Debenture Redemption Reserve Account, out of Current Profit for redemption of debentures., 4. The balance of Sinking Fund A/c is transferred to General Reserve A/c., 5. Premium on Redemption of Debentures A/c is a personal account., 6. Premium on redemption of debentures can not be written off out of capital profits., 7. A Company can purchase its own debentures., (J.A.C., 2015), [Ans. True, 2. False, 3. True, 4. True, 5. True, 6. False, 7. True.], , PRACTICAL PROBLEMS, ❏ Very Short Answer Type Numerical Questions, 1. Universal Bank issued 20,000, 8% Debentures of ` 100 each at a premium of 8% on April, 30, 2010 redeemable at par on June 30, 2020. The issue was fully subscribed. Debentures, were redeemed on the due date., Pass Journal entries for redemption of Debentures., [Ans. Payment to Debentureholders ` 20,00,000], 2. A Company has power in its articles to purchase out of profits its own debentures stock in, the open market for cancellation. On 1st January, 2020 the company applied ` 3,80,000 for, the purchase of its own debentures @ 95% and cancelled them immediately. Show Journal, entries to record the above., [Ans. Profit on Cancellation transferred to Capital Reserve ` 20,000], 3. Y Ltd. redeemed 4,800, 12% debentures of ` 100 each which were issued at par, redeemable, at 110 per cent by converting them into equity shares of ` 10 each issued at a discount of, 4%. Journalise., (N.C.E.R.T.), [Ans. Equity Share Capital ` 5,50,000], 4. Z Ltd. redeemed 2,000, 12% debentures of ` 100 each which were issued at a discount of 5%, by converting them into equity shares of ` 10 each issued at a premium of 25%. Journalise., [Ans. Equity Share Capital ` 1,52,000, Securities Premium ` 38,000], (N.C.E.R.T.), 5. Sanjay Ltd. issued 1,000, 10% debentures of ` 100 each at a discount of 10%. These, debentures were redeemed after 5 years by converting into equity shares of ` 10 each at, par. Make necessary Journal entries regarding redemption in the books of the company., [Ans. Redemption Amount ` 1,00,000.], , 215
Page 702 :
SBPD Publications Accountancy (XII), ❏ Long Answer Type Numerical Questions, ❏ Redemption of Debentures (in Lump-sum) as per Companies Rules, 1. Pass Journal entries in the following cases for redemption of debentures ignoring debenture, redemption reserve and investment in securities., (i) 15,000, 10% Debentures of ` 100 each issued at 10% premium, repayable at par., (ii) 6,00,000, 12% Debentures of ` 500 each issued at 5% premium, repayable at 10%., (iii) 20,000, 12% Debentures of ` 100 each issued at a discount of 5%, repayable at par., [Ans. Payment to Debentureholders (i) ` 15,00,000, (ii) 33,00,000, (iii) ` 20,00,000.], 2. N Ltd. issued 10,000 debentures of ` 100 each at a discount of 10% on April 1, 2017 with, the condition that they will be redeemed at a premium of 5% after the expiry of three years., The Board of Directors decided to transfer the required amount to Debenture Redemption, Reserve on 1st April, 2019. It was also decided to invest 15% of the face value of debentures, to be redeemed towards Debenture Redemption Investment on 30th April, 2019., Pass the necessary Journal entries for the issue and redemption of these debentures at the, expiry of three years., [Ans. Debenture Redemption Investment made for ` 1,50,000 on 30.4.2019, Creation of DRR, ` 2,50,000, Payment to Debentureholders ` 10,50,000.], 3A. Reliance Petro Chemicals Ltd. issued ` 1,00,000 12% Debentures of ` 100 each on January, 1, 2010 redeemable at par after 10 years. Assume that required investment was made in, 10% Government Securities on 30th April, 2019. How much amount of Debenture, Redemption Reserve should be created before redemption of debentures begins ? Give, necessary Journal entries at the time of redemption of debentures., [Ans. Create DRR with ` 25,000], 3B. XYZ Ltd. issued 200, 15% debentures of ` 100 each on January 1, 2016 at a discount of 10%, redeemable at premium of 10% out of profits. Give Journal entries at the time of, redemption of debentures if debentures are to be redeemed in lump-sum at the end of 4th, year. The Directors decided to transfer the required amount to Debenture Redemption, Reserve on 31st December, 2019. It was also decided to invest the required amount in, Debenture Redemption Investment., [Ans. DRI ` 3,000, Payment to Debentureholders ` 22,000, Creation of DRR ` 5,000], 3C. On 1st April, 2013 Anushka Ltd. issued ` 70,00,000, 9% debentures of ` 100 each at par,, redeemable at a premium of 5% on 31st March, 2018. The company created the necessary,, minimum amount of debenture redemption reserve and purchased debenture redemption, reserve investments. The debentures were redeemed on 31st March, 2018., Pass necessary journal entries for the redemption of debentures, in the books of the, company., (CBSE AI, 2019), 4. East-West Ltd. redeemed out of profits ` 3,00,000, 15% Debentures at a premium of 5%., Give Journal entries ignoring required investment., [Ans. Payment to Debentureholders ` 3,15,000; Debenture Redemption Reserve transferred to, General Reserve ` 3,00,000], 5. On 31st March, 2020 Rathi Ltd. redeemed ` 2,00,000, 8% Debentures out of profits., Journalise the transactions. Assume that the company has required balance in Debenture, Redemption Investment Account., [Ans. DRI encashed ` 30,000, Transfer to General Reserve ` 2,00,000], 6. On 31st March, 2020 Ashok Ltd. redeemed out of profits ` 50,000, 10% Debentures at a, premium of 5%. Show the Journal entries assuming that the company has required balance, in Debenture Redemption Investment Account., [Ans. D.R.I. encashed ` 7,500, Payment to Debentureholders ` 52,500, Transfer to General, Reserve ` 50,000], 7. Geman India Bridge Construction Company Ltd. (an Infrastructure Company) has issued, 10,000, 10% Debentures of ` 100 each on 1st April, 2010 due for redemption on 31st March,, 2020. How much amount of Debenture Redemption Reserve should be created before the, , 216
Page 703 :
Redemption of Debentures, redemption of debentures begins ? Record necessary Journal entries for redemption of, debentures. The company closes its books on March 31 every year., [Ans. DRI ` 1,50,000, Creation of DRR ` 2,50,000.], 8. State Bank of India issued 10,000, 9% Debentures of ` 50 each at a premium of 5% on 30th, September, 2017 redeemable on September 30, 2020. The issue was fully subscribed. Record, necessary Journal entries for issue and redemption of debentures. How much amount of, Debenture Redemption Reserve is to be created before redemption of debentures ?, [Ans. Creation of DRR not required, Payment to Debentureholders ` 5,00,000.], ❏ When DRR Balance is Given, 9. On 1st April, 2020 a company has outstanding ` 14,00,000 in 12% debentures on which, interest is payable yearly on 31st March. There was a balance of ` 1,80,000 in Debenture, Redemption Reserve. On 30th June, 2020 it was decided to redeem all the debentures. Pass, necessary entries in Journal. Ignore entries for interest and TDS., [Ans. Creation of DRR ` 1,70,000; Debenture Redemption Investment ` 2,10,000, Transfer of, DRR to G.R. ` 3,50,000.], 10. Devi Ltd. on 1st April, 2011 acquired assets of the value of ` 6,00,000 and liabilities worth, ` 70,000 from P & Co. at an agreed value of ` 5,50,000. Devi Ltd. issued 12% Debentures of, ` 100 each at a premium of 10% in full satisfaction of purchase consideration. The, debentures were redeemable on 31.3.2020 at a premium of 5%. Pass Journal entries for, redemption of debentures., [Ans. DRI ` 75,000, Payment to Debentureholders ` 5,25,000, DRR transferred to General, Reserve ` 1,25,000], ❏ Redemption by Sinking Fund Method*, 11. The Balance Sheet of Seema Ltd. disclosed the following information on 1.1.2018 :, `, 15% Debentures, 15,00,000, Debenture Redemption Fund, 11,60,000, 15% Debenture Redemption Fund Investment, 11,60,000, The annual contribution to the debenture redemption fund was ` 1,30,000 for the year 2018, and 2019. The debentures were redeemable on 31st December, 2019. On 31st December, 2019, the investments were sold for ` 13,80,000 and the debentures were redeemed., Prepare Debentures Account, Debenture Redemption Fund Account and Debenture Redemption, Fund Investment Account for the year 2018 and 2019., (N.C.E.R.T. Modified), [Ans. Loss on Sale of Investment ` 84,000; Transfer to General Reserve ` 17,29,600], 12. The following balances appeared in the books of Z Ltd. on January 1, 2019 :, `, 12% Debentures, 1,50,000, Debenture Redemption Fund, 1,25,000, Debenture Redemption Fund Investment, 1,25,000, (Represented by ` 1,47,500, 3% Government Securities), The annual instalment added to the fund is ` 20,575. On December 31, 2019, the Bank, balance after the receipt of interest on the investment was ` 39,100. On that date, all the, investments were sold at 83 per cent and the debentures were duly redeemed. Show the, necessary ledger accounts for the year 2019., (N.C.E.R.T.), [Ans. Loss on Sale ` 2,575, Transfer to General Reserve ` 1,47,425, Bank Balance ` 11,525.], 13. The following balances stood as on 31.3.2020 in the books of a company :, `, 12% Debentures, 10,00,000, Debenture Redemption Fund, 10,00,360, Debenture Redemption Fund Investments represented by :, ` 4,00,000, 9% Loan, 3,80,000, ` 7,00,000, 8% Govt. Paper, 6,20,360, *, , This method has been removed from C.B.S.E. Syllabus., , 217
Page 704 :
SBPD Publications Accountancy (XII), On the above date, the investments were sold as follows : 9% Loan at par and 8% Govt., Paper at 90% of nominal value. The debentures were redeemed accordingly., Show the necessary Ledger Accounts., (N.C.E.R.T.), [Ans. Profit on Sale of Investments ` 29,640; D.R.F. transferred to General Reserve ` 10,00,360,, Capital Reserve ` 29,640], 14. X Limited had ` 8,00,000, 5% debentures outstanding as on 1st January, 2019, redeemable, on 31st December, 2019. On that day, the sinking fund was ` 7,49,000 represented by, ` 1,00,000 own debentures purchased at the average price of ` 99 and ` 6,60,000, 3% stock., The annual instalment was ` 28,400. On 31st December, 2019, the investment were, realised @ ` 98 and the 5% debentures were redeemed. Company had bank balance of, ` 2,400 for payment of these debentures. Write up necessary accounts in the books of X Ltd., for the year 2019., (U.S.E.B., 2015), [Ans. Balance of S.F. A/c transferred to General Reserve A/c ` 7,99,000; Profit on Cancellation, transfer to Capital Reserve ` 1,000; Loss on Sale of Investment ` 3,200; 5% Debentures A/c, Total ` 8,00,000. Payment to Debentureholders ` 7,00,000.], ❏ Redemption in Instalments/by Annual Drawings, 15A. X Ltd. issued ` 1,00,000 debentures at 10% discount on 1-1-2010 and decided to redeem, debentures out of profits in two equal instalments on 31-12-2018 and 31-12-2019. The, company complied with the requirements with respect to investment in Government, Securities. Pass Journal entries for issue and redemption of debentures., [Ans. J/E, Transfer of DRR to General Reserve ` 1,00,000 (31.12.2019)], 15B Unilink Ltd. had outstanding ` 12,00,000, 9% debentures on 1st April, 2014 redeemable at, a premium of 8% in two equal annual instalments starting from 31st March, 2018. The, company had a balance of ` 3,00,000 in Debenture Redemption Reserve on 31st March,, 2017. Pass the necessary journal entries for redemption of debentures in the books of, Unilink Ltd. for the year ended 31st March, 2018., [Ans. Deb. Redemption Investment on 30.4.2017 ` 90,000; Payment to Debentureholders, ` 6,48,000], 16. On October 1, 2012 Pragati Ltd. issued 35,00,000, 9% debentures of ` 100 each which are, due for redemption in two equal annual instalments starting from 31.3.2019. The Board of, Directors decided to transfer out of profits ` 50,00,000 and ` 4,00,00,000 on 31st March,, 2016 and 2017 respectively and balance required on 31st March, 2018., Record necessary Journal entries. Ignore entries for payment of interest. Investment as, required by the Companies Rules, 2014 was made in Government Securities., [Ans. Transfer to DRR on 31st March, 2018 ` 4,25,00,000; Investment 30-4-2018 ` 2,62,50,000;, Payment to Debentureholders on 31st March, 2019 ` 17,50,00,000 and 31st March, 2020, ` 17,50,00,000.], ❏ Redemption by Purchase of Own Debentures in the Open Market, 17. Z Ltd. purchased its own 15% Debentures of ` 100 each of the face value of ` 20,000 from, the open market for immediate cancellation at ` 92. Pass necessary Journal entries., [Ans. Profit on Cancellation transferred to Capital Reserve ` 1,600], (N.C.E.R.T.), 18. Walter Ltd. issued 6,00,000, 8% Debentures of ` 100 each redeemable after 3 years either, by draw of lots or by purchase in the open market. At the end of three years, finding the, market price of debentures at 95 per debenture, it purchased all its debentures for, immediate cancellation. Pass the necessary Journal entries for cancellation of debentures, assuming the company has sufficient balance in Debenture Redemption Reserve., [Ans. Profit on Redemption of Debentures ` 30,000; DRR trans. to General Reserve ` 1,50,000.], 19. Bihar Steel Company had issued 10% debentures of ` 100 each, amounting to ` 1,00,000, redeemable at the option of the company by drawing at par or by purchase in the open, market. It decides to redeem ` 25,000 debentures by the purchase of ` 20,000 debentures in, the open market at ` 99 each and by drawings at par ` 5,000 debentures. Show the, necessary Journal entries in the books of the company., [Ans. Profit on Redemption of Debentures ` 200], , 218
Page 705 :
Redemption of Debentures, ❏ Purchase of Own Debentures as Investment, 20. Max Constructions Ltd. had ` 5,00,000, 10% Debentures outstanding on 1st April, 2019. On, the same date, the company purchased ` 1,00,000 own debentures at 96% in the open, market as investment., Give journal entries if the debentures purchased from open market were cancelled on 31st, March, 2020. (Ignore interest), [Ans. Profit on Cancellation ` 4,000 transferred to Capital Reserve.], 21. Singhal Ltd. issued 10,000, 12% Debentures of ` 500 each. The Board of Directors decided, to purchase 2,000 own debentures as a price of ` 490 each for investment purpose. After, few months, they decided to sell off there debentures @ ` 520 each in the market., Journalise the above transactions assuming sufficient funds in Debenture Redemption, Reserve as per legal requirements., [Ans. Investment in Own Debentures ` 9,80,000; Profit on Sale of Investment ` 60,000.], 22. On 1st April, 2019 OMG Ltd. purchased 400 of its own 15% Debentures of ` 100 each at, ` 95 in the open market and kept them as investment. On 31st March, 2020 fifty percent of, these debentures were cancelled and the remaining half were sold at ` 110., Record these transactions in the books of the company ignoring entries for interest-payment., [Ans. Investment in Own Debentures ` 38,000; Profit on Cancellation of Own Debentures, ` 1,000; Profit on Sale of Own Debentures ` 3,000.], ❏ Redemption by Conversion into Shares/Debentures, 23. Pass necessary Journal entries for the following transactions in the books of Fortune Ltd. :, (i) Redeemed ` 96,000, 12% Debentures by conversion into Equity Shares of ` 100 each., The Equity Shares were issued at a discount of 4%., (ii) Converted 4,800, 12% Debentures of ` 100 each into New 13% Debentures of ` 100 each., The New Debentures were issued at a premium of 25%., [Ans. (i) Discount on Issue of Equity Shares ` 4,000, (ii) Securities Premium ` 96,000.], 24. Pass necessary Journal entries in the books of the company in the following cases for, Redemption of 1,000, 12% Debentures of ` 10 each issued at par :, (a) Debentures redeemed at par by conversion into 12% Preference Shares of ` 100 each., (b) Debentures redeemed at a premium of 10% by conversion into Equity Shares issued at par., (c) Debentures redeemed at a premium of 10% by conversion into Equity Shares issued at a, premium of 25%., [Ans. (a) Preference Shares Issued 100, (b) Equity Shares Issued 1,100, (c) Equity Shares, Issued 880, Securities Premium ` 2,200], 25. Arjun Plastic Ltd. redeemed 1,000, 15% debentures of ` 100 each by converting them into, equity shares ` 10 each at a premium of ` 2.50 per share. The company also utilised ` 50,000, out of profits to redeem 500 debentures. Give Journal entries., (N.C.E.R.T.), [Ans. Equity Shares Issued 8,000, Securities Premium ` 20,000], ❏ Miscellaneous and Boards' Questions, 26. Give necessary Journal entries for the following transactions in the books of the company :, (i) X Ltd. redeemed 400, 10% debentures of ` 100 each which were issued at 10% discount, by issuing new equity share of ` 10 each. New shares were issued at par., (ii) X Ltd. purchased 500 own debentures of ` 100 each from the open market for, cancellation at ` 95 per debenture., [Ans. (i) Discount on Shares ` 4,000, (ii) Profit on Cancellation of Debentures A/c ` 2,500], 27. Z Ltd. issued ` 20,00,000, 8% debentures on 1.4.2011 at a premium of 5%. On 31.3.2020,, out of these ` 2,00,000, 8% debentures were redeemed by converting them into equity, shares of ` 100 each issued at par and ` 5,00,000, 8% debentures were converted into 10%, preference shares of ` 100 each issued at a premium of 25%., Pass necessary Journal entries in the books of Z Ltd. for the redemption of debentures., [Ans. J/E, 10% Pref. Share Capital ` 4,00,000; Securities Premium ` 1,00,000.], , 219
Page 706 :
SBPD Publications Accountancy (XII), 28. Pass necessary Journal entries in the following cases :, (i) Z Ltd. redeemed 1,500, 12% debentures of ` 100 each issued at a discount of 6% by, converting them into equity shares of ` 100 each issued at a premium of ` 25 per share., (ii) X Ltd. converted 1,000, 12% debentures of ` 100 each issued at a discount of ` 10 per, debenture into equity shares of ` 100 each, ` 90 paid-up., (C.B.S.E., Delhi, 2014), [Ans. J/E, (i) Discount on Debentures written off ` 9,000; Securities Premium ` 28,200;, (ii) Discount on Debentures written off ` 10,000.], 29. Bharti Ltd. issued 20,000, 15% Debentures of ` 100 each redeemable after 5 years by, conversion into equity shares of ` 50 each., [Ans. No. of Shares 40,000; Share Capital ` 20,00,000.], 30. Arnav Ltd. issued 2,400, 15% Debentures of ` 100 each, these are redeemable at a premium, of 10% by conversion into equity shares of ` 10 each at a discount of 4%. Pass necessary, Journal entries for redemption., [Ans. Share Capital ` 2,75,000; No. of Shares 27,500.], , ●, , 220
Page 707 :
Part B : Financial Statements, Analysis, , 7, , FINANCIAL STATEMENT OF, A COMPANY : BALANCE SHEET, AND STATEMENT OF PROFIT, AND LOSS, , Learning Objectives, , After Studying this chapter, you would be able to understand :, , P.No., , 7.1 Meaning of Financial Statements, , 222, , 7.2 Objectives of Financial Statements, , 222, , 7.3 Elements of Financial Statements, , 223, , 7.4 Nature of Financial Statements, , 224, , 7.5 Types of Financial Statements, , 224, , 7.6 Contents or Components of Annual Report, , 225, , 7.7 Importance of Financial Statements, , 227, , 7.8 Limitations of Financial Statements, , 227, , 7.9 Balance Sheet of a Company, , 228, , ● Format of Company’s Balance Sheet ● General Instructions for, Preparation of Balance Sheet, , 7.10 Statement of Profit and Loss, , 243, , ● Schedule III of Companies Act, 2013, Part II for Preparing, , Statement of Profit and Loss ● General Instructions for Preparation of, Statement of Profit and Loss, 7.11 Fast Revision, , 248, , ❑ Useful Questions, , 249, , ❑ Practical Problems, , 252, , 221
Page 711 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, , 7.6 Contents or Components of Annual Report, A com plete set of annual report in cludes the fol low ing which are called con tents of, annual report :, Balance Sheet U/S 129, Profit & Loss Statement U/S 129, Cash Flow State ment Re vised Ac cord ing to AS-3, Contents of, Statutory, Annual, Disclosure, Report, , Voluntary, Disclosure, , Board of Directors’ Report U/S 134, Directors Responsibility Statement, Auditor's Re ports, Segment Report, Management Discussion and Analysis, Notes to Accounts, Explanatory Notes, , Human Resource Accounting, Social Accounting Report, Accounting for Changing Prices, Value Added Statements, One-Person Company, Small Company and Dorment Company are exempted from, preparing Cash Flow Statement with their financial statements., Since we shall dis cussed first three main con tents of annual report in detail lateron, let, us turn our focus of at ten tion on the re main ing con tents., ❏ 1. Board of Di rec tors' Re port, The Board of Di rec tors has to re port on the fol low ing mat ters in the An nual Re port, pre sented to the share hold ers in the An nual Gen eral Meet ing :, (i) Fi nan cial Statement of Af fairs of the com pany., (ii) Fi nan cial high lights, i.e., sales, ex penses, profit be fore tax, tax pro vi sion, profit, after tax, trans fer to pro vi sions and re serves, bal ance to be car ried for ward., (iii) The amounts, if any of div i dends, which it pro poses by way of div i dends., (iv) Any material in formation with regard to changes in the nature of company's, business., (v) Re search and de vel op ment., (vi) For eign ex change earn ings and out go ings etc., , 225
Page 713 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, ❏ 6. Notes to Accounts, To supplement the above financial statements, certain notes to accounts are also, prepared as a part of the financial statements, for example, note relating to (1) Share, Capital, (2) Reserves and Surplus, (3) Long-term Liabilities, (4) Sched ule of Fixed As sets,, (5) Trade Receivable, (6) In ven to ries, etc., ❏ 7. Ex plan a tory Notes, Ex plan a tory notes are now treated as an in te gral part of fi nan cial state ments. Ex plan a tory notes are given at the end of fi nan cial state ments. Ex plan a tory notes are given for, (i) Con tin gent Li a bil i ties, (ii) De pre ci a tion Pol icy, (iii) Val u a tion of Stock or Inventoreis, etc., , 7.7 Importance of Financial Statements, Following are the various uses and importance of financial statements :, 1. Shareholders : Financial statements provide necessary information to shareholders particularly in respect of profitability, financial and cash position of the company., 2. Reports on Management Functioning : Financial Statements Report about the, management’s performance to the shareholders. It helps to know whether the management, is efficient in their functioning or not., 3. Helps Management in making Strategy : Management is interested in knowing, the existing profits, earning per share possibility of growth and diversification relative, performance etc. from the financial statements so that it can chalk out suitable strategy for, the enterprise., 4. Basis for Granting Credit : Banks and other financial institutions provide loans to, the business they are interested in the security of the loan advanced entity’s capacity to, repay the principal and interest as per terms. Financial statements cash flow statement, segment reports enable them to assess profitability cash position and future prospects etc. In, short such vendors take decisions on the basis of financial statements before granting credit., 5. Basis for Prospective Investors : Investors are primarily concerned about the, security and liquidity of their investment with reasonable profitability financial statements, help them in assessing solvency as well as the profitability of the entity., 6. Helpful to Government and its Authorities : Financial statements are used by, the government and its authorities in taking policy decisions. Government levies various, taxes such as G.S.T., Income Tax etc. from an analysis of financial statements., 7. Securities and Exchange Board of India (SEBI) : SEBI and other agencies like, to study the financial statements to see whether a company is within limit and the interest, of the investors is well protected., , 7.8 Limitations of Financial State ments, Fol low ing are the lim i ta tions of fi nan cial state ments :, 1. Based on Historical Data : Financial statements are based on historical data, while par ties are more in ter ested in know ing the pres ent po si tion and fu ture pros pects of, the busi ness en ter prise., 2. Based on Traditions and Conventions : Financial statements are prepared, based on traditions and conventions., 3. Ignore Qualitative Aspect : Financial statements provide only financial, information and ignore qualitative aspects, because they cannot be expressed in money, terms. Thus, work ing con di tions, cus tomer sat is fac tion, ef fi ciency of man age ment etc. are, ig nored and omit ted., , 227
Page 715 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, 2. A Com pany’s Bal ance Sheet is pre pared in ver ti cal form which is pre scribed by the, Com pa nies Act. There is no standard form pre scribed un der the In dian Part nership Act, 1932 for a firm’s Balance Sheet., 3. In case of a Com pany’s Bal ance Sheet, fig ures of cur rent year and pre vi ous year are, re quired to be given. It is not so in the case of part ner ship firm’s Bal ance Sheet., 7.9.1 Format of Company’s Bal ance Sheet, According to the Companies Act, 2013, Balance Sheet of the Company will have to, be prepared as per section 129 in the form given in Schedule III, Part I, which is similar to, the revised Schedule VI, Part I of the old Act., The ob ject of pre scrib ing the form is to en sure full dis clo sure of de tailed (ma te rial), in for ma tion nec es sary to pro tect in ves tors’ in ter est and to give a true and fair view of the, state of af fairs of the com pany., ❏ Salient Features of Schedule III of the New Act, ➤ A vertical format for presentation of Balance Sheet with classification of Balance, , Sheet items into current and non-current categories., , ➤ A vertical format of Statement of Profit and Loss. Part II as formal of statement of, , profit and loss is introduced first time., , ➤ Deletition of Part IV of the original schedule requiring presentation of Balance Sheet, , abstract and general business profile., , ➤ Schedule III has eliminated the concept of Schedules and such information is now to be, , furnished in terms of ‘Notes to Accounts’., , ➤ While preparing the Balance Sheet, ‘Cash and Cash Equivalents’ will be shown under, , ‘Current Assets’ and include the following :, (a) Cash with Banks, (b) Cheques, drafts on hand, (c) Cash in hand, (d) Other (Specify nature)., ➤ Treatment of Miscellaneous Expenditure : New Schedule III does not contain any, specific disclosure for items included in old Schedule VI under the head,, ‘Miscellaneous Expenditure’. As per AS-16 borrowing cost and premium relating to, borrowing could be amortised over loan period. Further, share expenses, discount on, issue of shares, discount/premium on borrowing are amortised over period of benefit, i.e., normally 3 to 5 years., ➤ Depending upon the turnover of the company the figures appearing in the financial, statements may be rounded off as follows :, l Turn over less than ` 100 crore to the near est hun dreds thousands lakh, million or, decimal thereof, and turn over ` 100 crore or more to the nearest lakh mil lion or, crore or dec i mal thereof., Disclosure in Balance Sheet :, (i) Amortised (written-off) portion of expenses on issue of shares and debentures,, discount on issue of shares and debentures, preliminary expenses etc. in the, current year should be shown as deduction from Securities Premium Reserve. If, Se cu ri ties Pre mium Re serve is not avail able or insufficient, they should be shown, as negative items under the head ‘Surplus’., (ii) A com pany can dis close the unamortised por tion of such ex penses as unamortised, (not yet writ ten-off) ex penses un der the head, ‘‘Other Cur rent/Non-cur rent Assets’’, de pend ing on whether the amount will be am or tised or writ ten-off in the next 12, months or thereafter., , 229
Page 716 :
SBPD Pub li ca tions Accountancy (XII), If a portion of such expenses is to be written-off in the next year, it should be shown under, ‘‘Other Current Assets’’ and the rest unamortised amount under the head, Non-current, Assets.’’, Example : Issue expenses and discount on issue of debentures are ` 10,000 and are to, be written-off over 5 years. Then 1/5th of ` 10,000. i.e., ` 2,000 will be shown as, deduction from Securities Premium Reserve or Reserves and Surplus. Further 1/5th of, ` 10,000 relating to next year amortisation amount i.e., ` 2,000 should be shown under, the head ‘‘Other Current Assets’’ and the rest amount, i.e., ` 6,000 under the head, ‘‘Non-current Assets’’., ➤ Debit Balance of Statement of Profit and Loss : This should be shown as a, negative figure under the head ‘Surplus’. Similarly, the balance of ‘‘Reserves and, Surplus’, after adjusting negative balance of surplus, if any, shall be shown under the, head’ ‘Reserves and Surplus’ if resulting figure is in the negative., ➤ Profit and Loss Appropriation Account not Required : The new format of, Statement of Profit and Loss does not provide for appropriation of profit. In fact, the, new Schedule III format prescribes for the approporiation items (technically called, ‘below the line adjustments) to be presented under Reserve and Surplus in the Notes to, Accounts of the Balance Sheet., Hence, for Journal entries it is suggested to use Surplus Account or Surplus of, Statement of Profit and Loss in place of Profit and Loss Appropriation Account., Format of Company’s Bal ance Sheet, Schedule III, Part I, Name of the Com pany........, Bal ance Sheet (as at ......), , Figures as at, the end of Figures as, at the end, Note No. the Current of Pre viFinancial, ous Year, Year, , Particulars, , I. EQUITY AND LIABILITIES :, (1) Shareholders' Funds :, (a) Share Capital, (b) Reserves & Surplus, (c) Money received against Share Warrants, (2) Share Application Money pending Allotment, (3) Non-current Liabilities :, (a) Long-term Borrowings, (b) Deferred Tax Liabilities (Net), (c) Other Long-term Liabilities, (d) Long-term Provisions, (4) Current Liabilities :, (a) Short-term Borrowings, (b) Trade Payables, (c) Other Current Liabilities, (d) Short-term Provisions, , `, , Total, , 230, , ( ` in .....), , `, , ......, ......, ......, ......, , ......, ......, ......, ......, , ......, ......, ......, ......, , ......, ......, ......, ......, , ......, ......, ......, ......, ......, , ......, ......, ......, ......, ......
Page 717 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, II. ASSETS :, (1) Non-current Assets :, (a) Fixed Assets :, , ......, , ......, , ......, , ......, , (ii) Intangible Assets, , ......, , ......, , (iii) Capital Work-in-progress, , ......, , ......, , (iv) Intangible Assets under Development, , ......, , ......, , ......, ......, ......, ......, , ......, ......, ......, ......, , ......, ......, ......, ......, ......, ......, ......, , ......, ......, ......, ......, ......, ......, ......, , (i), , Tangible Assets, , (b) Non-current Investments, (c) Deferred Tax Assets (Net), (d) Long-term Loans and Advances, (e) Other Non-current Assets, (2) Current Assets :, (a) Current Investments, (b) Trade Receivables, (c) Inventories, (d) Cash and Cash Equivalents, (e) Short-term Loans and Advances, (f) Other Current Assets, Total, , Note : As per C.B.S.E. Cir cu lar No. 43, dated 2 July, 2013 the ac count ing treat ment of the fol lowing items will not be, ex am ined in Board Exam. :, 1. Money received against Share Warrants., 2. Share Application Money pending Allotment., 3. Deferred Tax Liabilities (Net), 4. Other Long-term Liabilities., 5. Capital Work-in-progress., 6. Intangible Assets under Development., 7. Deferred Tax Assets (Net), , 7.9.2 General Instructions for Preparation of Balance Sheet, 1. Current Assets : Any asset can be classified as Current Asset only when any of the, following criteria (or test) is fulfilled :, (a) There is possibility of its realisation in course of normal op erating cycle of the, com pany or it is meant for sale or con sump tion;, (b) It is held pri mar ily for the pur pose of be ing traded;, (c) It is realisable within 12 months from the date of prep a ra tion of its state ment., (d) It is cash or cash equiv a lents un less it is re stricted from be ing ex changed or used to, settle a li a bil ity for at least 12 months af ter the re port ing date., All other assets will be treated as Non-current Asset., 2. Op er at ing cy cle is in ter ven ing pe riod re lat ing to the pur chase of any as set and its, con ver sion into cash or cash equiv a lents. If the pe riod of op er at ing cy cle is not mea surable,, its pe riod is taken as 12 months., 3. Any liability will be treated as Current Liability only when it satisfies any one of the, following criteria :, (a) It is likely to be settled in the normal op er at ing cy cle of the company., (b) It has been held primarily for the pur pose of be ing traded., (c) It is to be settled within 12 months from the date of prep a ra tion of its state ment., All other liabilities shall be treated as Non-current Liabilities., , 231
Page 718 :
SBPD Pub li ca tions Accountancy (XII), 4. Trade Receivable : A receivable can be classified as ‘trade receivable’ if it is related, to amount receivable from the sale of goods or services under normal operating activities of, the business. It will include Sundry Debtors and Bills Receivables., 5. Trade Payable : A payable can be classified as ‘trade payable’ if it is related with the, amount payable for purchase of goods or services under normal operating activities of the, business. It will include Sundry Creditors and Bills Payables., 6. Use of Notes : Earlier for the explanation of the items given in the Balance Sheet,, the term ‘Schedule’ was used but now the term ‘Notes’ will be used., If nothing is mentioned, transfer 10% of the net profit (after deducting depreciation and, Tax and Development Rebate Reserve) of the year to General Reserves of the company., However, a Company may transfer voluntarily a higher percentage of the net profit to, reserves in accordance with the rules made by the Central Government., I. Ex pla na tion of Items Ap pear ing un der the head Eq uity and, Liabilities in the Bal ance Sheet, (1) Shareholders’ Funds, (A) Share Capital : For each type of Capital :, (i) Num ber of Authorised shares and amount of authorised cap i tal., (ii) Number of Issued, Subscribed, Called-up, Fully paid-up, and Partly paid-up, shares., (iii) Par value of each share., (iv) A rec on cil i a tion of the num ber of shares out stand ing at the be gin ning and at the, end of the re port ing pe riod., (v) Shares in the com pany held by each share holder more than 5% shares spec i fy ing, the num ber of shares held., (vi) In the pe riod of 5 years just pre ced ing to the date of prep a ra tion of Bal ance Sheet :, In ful fil ment of the con tract, num ber and types of shares al lot ted as fully paid-up, shares with out re ceiv ing cash., (vii) Number and type of shares allotted as fully paid shares in the form of bonus, shares., (viii) Num ber and type of Buy-back of shares., (ix) Calls un paid (show ing amount not paid by di rec tors and of fi cials). Calls un paid, will be de ducted from sub scribed cap i tal., (x) Forfeited Shares (amount orig i nally paid-up)., Share capital is shown in Notes to Account as under :, Note No., , 1, , Particulars, , Amount, , (a) Share Capital, Authorised Capital :, ....... Shares of ` ...... each, Issued Capital :, ......... Share of ` ...... each, Subscribed Capital :, Subscribed and fully paid-up, ..... Shares of ` ....... each, .... per share paid-up, Subscribed but not fully paid-up :, ........ Shares of ` ........ each, ` ........ called-up, Less : Calls-in-arrears (if any), Add : Shares Forfeited A/c, , `, , ×××, ×××, , ×××, ×××, (×××), Total, , Note : Eq uity Share Cap i tal and Pref er ence Share Cap i tal to be shown sep a rately., , 232, , ×××, ×××, ×××
Page 719 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, (B) Reserves and Surplus :, (i) Reserves and Surplus will include the following :, (a) Cap i tal Re serve, (b) Cap i tal Re demp tion Re serve, (c) Securities Premium Re serve (Preliminary expenses will be deducted from, Se cu ri ties Pre mium Reserve), (d) Debenture Redemption Reserve, (e) Re val u a tion Re serve, (f) Share Op tions Out stand ing Ac count, (g) Other Re serves (ex plain ing na ture, pur pose, amount of each re serve), Such Gen eral Re serve, In vest ment Fluc tu a tion Re serve, Work men, Com pen sa tion, Re serve etc., (h) Sur plus, i.e., bal ance in Statement of Profit and Loss (after Dividend, Bonus, Shares and trans fer to Re serves)., (ii) Fund : The reserve which has been invested will be called fund., The debit bal ance of State ment of Profit and Loss will be shown as a neg a tive fig ure, un der the head ‘Sur plus’. Sim i larly, the neg a tive bal ance of Sur plus will be, ad justed from Re serve and Sur plus and if the bal ance of Re serve and Sur plus, comes to Negative, still it will be shown under the head Re serve and Sur plus., Im por tant Notes, 1. Pre lim i nary Ex penses : Pre lim i nary ex penses are to be writ ten-off en tirely in the year in, which they are incurred., They should be written-off first from Securities Premium and in its absence or, insufficiency from Surplus, i.e., Statement of Profit & Loss., 2. Bor row ing Costs : Borrowing costs such as Discount on Issue of Debentures should be, written-off over loan period., 3. Share Expenses, Underwritting Commission etc. should be writ ten-off be tween 3-5 years., , (C) Money Received against Share Warrants*, A share warrant is a financial instrument which gives holder the right to acquire equity, shares. A disclosure of the money received against share warrants is to be made since shares, are yet to be allotted against the share warrants. These are shown as part of share capital, but to be shown as a separate line items., (2) Share Application Money pending Allotment*, If company has issued shares but date of allotment falls after the Balace Sheet date,, such application money pending allotment is shown under this head., (3) Non-current Liabilities, A non-current liability is a liability which is not classified as current liability., Non-current liabilities shall include the liabilities due after one year. It shall include, the following :, (A) Long-term Borrowings : This will be classified as under :, (a) Bonds/Debentures, (b) Term Loan, – From Banks, – From other Parties, (c) Deposits : (i) Deferred Tax Liabilities (Net)* (Unless specified, it will be assumed, that deposits are for more than one year)., * Ac count ing Treat ment not to be Eval u ated., , 233
Page 720 :
SBPD Pub li ca tions Accountancy (XII), (B) Deferred Tax Liabilities (Net)*, (C) Other Long-term Liabilities : Other long-term liabilities are classified into :, (i) Trade Payables (If they are payable after 12 months)., (ii) Others., (D) Long-term Provisions : Any provision which is payable after 12 months will be, recorded under long-term provision. If provision is made for the amount payable within a, period of 12 months, it will be recorded under short-term provision., Example of Long-term Provision :, (i) Provision for Employee Benefits, Provision for Warranties., (ii) Others., (4) Current Liabilities, Current liabilities shall include the liabilities due within one year. It shall include the, following :, (A) Short-term Borrowings :, (i) Loans repayable on de mand, – from Banks, – from other Parties, (ii) Deposits, (iii) Other Loans and Advances., (B) Trade Payables (i.e., Sundry Creditors and Bills Payable) : These should be, repayable in 12 months or less than 12 months., (C) Other Current Liabilties :, (i) Cur rent Ma tu ri ties of long-term debt., (ii) Out stand ing in ter est on loans, but not payable., (iii) Interest accrued and due on borrowings., For ex am ple, A com pany pays in ter est on de ben tures on 30th June and 31st, December and if it pre pares fi nan cial state ment on 31st March, 2016 and if the, interest pay able on 31st De cem ber, 2015 has not been paid, this in ter est will be, called as ‘In ter est ac crued and due’. The in ter est from 1st Jan u ary to 31st March,, 2016 will be called ‘Interest accrued but not due’., (iv) In come re ceived in ad vance., (v) Un paid div i dends., (D) Short-term Provisions : Short-term Provisions will be classified as follows :, (i) Provision for Employee Benefits., (ii) Others, such as Provision for Tax, Other Provision etc., II. Explanation of Items Appearing under the head, As sets in the Bal ance Sheet, (1) Non-current Assets : Non-current assets shall include the assets held for more, than one year. It shall include the following :, (A) Fixed As sets : Fixed as set is an as set of a busi ness in tended for con tin u ing use,, rather than a short-term as set. Fixed as sets must be clas si fied in a com pany’s, Bal ance Sheet as un der :, (i) Tangible Assets : Such as (a) Land, (b) Buildings, (c) Plant and Machinery,, (d) Fur ni ture and Fix tures, (e) Ve hi cles, (f) Of fice Equipment, (g) Others., (ii) Intangible Assets : Intangible assets will be classified as : (a) Goodwill,, (b) Brands/Trade Marks, (c) Computer Software, (d) Mastheads and publishing, * Ac count ing Treat ment not to be Eval u ated., , 234
Page 721 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, titles, (e) Min ing Rights, (f) In tel lec tual Prop erty Rights, Ser vices and Op er at ing, Rights, (g) Rec i pes, For mu lae, Model, De sign and Pro to types, (h) Licence and franchisee., (iii) Capital Work-in-Progress : By capital work-in-prog ress we mean cost of selfman u fac tured as set, Plant and Equipments., (B) Non-current Investments (Investments held for more than 12 months), (i) Non-current investments are classified into ‘Trade Investments’ and ‘Other, Investments’. Investments may be classified into :, (a) Investment in Property., (b) Investment in Equity Shares., (c) Investments in Preference Shares., (d) Investments in Government or Trust Securities., (e) Investments in Bonds and Debentures., (f) Investments in Mutual Funds., (g) Investments in Partnership Firms., (h) Other non-current investments. (Specify na ture), (ii) In vest ments not val ued at cost will be shown at the value with ba sis of val u a tion., (iii) The fol low ing will also be dis closed :, (a) Quoted Investments on stock exchange and their market value., (b) Value of Unquoted Investments., (c) Amount of Provision for diminution in the value of Investments., (C) Deferred Tax Assets (Net)*, (D) Long-term Loans and Advances :, (i) Long-term loans and ad vances will be clas si fied into the fol low ing :, (a) Capital ad vances,, (b) Security Deposits, (c) Other loans and advances., (ii) Loans and advances to directors and other officials of the company., (E) Other Non-current Assets* :, (i) Long-term Trade Re ceiv ables (in clud ing trade re ceiv able on de ferred credit terms)., (ii) Others., (iii) Long-term Trade Re ceiv ables will be clas si fied into as un der :, (i) (a) Secured, considered good, (b) Unsecured, considered good, (c) Doubtful, (ii) Provision for Bad and Doubtful Debts will be shown separately under, appropriate head., (iii) Amount payable by company’s directors and other officials., (2) Current Assets : (Shall include the assets held for one year or less), (A) Current Investments (Investments made for 1 year or less than 1 year), Current Investments will be classified as under :, (a) Investments in Equity Instruments., (b) Investments in Preference Shares., (c) Investments in Government or Trust Securities., (d) Investment in Debentures or Bonds., (e) Investments in Mutual Funds., (f) Investments in Partnership Firms, (g) Other Investments., * Not to be valuated, , 235
Page 722 :
SBPD Pub li ca tions Accountancy (XII), (B) Inventories :, (i) Inventories will be classified as under :, (a) Raw Materials, (b) Work-in-Progress, (c) Finished Goods, (d) Stock-in-trade, (e) Stores and Spares, (f) Loose Tools, (g) Others, (ii) Goods-in-transit will be shown under a separate sub-head under Inventories., (iii) The method of valuation of inventories will be disclosed., (C) Trade Receivables : Trade Receivables refer to the amount due on account of, goods sold or services rendered in the normal course of business. It included both Debtors, and Bills Receivables (to be realised within 12 months)., (D) Cash and Cash Equivalents :, (a) Cash at Bank, (b) Cheques and drafts on hand, (c) Cash balance/Cash in hand, (d) Others e.g. Short-term Investments or Marketable Securities., Cash Equiv a lents : Cash equiv a lents are short-term, highly liq uid in vest ments, that are readily con vert ible into known amounts of cash and which are sub ject to an, in sig nif i cant risk of changes in value., (E) Short-term Loans and Advances :, These will be classified into as under :, (a) Loans and ad vances to re lated par ties., (b) Others (e.g., fixed deposit—maturity pe riod from 3 months to 12 months), (i) Pro vi sion for Bad and Doubt ful Debts will be shown sep a rately un der ap pro pri ate head., (ii) Amount pay able by di rec tors and other of fi cials of the com pany., (F) Other Current Assets : Under this head all such current assets will be shown, which cannot be included in any head. For example, Prepaid Expenses, Interest accrued on, Investments, etc., Contingent Liabilities and Commitments, 1. Contingent Liabilities : Contingent liabilities are those liabilities that arise from, the past events, whose existence will be confirmed only by the occurrence of one or more, uncertain future events not wholly within an entity’s control., Contingent Liability is not shown in Balance Sheet. It is shown as Notes to Accounts., Examples of Contingent Liabilities :, (i) Claims against company not acknowledged as debts (e.g., towards Goods and, Services Tax etc.)., (ii) Li a bil ity for guar an tees given by the com pany ( i.e., to Banks on be half of oth ers)., (iii) Other amount for which the com pany is contigently li a ble, such as Bills dis counted, but not matured., 2. Commitments : Commitments refer to a contract to do specific work at specific time, under certain conditions. Commitments will be classified as under :, (a) Es ti mated amount of those con tracts which are in com plete and for which no pro vision has been made., (b) Uncalled li a bil ity on partly paid shares;, (c) Other com mit ments e.g., ar rears of div i dends on cu mu la tive pref er ence shares., , 236
Page 723 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, ILLUSTRATIONS AND PRAC TICAL PROB LEMS : AT A GLANCE, Illustration, No., , Details, , Practical, Problem No., , —, , Very Short Answer Type Numerical Questions, , —, , Long Answer Type Numerical Questions, , —, , 1, , Major Headings on Liabilities Side, , —, , 2, , Major Headings on Assets Side, , 3(A) to 6, 7, 8, , Heads and Sub-heads of Various Items, , 1 to 3, , —, 1 to 6, , 9, , Disclosure of Share Capital in the Balance Sheet, Preparation of Notes to Accounts of Reserves and Surplus, , 10, , Disclosure of Current and Non-current Liabilities in the, Balance Sheet, , 9, , 11, , Showing of Non-current Assets in the Balance Sheet, , 10, , 12, , Preparation of Balance Sheet, , 11 to 13, 14 to 16, , 15, , Calculation of Revenue from Operations, Employee Benefit Expenses, , 16, , Preparation of Statement of Profit & Loss, , 13, 14, , 16, , Total, , 7, 8, , —, 17, 18, 3 + 18, , Illustration 1 (Major Head ings on the Li a bil i ties Side), Show the major headings into which the Equity and Liabilities side of a Company's, Balance Sheet are presented as per Schedule III, Part I of the Companies Act, 2013., Solution, Major headings of Equity and Liabilities side are :, 1. Shareholders’ Funds, 2. Share Application Money pending Allotment, 3. Non-current Liabilities, 4. Current Liabilities, Illustration 2 (Major Headings on the Assets Side), Show the major headings into which the Assets side of a Company's Balance Sheet are, presented as per Schedule III, Part I of the Companies Act, 2013., Solution, Major headings on the Assets side are as follows :, 1. Non-current Assets, 2. Current Assets., Illustration 3(A) (Headings and Sub-heading of Various Items), List the items which are shown under the heading ‘Current Liabilities’ as per Schedule, III, Part I of the Companies Act, 2013., Solution, Items to be shown under the heading ‘Current Liabilities’ are :, (a) Short-term Borrowings, (b) Trade Payables, (c) Other Current Liabilities, (d) Short-term Provisions, , 237
Page 724 :
SBPD Pub li ca tions Accountancy (XII), Illustration 3(B), List the items which are shown under the heading ‘Non-current Liabilities’ as per, Schedule III, Part I of the Companies Act, 2013., Solution, Items to be shown under the heading ‘Non-current Liabilities’ are :, (a) Long-term Borrowings, (b) Deferred Tax Liabilities (Net), (c) Other Long-term Liabilities, (d) Long-term Provisions, Illustration 4, Under what heads the following items on the ‘Equity and Liabilities’ side of the Balance, Sheet of a Company will be shown ?, (i) Bills Payable, (ii) Preference Share Capital, (iii) Debentures, (iv) Calls-in-arrears,, (v) General Reserve, (vi) Provision for Tax., Solution, S. N., (i), (ii), (iii), (iv), (v), (vi), , Items, Bills Payable, Preference Share Capital, Debentures, Calls-in-arrears, General Reserve, Provision for Tax, , Heading, Current Liabilities, Shareholders’ Funds, Non-current Liabilities, This will be deducted from, Called-up Capital, Shareholders' Funds, Current Liabilities, , Sub-heading (if any), Trade Payables, Share Capital, Long-term Borrowings, —, Reserves and Surplus, Short-term Provisions, , Illustration 5 (Items to be Shown on Assets Side), Under what heads the following items on the Assets side of the Balance Sheet of a, Company will be shown ?, (i) Loose Tools, (ii) Bills Re ceiv able, (iii) Sundry Debtors, (iv) Goodwill, (v) Brands and Trade Marks, (vi) Shares in ABC Co. Ltd., Solution, S.N., , (i), (ii), (iii), (iv), (v), (vi), , Items, Loose Tools, , Heading, Current Assets, , Sub-head ing (if any), Inventories, , Bills Receivable, , Current Assets, , Trade Receivables, , Sundry Debtors, , Current Assets, , Goodwill, , Non-current Assets, , Trade Receivables, Intangible Assets, , Brands and Trade Marks, , Non-current Assets, , Intangible Assets, , Shares in ABC Co. Ltd., , Non-current Assets, , Non-current Investments, , Illustration 6, Under what headings will you show the following items in the Balance Sheet of the, Company :, 1. Unclaimed Dividend, 2. Securities Premium, 3. Preliminary Expenses,, 4. Acceptances, 5. Investments, 6. Calls-in-advance, 7. Forfeited Shares., , 238
Page 725 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, Solution, S. N., (1), (2), (3), , Items, , Heading, , Sub-heading (if any), , Unclaimed Dividend, , Current Liabilities, , Other Current Liabilities, , Securities Premium, Preliminary Expenses, , Shareholders' Funds, Deducted from Securities, Premium Reserve, , Reserve & Surplus, , —, , (4), (5), (6), , Acceptances, Investments, Calls-in-advance, , Current Liabilities, Non-current Assets, Current Liabilities, , Trade Payables, Non-current Investments, Other Current Liabilities, , (7), , Forfeited Shares, , Shareholders’ Funds, , It is added to the Paid-up, Capital, , Illustration 7 (Disclosure of Share Capital in the Balance Sheet), East-West Ltd. was registered with an authorised capital of ` 5,00,000 divided into, 50,000 Equity Shares of ` 10 each. The company decided to offer to the public for, subscription 30,000 equity shares of ` 10 each at a premium of ` 20 per share. Applications, for 28,000 shares were received and allotment was made to the applicants. All calls were, made and duly received except the final call of ` 2 per share on 200 shares. Show the ‘Share, Capital’ in the Balance Sheet of East-West Ltd. as Schedule III of the Companies Act, 2013., Also prepare Notes to Accounts for the same., Solution, Balance Sheet of East-West Ltd., (as at ....), Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, Share Capital, , Note No., , Year ended Current Year, `, , 1, , 2,79,600, , Notes to Ac counts :, Particulars, 1. Share Capital :, Authorised Share Capital :, 50,000 Equity Shares of ` 10 each, Issued Share Capital :, 30,000 Equity Shares of ` 10 each, Subscribed Share Capital :, (a) Subscribed and fully paid-up, 27,800 Shares of ` 10 each fully called-up, (b) Subscribed but not fully paid-up, 200 Shares of ` 10 each, Less : Calls-in-arrears, , `, , 5,00,000, 3,00,000, , 2,78,000, `, 2,000, (400), To tal (to be shown in Bal ance Sheet), , 1,600, 2,79,600, , Illustration 8 (Disclosure of Share Capital), ‘David Ltd.’ issued ` 40,00,000 equity shares of ` 10 each out of its registered capital of, ` 10,00,00,000. The amount payable on these shares was as follows :, On Ap plication, ` 1 per Share, On Allotment, ` 2 per Share, On First Call, ` 3 per Share, On Second and Final Call, ` 4 per Share, , 239
Page 726 :
SBPD Pub li ca tions Accountancy (XII), All calls were made and were duly received, except the second and final call on 1,000, shares held by Vipul. These shares were forfeited., Present the ‘Share Capital’ in the Balance Sheet of the company as per Schedule III,, Part I of the Companies Act, 2013. Also prepare ‘Notes to Accounts’., (C.B.S.E., 2015, A.I., Set III), Solution, Balance Sheet of David Ltd., (as at ....), Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, Share Capital, , Note, No., , Current, Year, `, , 1, , 3,99,96,000, , Notes to Ac counts :, Particulars, 1. Share Capital :, Authorised Capital :, 1,00,00,000 Equity Shares of ` 10 each, Issued Capital :, 40,00,000 Equity Shares of ` 10 each, Subscribed Capital :, Subscribed and Fully paid :, 39,99,000 Equity Shares of ` 10 each, Subscribed but not fully paid :, Forfeited Shares (1,000 × ` 6), , `, , 10,00,00,000, 4,00,00,000, , 3,99,90,000, , Total, , 6,000, 3,99,96,000, , Illustration 9 (Preparation of Note to Accounts on Reserves and Surplus), Mona Ltd. has the following balances on 1.4.2017 :, `, General Re serve, 2,00,000, Sur plus, i.e., Balance in Statement of Profit & Loss, 3,00,000, It earned a profit of ` 5,00,000 for the year ended 31st March, 2018. Prepare Note to, Accounts on Reserves and Surplus., Solution, Notes to Ac counts, , Particulars, Reserves and Surplus :, (a) General Reserve, (b) Surplus :, Balance in Statement of Profit & Loss (Opening), Surplus for the Period, , 31.3.2018, `, , 2,00,000, `, , 3,00,000, 5,00,000, , 8,00,000, 10,00,000, , The balance of Reserves and Surplus to be shown in the Balance Sheet : ` 10,00,000., Illustration 10 (Disclosure of Current and Non-current Liabilities in the Balance, Sheet), From the following information extracted from the books of Raj Royals, prepare Notes, to Accounts on ‘Non-current’ and ‘Current’ Liabilities :, `, Share Capital, 5,00,000, 12% Debentures, 2,00,000, , 240
Page 727 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, Bank Overdraft, Provision for Employee Benefits, Provision for Taxation, Trade Payables, Solution, Notes to Accounts, , 60,000, 1,00,000, 30,000, 60,000, , Particulars, , `, , 1. Non-current Liabilities :, Long-term Borrowings, 2. Current Liabilities :, (a) Short-term Borrowings :, Bank Overdraft, , 2,00,000, 60,000, , (b) Trade Payables, (c) Short-term Provisions :, Provision for Taxation, Provision for Employee Benefits, , 60,000, 30,000, 1,00,000, 1,30,000, , Illustration 11 (Showing of Non-current Assets in the Balance Sheet), Show how the following items will appear in a Company’s Balance Sheet :, `, Land and Building, 10,00,000, Goodwill, 2,50,000, Marketable Securities, 2,00,000, Cash, 50,000, Trade Receivables, 1,30,000, Solution, Extract of Balance Sheet, (as at ........), Note, No., , Particulars, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets :, (i) Tangible Assets, (ii) Intangible Assets, 2. Current Assets :, (a) Trade Receivables, (b) Cash and Cash Equivalents, , Current, Year, , Previous, Year, , `, , 1, 2, , Total (1 + 2), , `, , 10,00,000, 2,50,000, 1,30,000, 2,50,000, 16,30,000, , Notes to Ac counts :, Particulars, 1. Tangible Assets :, Land and Building, 2. Intangible Assets :, Goodwill, 3. Cash and Cash Equivalents :, Cash, Marketable Securities, , `, 10,00,000, 2,50,000, 50,000, 2,00,000, 2,50,000, , Illustration 12 (Prep a ra tion of Bal ance Sheet), Pre pare a Bal ance Sheet of V. T. Co. Ltd. as on March 31, 2020 as per pro vi sions of Part, I, Sched ule III, un der sec tion 129 of the Com pa nies Act, 2013 from the given in for ma tion :, , 241
Page 728 :
SBPD Pub li ca tions Accountancy (XII), (` in ’000), 3,000, 3,000, 1,200, 700, 9,000, 2,500, 300, 6,100, 4,000, 1,000, , Gen eral Re serve, Debentures, Statement of Profit & Loss (Cr.), De pre ci a tion on Fixed As sets, Gross Fixed Assets, Trade Payable, Pre lim i nary Ex penses, Trade Receivables, Equity Share Capital, Pref er ence Share Cap i tal, Solution, In Vertical Form, V. T. Co. Ltd., Bal ance Sheet, (as on 31st March, 2020), , ( ` in ’000), Note, No., , Particulars, 1, I. EQUITY AND LIABILITIES, (1) Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, (2) Non-current Liabilities :, (a) Long-term Borrowings (Debentures), (3) Current Liabilities, Trade Payable, II. ASSETS, (1) Non-current Assets :, Fixed Assets, (2) Current Assets, Trade Receivables, , 2, 1, 2, , Total, , 3, , Figures as, Figures as, at the end of at the end of, 31.3.2020, 31.3.2019, 3, 4, 5,000, 3,900, 3,000, 2,500, 14,400, , —, —, —, , 8,300, , —, , 6,100, 14,400, , —, —, , Notes to Ac counts :, Particulars, , `, , 1. Share Capital :, Equity Share Capital, Pref er ence Share Cap i tal, , 4,000, 1,000, 5,000, , 2. Reserve and Surplus :, General Reserve, Surplus i.e., Statement of Profit & Loss, Preliminary Exps., , 3,000, 1,200, (300), 3,900, , 3. Fixed Assets :, Gross Fixed Assets, Less : Depreciation on Fixed Assets, , 9,000, 700, 8,300, , 242
Page 729 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, , 7.10 Statement of Profit and Loss*, l Part II of Sched ule III deals with the prep a ra tion of the Profit and Loss Statement of, , companies and provisions contained theirin hold good for the Income and, Ex pen di ture Ac count pre pared by non-profit organisations., 7.10.1 Schedule III of Companies Act, 2013, Part II for Preparing Statement of, Profit and Loss, In 2011, for the preparation of Profit and Loss Statement Schedule VI of the Companies, Act was revised and made effective on and from 1.4.2011 (i.e., from financial year 2011-12)., The new format is given below :, PART II, FOR MAT OF STATE MENT OF PROFIT AND LOSS, Name of the Com pany ..............., Profit and Loss Statement (for the year ended ................), (` in .........), Particulars, I., II., III., IV., , V., VI., VII., , Revenue from Operations, Other Income, Total Revenue (I + II), Expenses :, Cost of Materials Consumed, Purchases of Stock-in-trade, Changes in Inventories of Finished Goods,, Work-in-progress and Stock-in-trade, Employees Benefit Expenses, Finance Costs, Depreciation and Amortisation Expense, Other Expenses, Total Expenses, Profit before Tax (III – IV), Tax, Profit after Tax (V – VI), , Note, No., , Figures for Figures for, the current the pre vi ous, reporting, reporting, period, period, ×××, ×××, ×××, ×××, ×××, ×××, ×××, ×××, , ×××, ×××, , ×××, ×××, ×××, ×××, ×××, ×××, , ×××, ×××, ×××, ×××, ×××, ×××, , ×××, ×××, ×××, , ×××, ×××, ×××, , Important Note, 1. The col umn for Note No. is pre scribed for the pur pose of cross ref er ence to the Note No. in, the Notes to Accounts where detail of the line item is given., 2. C.B.S.E. has prescribe that exceptional items, Explanatory Items and Discontinuous, Operations are excluded., Therefore, these items have not been shown in the format., , 7.10.2 General Instructions for Preparation of Statement of Profit & Loss, I. Revenue from Operations :, (A) In respect of a company other than a finance company revenue from operations shall, disclose separately in the notes revenue from :, (a) Rev e nue from Sale of Prod uct, ...., (b) Rev e nue from Sale of Ser vices, ...., * Not in J.A.C. Syl la bus., , 243
Page 730 :
SBPD Pub li ca tions Accountancy (XII), (c) Other Op er at ing Rev e nues, Less : (d) Excise Duty, , ...., ...., ...., ...., , (B) In respect of a finance company revenue from operations shall include revenue from :, (a) Interest, and (b) other financial services., II. Other Income : Other income shall be classified into :, (a) Dividend Income, (b) Net Gain/Loss on Sale of Investments, (c) Other Non-operating Income less Non-operating Expenses, Such as,, (i), Rent Re ceived, (ii) Dis count Re ceived, (iii) Trans fer Fees, (iv) Profit on Sale of Fixed Assets, (v) Sundry Cred i tors Writ ten-off, (vi) Revenue from Project Consultancy, (vii) Fees re ceived from ar rang ing loans, (viii) Re fund of In come-tax, etc., III. Additional Information : Every company shall disclose the following, expenses and incomes in notes as additional information :, (a) Employee Benefit Expenses :, (i) Salaries and Wages, (ii) Contribution to Provident Fund and other Funds, (iii) Staff Welfare Expenses, such as Canteen Expenses., (b) Depreciation and Amortisation Expense., (c) Any item of income or expense which exceeds 1% of ‘Revenue from Operations’ or is, more than ` 1,00,000 will be shown separately in notes., (d) Interest Income., (e) Interest Expense etc., (f) Dividend Income, (g) Net Gain or Loss on foreign currency transaction and translation, (h) Payments to the Auditor., Statement of Exceptional and Extra-ordinary Items :, IV. Earnings per Share : The profit in ` attributable to each equity share in a, company based on net profit after tax and preference share dividend., Net Profit after Tax and Pref. Dividend, E.P. S. =, Number of Equity Shares, Part II or Schedule III, Part II of Companies Act, 2013 requires the disclosure of both (a), basic E.P.S., and (b) diluted earnings per share on the Profit and Loss Statement., 1. Revenue from Operations, ä Revenue from operations means revenue earned by the company from its business, activities. Business activities are the activities carried on by the company with the, aim to earn profit., ä For a manufacturing and trading concern, the revenue from operations is derived, from the following activities :, (a) Sale of Products, , 244
Page 731 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, (b) Sales of Services, (c) Other operating revenues, such as sale of scrap, commisson received, etc., Less : Excise Duty Collected, ä In respect of a finance company or company providing financial services, revenue, from operation includes :, → Interest, → Dividend Income, → Net Gain on Sale of Investments, → Revenue from other Financial Services., Characteristics of Statement of Profit & Loss, 1. It dis closes the net re sults (i.e., Net Profit or Net Loss) of the busi ness op er a tions, of a company., 2. It is a historical document as it is prepared for a past period., 3. It is prepared for a specific accounting period., Illustration 13 (Calculation of Revenue from Operations), Calculate total revenue from operations of a manufacturing company from the, following for the year ended 31st March, 2020 :, Sales ` 9,36,000; Sales Return ` 36,000; Sale of Scrap ` 4,500; Interest on Securities, ` 5,400; Refund of Income-tax ` 1,800., Solution, Statement of Profit and Loss, (for the year ended 31st March, 2020), 31st, March,, 2020, , Particulars, `, , I. Revenue from Operations :, Sales, Less : Sales Return, Sale of Scrap, II. Other Income :, Interest on Securities, Refund of Income-tax, III.Total Revenue (I + II), , `, , 9,36,000, 36,000 9,00,000, 4,500, 5,400, 1,800, , 7,200, 9,11,700, , Illustration 14 (Calculation of Revenue from Operations), Compute total revenue from operations for the year ended 31st March, 2020 of Sharda, Finance Ltd. from the following details :, `, Interst on Loans Given, 30,00,000, Profit from Sale of Investments, 2,50,000, Commission Received, 10,000, Profit on Sale of Building, 12,00,000, Dividend Received, 1,00,000, Miscellaneous Income, 10,000, Solution, Statement of Profit and Loss of Sharda Ltd., (for the year ended 31st March, 2020), Particulars, , Note, No., , 31st, March,, 2020, , 1, , 32,60,000, , `, , I., , Revenue from Operations, , 31st, March,, 2019, `, , 245
Page 732 :
SBPD Pub li ca tions Accountancy (XII), II. Other Income, III. Total Revenue from Operations (I + II), , 2, , 13,10,000, 45,70,000, , Notes to Ac counts :, Particulars, 1. Revenue from Operations :, Interest on Loans Given, Profit on Investments, Commission Received, 2. Other Income :, Profit on Sale of Building, Miscellaneous Income, Dividend Received, , `, , `, , 30,00,000, 2,50,000, 10,000 32,60,000, 12,00,000, 10,000, 1,00,000 13,10,000, , Cost of Materials Consumed, ä The term ‘Materials’ means raw materials and other materials used in manufacturing of goods., ä Cost of Materials Consumed means cost of raw materials and other materials, consumed in manufacturing the goods., ä Calculation of Cost of Materials Consumed :, `, Cost of Material Con sumed :, Opening Inventory (Stock) of Materials, ×××, Add : Purchases of Materials, ×××, ×××, Less : Closing Inventory (Stock) of Materials, ×××, Cost of Materials Con sumed, ×××, Employees Benefit Expenses, Employees Benefit Expenses means expenses made by the company for the benefit, of its employees. Under this head the following expenses are included :, (i) Wages, Salaries, Bonus and Leave Encashment., (ii) Staff welfare expenses, such as canteen expenses, medical expenses on, employees Employees State Insurance (ESI)., (iii) Contribution to Provident Fund and Gratuity Funds, Gratuity payments, etc., Example, Out of the following, identify the items to be shown in the Note to Accounts on, Employees Benefit Expenses :, (i) Salaries, (ii) Wages, (iii) Conveyance Expenses, (iv) Office Expenses, (v) Bonus,, (vi) Gratuity Paid., Solution, Items to be shown in Note to Employees Benefit Expenses are :, (i) Salaries, (ii) Wages, (iii) Bonus, (vi) Gratuity Paid., Finance Costs, Finance cost means cost incurred by the company on loans and borrowings. It includes, interest paid on borrowings and expenses incurred for the borrowings, such as loan,, discount on issue of debentures etc., Classification on Finance Costs :, (i) Indirect Expenses, such as, l Interest paid on Term Loan from Bank, l Interest paid on Overdraft and Cash Credit Limit from Bank, l Interest paid on Debentures, Bonds and Public Deposits., , 246
Page 733 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, (ii) Other Borrowing Costs, such as, l Loan Processing Fee, l Discount and Issue of Debentures, l Premium Payable on Redemption of Debentures, l Guarantee Charges, l Commission paid for Deposit mobilisation, etc., Depreciation and Amortisation Expenses, Depreciation Expenses : Depreciation is an expense charged to Statement of Profit, and Loss. In fact, it is a cost of tangible fixed assets written-off over their useful life., Amortisation Expenses : Like depreciation, it is also an expense written-off to, Statement of Profit and Loss, being cost of intangible fixed assets written-off over its useful, life. For example, goodwill, technical know-how, patents etc., Other Expenses, Expenses that are not shown under any of the above six categories are shown under, ‘‘Other Expenses’’., Illustration 15, Under which major head of the Statement of Profit and Loss of a Company following, items will be shown :, (i) Carriage Inwards, (ii) Telephone Expenses, (iii) Sales, (iv) Salaries, (v) Interest Earned, (vi) Interest paid on Term Loan, (vii) Purchase of Stock-in-trade, (viii) Depreciation of Machinery, Solution, S.N., (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), , Items, Carriage Inwards, Telephone Expenses, Sales, Salaries, Interest Earned, Interest paid on Term Loan, Purchase of Stock-in-trade, Depreciation of Machinery, , Major Heads, Other Expenses, Other Expenses, Revenue from Operations, Employee Benefit Expenses, Other Revenue, Finance Costs, Purchase of Stock-in-trade, Depreciation & Amortisation, , Illustration 16 (Preparation of Statement of Profit & Loss), From the following information extracted from the books of Hero Ltd. as at 31st March,, 2020, prepare Statement of Profit & Loss :, `, Revenue from Operations, 30,00,000, Purchase of Stock-in-trade, 12,00,000, Salaries, 6,00,000, Bonus, 60,000, Gratuity Paid, 50,000, Interest Paid on Debentures, 10,000, Opening Stock-in-trade, 1,50,000, Closing Stock-in-trade, 2,00,000, Depreciation on Furniture, 20,000, , 247
Page 734 :
SBPD Pub li ca tions Accountancy (XII), Solution, , Hero Ltd., Statement of Profit and Loss, (for the year ended 31st March, 2020), Particulars, , I. Revenue from Operations, II. Other Income, III.Total Revenue (I + II), IV. Expenses :, Purchase of Stock-in-trade, Changes in Inventories of Stock-in-trade, Employee Benefit Expenses, Finance Costs, Depreciation and Amortisation, Total Expenses, V. Profit before Tax (III – IV), , Note, No., 1, , 2, 3, 4, 5, , `, , 30,00,000, —, 30,00,000, 12,00,000, (50,000), 7,10,000, 10,000, 20,000, 18,90,000, 11,10,000, , Notes to Ac counts :, Particulars, 1. Revenue from Operations :, Sales, 2. Changes in Inventories of Stock-in-trade :, Opening Inventory, Less : Closing Inventory, 3. Employee Benefit Expenses :, Salaries, Bonus, Gratuity Paid, 4. Finance Costs :, Interest Paid on Debentures, 5. Depreciation and Amortisation :, Depreciation on Furniture, , `, 30,00,000, `, 1,50,000, 2,00,000, , (50,000), , 6,00,000, 60,000, 50,000, , 7,10,000, 10,000, 20,000, , 7.11 FAST RE VI SION, l Meaning of Financial Statements : Financial Statements present financial information, , about the performance (profitability) and the financial position of a business firm., , l Main Components of Financial Statements :, , (i) Statement of Profit and Loss or Income Statement., ● Profit and Loss Statement or Income Statement refers to statement which is prepared to, ascertain operational position of the enterprise, i.e., revenues earned and expenses, incurred for earning that revenues. It shows net profit or net loss for a particular, accounting period., l (ii) Balance Sheet., ● Balance Sheet is a statement showing total assets and total liabilities of a business, enterprise on a particular date., l Preparation of Balance Sheet of a Company : Balance Sheet of a company is prepared, according to the requirements of Schedule III, Part I of the Indian Companies Act, 2013., According to Sec. 129 of the Companies Act, the Balance Sheet must be prepared in a, prescribed format, depict true and fair view of financial position. Assets and liabilities should, be shown under the given headings with notes at the end., l Significance of Financial Statements : Financial statements are very useful for, shareholders, investors, creditors, management, government etc. Financial statements help, the users in their decision-making process., , 248
Page 735 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, l Limitations of Financial Statements :, , (i) Financial statements depict only those transactions which can be measured in terms of, money., (ii) Financial statements are historical and related to the past and therefore, assets and, liabilities shown in financial statements do not reflect their current values., (iii) Financial statements lack precision and their data are based on comentional procedures,, conventions and personal judgements., , USEFUL QUES TIONS, (A) Long Answer Type Questions, , (5/6/8 Marks Questions), , 1. Draw up a proforma of Balance Sheet as per re quire ments of Sched ule III of the Com pa nies, Act, 2013., (J.A.C., 2018), 2. What is a vertical form of Balance Sheet ? Give its proforma., 3. What is meant by Financial Statement ? Explain its nature., 4. What do you mean by Financial Statements ? State their objectives., 5. What is Financial Statement ? Explain its Limitations., , (B) Short Answer Type Questions, , (3/4 Marks Questions), , 1. Name the major headings into which the liabilities side of a company's Balance Sheet is, organised and presented., 2. Men tion the ma jor heads (in re quired se rial or der) un der which var i ous as sets of a com pany are, to be presented as per the requirements of the Indian Companies Act., 3. Give the ma jor head ings of the li a bil i ties side of the com pany's Bal ance Sheet as per Schedule, III, Part I of the Companies Act 2013., 4. State the ma jor heads of li a bil i ties side of the Bal ance Sheet of a com pany in ac cor dance with, Section 129, Schedule III of the Companies Act, 2013., 5. Men tion any three items that are to be pre sented un der the head ing ‘Re serves and Sur plus' in, the Balance Sheet of a company., 6. What is a Con tin gent Li a bil ity ? Where it is shown in the Bal ance Sheet ? Give three ex am ples, of Contingent Liabilities., 7. What are the elements of financial statements ?, 8. List the ma jor heads un der which var i ous items are shown in the Bal ance Sheet of a com pany., 9. Give the ma jor head ings of the as sets side of com pany's Bal ance Sheet as per Sched ule III, Part I., 10. What is dif fer ence be tween Com pany's Bal ance Sheet and Part ner ship Firm's Bal ance Sheet ?, 11. Explain the importance of Financial Statements., (U.S.E.B., 2019), 12. Name the ma jor head ings un der which the li a bil i ties and as sets of a com pany's Bal ance Sheet, are organised and presented., 13. What do you understand by Financial Statements ?, (U.S.E.B., 2009), 14. What are the purposes (or objectives) of Financial Statements ?, (U.S.E.B., 2016), 15. Explain the nature of Financial Statements., (N.C.E.R.T.), 16. What are the limitations of Financial Statements ?, (U.S.E.B., 2017), Or, State the limitations of Financial Statement., (N.C.E.R.T.), 17A. State the three qualities of good Financial Statements., (J.A.C., 2010), 17B. State the various characteristics of idea Financial Statements., (J.A.C., 2017), 18. What do you understand by fictitious assets ?, 19. Under what headings will you show the following in the Balance Sheet of a company ?, (a) Livestock, (b) Bills Receivable, (c) Underwriting Commission, (d) Proposed Dividend, [Ans. (a) Non-cur rent As sets, sub-head ing Fixed As sets, (b) Cur rent As sets, sub-head ing Trade, Re ceiv able, (c) Shown as neg a tive fig ure un der Re serve & Sur plus, (d) Cur rent Li a bil i t ies,, sub-head ing Short-term Pro vi sions.], , 249
Page 736 :
SBPD Pub li ca tions Accountancy (XII), 20. Give the major headings under which the following items will be shown in a Company’s, Balance Sheet as per Schedule III, Part I of Companies Act, 2013 :, (i) Sun dry Cred i tors; (ii) Pro vi sion for Tax; (iii) Pre lim i nary Ex penses; (iv) Loose Tools; (v) In terest accrued on Investments, and (vi) Goodwill., , (C) Very Short An swer Type Ques tions, , (1/2 Marks Questions with Answers), , 1. What do you mean by financial statement ?, [Ans. Fi nan cial state ments are the an nual re ports which pres ent fi nan cial in for ma tion about, the per for mance and fi nan cial po si tion of a busi ness en ter prise.], 2. What are the two basic financial statements of a company ?, [Ans. (i) In come State ment or State ment of Profit and Loss, (ii) Bal ance Sheet or Po si tion Statement.], 3. What is Income Statement ?, Or, What is Profit and Loss Statement ?, [Ans. In come State ment (or Profit and Loss State ment) is the ac count ing re port which shows the, rev e nues and ex penses and as cer tains the profit/loss for a spec i fied ac count ing pe riod.], 4. What is ‘Position Statement’ or a Balance Sheet ?, [Ans. Po si tion State ment or a Bal ance Sheet is a state ment show ing as sets and li a bil i ties of a, busi ness en ter prise on a par tic u lar date.], 5. State any two objectives of financial statements., (B.S.E.B., 2014), [Ans. (i) To pro vide fi nan cial in for ma tion about economic re sources and ob li ga tion of a busi ness, enterprise., (ii) To as sist in es ti mat ing the earn ings po ten tial of the busi ness.], 6. What is meant by non-current assets ? Give two examples., [Ans. Non-cur rent as sets are those as sets which are kept for pe riod more than one year. It includes fol low ing as sets :, (i) Tan gi ble As sets, (ii) In tan gi ble As sets.], 7. Give any two examples of Current Assets., [Ans. (i) Cash in hand; (ii) Sun dry Debt ors.], 8. Give two examples of Current Liabilities., [Ans. (i) Sun dry Cred i tors; (ii) Bills Pay able.], 9. Give two examples of Liquid Assets., [Ans. (i) Cash in hand and Cash at Bank; (ii) Bills Re ceiv able.], 10. Give two examples of Non-current Assets., [Ans. (i) Plant and Ma chin ery; (ii) Land and Build ing.], 11. Give two examples of Non-current Liabilities ?, [Ans. (i) De ben tures; (ii) Long-term Loans/Pub lic De pos its.], 12. List any two items presented under the heading ‘Long-term Borrowing’., [Ans. (1) De ben tures; (2) Loan from Bank], 13. What is meant by non-current liabilities ? Give two examples., [Ans. Non-cur rent Li a bil i ties are those li a bil i ties which are pay able af ter pe riod of 12 months. It, in cludes fol low ing li a bil i ties : (i) De ben tures; (ii) Loan from Bank.], 14. What are Contingent Liabilities ?, [Ans. Con tin gent li a bil i ties are the li a bil i ties which come into ex is tence on the hap pen ing of, some un cer tain events.], 15. List any two items that can be shown as ‘Contingent Liabilities’ in a Company's, Balance Sheet., [Ans. (i) Claims against the com pany not ac knowl edged as debts., (ii) Li a bil i ties on bills dis counted.], , 250
Page 737 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, 16. In which form a company can prepare Balance Sheet ?, [Ans. In Ver ti cal Form.], 17. Give any two items that are shown under the heading ‘Reserves and Surplus’., [Ans. (i) Gen eral Re serve/Cap i tal Re serve; (ii) Profit and Loss (Cr.).], 18. Give any two items that are shown under the heading ‘Provisions’., [Ans. (i) Pro vi sion for Tax a tion; (ii) Pro vi sion for Em ployee Benefit.], 19. List any two items presented under the heading ‘Fixed Assets’., [Ans. (i) Land and Build ing; (ii) Fur ni ture.], 20. Men tion any two items to be shown un der the head ing ‘In vest ments’ in a Com pany’s, Balance Sheet., [Ans. (i) In vest ment in Gov ern ment Se cu ri ties., (ii) In vest ment in Shares of a Com pany.], 21. How would you show Call-in-arrears in the Balance Sheet of a Company ?, [Ans. Amount of calls-in-ar rears is shown as de duc tion from called-up cap i tal.], 22. How would you show Calls-in-advance in a Company's Balance Sheet ?, [Ans. Calls-in-ad vance is shown on the li a bil i ties side of the Bal ance Sheet un der the head Current Li a bil i ties and sub-head ‘Other Cur rent Li a bil i ties.], 23. Give the name of sub-heads to be shown under the head Shareholders’ Fund., [Ans. (a) Share Cap i tal, (b) Re serve and Sur plus, (c) Money re ceived against Share War rants.], 24. Which part and which schedule of the Companies Act, 2013 prescribe the form of, Balance Sheet ?, [Ans. Part I of Sched ule III pro vides the for mat of Bal ance Sheet of a com pany.], 25. What is interim dividend ?, [Ans. In terim div i dend is a div i dend which is de clared be fore the dec la ra tion of fi nal div i d end for, any par tic u lar year. It is paid be tween two an nual gen eral meet ings.], 26. Un der what heads the fol low ing items on the li a bil i ties side of the Bal ance Sheet of a, Company will be presented :, (a) Un claimed Div i dend, (b) Pro posed Div i dend., [Ans., Items, Heading, (a) Unclaimed Dividend Current Liabilities. Sub-heading : Other Current Liabilities, (b) Provision for Tax, Current Liabilities. Sub-heading : Short-term Provisions, 27. How are Contingent Liabilities shown in the Balance Sheet of the Company ?, [Ans. It is shown as foot notes.], 28. Write two limitations of Financial Statement., (U.S.E.B., 2015), [Ans. 1. Fi nan cial State ments do not re veal a real and cor rect pic ture of the worth of as sets and, their loss of value., 2. Fi nan cial State ments are af fected by es ti mates. There fore, they are not free from bias], 29. In the Balance Sheet of Liabilities side write any four items which are shown in, current liabilities heading., (Raj. Board, 2016), [Ans. (i) Short-term Borrowings (ii) Trade Payables, (iii) Other Cur rent Li a bil i ties, (iv) Shortterm Pro vi sions.], 30. List any two items that are presented under the head ‘Other Current Liabilities’ and, any two items that are presented under the head ‘Other Current Assets’ as per, schedule III of the companies Act, 2013., (C.B.S.E. A.I. , 2016), [Ans. Other Cur rent Li a bil i ties : (i) In come re ceived in a In come, (ii) Un paid div i dend., Other Cur rent As sets : (i) Pre paid Ex penses, (ii) Ad vance Tax paid.], 31. Name the major headings under which the following items will be shown in a, company’s Balance sheet as per schedule III Part 1 of companies Act. 2013., (i) Sundry Creditors, (ii) Provision for Income Tax, (iii) Loose Tools.(J.A.C. Mock Test Paper), [Ans. Sundry Creditors—Current Liabilities, Provision for Tax—Current Liabilities, Loose, Tools—Cur rent As sets.], , 251
Page 738 :
SBPD Pub li ca tions Accountancy (XII), (D) Objective Type Questions, I. Select the cor rect alternative :, 1. Which of the following is not a part of financial statements of a company :, (a) Profit & Loss Statement, (b) Balance Sheet, (c) Ledger Account, 2. Under which heading of Balance Sheet, is General Reserve shown :, (a) Miscellaneous Expenditure, (b) Share Capital, (c) Reserves & Surplus, (d) None of these, 3. Current Assets on the Assets side of Balance Sheet of a Company includes :, (a) Sundry Debtors, (b) Cash in hand, (c) Stock, (d) All of these, 4. Debit Balance of Profit & Loss Statement will be shown on :, (a) Assets Side of Balance Sheet, (b) Liabilities Side of Balance Sheet, (c) Under the head Reserves & Surplus, (d) Under the head Reserve and Surplus as a negative item, 5. Preliminary Expenses are shown in the Balance Sheet under the head :, (a) Fixed Assets, (b) Reserve and Surplus, (c) Loans and Advances, (d) Other Expenditure, 6. Financial Statements are :, (J.A.C., 2019), (a) Anticipated Facts, (b) Recorded Facts, (c) Estimated Facts, (d) None of these, [Ans. 1. (c), 2. (c), 3. (d), 4. (d), 5. (b), 6. (b).], II. State whether the following statements are True or False :, 1. Financial Statements are the end product of accounting process., 2. In the Com pa nies Act, 2013 only ver ti cal for mat has been pre scribed for the Bal ance Sheet of a, Company., 3. Facts and figures presented in Financial Statements are not at all based on personal, judgements., 4. Recorded facts are based on replacement cost., 5. In the Companies Act, 2013, assets have mainly been classified into two categories., 6. Financial Statement include both income statement and position statement., [Ans. 1. True, 2. True, 3. False, 4. False, 5. True, 6. True.], , PRACTICAL PROB LEMS, ❏ Very Short Answer Type Numerical Questions, 1. Classify the following items under Major Head and Sub-head (if any) in the Balance Sheet of a, Company as per Schedule III of the Companies Act, 2013 :, (i) Income received in advance., (ii) Capital Advances., Ans., Head, (i) Current Liabilities, (ii) Non-current Assets, , Sub-head, Other Current Liabilities, Long-term Loans and Advances, , 2. Classify the following items under Major Head and Sub-head (if any) in the Balance Sheet of a, Company as per Schedule III of the Companies Act, 2013 :, (i) Capital Work-in-Progress., (ii) Provision for Employee Benefits., , 252
Page 739 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, Ans., Head, (i) Non-current Assets, (ii) Non-current Liabilities, , Sub-head, Separate Heading, Long-term Provisions, , 3. State under which major headings and sub-headings the following items will be presented in, the Balance Sheet of a Company as per Schedule III of the Companies Act ?, (i) Capital Reserve, (ii) Calls-in-Advance, (iii) Loose Tools, (iv) Bank Overdraft, (CBSE, A.I., 2017), Ans., Head, (i) Shareholders’ Funds, (ii) Current Liabilities, (iii) Current Assets, (iv) Current Liabilities, , Sub-head, Reserves and Surplus, Other Current Liabilities, Inventories, Short-term Borrowings, , ❏ Long Answer Type Numerical Questions, ❏ Headings and Sub-heading of Various Items, 1. Name the sub-head under the head (a) Shareholders’ Funds, and (b) Non-current Liabilities as, per Schedule III, Part I of the Companies Act, 2013., [Ans. (a) (i) Share Capital, (ii) Reserves and Surplus, (iii) Money received against Share, Warrants,, (b) (i) Long-term Borrowings, (ii) De ferred Tax Li a bil i ties (Net), (iii) Other Long-term, Li a bil i ties, (iv) Long-term Pro vi sions.], 2. Name the sub-heads under the head ‘Non-current Assets’ in the Balance Sheet as per Schedule, III of the Indian Companies Act, 2013., [Ans. (a) Fixed As sets, (b) Non-cur rent In vest ments, (c) De ferred Tax As sets (Net), (d) Longterm Loans and Ad vances, (e) Other Non-current As sets.], 3. Under what heads will you show the following items on the equity and liabilities side of the, Balance Sheet of a limited company ?, (i) Proposed Dividend, (ii) Unclaimed Dividend, (iii) Public Deposits, (iv) Debentures, (v) Share Forfeited Account, (vi) Provision for Provident Fund, [Ans. (i) Contingent Li a bil i ties un der Notes to Ac count of Bal ance Sheet, (ii) Cur rent Li a bil i ties un der Other Cur rent Li a bil i ties., (iii) Non-cur rent Li a bil i ties un der De pos its., (iv) Non-cur rent Li a bil i ties un der Long-term Borrowings., (v) Share hold ers’ Funds un der Share Cap i tal., (vi) Non-cur rent Li a bil i ties un der Long-term Pro vi sions.], 4. Give the major headings under which the following items will be shown in Company's Balance, Sheet as per Schedule III, Part I of Companies Act, 2013 :, (i) Loose Tools, (ii) Bills Receivable, (iii) Discount on Issue of Debentures/Shares, (iv) Patents, (v) General Reserve, (vi) Debentures, (C.B.S.E., A.I., 2011, Set III), [Ans. (i) Current Assets under ‘Inventories.’, (ii) Cur rent As sets un der ‘Trade Re ceiv ables.’, (iii) De ducted from Se cu ri ties Pre mium Re serve or shown as Neg a tive item un der Re serve, & Sur plus., , 253
Page 740 :
SBPD Pub li ca tions Accountancy (XII), (iv) Non-cur rent As sets un der ‘In tan gi ble As sets’., (v) Share hold ers’ Funds un der Re serve and Sur plus., (vi) Non-cur rent Li a bil i ties un der Long-term Borrowings.], 5. Under what heads and sub-heads will the following items appear in the Balance Sheet of a, Company as per Schedule III, Part I of the Companies Act, 2013. : (i) Provision for Tax,, (ii) Debentures, (iii) Loose Tools, (iv) Calls-in-advance., [Ans., S.No., (i), (ii), (iii), (iv), , Head ing, Current Liabilities, Non-current Liabilities, Current Assets, Current Liabilities, , Sub-heading, if any, Short-term Provision, Long-term Borrowings, Inventories, Other Current Liabilities, , 6. State the relevant main heads and sub-heads under which the following items would be, disclosed in the Balance Sheet of a company as per the Companies Act :, (i) Bills Receivable, (ii) Work-in-progress, (iii) Livestock, (iv) Stock., [Ans., S.No., (i) Current Assets, (ii) Current Assets, (iii) Non-current Assets, (iv) Current Assets, , Heading, , Sub-heading, if any, Trade Receivables, Inventories, Tangible Assets, Inventories, , ❏ Disclosure of Share Capital in the Balance Sheet, 7. On 1st April, 2020, Ashok Ltd. was formed with an authorised capital of ` 1,00,00,000 divided, into 2,00,000 equity shares of ` 50 each. The company issued prospectus inviting applications, for 1,50,000 shares. The issue price was payable as under :, On Application : ` 15, On Allotment : ` 20, On Balance., The issue was fully subscribed and the company allotted shares to all the applicants. The, company did not make the call during the year., The company also issued 5,000 shares of ` 50 each fully paid to the vendor for purchase of office, premises., (a) Show Share Capital in the Balance Sheet of the Company as per Schedule III., (b) Also prepare Notes to Accounts., [Ans. Share Capital ` 5,500 thousand.], ❏ Reserves and Surplus, 8. Katyani Ltd. has the following balances on 1st April, 2019 :, `, Capital Reserve, 8,50,000, Statement of Profit and Loss (Surplus), 4,00,000, Dur ing the year ended 31st March, 2020 it earned a profit of ` 6,50,000. How would you show, these items in the Balance Sheet and Notes to Accounts ?, [Ans. Reserves and Sur plus ` 19,00,000.], ❏ Items to be shown on the Li a bil ity Side, 9. The following figures were extracted from the Trial Balance of X Ltd. :, Share Cap i tal ` 1,00,000., 10,000 Equity Shares of ` 10 each fully called-up and paid-up., Securities Pre mium ` 10,000., 12% Debentures ` 50,000., Public De posit ` 10,000., Cred i tors ` 5,000., , 254
Page 741 :
Fi nan cial State ment of a Com pany : Bal ance ........... Loss, You are re quired to draw up the li a bil i ties side of a Bal ance Sheet of the Company ac cord ing to, the requirements of the Companies Act., [Ans. Total of the Liabilities side of the B/S ` 1,75,000], ❏ Items to be shown on the As sets Side, 10. The following figures were extracted from the Trial Balance of Tarun Ltd. :, `, Land, 5,00,000, Vehicles, 2,00,000, 10% Govt. Bonds, 50,000, Accrued Interest on Investments, 5,000, Stock-in-trade, 75,000, Sundry Debt ors, 3,00,000, Bills Receivable, 40,000, Preliminary Expenses, 30,000, You are re quired to draw up the as sets side of the Bal ance Sheet of the Com pany ac cord ing to, the requirements of the Companies Act., [Ans. Total of the Assets side of the B/S ` 11,70,000.], ❏ Prep a ra tion of Bal ance Sheet, 11. From the fol low ing in for ma tion ex tracted from the books of XY Ltd., pre pare a Bal ance Sheet of, the Company as at 31st March, 2020 as per Schedule III of the Companies Act, 2013 :, (` in '000), Particulars, 10% Debentures, Trade Payable, Share Capital, Reserves and Surplus, Fixed Assets (Tangible), Inventories, Trade Receivables, Cash and Cash Equivalents, , Amount, `, , 500, 30, 400, 90, 800, 20, 80, 120, , [Ans. Total of Balance Sheet ` 1,020 thousand], 12. The following balances were extracted from the books of Raman Ltd. on 31st Dec., 2018 :, Land ` 10,00,000, Immovable Prop er ties ` 10,00,000, Loose Tools ` 10,000, Bills Receivable, ` 2,30,000; Profit & Loss Statement (Dr.) ` 1,20,000, Share Cap i tal ` 18,00,000, Reserve and, Surplus ` 2,00,000, 12% De ben tures ` 5,50,000; Provision for Tax a tion ` 10,000, Creditors, ` 1,00,000, Goodwill ` 1,00,000; Cash at Bank ` 2,00,000., Pre pare Bal ance Sheet of the com pany as per Sched ule III, Part I of the Com pa nies Act, 2013., [Ans. Total of Balance Sheet ` 25,40,000], 13. The fol low ing bal ances are sup plied, on the ba sis of which you are re quired to show the ma jor, appropriate heads under which the items given below will appear in the Balance Sheet of, Veekay Ltd. as on 31st March, 2020 :, `, Plant and Machinery, 5,60,000, Building, 10,00,000, Equity Share Capital (Authorised), 20,00,000, Equity Share of ` 100 each, ` 70 called and paid-up, 14,00,000, 10% Debentures, 55,000, Discount on Issue of 10% Debentures, 5,000, Furniture and Fixture, 15,000, Long-term Bank Loan (Secured), 1,25,000, [Ans. Bal ance Sheet To tal ` 15,75,000], , 255
Page 742 :
SBPD Pub li ca tions Accountancy (XII), ❏ Items of Statement of Profit, ❏ Revenue from Operations, 14. Calculate Revenue from Operations, Other Income and Total Revenue for a manufacturing, company from the following information :, Sales ` 6,00,000; Sales Re turn ` 1,00,000; Sale of Scrap ` 12,500; In ter est on Fixed De pos its, ` 50,000; Dividend Received ` 25,000., [Ans. (I) Rev e nue from Op er a tions ` 6,00,000 – ` 1,00,000 + 12,500 = 5,12,500; (II) Rev e nue, from Other In come ` 75,000; (III) Total Rev e nue ` 5,87,500.], 15. Calculate Revenue from Operations, Other Income and Total Revenue of a non-financial, company from the following information :, Sales ` 24,00,000; Sales Re turn ` 4,00,000; Sale of Scrap ` 50,000; In ter est on Fixed De posit, ` 1,00,000 Dividend Earned ` 25,000., [Ans. (I) Rev e nue from Op er a tions ` 20,50,000; (II) Other In come ` 1,25,000; (III) Total, Rev e nue ` 21,75,000.], 16. Calculate Revenue from Operations, Other Income and Total Revenue for a Financial Company, from the following information :, `, Dividend Received, 2,50,000, Commission Received, 25,000, Interest on Loans, 15,00,000, Profit on Sale of Building, 1,75,000, Miscellaneous Income, 15,000, [Ans. (I) Revenue from Op er a tions ` 17,75,000; (II) Other In come ` 1,90,000; (III) Total, Rev e nue ` 19,65,000.], ❏ Preparation of Statement of Profit and Loss, 17. Prepare Statement of Profit and Loss from the following balances extracted from the books of, AB Ltd. as at 31st March, 2020 :, `, Sales, 12,00,000, Commission Received, 50,000, Cost of Material Consumed, 5,00,000, Purchase of Stock-in-trade, 3,00,000, Salaries, 1,25,000, Wages, 25,000, Depreciation, 20,000, Advertising Expenses, 10,000, [Ans. Total In come ` 12,50,000; Total Ex penses ` 9,80,000; Profit before Tax ` 2,70,000.], 18. From the following balances extracted from the books of X Ltd. prepare Statement of Profit and, Loss as at 31st March, 2020 :, `, Depreciation on Machinery, 32,000, Purchases of Raw Materials (Adjusted), 8,00,000, Closing Stock, 30,000, Wages, 2,40,000, Sales, 20,00,000, Salaries, 2,00,000, Interest paid on Debentures, 20,000, Opening Stock, 40,000, [Ans. Profit before Tax ` 6,98,000.], , l, , 256
Page 743 :
8, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 8.1 Concept of Financial Analysis or Meaning of Analysis of, Financial Statements, , 258, , 8.2 Meaning of Interpretation of Financial Statements, , 258, , 8.3 Features of Financial (Statement) Analysis, , 258, , 8.4 Objectives or Purposes of Financial Analysis, , 259, , 8.5 Importance or Advantages of Analysis of Financial Statements, , 259, , 8.6 Importance of Financial Analysis to User Groups, , 260, , 8.7 Types or Methods of Financial Analysis, , 261, , 8.8 Limitations of Financial Analysis, , 262, , 8.9 Fast Revision, , 263, , ❑ Useful Questions, , 264, , 257
Page 749 :
Anal y sis of Fi nan cial State ments, (2) Un re li able Com par i son : There are dif fer ent meth ods for charg ing de pre ci a tion, and val u a tion of stock. In ter est may be charged on dif fer ent rates. In this way, there is, suf fi cient pos si bil ity of ma nip u la tion and the fi nan cial state ments have to suf fer. As a re sult, financial analysis also proves to be defective. In fact, in many cases comparisons are, unreliable., (3) Ig nor ing Price-level Changes : The re sults shown by fi nan cial state ments may, be mis lead ing, if price-level changes have not been ac counted for. Changes in price af fects, cost of pro duc tion, sales and value of as sets as a con se quence com pa ra bil ity of ra tios also, suffers., (4) Ignoring Qualitative Aspect : Financial analysis does not measure the, qual i ta tive as pect of the busi ness. It does not show the skill, tech ni cal know-how and the, ef fi ciency of its em ploy ees and man ag ers., (5) Fi nan cial Anal y sis is only a Tool, not the Fi nal Rem edy : Anal y sis of fi nan cial, state ment is a tool to mea sure the prof it abil ity, ef fi ciency and fi nan cial sound ness of the, busi ness. It should be noted that per sonal judge ment of the anal y sis is more im por tant in, financial analysis. We should not rely on sin gle ra tio., (7) Dif fer ent Tech niques of Anal y sis : There are so many tech nique of anal y sis of, financial statements. Therefore, the analysis, interpretation and results are of different, types. It cre ate con fu sion in the mind of analyser., (8) Win dow Dress ing : Usu ally win dow dress ing is made in fi nan cial state ments to, cover up bad financial position. It creates a bad effect on the analysis of financial, statements., (9) Dif fi culty in Fore cast ing : As fi nan cial state ment is a re cord of past events and, his tor i cal cost. The de ci sions drawn from such state ments can not be used for the pur pose of, forecasting., 8.9 FAST RE VI SION, l Meaning of Analysis of Financial Statements : Analysis of financial statement is a, systematic process of analysing and evaluating the relationship between the items of the, Balance Sheet and Income Statement. Hence, financial analysis reveals the financial strength, and weaknesses of the firm. Financial analysis includes both analysis and interpretation., l Objectives or Purposes of Financial Statement Analysis : (i) To judge the profitability,, (ii) To know the financial strength, (iii) To assess the solvency position of the business, (iv) To, make comparison of the performance, (v) To assess short-term and long-term liquidity, position of the firm., l Different Users of Financial Analysis : Shareholders, Trade Creditors, Lenders, Financial, Manager, Management, Investors, Tax Authorities etc., l Significance of Financial Analysis : (i) In judging the profitability and operational, efficiency of the business. (ii) In measuring short-term financial position. (iii) In measuring, long-term financial position. (iv) In assessing growth potential of the business. (v) In, intra-firm and inter-firm comparison of the performance. (vi) In judging the solvency position, of the concern., l Financial Analysis is very useful in (i) Security Analysis, (ii) Credit Analysis, (iii) Debt, Analysis, (iv) Dividend Analysis, and (v) General Analysis., l Limitations of Financial Analysis : (i) Financial analysis is adversely effected by, limitations or disadvantages of financial statements. (ii) Analysis of financial statements, ignore the qualitative elements like quality of management, quality of labour force, public, relations, etc. (iii) Analysis of financial statements ignore the price level changes since the, financial statements are prepared on historical cost basis. (iv) Financial analysis is very much, affected by window dressing of financial statements. (v) It is affected by personal ability and bias of, the analyst., , 263
Page 750 :
SBPD Pub li ca tions Accountancy (XII), USEFUL QUESTIONS, (A) Long Answer Type Questions, , (5/6/8 Marks Questions), , 1., 2., 3., 4., , What is meant by Anal y sis of Fi nan cial State ments ? What are their ob jec tives and lim i ta t ions ?, Briefly explain the objectives and limitations of Financial Statement., What is meant by Analysis of Financial Statement ? Briefly explain its limitations., ‘‘Anal y sis of Fi nan cial State ments is af fected by win dow dress ing and the per sonal abil ity and, bias of the analyst.’’ Comment., 5. What is the importance of analysis of Financial Statements., 6. Define Financial Analysis. Distinguish between vertical and horizontal analysis., 7. State who may be interested in the Analysis of Financial Statements and why ?, 8. What is Financial Statement Analysis ? Why are (a) Creditors for supply of goods, and, (b) Shareholders interested in it ?, 9. ‘‘Anal y sis of Fi nan cial State ments suf fers from lack of ini tia tive anal y sis and dif fi culty in forecasting.’’ Comment., 10. What is meant by Fi nan cial State ment Anal y sis ? What is the in ter est of share hold ers and, prospective investors in such analysis ?, 11. State the mean ing of ‘Fi nan cial State ment Anal y sis’. List the par ties who may be in ter ested in, such analysis., (B) Short Answer Type Questions, (2/4 Marks Questions), 1. What is meant by Financial Statement Analysis ?, Or, Explain the meaning of Analysis of Financial Statements., (U.S.E.B., 2010, 18), 2. Describe the objectives (purposes) of Financial Statement Analysis., (C.B.S.E., A.I., 2017, 19), Or, Explain briefly four objectives of Analysis of Financial Statements., (C.B.S.E., 2019), 3. Explain limitations of Financial Analysis., (C.B.S.E., A.I., 2009), Or, What are the limitations of Analysis of Financial Statement ?, 4. Discuss the purposes of Financial Statement Analysis., 5. Briefly explain the advantages (or importance) of Analysis of Financial Statements., 6. Explain the importance of Financial Analysis., (N.C.E.R.T.), 7. What is meant by Anal y sis of Fi nan cial State ments ? Briefly ex plain the in ter est of share h olders in such an analysis., 8. What is meant by ‘Analysis of Financial Statements' ? State any two limitations., 9. What is the im por tance of Anal y sis of Fi nan cial State ments for cred i tors, bank ers and finan cial, institutions ?, 10. What is meant by Anal y sis of Fi nan cial State ments ? What is the in ter est of the man age ment, and shareholders in such analysis ?, 11. Explain meaning and importance of Financial Statements., 12. Explain (briefly any) three limitations of Analysis of Financial Statements., (J.A.C., 2011; U.S.E.B., 2009, 18), 13. Explain the meaning of Analysis of Financial Statements., 14. Ex plain briefly the in ter est of share hold ers and cred i tors in the Anal y sis of Fi nan cial Statements of a company., 15. Explain briefly any three objectives of Analysis of Financial Statements., 16. What is meant by Anal y sis of Fi nan cial State ment ? How is it use ful to in ves tors and em ploy ees ?, 17. How is the Analysis of Financial Statement useful to customers and employees ?, 18. Explain the meaning of Analysis and Interpretation., (N.C.E.R.T.), 19. What is meant by Anal y sis of Fi nan cial State ments ? How is it im por tant from the view point of, creditors and management ?, 20. What is meant by Anal y sis of Fi nan cial State ment ? What is its im por tance to share hold ers and, creditors ?, 21. Ex plain briefly the in ter est of share hold ers, lend ers and tax a tion au thor i ties in the Anal y sis of, Financial Statement., , 264
Page 752 :
SBPD Pub li ca tions Accountancy (XII), , 12., , 13., 14., 15., 16., 17., 18., , 19., 20., 21., , [Ans. Potential investors are interested in knowing the present profitability and financial, sound ness as well as fu ture pros pects to de ter mine whether they should in vest in the, company or not.], What is the in ter est of lend ers in the anal y sis of fi nan cial state ments of a com pany ?, [Ans. (i) They are in ter ested in know ing the profit-earn ing ca pac ity of the busi ness and longterm solvency., (ii) They are interested in regular payment of interest and repayment of principal, amount on sched uled dates.], What is the in ter est of cred i tors in the anal y sis of fi nan cial state ments of a com pany ?, [Ans. Trade cred i tors are in ter ested in the firm's abil ity to meet their claims over a short pe riod of, time. Their anal y sis will, there fore, con fine to the eval u a tion of the firm's li quid ity position.], What is the significance of financial statement analysis ?, [Ans. Anal y sis of fi nan cial state ment mea sures the en ter prise's li quid ity, prof it abil ity, solvency, and other in di ca tor to de ter mine the ef fi ciency and per for mance of the business enterprise.], Discuss the limitations of financial analysis and interpretation., (J.A.C., 2010), [Ans. (1) Financial analysis does not consider price level changes. (2) It suffers from the, lim i ta tions of fi nan cial state ments.], Give the ar eas of in ter est for man age ment while ana lys ing the fi nan cial state ments., [Ans. (i) Over all prof it abil ity of the en ter prise; (ii) Fi nan cial con di tion of the en ter prise.], State any two advantages (or uses) of the financial statements., [Ans. (i) Use ful in tak ing de ci sions for in vest ment; (ii) Use ful in tak ing de ci sions for grant ing, loans and ad vances.], State the interest of tax authorities in the analysis of financial statements., (C.B.S.E., O.D., 2011), [Ans. Tax authorities are interested to know whether the financial statements have been, prepared in accordance with the legal provisions. Further they are interested in, ensuring proper assessment of income and sales etc.], State any one limitation of Financial Statement Analysis., (C.B.S.E., 2013), [Ans. The qualitative el e ments like qual ity of man age ment, qual ity of la bour force etc. are, ig nored while carrying out the Anal y sis of Fi nan cial State ments.], State two limitations of Analysis of Financial Statements., [Ans. 1. Unreliable comparison, and 2. Window Dressing.], (U.S.E.B., 2015), What is Financial Analysis ?, , (D) Objective Type Questions, I. Select the correct alternative :, 1. The financial statements of a business en terprise in clude :, (a) Balance Sheet, (b) Profit & Loss Account, (c) Cash Flow Statement, (d) All the above., 2. An Annual Report is issued by company to its :, (a) Directors, (b) Auditors, (c) Shareholders, (d) Management, 3. Balance Sheet provides information about financial position of the enterprise :, (a) At a Point of Time, (b) Over a Period of Time, (c) For a Period of Time, (d) None of these, 4. Profit & Loss Statement is also called ................ :, (a) Balance Sheet, (b) Income Statement, (c) Operating Profit, (d) Investment, [Ans. 1. (d), 2. (c), 3. (a), 4. (b).], II. State whether the following statements are True or False :, 1. The ob jec tive of Fi nan cial State ment Anal y sis is to as sess only the long-term sol vency of the firm., 2. Analysis based on Financial Statements are always reliable., 3. In ter pre ta tion is not pos si ble with out anal y sis and anal y sis with out in ter pre ta tion is mean ing less., 4. Horizontal analysis is also known as dynamic analysis., 5. Vertical analysis is also known as static analysis., 6. Financial analysis spots symptoms but does not arrive at diagnosis., [Ans. 1. False, 2. False, 3. True, 4. True, 5. True, 6. True.], , l, , 266
Page 753 :
9, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 9.1 Meaning of Tools of Financial Analysis, , 268, , 9.2 Tools or Techniques or Methods of Financial Analysis, , 268, , ● Comparative Financial Statements ● Common-size Statements, ● Ratio Analysis ● Cash Flow Statement ● Fund Flow Statement, ● Trend Analysis ● Break-even Analysis, , 9.3 Comparative Statements, , 269, , ● Comparative Income Statement ● Comparative Balance Sheet, , 9.4 Fast Revision, , 283, , ❑ Useful Questions, , 284, , ❑ Practical Problems, , 286, , 267
Page 757 :
Tools for Fi nan cial State ment ........... State ments, ❏ Objectives of Comparative Statement of Profit & Loss, 1. To analyse income and expenditure of two or more years., 2. To ana lyse in crease or de crease in in come and ex pen di ture in ab so lute amount as, well as perentage., 3. To analyse increase or decrease in profit of the organisation., 4. To make forecasts of the profitability of the firm for future., 5. To show the weak and strong points., ❏ Prep a ra tion of Com par a tive In come State ment, The Com par a tive Profit & Loss Statement is pre pared show ing in crease or de crease in, the items both in ab so lute form and in rel a tive form, i.e., show ing the change in per cent ages., It has five columns :, 1. First column for items of in come or ex penses., 2. Sec ond col umn for pre vi ous year's orig i nal fig ures., 3. Third col umn for cur rent year's orig i nal fig ures., 4. Fourth col umn for changes in ab so lute fig ures., 5. Fifth col umn shows rel a tive changes (in per cent age)., Absolute Change, %=, × 100, Original figures of Previous year, Since the fig ures for two or more years, are shown side by side, the an a lyst can quickly, as cer tain whether sales have de creased or in creased, whether cost of sales has de creased or, in creased and so on. This will help the an a lyst to de rive mean ing ful conclusions., Format of Comparative Statement of Profit & Loss, Comparative Statement of Profit & Loss, (for the years ended ........ and .........), Particulars, , Note, No. Absolute Figures, , Changes, , Absolute, Percentage, 2018-19 2019-20 change Incre- Change Increase or Decrease ase or Decrease, 1, , I., II., III., IV, , Revenue from Operations, Other Income, Total Revenue (I + II), Less : Expenses :, Cost of Materials Consumed, Purchases of Stock-in-trade, Employees Benefits Expenses, Finance Costs, Depreciation and Amortization, Expenses, Other Expenses, Total Expenses, V. Profit before Tax (III – IV), VI. Tax, VII. Profit after Tax (V – VI), , 2, A, , 3, B, , 4, B–A=C, , 5, C × 100, =D, A, , `, , `, , `, , ......., ......., ......., ......., ......., ......., ......., ......., , ......., ......., ......., ......., ......., ......., ......., ......., , ......., ......., ......., ......., ......., ......., ......., ......., , ......., ......., ......., ......., ......., ......., ......., ......., , ......., ......., ......., ......., ......., ......., , ......., ......., , ......., ......., , ......., ......., ......., , ......., ......., ......., , ......., ......., ......., ......., ......., ......., , 271
Page 758 :
SBPD Pub li ca tions Accountancy (XII), Explanations, 1. Revenue from Operations : It is revenue earned from the operating activities of, the enterprise., Examples : Sales (Net of Returns), Sale of Scrap, Trading Commission, Cash Discount, Received, Revenue from Services, etc.., 2. Other Income : Other incomes are those incomes which are not revenue from, operations., Examples : (i) Rent Received, (ii) Interest and Dividend Received, (iii) Profit from Sale, of Fixed Assets and Investments., 3. Expenses :, Cost of Materials Consumed :, Opening Stock of Materials + Purchases of Materials + Direct Expenses – Closing Stock, of Materials, Or, Purchases + Direct Expenses + Changes in Inventories1, 1. Changes in Inventories = Opening Stock – Closing Stock., , 4. Employees Benefit Expenses : Wages, Salaries, Staff Welfare Expenses, etc., 5. Other Expenses : Telephone Expenses, Selling and Distribution Expenses,, Advertisement Expenses, Cash Discount Allowed, Bad Debts, Provision for Doubtful Debts,, Loss on Sale of Fixed Assets, Loss on Sale of Investments etc., ILLUSTRATIONS AND PRAC TICAL PROB LEMS : AT A GLANCE, Il lus tra tion No., 1 to 8, 9, 10, 11, , Practical, Prob lem No., , Details, Com par a tive In come State ment, Com par a tive Bal ance Sheet, Miscellaneous and Boards’ Questions, , 11, , 1 to 8, 9 to 11, 12 to 18, , Total, , 18, , Illustration 1 (Comparative Income Statement), Prepare Com par a tive State ment of Profit & Loss from the following :, Particulars, , Note No., , 31.3.2020, `, , Revenue from Operations, Expenses, Other Income, , So lu tion, , 15,00,000, 10,50,000, 1,80,000, , 1, , 10,00,000, 6,00,000, 2,00,000, , Note No., , Absolute Percentage, Change, Change, 31.3.2019 31.3.2020 (Increase (Increase, or, or, Decrease) Decrease), 4 × 100, 2, 3, 4(3 – 2), 2, `, , Revenue from Operations, Other Income, , 272, , `, , Com par a tive State ment of Profit & Loss, (for the years ended 31st March, 2019 & 2020), Particulars, , I., II., , 31.3.2019, , `, , 10,00,000 15,00,000, 2,00,000 1,80,000, , `, , 5,00,000, (20,000)*, , 501, (10)*
Page 759 :
Tools for Fi nan cial State ment ........... State ments, III. Total Revenue (I + II), IV. Less : Expenses, V. Profit before Tax (III – IV), * Brack ets in di cate neg a tive items., 5,00,000 × 100, 1, = 50%;, 10,00,000, , 12,00,000 16,80,000, 6,00,000 10,50,000, 6,00,000 6,30,000, 2, , 4,80,000, 4,50,000, 30,000, , 402, 75, 5, , 4,80,000 × 100, = 40% and so on., 12,00,000, , Illustration 2, From the following details, prepare a Comparative Profit and Loss Statement :, Particulars, , Note No., , `, , Revenue from Operations, Other Income (% of Revenue from Operations), Expenses (% of Revenue from Operations), , So lu tion, , 30,00,000, 15%, 60%, , 31.3.2019, `, , 20,00,000, 20%, 50%, , Com par a tive State ment of Profit & Loss, (for the years ended 31st March, 2019 & 2020), Particulars, , Note, No., , Absolute, Absolute Absolute Change Percentage, Change, Figure, Figure, (Increase (In crease or, 31.3.2019 31.3.2020, or, Decrease) Decrease), A, , I., II., III., IV., V., , 31.3.2020, , B, `, , Revenue from Operations, Other Income, Total Revenue (I + II), Expenses, Profit before Tax (III – IV), , 20,00,000, 4,00,000, 24,00,000, 10,00,000, 14,00,000, , `, , B – A = C C × 100 = D, A, `, , 30,00,000 10,00,000, 4,50,000, 50,000, 34,50,000 10,50,000, 18,00,000 8,00,000, 16,50,000 2,50,000, , 50, 12.50, 43.75, 80, 17.85, , Illustration 3, From the following Statement of Profit and Loss of Star Ltd. for the years ended 31st, March, 2019 and 2020, prepare a Comparative Statement of Profit and Loss :, Particulars, , Note No., , 31.3.2020, `, , Revenue from Operations, Employees Benefit Expenses, Other Expenses, Tax, , So lu tion, , 20,00,000, 10,00,000, 1,00,000, 50%, , `, , 16,00,000, 8,00,000, 2,00,000, 50%, , Com par a tive State ment of Profit & Loss, , Particulars, , Note, No., , Absolute Percentage, Change, Change, Absolute Absolute (Increase (Increase, Figure, Figure, or, or, 31.3.2019 31.3.2020, Decrease) Decrease), A, , B, `, , I., , 31.3.2019, , Revenue from Operations, , `, , 16,00,000 20,00,000, , B–A=C, , C × 100, A, , `, , 4,00,000, , 251, , 273
Page 760 :
SBPD Pub li ca tions Accountancy (XII), II., III., IV., V., VI., , Less : Expenses :, Employees Benefit Expenses, Other Expenses, Total Expenses (I + II), Less : Profit before Tax (I – III), Tax (@ 50% of IV), Profit after Tax (IV – V), , * Brackets indicate negative items., 4,00,000 × 100, 1, = 25%;, 16,00,000, , 2, , 8,00,000 10,00,000 2,00,000, 2,00,000 1,00,000 (1,00,000), 10,00,000 11,00,000 1,00,000, 6,00,000 9,00,000 3,00,000, 3,00,000 4,50,000 1,50,000, 3,00,000 4,50,000 1,50,000, , 25, (50)2, 10, 50, 50, 50, , (1,00,000) × 100, = (50)%., 2,00,000, , Illustration 4, From the following ‘Statement of Profit and Loss’ for the year ended 31st March, 2019, and 2020, prepare a ‘Comparative Statement of Profit and Loss’ of Good Services Ltd. :, Particulars, , Note No., , 2019-20, , 2018-19, , `, , `, , Revenue from Operations, , 20,00,000 15,00,000, , Other Incomes, , 10,00,000, , Expenses, , 21,00,000 15,00,000, , Rate of Interest was 50%., , 4,00,000, , (C.B.S.E., 2019), , Solution, Com par a tive Statement of Profit, (for the years ended 31st March, 2019 and 2020), Particulars, , 2018-19, `, , I. Revenue from Operations, II. Other Incomes, , 2019-20, , Absolute, Change, % Change, (Increase/, +/–, Decrease), , `, , 15,00,000 20,00,000 + 5,00,000, 4,00,000 10,00,000 + 6,00,000, , III. Total Revenue (I + II), , 19,00,000 30,00,000 + 11,00,000, , IV. Expenses, , 15,00,000 21,00,000 + 6,00,000, , V. Profit before Tax (III – IV), Less : Tax @ 50%, VI.Profit af ter Tax, , + 33.33, + 150.00, +, , 57.89, , +, , 40.00, , 4,00,000, , 9,00,000 + 5,00,000, , + 125.00, , 2,00,000, , 4,50,000 + 2,50,000, , + 125.00, , 2,00,000, , 4,50,000 + 2,50,000, , + 125.00, , Illustration 5(A), Prepare a Comparative Income Statement of A Ltd. with the help of the following, in formation :, 31-3-2019, 31-3-2020, `, , Sales, Cost of Goods Sold, Other Expenses, Rate of Tax : 50% of Net Profit before Tax, , 274, , 2,00,000, 60% of Sales, 8,000, , `, , 4,00,000, 70% of Sales, 12,000
Page 761 :
Tools for Fi nan cial State ment ........... State ments, Solution, , Com par a tive In come State ment, (for the years ended 31st March., 2019 & 2020), 2019, , Particulars, 1, , Absolute, Change, (Col. 3 – 2), 4, , 2020, , 2, , 3, `, , `, , % In crease or De crease, 5, , `, , A. Revenue from Operations, (Net Sales), , 2,00,000 4,00,000, , 2,00,000, , 2,00,000 × 100, = 100, 2,00,000, , B. Less : Expenses :, Cost of Goods Sold, , 1,20,000 2,80,000, , 1,60,000, , 1,60,000 × 100, = 133.33, 1,20,000, 4,000 × 100, = 50, 8,000, 1,64,000, × 100 = 128.13, 1, 28,000, 36,000 × 100, = 50, 72,000, 18,000 × 100, = 50, 36,000, 18,000, × 100 = 50, 36,000, , Other Ex penses, , 8,000, , Total Expenses (B), , 12,000, , 4,000, , 1,28,000 2,92,000, , 1,64,000, , C. Net Profit be fore Tax (A – B), , 72,000 1,08,000, , 36,000, , D. Less : In come-tax, , 36,000, , 18,000, , E. Profit af ter Tax (C – D), , 36,000, , 54,000, 54,000, , 18,000, , Illustration 5(B), From the following data, prepare a Statement of Profits in the Comparative form :, 31.3.2019, , Particulars, Sales, Gross Profit Ratio, Administrative Expenses, Income-tax, , Solution, , 31.3.2020, , ` 6,00,000 ` 8,00,000, , 30%, , 40%, , ` 40,000 ` 1,00,000, , 50%, , 50%, , Com par a tive Statement of Profits, (for the years ended 31st March 2019 and 2020), Particulars, , Revenue from Operations (Sales), Other Income, Total Revenue (I + II), Expenses :, (a) Cost of Goods Sold, (b) Administrative Expenses, Total Expenses, V. Profit before Tax (III – IV), VI. Less : Income-tax @ 50%, , Absolute Percentage, Note 31.3.2019 31.3.2020 Change, Change, No., A, B, B – A = C C/A × 100, , I., II., III., IV., , 1, , `, , `, , 6,00,000, —, 6,00,000, , 8,00,000, —, 8,00,000, , 2,00,000, —, 2,00,000, , `, , 33.33, —, 33.33, , 4,20,000, 40,000, 4,60,000, 1,40,000, 70,000, 70,000, , 4,80,000, 1,00,000, 5,80,000, 2,20,000, 1,10,000, 1,10,000, , 60,000, 60,000, 1,20,000, 80,000, 40,000, 40,000, , 14.29, 150.00, 26.09, 57.14, 57.14, 57.14, , 275
Page 762 :
SBPD Pub li ca tions Accountancy (XII), Work ing Note :, 1. Cost of Goods Sold :, , 2019, `, 6,00,000, , Sales, , 6,00,000 × 30 , Less : Gross Profit , , , , 100, , 2020, `, 8,00,000, , 8,00,000 × 40 , 3,20,000, , 100, 4,20,000, 4,80,000, 1,80,000 , , , Illustration 6, Prepare a Comparative Statement of Profit and Loss from the following information :, 31.3.2019, , fooj.k (Particulars)Particulars, , `, , 31.3.2020, `, , Revenue from Operations, , 30,00,000, , 40,00,000, , Purchase of Stock-in-trade, Changes in Inventories, Other Expenses, , 19,00,000, (1,00,000), 1,80,000, , 20,00,000, 2,00,000, 1,76,000, , (C.B.S.E., 2011, Set II), So lu tion, , Com par a tive Statement of Profit and Loss, (for the year ended 31st March 2019 and 2020), Absolute Figures, , Particulars, , Absolute Percentage, Change, Change, 31.3.2020 31.3.2019 Increase/ Increase/, Decrease Decrease, A, , B, `, , I. Revenue from Operations, II. Less : Expenses :, , C(A – B), `, , 40,00,000 30,00,000 10,00,000, , Purchases of Stock-in-trade, 20,00,000 19,00,000, Changes in Inventories, 2,00,000 (1,00,000), Other Expenses, 1,76,000 1,80,000, To tal Ex penses 23,76,000 19,80,000, III. Profit before Tax (I – II), , 16,24,000 10,20,000, , %, , `, , 33.33, , 1,00,000, 3,00,000, (4,000), 3,96,000, , 5.26, 300.00, (2.22), 20.00, , 6,04,000, , 59.21, , Note : Fig ures of current year, i.e., 2020 have been pre sented first., , Illustration 7(A), From the fol low ing in for ma tion, pre pare a Com par a tive In come State ment show ing, in creases, de creases and per cent ages :, Particulars, , 2018-19, `, , Net Sales, Cost of Goods Sold, Sell ing, Gen eral and Ad min is tra tive Ex penses, Other In come, Income-tax, , 13,20,000, 10,00,000, 1,40,000, 16,000, 88,000, , 2019-20, `, , 18,00,000, 13,40,000, 2,00,000, 4,000, 1,28,000, , (J.A.C., 2009, 2015 Figures amended), , 276
Page 763 :
Tools for Fi nan cial State ment ........... State ments, Solution, , Com par a tive In come State ment, (for the years 2019-20 and 2018-19), Absolute Figures, Particulars, , I., II., III., IV., , Revenue from Operations (Sales), Add : Other Income, Total Revenue (I + II), Less : Expenses :, Cost of Goods Sold, Other Expenses, Total Expenses, , Note No., , 31.3.2020, `, , 18,00,000, 4,000, 18,04,000, 1, , V. Profit before Tax (III – IV), VI. Less : Income-tax, VII. Profit after Tax (V – VI), , Absolute, Percentage, Change Increase/, 31.3.2019 Increase/ Decrease, Decrease, `, `, %, 13,20,000 4,80,000, 36.36, 16,000 (12,000), (75.00), 13,36,000 4,68,000, 35.03, , 13,40,000 10,00,000, 2,00,000 1,40,000, 15,40,000 11,40,000, 2,64,000, 1,28,000, 1,36,000, , 3,40,000, 60,000, 4,00,000, , 34.00, 42.86, 35.09, , 68,000, 40,000, 28,000, , 34.69, 45.45, 25.93, , 1,96,000, 88,000, 1,08,000, , Note : Fig ures in the brack ets show neg a tive fig ure., Note 1 :, Other Ex penses :, Sell ing, Gen eral and Administrative Ex penses, , 2020, `, 2,00,000, , 2019, `, 1,40,000, , Illustration 7(B), From the information given below, prepare Comparative Income Statement :, Particulars, Sales, Purchases, Cost of Goods Sold, Administrative Expenses, Income-tax, , Solution, , 31st March, 2019, , 31st March, 2020, , `, , `, , 2,00,000, 3,00,000, 1,00,000, 2,00,000, 1,20,000, 2,10,000, 10% of Gross Profit 5% of Gross Profit, 30%, 30%, , Comparative Income Statement, (for the years ended 31st March, 2019 and 2020), , Particulars, , Note, No., , 31.3.2019 31.3.2020, , 2,00,000, , 3,00,000, , —, 2,00,000, , —, 3,00,000, , —, 1,00,000, , —, 50, , 1,20,000, 8,000, 1,28,000, 72,000, 21,600, 50,400, , 2,10,000, 4,500, 2,14,500, 85,500, 25,650, 59,850, , 90,000, (3,500), 86,500, 13,500, 4,050, 9,450, , 75, (43.75), 67.58, 18.75, 18.75, 18.75, , B, `, , Revenue from Operations (Sales), Other Income, Total Revenue (I + II), Expenses :, (a) Cost of Goods Sold, (b) Administrative Expenses, Total Expenses, V. Profit before Tax (III – IV), VI. Less : Income-tax @ 30%, VII. Profit after Tax (V – VI), , Percentage, Change (%), , C, × 100 = D, A, `, %, 1,00,000, 50, , A, , I., II., III., IV., , Absolute, Changes, (B – A) = C, , `, , 277
Page 764 :
SBPD Pub li ca tions Accountancy (XII), Work ing Note :, , Particulars, Revenue from Operations (Sales), Less : Cost of Goods Sold, Gross Profit, Administrative Expenses, , 2019, , 2020, , `, 2,00,000, 1,20,000, 80,000, , `, 3,00,000, 2,10,000, 90,000, , 10% of 5% of G.P., G.P. =, = 4,500, 8,000, , Illustration 8, Prepare Comparative Income Statement from the following information :, 2019, , Particulars, , `, , Revenue from Operations, Cost of Materials Consumed, Other Expenses, Interest Received, In come-tax Rate, , Solution, , 2020, , 3,20,000, 1,60,000, 40,000, 5,000, 50%, , `, , 4,00,000, 2,00,000, 60,000, 10,000, 50%, , Com par a tive In come State ment, (for the years ended 2019 and 2020), Particulars, , 2019, `, , 2020, , Absolute, Change, , %, Change, , `, , `, , I. Revenue from Operations, II. Other Income, Total Revenue (I + II) (A), III. Expenses :, (a) Cost of Materials Consumed, (b) Other Expenses, To tal Ex penses (B), , 3,20,000, 5,000, 3,25,000, , 4,00,000, 10,000, 4,10,000, , 80,000, 5,000, 85,000, , 25.00, 100.00, 26.15, , 1,60,000, 40,000, 2,00,000, , 2,00,000, 60,000, 2,60,000, , 40,000, 20,000, 60,000, , 25.00, 50.00, 30.00, , IV. Profit before Tax (A – B), Less : Income-tax @ 50%, V. Profit after Tax, , 1,25,000, 62,500, 62,500, , 1,50,000, 75,000, 75,000, , 25,000, 12,500, 12,500, , 20.00, 20.00, 20.00, , 9.3.2 Com par a tive Bal ance Sheet, In the Com par a tive Bal ance Sheets, Balance Sheet pre pared at two dif fer ent dates, the, items and data are pre sented in such a way that the changes in each item be tween two dates, are eas ily found and de ter mined. Ac cord ing to Ray A. Foulke, ‘‘Com par a tive Bal ance Sheet, Anal y sis is the study of the trend of same items, group of items, com pound items in two or, more Balance Sheets of the same business enterprise of different dates.’’ For inter-firm, comparison, Comparative Balance Sheets of two or more business enterprises on a, par tic u lar date may also be studied., The Com par a tive Bal ance Sheet shows the dif fer ent as sets and li a bil i ties of the firm on, different dates to make com par i son of bal ance from one date to another., ❏ Anal y sis and In ter pre ta tion, While in ter pret ing Com par a tive Bal ance Sheet the in ter preter is ex pected to study the, following aspects :, (1) Current financial position and liquidity position (for this working capital is, examined)., , 278
Page 765 :
Tools for Fi nan cial State ment ........... State ments, (2) Long-term fi nan cial po si tion (for this long-term changes in fixed as sets and longterm li a bil i ties and capital are examined)., (3) Profitability of the concern (for this in crease or de crease in profit is stud ied)., ❏ Prep a ra tion of Com par a tive Bal ance Sheet, Under this method of analysis of Balance Sheet, there are five columns : (1) First, col umn shows items of as sets and li a bil i ties. (2) Sec ond col umn is meant for pre vi ous year's, Bal ance Sheet fig ures. (3) Third col umn shows Bal ance Sheet fig ures of the cur rent year., (4) Fourth column shows in crease or de crease in as sets and li a bil i ties in ab so lute terms., (5) Fifth column (if re quired) shows the per cent age change., Absolute Increase /Decrease, Percentage Increase or Decrease =, × 100, Absolute Figure of Previous Year, Ad van tages of Com par a tive Bal ance Sheet : Com par a tive Bal ance Sheet is a most, important tool of fi nan cial anal y sis. It is more suit able for ana lys ing the po si tion on two, dates in com par i son to the sin gle Bal ance Sheet which pro vides in for ma tion only about the, balances of accounts on a particular date. Comparative Balance Sheets are additionally, advantageous in the following respects :, (1) Changes are Determined : By Comparative Balance Sheets besides giving, balances of accounts at different dates, the changes in such balances between the two, different dates are also determined., (2) More Stress on Changes : The sin gle Bal ance Sheet lays em pha sis on sta tus but, in the Com par a tive Bal ance Sheet more stress is laid on the changes. These changes are the, re sults of the use of as sets and li a bil i ties due to var i ous ac tiv i ties of the con cern., (3) Reflects Trend : The Com par a tive Bal ance Sheets not only throw light on the, changes in the book val ues of the as sets and li a bil i ties but in di cates trends vis i ble in them, over a pe riod of time., (4) Link between Balance Sheet and Profit & Loss Account : Comparative, Bal ance Sheets serve as a link be tween the Bal ance Sheet and the Profit & Loss Ac count., FOR MAT OF COM PAR A TIVE BAL ANCE SHEET, Com par a tive Bal ance Sheet, (as at ........2019 and 2020), Particulars, 1, , I. EQUITY AND LIABILITIES, 1. Shareholders' Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, (a) Long-term Borrowings, (b) Long-term Provisions, 3. Current Liabilities :, (a) Short-term Borrowings, (b) Trade Payables, , Note, No., , Absolute, Changes, 31.3.2019 31.3.2020 (Increase/, Decrease), , Percentage, (Increase/, Decrease), , 2, , 3, , 4, , 5, C × 100, (B – A) = C, =D, A, , A, , B, , ....., ....., , ....., ....., , ....., ....., , ....., ....., , ....., ....., , ....., ....., , ....., ....., , ....., ....., , ....., ....., , ....., ....., , ....., ....., , ....., ....., , 279
Page 766 :
SBPD Pub li ca tions Accountancy (XII), (c) Other Current Liabilities, (d) Short-term Provisions, Total, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets :, (i) Tangible Assets, (ii) Intangible Assets, (b) Non-current Investments, (c) Long-term Loans and, Advances, 2. Current Assets :, (a) Current Investments, (b) Inventries, (c) Trade Receivables, (d) Cash and Cash Equivalents, (e) Short-term Loans and, Advances, (f) Other Current Assets, Total, , ....., ....., ....., , ....., ....., ....., , ....., ....., ....., , ....., ....., ....., , ....., ....., ....., , ....., ....., ....., , ....., ....., ....., , ....., ....., ....., , ....., , ....., , ....., , ....., , ....., ....., ....., ....., , ....., ....., ....., ....., , ....., ....., ....., ....., , ....., ....., ....., ....., , ....., , ....., , ....., , ....., , ....., ....., , ....., ....., , ....., ....., , ....., ....., , Il lus tra tion 9 (Comparative Balance Sheet), From the fol low ing Bal ance Sheets of Usha Chem i cal Ltd. on 31st March, 2019 and, 2020, pre pare a Com par a tive Bal ance Sheet :, Particulars, , Note No., , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserve and Surplus, 2. Non-current Liabilities :, Long-term Borrowings (12% Loan), 3. Current Liabilities, , 2019, , 2020, , `, , `, , 5,00,000 10,00,000, 3,00,000 2,00,000, , To tal, , 5,00,000 8,00,000, 2,00,000 4,00,000, 15,00,000 24,00,000, , Total, , 10,00,000 15,00,000, 5,00,000 9,00,000, 15,00,000 24,00,000, , II. ASSETS, 1. Non-current Assets :, Fixed Assets, 2. Current Assets, , So lu tion, Com par a tive Bal ance Sheet, (as on 31st March., 2019 and 2020), Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, , 280, , 2019, , 2020, , `, , `, , Absolute, Change, , %, Change, , `, , 5,00,000 10,00,000 5,00,000, 3,00,000 2,00,000 (1,00,000), , 100, (33.33)
Page 767 :
Tools for Fi nan cial State ment ........... State ments, 2. Non-current Liabilities :, Long-term Borrowings (12% Loan), 3. Current Liabilities, To tal, II. ASSETS, 1. Non-current Assets :, Fixed Assets, 2. Current Assets, To tal, , 5,00,000 8,00,000, 2,00,000 4,00,000, 15,00,000 24,00,000, , 3,00,000, 2,00,000, 9,00,000, , 60, 100, 60, , 10,00,000 15,00,000, 5,00,000 9,00,000, 15,00,000 24,00,000, , 5,00,000, 4,00,000, 9,00,000, , 50, 80, 60, , Illustration 10, The Bal ance Sheet of Nandwani Ltd. for the year end ing 31st March, 2019 and 2020 are, as fol lows :, (` in '000), Particulars, , Note No., , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Equity Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, Trade Payables, To tal, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets :, Land and Building, Plant and Machinery, (b) Investments (Non-current), 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, Total, , 31st, March,, 2019, , 31st, March,, 2020, , `, , `, , 4,000, 150, , 5,000, 900, , 600, , 800, , 250, 5,000, , 300, 7,000, , 2,000, 1,000, 600, , 3,000, 1,500, 800, , 800, 200, 400, 5,000, , 900, 300, 500, 7,000, , Draw a Com par a tive Bal ance Sheet show ing in creases and de creases both in ab so lute, fig ures and in per cent age., Solution, Com par a tive Bal ance Sheet of Nandwani Ltd., (as on 31st March, 2019 and 2020), (` in '000), Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Equity Share Capital, (b) Reserves and Surplus, , Note No., , 31st, March,, 2019, `, , 4,000, 150, , 31st, March,, 2020, `, , 5,000, 900, , Increase Percentage, or, Change, Decrease, `, , 1,000, 750, , %, 25, 500, , 281
Page 768 :
SBPD Pub li ca tions Accountancy (XII), 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, Trade Payables, Total, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets :, Tangible Assets, (b) Investments (Non-current), 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, Total, , 1, , 600, , 800, , 200, , 250, 5,000, , 300, 7,000, , 50, 2,000, , 20, 40, , 3,000, 600, , 4,500, 800, , 1,500, 200, , 50, 33.33, , 800, 200, 400, 5,000, , 900, 300, 500, 7,000, , 100, 100, 100, 2,000, , 12.50, 50, 25, 40, , Note 1., , 31-03-2019, Tan gi ble As sets :, , 33.33, , 31-03-2020, , `, , `, , Land and Build ings, , 2,000, , 3,000, , Plant and Ma chin ery, , 1,000, , 1,500, , 3,000, , 4,500, , Miscellaneous and Board’s Question, Illustration 11, Following is the Statement of Profit and Loss of Moon India Ltd. for the year ended 31st, March, 2019., Moon India Ltd., Comparative Statement of Profit and Loss, Particulars, , Note No., , 31st March, 2018, , 31st March, 2019, , `, , `, , Revenue from Operations, , 40,00,000, , 50,00,000, , Other Incomes, , 10,00,000, , 2,00,000, , 50% of Total Rev e nue, , 60% of Total Rev e nue, , 20% of Employee Benefit, Expenses, , 10% of Employee Benefits, Expenses, , 40%, , 50%, , Employee benefit, Other Expenses, Tax Rate, , The motto of Moon India Ltd. is to produce and distribute green energy in the backward, areas of India. It has also taken up a project of giving vocational training to the girls, belonging to the backward areas of Rajasthan. You are required to prepare a comparative, statement of Profit and Loss of Moon India Ltd. From the given statement of Profit and Loss, and also indentify any two values that the company wishes to convey to the society., (C.B.S.E., A.I., 2016), , 282
Page 771 :
Tools for Fi nan cial State ment ........... State ments, 8. What do you mean by Com par a tive In come State ment ?, (J.A.C., 2011), [Ans. Comparative Income Statement shows in crease or de crease in ab so lute fig ures of the, incomes and expenses. It reflects absolute and percentage change in the operating, ac tiv i ties of the busi ness firm for two or more accounting periods.], 9. What do you mean by Com par a tive Bal ance Sheet ?, [Ans. A Comparative Balance Sheet shows the balances of accounts (personal and real) on, dif fer ent dates and also the ex tent of their in crease or de crease be tween these dates. It, throws light on the trend and di rec tion of change in the po si tion over the period.], 10. A com pany had Trade Re ceiv ables worth ` 1,00,000 in 2015 and ` 80,000 in 2016. By, what per cent age it has changed ?, [Ans. 20% de crease., Working : ` 1,00,000 – 80,000 = ` 20,000 de crease, 20,000, Per cent age Change =, × 100 = 20%.], 1,00,000, , 11. Cal cu late the per cent age of cost of goods sold to net sales, when net sales ` 1,25,000 and, gross profit ` 40,000., [Ans. Cost of Goods Sold = 68% of Net Sales., Work ing : Cost of Goods Sold : ` 1,25,000 – 40,000 = ` 85,000, 85,000 × 100, ∴, Cost of Goods Sold % =, = 68%], 1,25,000, , (D) Objective Type Questions, I. Se lect the cor rect alternative :, 1. In ter pre ta tion of Fi nan cial State ments in cludes :, (a) Crit i cisms and Anal y sis, (b) Com par i son and Trend Study, (c) Draw ing Con clu sion, (d) All the above, 2. Hor i zon tal Anal y sis is known as :, (a) Dy namic Anal y sis, (b) Struc tural Anal y sis, (c) Static Anal y sis, (d) None of these, 3. Ver ti cal Anal y sis is known as ............ :, (a) Static Anal y sis, (b) Dy namic Anal y sis, (c) Struc tural Anal y sis, (d) None of these, 4. Com par a tive State ments are also known as ..................... :, (a) Dy namic Anal y sis, (b) Hor i zon tal Anal y sis, (c) Ver ti cal Anal y sis, (d) Ex ter nal Anal y sis, 5. The most com monly used tools for fi nan cial anal y sis are :, (a) Hor i zon tal Anal y sis, (b) Ver ti cal Anal y sis, (c) Ra tio Anal y sis, (d) All of these, [Ans. 1. (d), 2. (a), 3. (a), 4. (b), 5. (d).], II. State whether the fol low ing state ments are True or False :, 1. Comparative Financial Statement is a tool of Financial Analysis., 2. Comparative Statement is the main form of horizontal analysis., 3. The process of interpretation comes after analysis., [Ans. 1. True, 2. True, 3. True.], , 285
Page 772 :
SBPD Pub li ca tions Accountancy (XII), PRACTICAL PROB LEMS, ❏ Com par a tive In come State ment, 1. From the fol low ing de tails, pre pare an Com par a tive In come State ment :, Particulars, 31.3.2019, , 31.3.2020, , `, , Revenue from Operations, Other Income (% of Revenue from Operations), Expenses (% of Revenue from Operations), , `, , 10,00,000, 10%, 50%, , 20,00,000, 15%, 60%, , [Ans. Percentage Change : Revenue from Operations 100%, Other Income 200%, Total Revenue, 109.09; Expenses 140%; PBT 83.33%.], 2. From the fol low ing in for ma tion, pre pare Com par a tive State ments of Profit & Loss of Goodluck, Ltd. :, Particulars, , 31.3.2019, `, , 31.3.2020, `, , Revenue from Operations, , 20,00,000, , 25,00,000, , Employees Benefit Expenses, , 10,00,000, , 12,50,000, , 2,50,000, , 1,25,000, , Other Expenses, Rate of Tax 40%, , [Ans. Percentage Change : Revenue from Operations 25%, Total Expenses 10%, PBT 50%, Tax, 50%, PAT 50%.], 3. Pre pare Com par a tive Profit and Loss State ment from the fol low ing :, Particulars, , 31.3.2019, , 31.3.2020, , `, , `, , Revenue from Operations, , 4,00,000, , 8,00,000, , Purchase of Stock-in-trade, , 2,50,000, , 4,75,000, , 50,000, , 50,000, , 10% of Cost of, Goods Sold, , 8% of Cost of, Goods Sold, , 40%, , 50%, , Changes in Inventories, Other Ex penses, Tax, , [Ans. Percentage Change : Revenue from Operations 100%, Total Expenses 71.82%, PBT, 232.86%], 4. From the fol low ing in for ma tion, pre pare a Com par a tive In come State ment :, Pararticulars, , 2017, `, , Net Revenue from Operations (Net Sales), Cost of Goods Sold, Ad min is tra tive Ex penses, Op er at ing Ex penses, Other In come, Income-tax, [Ans. Increase : NPBT 20%, Net Loss 180%], , 286, , 2018, `, , 10,00,000 15,00,000, 8,00,000 11,00,000, 1,00,000, 1,00,000, 20,000, , 1,50,000, 2,50,000, 24,000, , 40,000, , 80,000
Page 773 :
Tools for Fi nan cial State ment ........... State ments, 5. From the fol low ing State ment of Profit and Loss, pre pare Com par a tive Profit & Loss State ment :, 31st March,, 2019, , Particulars, I. Income :, Revenue from Operations (Net Sales), Other Income, Total, II. Expenses :, (a)Purchase of Stock-in-trade, (b)Changes in Inventories, (c) Finance Cost, (d)Other Expenses, , Total, , III. Profit (I – II), , 31st March,, 2020, , `, , `, , 5,00,000, 50,000, 5,50,000, , 7,00,000, 60,000, 7,60,000, , 2,00,000, 50,000, 40,000, 1,10,000, 4,00,000, 1,50,000, , 3,00,000, (40,000), 60,000, 2,20,000, 5,40,000, 2,20,000, , Ad di tional In for ma tion :, `, Other Ex penses include Provision for Tax, 60,000, [Ans. Item :, Total Revenue, Total Exps., PBT, I.T., Percentage :, 38.18, 26.47, 57.14, 83.33, 6. Prepare Comparative Profit and Loss Statement from the following information :, , `, , 1,10,000, PAT, 46.67], , 31st Mar., 2019 31st Mar., 2020, , Particulars, Cost of Materials Consumed, Revenue from Operations (% of Cost of Material Consumed), Other Expenses, Income-tax Rate, , `, , `, , 5,00,000, 150%, 1,00,000, 40%, , 6,00,000, 250%, 1,50,000, 50%, , [Ans. Item, : Rev e nue from Op er a tions To tal Ex penses, PBT, Tax, PAT, Percentage Change :, 100, 25, 400, 525, 316.67], 7. From the fol low ing in for ma tion pre pare a com par a tive state ment of In come of Ashok Ltd. :, 2018, , Particulars, , 2019, `, , Sales, Gross Profit, Indirect Expenses, Income Tax, , `, , 5,00,000, 6,00,000, 40%, 30%, 20% on Gross Profit 25% on Gross Profit, 40%, 40%, , [Ans. Per cent age Change in :, Sales, , Gross Profit, , Indirect Expenses, , Net Profit before, Tax, , Profit after Tax, , 20%, , 40%, , (10%), , (15.825), , (15.825), , 8. From the fol low ing data, Pre pare Statement of Profit and Loss in Com par a tive form :, Particulars, , Year I, `, , Revenue from Operations, Expenses, Other Income, Income Tax Rate, , Year II, `, , 6,00,000, 8,00,000, 55% of Income from, Operation, 20,000, 40,000, 35%, , 40%, , 287
Page 774 :
SBPD Pub li ca tions Accountancy (XII), [Ans. Percentage change in :, Revenue from, Operations, , Other Income, , Total Income, , Expenses, , P.B.T., , P.A.T., , 33.33, , 100, , 35.48, , 33.33, , 37.93, , 27.32, , ❏ Comparative Balance Sheet, 9. From the fol low ing Bal ance Sheets of Praveen Ltd. on 31st March 2019 and 2020, pre pare a, Com par a tive Bal ance Sheet and in ter pret the changes. :, Bal ance Sheets, (as on 31st March, 2019 and 2020), Particulars, Note No., 2019, 2020, I. EQ UITY AND LI A BIL I TIES, `, `, 1. Share holders’ Funds :, (a) Share Cap i tal, 10,00,000 20,00,000, (b) Re serves and Sur plus, 6,00,000 4,00,000, 2. Non-cur rent Li a bil i ties :, Long-term Borrowings (10% Loan), 10,00,000 16,00,000, 3. Cur rent Li a bil i ties, 4,00,000 8,00,000, Total, 30,00,000 48,00,000, II. AS SETS, 1. Non-cur rent As sets :, Fixed As sets, 2. Cur rent As sets, Total, , 20,00,000 30,00,000, 10,00,000 18,00,000, 30,00,000 48,00,000, , [Ans. Per cent age Change : Fixed As sets 50%, Cur rent As sets 80%, Cur rent Liab. 100%, Loans, 60%, Share Cap i tal 100%, Re serves (33.33%).], 10. From the fol low ing in for ma tion, pre pare a Com par a tive Bal ance Sheet of Deep Ltd. as on 31st, March :, Particulars, 31.3.2019 31.3.2020, `, , `, , Eq uity Share Cap i tal, 25,00,000 25,00,000, Fixed As sets, 30,00,000 36,00,000, Re serves & Sur plus, 5,00,000, 6,00,000, Non-current In vest ments, 5,00,000, 5,00,000, Long-term Loans, 15,00,000 15,00,000, Cur rent As sets, 15,00,000 10,50,000, Cur rent Li a bil i ties, 5,00,000, 5,50,000, [Ans. In crease : Fixed As sets 20%, To tal As sets and To tal Li a bil i ties 3%], 11. From the following Balance Sheets of Vibhor Ltd., as on 31st March, 2019 and 2020, pre pare a, Com par a tive Bal ance Sheet :, Particulars, Note No., 2018-19, 2019-20, I. EQ UITY AND LI A BIL I TIES, 1. Share hold ers’ Funds :, (a) Share Cap i tal, (b) Re serves and Sur plus, 2. Non-cur rent Li a bil i ties :, Long-term Borrowings, 3. Cur rent Li a bil i ties, Trade Payables, , `, , Total, , 288, , `, , 25,00,000, 6,00,000, , 30,00,000, 3,00,000, , 6,00,000, , 9,00,000, , 3,00,000, 40,00,000, , 4,00,000, 46,00,000
Page 775 :
Tools for Fi nan cial State ment ........... State ments, II. AS SETS, 1. Non-cur rent As sets :, Fixed As sets :, (i) Tan gi ble As sets, (ii) In tan gi ble As sets, 2. Cur rent As sets :, (i) In ven to ries, (ii) Cash and Cash Equiv a lents, Total, , 20,00,000, 8,00,000, , 25,00,000, 10,00,000, , 8,00,000, 4,00,000, 40,00,000, , 6,00,000, 5,00,000, 46,00,000, , [Ans. Increase in Share Capital 20%, Decrease in Reserves and Surplus 50%, Increase in, Long-term Borrowings 50%, Increase in Trade Payables 33.33%, Increase in Tangible, Fixed As sets 25%, In crease in In tan gi ble Fixed As sets 25%, Decrease in Inventories 25%,, Increase in Cash & Cash Equivalents 25%], ❏ Miscellaneous and Boards’ Questions, 12. Prepare Comparative Income Statement with the help of the following information :, Particulars, , 31-3-2019 31-3-2020, , `, , `, , Sales, Cost of Goods Sold, Direct Expenses, , 5,00,000, 3,00,000, 30,000, , 8,00,000, 4,50,000, 40,000, , Indirect Expenses, , 40,000, , 50,000, , Rate of Income-tax 50%., [Ans. N. P. before Tax 2019 : ` 1,60,000; 2020 : ` 3,00,000; Change in % : Sales 60%, Cost of Goods, Sold 50%, G.P. 75%, Indirect Exps. 25%, N.P. before Tax 87.5%, Income-tax 87.5%, N.P., after Tax 87.5%], 13. From the following information, prepare a Comparative Income Statement :, Particulars, 31-3-2019, 31-3-2020, , `, , `, , Sales, Cost of Goods Sold, Operating Expenses, Dividend Received, Income-tax Rate, , 2,00,000, 2,50,000, 1,00,000, 1,30,000, 10,000, 12,000, 20,000, 20,000, 50% of Net 50% of Net, Profit before Profit before, Tax, Tax, , [Ans. N.P. 2019 : ` 1,10,000, 2020 ` 1,28,000; Percentage Change : In Sales 25%, Cost of Goods, Sold 30%, G.P. 20%, Operating Exps. 20%, Operating Profit 20%, NPBT 16.36%, I.T., 16.36%, NPAT 16.36%.], 14. From the following Statement of Profit and Loss for the year ended 31st March, 2020, prepare a, Comparative Statement of Profit and Loss of X Ltd. :, Particulars, Revenue from Operation, Other Income, Expenses, Rate of Income-tax 50%, , 2019-20, `, , 10,00,000, 5,00,000, 10,50,000, , 2018-19, `, , 7,50,000, 2,00,000, 7,50,000, , [Ans. % Change : Revenue from Operations 33.33%, Other Income 150%, Total Revenue 57.89%,, Expenses 40%, Profit before Tax 125%, Tax 125%, Profit after Tax 125%], , 289
Page 776 :
SBPD Pub li ca tions Accountancy (XII), 15. Prepare Comparative Income Statement from the following informations :, 31-3-2019, 31-3-2020, `, `, Sales, 3,00,000, 5,00,000, Purchases, 1,50,000, 3,00,000, Gross Profit, 40% of sales, 30% of sales, Administrative expenses, 5% of Gross Profit 4% of Gross Profit, Income Tax, 40% of Net Profit, 40% of Net profit, before Tax, before Tax, [Ans. Per cent age Change :, Sales, 66.67%, , Purchases Other D.E., 100%, , 66.67%, , G.P., , Adm. Exp., , NPBT, , Income, Tax, , NPAT, , 25%, , Nil, , 26.32, , 26.32, , 26.32, , 16. From the following informations for the year ended 31st March, 2019 and 2020 prepare, Com par a tive In come State ment :, 31st March 31st March,, Particulars, 2019, 2020, Sales, ` 80,000 ` 1,00,000, Cost of Goods Sold, 60% of, 60% of, Sales, Sales, Indirect Expenses, 10% of, 15% of, Gross Profit Gross Profit, Income-tax Rate, 50%, 60%, [Ans. Percentage Change : Sales 25%, G.P. 25%, Indirect Exp. 87.5%; Tax 41.67%; NPAT, (5.55%)], 17. From the fol low ing in for ma tion, pre pare com par a tive state ment for the year ended 31st March,, 2019 and 31st March, 2020 :, 31st, 31st, Particulars, March, March,, 2019, 2020, Sales, Cost of Goods Sold, Indirect Expenses, Provision for Tax, , `, , `, , 2,40,000, 1,40,000, 40,000, 12,000, , 3,00,000, 1,50,000, 50,000, 20,000, , [Ans. Per cent age Change : Sales 25%; G.P. 50%; In di rect Ex penses 25%; Tax 67%; NPAT 67%], 18. From the following information extracted from the Statement of Profit and Loss for the years, ended 31st March, 2019 and 2020, prepare a Comparative Statement of Profit & Loss :, Particulars, 2019-20, 2018-19, Revenue from Operations, ` 6,00,000 ` 5,00,000, Other Incomes (% of Revenue from Operations), 20%, 20%, Employee benefit Expenses (% of Total Revenue), 40%, 30%, Tax Rate, 50%, 50%, (C.B.S.E., A.I., 2019), [Ans. Percentage Change : Revenue from Operations 20%, Other Incomes 20%, Employee, Benefit Expense (– 10%), Tax – 11.43%, Profit after Tax – 11.43%.], , l, , 290
Page 777 :
Com mon-size Statements, , 10, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 10.1 Meaning of Common-size Statements, , 292, , 10.2 Purpose or Objectives of Common-size Statements, , 292, , 10.3 Utility or Importance of Common-size Statements, , 292, , 10.4 Types of Common-size Statements, , 292, , 10.5 Limitations of Common-size Statements, , 292, , 10.6 Common-size Income Statement, , 293, , ● Preparation of Common-size Profit & Loss Statement or Income, , Statement ● Format of Common-size Statement of Profit & Loss, 10.7 Common-size Balance Sheet, ● Meaning ●, , 298, , Objectives or Utility of Common-size Balance Sheet, , ● Preparation of Common-size Balance Sheet ● Format of Common-, , size Balance Sheet, 10.8 Trend Analysis, , 302, , 10.9 Fast Revision, , 305, , ❑ Useful Questions, , 305, , ❑ Practical Problems, , 307, , 291
Page 778 :
SBPD Pub li ca tions Accountancy (XII), , 10.1 Meaning of Com mon-size State ments, Meaning : Com mon-size State ment is a state ment ex press ing all items of fi nan cial, state ments as a per cent age of some common base., It can be ‘Revenue from Operations’, i.e., Net Sales or Total Revenue (in case other, income exists) in the case of Statement of Profit as Loss (or Income Statement) and total of, Balance Sheet for the Balance Sheet., Thus, Com mon-size fi nan cial state ment shows the per cent age of each item to the to tal, in each pe riod. If the Bal ance Sheet and In come State ment items are shown in an a lyt i cal, per cent age form i.e., percentages or ra tios to the to tal of ap pro pri ate items (to tal as sets,, total li abilities and total net sales) as common base for comparison is pro vided. The, state ments in this form are called Common-size Statements . In Common-size Statements, vertical analysis is required. Hence, it is also called as Vertical Analysis., Com mon-size State ment is of ten called ‘Com po nent Per cent age Statement' or ‘100 per, cent’ State ment be cause each state ment is re duced to the to tal of 100 and each in di vid ual, item or component is stated as a per cent age of the total of 100., Each Item of Revenue /Expenses, Common-size % =, × 100, Revenue from Operations, , 10.2 Purpose or Objectives of Com mon-size State ments, 1. To pres ent the changes in var i ous items of assets and liabilities in re la tion to to tal of, Balance Sheet., 2. To pres ent the changes in var i ous items of Profit and Loss Statement in re la tion to, revnue from operations (i.e., Net Sales)., 3. To establish relationship of different items of Balance Sheet with total assets/, liabilities so that important conclusion can be drawn., 4. To pro vide a com mon base for com par i son., , 10.3 Util ity or Im por tance of Com mon-size State ments, 1. Com mon-size In come es tab lishes re la tion ship be tween revenue from operations, i.e.,, net sales and other items of in come state ment and this re la tion ship is use ful in eval u at ing, operational activities of a business firm., 2. Common-size Balance Sheet is very useful for comparing the profitability and, financial po si tion of two or more busi ness firms or two or more periods., Thus, Common-size Statement is a financial tool for studying the key changes and, trends in the financing position and operational result of a company., , 10.4 Types of Com mon-size State ments, Com mon-size State ment in clude :, (i) Com mon-size Statement of Profit & Loss or Com mon-size In come State ment, and, (ii) Com mon-size Bal ance Sheet., In or der to pre pare a Com mon-size State ment, Revenue from Operations, i.e., net sales,, to tal of Balance Sheet are as sumed to be equal to 100, then the ra tio of each item of the, state ment to the to tal of the state ment is found out by di vid ing the value of in di vid ual item, by the to tal of the amount in the state ment and by mul ti ply ing the quo tient by 100., , 10.5 Limitations of Common-size Statements, Fol low ing are the main lim i ta tions of Com mon-size State ments :, , 292
Page 779 :
Com mon-size Statements, (1) Dif fer ence be tween Dif fer ent Ac tiv i ties : The use of this method is not pos si ble, when the var i ous ac tiv i ties of a con cern dif fer from each other., (2) Dif fer ence in Ac count ing Meth ods : If the ac count ing meth ods fol lowed by two, busi nesses are dif fer ent, this method of anal y sis can not be used., (3) Dif fer ence in Heads of Ac count : If there is dif fer ence be tween the var i ous heads, of ac count, i.e., in the way of the dif fer ent ex penses are treated and writ ten or col lected, this, method may give mis lead ing conclusions., , 10.6 Common-size Income State ment, In a Com mon-size Profit & Loss Ac count or In come State ment each item is shown as, per cent age to ‘Revenue from Operation’, i.e., Net Sales or Total Revenue (in case of other, income). It re flects as to what part of net sales has been ab sorbed by each in di vid ual item of, ex pense. The state ment pre pared in this way, is called Com mon-size In come State ment. It, facilitates the ver ti cal anal y sis since each item is analysed vertically., Each Item of Income /Expense, Common-size Percentage =, × 100, Revenue from Operations (Net Sales), 10.6.1 Preparation of Common-size Profit & Loss Statement or Income Statement, A Common-size Income Statement consits of five columns. The following steps are, required to prepare a Common-size Income Statement., Step 1 : Enter the items of Income and Expenses in the first column., Setp 2 : En ter the ab so lute amounts of dif fer ent items (i.e., In come and Ex penses) of, Income Statement for the previous year in second column and that of the, current year in third column., Step 3. : Now calculate percentage of different items of Income Statement for the, previous year ‘Rev e nue from Op er a tions, i.e., Net Sales or To tal Rev e nue (if, other income exists). Enter the percentage in the fourth column., Step 4 : En ter the per cent age in re la tion of dif fer ent items of In come State ment for, the current year to ‘Revenue from Op er a tions’, i.e., Net Sales or Total, Revenue (if other income exists) in the fifth column., Notes :, 1. If ab so lute amounts of the cur rent year are en tered in the sec ond col umn, than that of the pre vi ous year will, be en tered in the third col umn., 2. In such a case, per cent age of dif fer ent items of In come State ment for the cur rent year will be en tered in, the 4th col umn and that of the pre vi ous year in the 5th col umn., , 10.6.2 Format of Common-Size Statement of Profit & Loss, Common-size Statement of Profit & Loss, (for the year ended 31st March, 2019 and 2020), Particulars, , Note, No., , Absolute Amounts, 2019, , 2019, , (2), ......, ......, ......, , 2020, %, (3), ......, ......, ......, , (4), ......, ......, ......, , 2020, %, (5), ......, ......, ......, , ......, ......, , ......, ......, , ......, ......, , ......, ......, , `, , I., II., III., IV., , (1), Revenue from Operations, Other Income, Total Revenue (I + II), Expenses :, Cost of Materials Consumed, Purchases of Stock-in-trade, , Percentage of Revenue, from Operations, `, , 293
Page 780 :
SBPD Pub li ca tions Accountancy (XII), Changes in Inventories of Finished, Goods, Work-in-progress and Stock-in-trade, Employees Benefits Expenses, Finance Costs, Depreciation and Amortisation, Expenses, Other Expenses, Total Expenses, V. Profit before Tax (III – IV), VI. Less : Tax, VII. Profit after Tax (V – VI), , ......, , ......, , ......, , ......, , ......, ......, ......, ......, , ......, ......, ......, ......, , ......, ......, ......, ......, , ......, ......, ......, ......, , ......, ......, ......, ......, ......, , ......, ......, ......, ......, ......, , ......, ......, ......, ......, ......, , ......, ......, ......, ......, ......, , IL LUSTRATIONS AND PRACTICAL PROBLEMS : AT A GLANCE, Il lus tra tion No., 1 to 6, , Practical, Prob lem No., , Details, Common-size Statement of Profit & Loss, , 1 to 6, , 7 to 10, , Common-size Balance Sheet, , 7 to 10, , 11, 12, 13, , Trend Analysis, Miscellaneous and Boards’ Questions, , 11, 12, 13 to 15, , 13, , Total, , 15, , Illustration 1 (Common-size Statement of Profit and Loss), From the following information of Star Ltd. for the year ended 31st March, 2020,, prepare a Common-size Statement of Profit and Loss :, Particulars, , Note No. 31-03-2020, `, , Revenue from Operation (Net Sales), Employees Benefit Expenses, Other Expenses, , Solution, , 20,00,000, 10,00,000, 1,00,000, , Common-Size Statement of Profit & Loss, (for the year ended 31st March, 2020), Note No., , Particulars, , Absolute, Amounts, 2019-20, 20,00,000, , 2019-20, %, 100, , 10,00,000, 1,00,000, 11,00,000, 9,00,000, , 50, 5, 55, 45, , `, , I. Revenue from Operation (Net Sales), II. Expenses :, Employees Benefit Expenses, Other Expenses, To tal Ex penses (II), III. Profit before Tax (I – II), , 294, , Per cent age of, Rev e nue from, Operations
Page 781 :
Com mon-size Statements, Illustration 2, Prepare a Common-size Income Statement from the following Income Statement :, 31st March, 31st March,, 2019, 2020, , Particulars, , `, , I. Income :, Revenue from Operations (Net Sales), II. Expenses :, Cost of Materials Consumed, Finance Cost, Other Expenses, Total Expenses, Profit (I – II), , Solution, , `, , 10,00,000, , 12,50,000, , 6,50,000, 1,00,000, 70,000, 8,20,000, 1,80,000, , 8,00,000, 1,25,000, 75,000, 10,00,000, 2,50,000, , Common-size Income Statement, (for the year ended 31st March, 2019 and 2020), Percentage Revenue, from Operations, , Absolute Amounts, , Particulars, , I. Revenue from Operations (Net Sales), II. Expenses :, Cost of Materials Consumed, Finance Costs, Other Expenses, III.Total Expenses, IV. Profit before Tax (I – III), , 2019, , 2020, , `, , `, , 10,00,000 12,50,000, , 2019, %, 100, , 2020, %, 100, , 6,50,000 8,00,000, 1,00,000 1,25,000, 70,000, 75,000, 8,20,000 10,00,000, 1,80,000 2,50,000, , 65, 10, 7, 82, 18, , 64, 10, 6, 80, 20, , All per cent age will be cal cu lated on the ba sis of To tal Rev e nue :, Cal cu la tion of Per cent age :, 6, 50,000 × 100, 8, 00, 000, 1., = 65%, 1., × 100 = 64%, 10, 00, 000, 12, 50, 000, 2., , 1, 00,000 × 100, = 10%, 10, 00, 000, , 2, , 1, 25,000 × 100, = 10%, 12, 50,000, , 3., , 70, 000 × 100, = 7%, 10,00, 000, , 3, , 75, 000 × 100, = 6%, 12, 50, 000, , Illustration 3, From the following statement of Profit and Loss of Star Ltd., for the years ended 31st, March, 2018 and 2019, prepare a common size statement., 2018-19, , 2017-18, , `, , `, , Revenue from Operations, , 25,00,000, , 20,00,000, , Employee Benefit Expenses, , 10,00,000, , 7,00,000, , 2,00,000, , 3,00,000, , Particulars, , Other Expenses, , Note No., , Tax Rate 40%, , 295
Page 782 :
SBPD Pub li ca tions Accountancy (XII), Solution, , Com mon-Size State ment of Profit & Loss of Star Ltd., (for the year ended 31st March, 2018 and 2019), Percentage of Revenue, from Operations, , Absolute Amounts, , Particulars, , I. Revenue from Operations, II. Expenses :, Employee Benefit Exps., Other Expenses, Total Expenses, III. Profit before Tax (I – II), Less : Tax @ 40%, IV. Profit after Tax (I – II), , 2017-18, `, 20,00,000, , 2018-19, `, 25,00,000, , 2017-18, %, 100, , 2018-19, %, 100, , 7,00,000, 3,00,000, 10,00,000, 10,00,000, 4,00,000, 6,00,000, , 10,00,000, 2,00,000, 12,00,000, 13,00,000, 5,20,000, 7,80,000, , 35.0, 15.0, 50.0, 50.0, 20.0, 30.0, , 40.0, 8.0, 48.0, 52.0, 20.8, 31.2, , Illustration 4, Prepare Com mon-size State ment from the fol low ing In come State ment of Karan Ltd. for the, year ended March 31, 2020 :, Income Statement, (` ’000), , Particulars, , Income :, Sales, Mis cel la neous In come, , To tal In come, Expenses :, Cost of Goods Sold, Ad min is tra tive Ex penses, Sell ing Ex penses, Other Non-Op er at ing Ex penses, , 2,538, 26, 2,564, 1,422, 184, 720, 40, , 2,366, 68, (N.C.E.R.T.), , To tal Ex penses, Tax, , Solution, , Common-size Income Statement of Karan Ltd., (for the year ended March 31, 2020), Note, No., , Particulars, I. Income :, (a) Revenue from Operations (Sales), (b) Other Income, Total Revenue (a + b), II. Expenses :, Cost of Goods Sold, Other Expenses, III Profit before Tax (I – II), IV. Less : Tax, V. Profit after Tax (III – IV), , 296, , Total Expenses, , (` ’000), , Absolute, Amount, (` ), , Percentage, of Revenue, from, Operations, , 2,538, 26, 2,564, , 100.00, 1.021, 101.022, , 1,422, 944, 2,366, 198, 68, 130, , 56.03 3, 37.19 4, 93.22, 7.80, 2.68, 5.12
Page 783 :
Com mon-size Statements, Note to Ac counts :, Note 1, , Other Expenses :, Ad min is tra tion Ex penses, Sell ing Ex penses, Other Non-op er at ing Ex penses, , `, 184, 720, 40, 944, , Note : Per cent age has been cal cu lated on the ba sis of Rev e nue from Op er a tions. Some cal cu la tions are as fol lows :, Work ing Notes :, 26 × 100, 2,564 × 100, 1., = 1.02%, 2., = 101.02%, 2,538, 2,538, 1,422 × 100, 944 × 100, 3., = 56.03%, 4., = 37.19%, 2,538, 2,538, , Interpretation :, The company's profitability as a percentage of sales is rather low. This is primarily on, account of higher operating expenses. Hence, the company has to find ways and means to, reduce cost of goods sold and operating expenses., Illustration 5, From the following Statement of Profit and Loss, prepare Common-size Income, Statement and enterpret the same :, 31st March, 31st March,, 2019, 2020, , Particulars, , `, , I. Income :, Revenue from Operations (Net Sales), II. Expenses :, Purchases of Stock-in-trade, Changes in Inventories, Depreciation and Amortisation, Other Expenses, Total, , III. Net Profit (I – II), , Solution, , `, , 20,00,000, , 25,00,000, , 14,00,000, 60,000, 40,000, 1,00,000, 16,00,000, 4,00,000, , 17,00,000, (40,000), 60,000, 50,000, 17,70,000, 7,30,000, , Common-size Income Statement, (for the years ended 31st March, 2019 and 2020), Particulars, , I. Revenue from Operations (Net Sales), II. Expenses :, (a) Purchases of Stock-in-trade, (b) Changes in Inventories, (c) Depreciation and Amortisation, (d) Other Expenses, Total Expenses, III. Profit before Tax (I – II), , 2019 (` ), 20,00,000, , Percentage of Revenue, from Operations (Net, Sales), 2020 (`), 2019 (%), 2020 (%), 25,00,000, 100, 100, , 14,00,000, 60,000, 40,000, 1,00,000, 16,00,000, 4,00,000, , 17,00,000, (40,000), 60,000, 50,000, 17,70,000, 7,30,000, , Absolute Amounts, , 70.0, 3.0, 2.0, 5.0, 80, 20, , 68.0, (1.6), 2.4, 2.0, 70.8, 29.2, , Interpretation :, The above Statement reveals the following :, 1. Purchases of stock-in-trade, changes in inventories and other expenses have, de creased. This may be due to :, , 297
Page 784 :
SBPD Pub li ca tions Accountancy (XII), ➤ Efficient functioning of the purchase or reduction in cost of raw materials., ➤ Increase in the sale price of the product., 2. Depreciation and amortisation have increased from 2.0% to 2.4., 3. Increase in profit is mainly due to decrease in the percentage of cost of goods sold., Illustration 6, Prepare Common-size Income Statement from the following :, 2019, , Particulars, , `, , Revenue from Operations, (–) Cost of Materials Consumed, (–) Operating Expenses, Profit befre Tax, , 2,00,000, (1,00,000), (10,000), 90,000, , 2020, `, , 2,50,000, (1,25,000), (10,000), 1,15,000, , Income-tax 50%., Solution, Common-size Income Statement, (for the years ended 31st Dec., 2019 and 2020), Particulars, I. Revenue from Operations, II. Less : Expenses :, Cost of Materials Consumed, Other Expenses (Operating Expenses), Total Expenses, III. Profit before Tax (I – II), IV. Less : Income-tax @ 50%, V. Profit after Tax (III – IV), , Percentage of Revenue, from Operations, 2020 (`), 2019 (%), 2020 (%), 2,50,000, 100, 100, , Absolute Amounts, 2019 (` ), 2,00,000, 1,00,000, 10,000, 1,10,000, 90,000, 45,000, 45,000, , 1,25,000, 10,000, 1,35,000, 1,15,000, 57,500, 57,500, , 50, 5, 55, 45, 22.5, 22.5, , 50, 4, 54, 46, 23, 23, , 10.7 Common-size Balance Sheet, 10.7.1. Meaning, In the Com mon-size Bal ance Sheet, each item of as sets is con verted into per cent ages to, to tal as sets and each item of cap i tal and li a bil i ties is con verted into per cent ages to to tal of, li a bil i ties side. Thus, the Bal ance Sheet is con verted into per cent age form and the con verted, Bal ance Sheet is called Com mon-size Bal ance Sheet., Each Item of Assets, Common-size Percentage =, × 100, Total Assets or Total of Balance Sheet, Each Item of Liabilities, Common-size Percentage =, × 100, Total Liabilities or Total of Balance Sheet, In case two or more business concerns are to be com pared, the Bal ance Sheets of other, con cerns should also like wise to be con verted into per cent ages they will be calledComparative, Com mon-size Bal ance Sheets. This method is most use ful in inter-firm comparisons., 10.7.2 Objectives or Utility of Common-size Balance Sheet, 1. To analyse the changes in individual item of Balance Sheet., 2. To find the trend of different items of assets, equity and liabilities., 10.7.3 Preparation of Common-size Balance Sheet, Common-size Balance Sheet consists of five columns. The following steps are taken in, preparing a Common-size Statement :, Step 1 : In first column enter the items of equity, liabilities and assets., Step 2 : Enter the absolute figures of different equity and liabilities and assets of, previous year in second column., , 298
Page 785 :
Com mon-size Statements, Step 3 : Enter the absolute figures of different equity and liabilities and asets of, current year in third column., Step 4 : Calculate and enter the percentage relation of different items of previous, year’s Balance Sheet to Total Equity and Liabilities/Assets (i.e., Balance, Sheet Total) in fourth column. For calculating percentage, Balance Sheet, total is taken as 100., Step 5 : Calculate and enter the percentage of different items of current year’s, Balance Sheet., Total Equity and Liabilities/Assets in fifth column, assuming them as 100., 10.7.4 Format of Common-size Balance Sheet, Common-size Bal ance Sheet, (as at 31st March, 2020), Note, No., , Particulars, , Absolute, Amount, 2018-19, , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, (a) Long-term Borrowings, (b) Long-term Provisions, 3. Current Liabilities :, (a) Short-term Borrowings, (b) Trade Payables, (c) Other Current Liabilities, (d) Short-term Provisions, , `, , ......, ......, , Total, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets :, (i) Tangible Assets, (ii) Intangible Assets, (b) Non-current Investments, (c) Long-term Loans and Advances, 2. Current Assets :, (a) Current Investments, (b) Inventories, (c) Trade Receivables, (d) Cash and Cash Equivalents, (e) Short-term Loans and Avances, (f) Other Current Assets, Total, , Percentage Absolute, of Balance, Sheet Total Amount, 2019-20, 2018-19, %, `, 100, ......, ......, ......, ......, , Percentage, of Balance, Sheet Total, 2019-20, %, 100, ......, ......, , ......, ......, , ......, ......, , ......, ......, , ......, ......, , ......, ......, ......, , ......, ......, ......, , ......, ......, , ......, ......, , ......, , 100, , ......, , 100, , ......, ......, ......, ......, , 100, ......, ......, ......, ......, , ......, ......, ......, ......, , 100, ......, ......, ......, ......, , ......, ......, ......, ......, ......, ......, ......, , ......, ......, ......, ......, ......, ......, 100, , ......, ......, ......, ......, ......, ......, ......, , ......, ......, ......, ......, ......, ......, 100, , Il lus tra tion 7 (Common-size Balance Sheet), From the fol low ing information, pre pare a Com mon-size Bal ance Sheet of Amrit Ltd. :, Particulars, I. EQUITY & LIABILITIES, Share Capital, Reserves and Surplus, , 31.3.2020, `, , 1,60,000, 80,000, , 299
Page 786 :
SBPD Pub li ca tions Accountancy (XII), Total, , 1,10,000, 3,50,000, , Total, , 2,10,000, 1,40,000, 3,50,000, , Current Liabilities, II. ASSETS, Non-current Assets, Current Assets, , Solution, , Common-size Balance Sheet of Amrit Ltd., (as on 31st March, 2020), Particulars, , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserve and Surplus, 2. Current Liabilities, , Amount, , % with Total, Assets/Liab., , `, , II. ASSETS, Non-current Assets, Current Assets, , Formula : % =, , Note No., , Total, , 1,60,000, 80,000, 1,10,000, 3,50,000, , 45.71, 22.86, 31.43, 100.00, , Total, , 2,10,000, 1,40,000, 3,50,000, , 60.00, 40.00, 100.00, , Individual Item of Liabilities/Assets Side, × 100, Total Liabilities/Assets, , Illustration 8, From the following Balance Sheet of Sun Ltd. as on 31st March, 2020, prepare a, Common-size Balance Sheet :, Sun Ltd. Bal ance Sheet, (as at 31st March, 2020), Particulars, , Note No., , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, Trade Payables, , `, , 30,00,000, 4,00,000, 10,00,000, , Total, II. ASSETS, 1. Non-current Assets :, Fixed Assets :, (i) Tangible Assets, (ii) Intagible Assets, 2. Current Assets :, (a) Inventories, (b) Cash and Cash Equivalents, , 6,00,000, 50,00,000, , 30,00,000, 6,00,000, , Total, , 300, , 31-03-2020, , 10,00,000, 4,00,000, 50,00,000
Page 787 :
Com mon-size Statements, Solution, , Sun Ltd., Common-size Balance Sheet, (as at 31st March, 2020), Particulars, , Percentage, of Balance, Sheet Total, 31-03-2020, %, , Absolute, Amount, , Note No., , 31-03-2020, , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, Trade Payables, , `, , Total, , II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets :, (i) Tangible Assets, (ii) Intangible Assets, 2. Current Assets :, (a) Inventories, (b) Cash and Cash Equivalents, , Total, , 30,00,000, 4,00,000, , 60, 8, , 10,00,000, , 20, , 6,00,000, 50,00,000, , 12, 100, , 30,00,000, 6,00,000, , 60, 12, , 10,00,000, 4,00,000, 50,00,000, , 20, 8, 100, , Illustration 9, From the following information, prepare the Common-size Balance Sheet of Moon Ltd. :, 2018, , Particulars, , `, , Share Capital, Reserves and Surplus, Current Liabilities, Fixed Assets, Current Assets, , Solution, , 4,00,000, 1,60,000, 2,40,000, 4,80,000, 3,20,000, , 2019, `, , 4,80,000, 3,00,000, 4,20,000, 8,40,000, 3,60,000, , Common-size Balance Sheet of Moon Ltd., (as on 31st Dec. 2018 and 2019), Absolute Amount, 2018, 2019, , Particulars, I. EQUITY AND LIABILITIES, 1. Share Capital, 2. Reserve and Surplus, 3. Cur rent Li a bil i ties, , `, , `, , Total, , 4,00,000 4,80,000, 1,60,000 3,00,000, 2,40,000 4,20,000, 8,00,000 12,00,000, , To tal, , 4,80,000 8,40,000, 3,20,000 3,60,000, 8,00,000 12,00,000, , II. ASSETS, 1. Non-cur rent As sets :, Fixed As sets, 2. Cur rent Assets, , % of Total, 2018, 2019, %, %, 50, 40, 20, 25, 30, 35, 100, 100, , 60, 40, 100, , 70, 30, 100, , 301
Page 788 :
SBPD Pub li ca tions Accountancy (XII), Il lus tra tion 10, The fol low ing Bal ance Sheets of X Ltd. are given for the years end ing 2018 and 2019 :, Balance Sheets, (` in ’000), 2018, , Particulars, I. EQUITY AND LIABILITIES, 1. Share holders’ Funds :, (a) Share Cap i tal, (b) Re serve and Sur plus, 2. Non-cur rent Li a bil i ties :, Long-term Bor row ings (12% De ben tures), 3. Cur rent Li a bil i ties :, Trade Payables, , 2019, `, , II. AS SETS, 1. Non-cur rent As sets :, (a) Fixed As sets (Tangible), (b) Non-cur rent In vest ments :, Shares in AB Ltd., 2. Cur rent Assets, , `, , 4,000, 1,400, , 8,000, 1,400, , 400, , 800, , 2,400, 8,200, , 1,640, 11,840, , 4,000, , 9,800, , 1,800, 2,400, 8,200, , 1,000, 1,040, 11,840, , Convert the above Balance Sheets into a Common-size Statement for Comparative, Analysis., So lu tion, Common-size Bal ance Sheet of X Ltd., (as on 31st Dec., 2018 and 2019), (` in ’000), Absolute Amount, 2018, 2019, , Particulars, I. EQUITY AND LIABILITIES, 1. Share hold ers’ Funds :, (a) Eq uity Share Cap i tal, (b) Re serves and Sur plus, 2. Non-cur rent Li a bil i ties :, Long-term Borrowings (12% Debentures), 3. Cur rent Li a bil i ties:, Trade Payables, II. ASSETS, 1. Non-cur rent As sets :, (a) Fixed As sets (Tangibles), (b) Non-current Investments, 2. Cur rent Assets, , % of Total, 2018, 2019, %, %, , `, , `, , 4,000, 1,400, , 8,000, 1,400, , 48.78, 17.07, , 67.57, 11.82, , 400, , 800, , 4.88, , 6.76, , Total, , 2,400, 8,200, , 1.640, 11,840, , 29.27, 100, , 13.85, 100, , To tal, , 4,000, 1,800, 2,400, 8,200, , 9,800, 1,000, 1,040, 11,840, , 48.78, 21.95, 29.27, 100, , 82.78, 8.44, 8.78, 100, , 10.8 Trend Anal y sis, Trend Analysis is also an important tool of anal y sis and in ter pre ta tion of fi nan cial, state ment. Trend means ten dency in gen eral term. Trend anal y sis dis closes changes in the, fi nan cial and op er at ing data of fi nan cial state ments over a se ries of years in per cent age. The, trend anal y sis of busi ness op er a tions and other fi nan cial data may be done in any of the, following ways :, (i) Trend Percentage,, , 302
Page 789 :
Com mon-size Statements, (ii) Trend Ra tios, and, (iii) Graphic or Di a gram matic Pre sen ta tion., Com pu ta tion of Trend Per cent age : Un der this method, fol low ing steps are taken :, Step 1 : Se lec tion of a base year (one state ment is taken as the base)., Step 2 : Each item of the base year is stated as 100., Step 3 : Calculation of percentage relationship that each item of each year bears, to the same item in the base year., Absolute Value of the Concerned Year, For mula : Trend Percentage =, × 100, Absolute Value of the Base Year, Thus, fig ures of dif fer ent years are con verted into terms of rel a tive value to that of the, base year., While ana lys ing changes, first the in for ma tion con tained in the fi nan cial state ments is, tab u lated and tak ing the ear li est year or any one year as the base, the per cent age, in crease, or decrease for other years is calculated. The percentages are called trend percentages, which give an idea about the changes in com par i son to previous years., Illustration 11 (Trend Analysis), From the fol low ing items of the as sets side of the Bal ance Sheet of ABC Co. Ltd. for the, pe riod 31.3.2016 to 31.3.2019, cal cu late trend per cent age tak ing March 2016 as the base year:, Particulars, 2016, Cash, Debtors, Stock, , Solution, , ` in '000, as on 31st March, 2017, 2018, `, , `, , `, , 40, 20, 50, , 60, 40, 75, , 80, 30, 60, , 70, 15, 70, , Statement showing Trend Percentage, Particulars, 1, , Cash, Debtors, Stock, , 31st March, 2016, 2, , 2017, 3, , `, , `, , 40, 20, 50, , 60, 40, 75, , 2018, 4, , 2019, , `, , 2019, 5, , `, , `, , 80, 30, 60, , 70, 15, 70, , ` in '000, , Trend Per cent age, (Base 2016), 2016 2017 2018 2019, 6, 7, 8, 9, 100, 100, 100, , 150, 200, 150, , 200, 150, 120, , 175, 75, 140, , Work ing Notes :, Col. 7, 60 × 100, = 150, 40, 40 × 100, = 200, 20, 75 × 100, = 150, 50, , Col. 8, 80 × 100, = 200, 40, 30 × 100, = 150, 20, 60 × 100, = 120, 50, , Col. 9, 70 × 100, = 175, 40, 15 × 100, = 75, 20, 70 × 100, = 140, 50, , Illustration 12, Value of sales for the five years are given as follows :, Year (31st March) :, 2015, 2016, 2017, 2018, 2019, Sales (in `), : 1,50,000 1,80,000 1,30,500 1,65,000 1,87,500, Mea sure the changes in the sales value for other years tak ing 2015 as the base year., , 303
Page 790 :
SBPD Pub li ca tions Accountancy (XII), Solution, , Trend Percentage, Sales, (`), , 31st March, , Increase/Decrease, in Com par i son to, 2015, Sale of Base Year, ` 1,50,000, , 1,50,000, 1,80,000, 1,30,500, 1,65,000, 1,87,500, , 2015, 2016, 2017, 2018, 2019, , In crease or De crease in % in, Com par i son to 2015, (Increase / Decrease), × 100, Sales for the Base year, , —, + 30,000, – 19,500, + 15,000, + 37,500, , —, + 20%, – 13%, + 10%, + 25%, , Miscellaneous and Boards’ Questions, Illustration 13, Prepare Common-size Income Statement from the following information :, Year 2018, , Particulars, Sales, Cost of Goods Sold, Indirect Expenses, Income Tax, , Solution, , Year 2019, , ` 5,00,000, , ` 6,00,000, , 60% of Sales, 40% of Gross Profit, 30% of Net Profit before Tax, , 70% of Sales, 30% of Gross Profit, 30% of Net Profit before Tax, , Common-size Income Statement, (for the years ended 31st March, 2018 and 2019), Note, No., , Particulars, , 2018, , 2019, `, , I. Revenue from Operations, II. Expenses :, Cost of Goods Sold, Indirect Expenses (Note 1), To tal Ex penses, III.Profit before Tax (I – II), IV. Income-tax @ 30%, , Percentage of, Revenue from, Operations, , Absolute Amounts, , `, , 5,00,000, , 6,00,000, , 3,00,000, 80,000, 3,80,000, 1,20,000, 36,000, 84,000, , 4,20,000, 54,000, 4,74,000, 1,26,000, 37,800, 88,200, , 2018, %, 100, 601, 162, 76 3, 244, 7.2 5, 16.8, , 2019, %, 100, 70, 9, 79, 21, 6.3, 14.7%, , Work ing Notes :, 2018, , Particulars, Revenue from Operations (Sale), Less : Cost of Goods Sold, Gross Profit, Indirect Expenses, , 304, , 2019, `, `, 5,00,000, 6,00,000, 3,00,000, 4,20,000, 2,00,000, 1,80,000, 40% of G.P. 30% of G.P., 2,00,000 × 40 1,80,000 × 30, 100, 100, = ` 80,000, = ` 54,000
Page 791 :
Com mon-size Statements, 3,00,000 × 100, = 60%, 5,00,000, 3 ,80 ,000 × 100, 3., = 76%, 5 ,00 ,000, 36,000 × 100, 5., = 7 .2%, 5 ,00,000, 4 ,20 ,000 × 100, 7., = 70%, 6 ,00,000, 4,74 ,000 × 100, 9., = 79%, 6 ,00,000, 37 ,800 × 100, 11., = 63, .%, 6 ,00,000, , 80 ,000 × 100, = 16%, 5 ,00 ,000, 1 ,20,000 × 100, 4., = 24%, 5 ,00 ,000, 84 ,000 × 100, 6., = 16.8 %, 5 ,00 ,000, 54 ,000 × 100, 8., = 9%, 6 ,00,000, 1 ,26 ,000 × 100, 10., = 21 %, 6,00 ,000, 88 ,200 × 100, 12., = 147, . %, 6 ,00 ,000, , 1., , 2., , 10.9 FAST RE VI SION, b Com mon-size State ment : Com mon-size State ment is a state ment in which each item in, , the state ment is stated as a per cent age of the ag gre gate (i.e., com mon base), of which that, item is a part. Thus, each percentage shows the relation of the individual term to its, re spec tive to tal., b Com mon-size In come State ment : In Comman-size In come State ment, each item of the, income statement is expressed as a percentage of ‘net sales'. Thus, it expresses the, re la tion ship be tween net sales and var i ous ex penses., Formula :, Each Individual Item of Income, Statement of a particular year, Com mon-size Per cent age =, × 100, Net Sales of a particular year, b Common-size Balance Sheet : A state ment where Bal ance Sheet items are ex pressed in, the ra tio of each as set to to tal as sets and the ra tio of each li a bil ity is ex pressed in the ra tio of, to tal li a bil i ties is called Com mon-size Bal ance Sheet., , USEFUL QUES TIONS, (A) Long Answer Type Questions, , (5/6/8 Marks Questions), 1. Explain the ‘Comparative Statement’ and ‘Common-size Statement’ methods of Financial, State ment Analysis., 2. What is Com mon-size State ment ? How is it pre pared ?, 3. What is Com mon-size Financial State ment ? Give any two uses of Common-size Financial Statement., 4. What is a Com mon-size Bal ance Sheet ? How is it pre pared ?, , (B) Short Answer Type Questions, 1., 2., 3., 4., 5., 6., , (3/4 Marks Ques tions), , What do you understand by Common-size Statement ?, What are the objectives of preparing Common-size Statement ?, What are the ob jects or util ity of Com mon-size Fi nan cial State ments ?, Give speciman of Com mon-size of In come State ment for two years., Give the format of Common-size Balance Sheet., What is the meaning and objectives of Trend Analysis ?, , (C) Very Short An swer Type Ques tions, , (1/2 Marks Ques tions with An swers), 1. Explain briefly any two techniques of analysis of financial statements. (U.S.E.B., 2011), [Ans. (i) Com par a tive State ment Anal y sis; (ii) Commion-size Statement.], 2. What is a Com mon-size State ment ?, (C.B.S.E., Delhi, 2011), [Ans. The Com mon-size State ments are shown in an a lyt i cal per cent ages. The fig ures of these, state ments are shown as per cent age to some com mon base (such as net sales, to tal as sets,, and to tal li a bil i ties). It is also known as Com po nent Per cent age Statement.], 3. Name the Com mon-size State ment., [Ans. There are two types of Com mon-size State ments :, (1) Com mon-size In come State ment;, (2) Com mon-size Bal ance Sheet.], , 305
Page 792 :
SBPD Pub li ca tions Accountancy (XII), 4. What do you mean by Com mon-size In come State ment ?, [Ans. In Com mon-size In come State ment, the items of ex pen di ture are shown as a per cent age of, the net sales for two or more pe ri ods.], 5. What is meant by Com mon-size Bal ance Sheet ?, [Ans. Com mon-size Bal ance Sheet is a bal ance sheet which shows the per cent age of each as set to, the to tal as sets and that of each li a bil ity to the to tal li a bil i ties. To tal of Bal ance Sheet is, taken as 100.], 6. What is meant by Trend Anal y sis or Trend Per cent age Anal y sis ?, [Ans. Trend Anal y sis is a tech nique of study ing sev eral fi nan cial state ments over a se ries of, years. In this anal y sis the trend per cent ages are cal cu lated for each item. The fig ure of that, item for the base year is taken as 100.], 7. If a com pany had fixed as sets ` 4,00,000 and cur rent as sets ` 1,00,000, then find out the, per cent age of cur rent as sets to to tal as sets., [Ans. Cur rent As sets = 20% of Fixed As sets, Working : To tal As sets = ` 4,00,000 + 1,00,000 = ` 5,00,000, , ∴ % of Cur rent As sets = 1,00, 000 × 100 = 20%.], 5, 00, 000, , 8. If a company has fixed assets worth ` 780 crores and current as sets ` 500 crores,, in vest ments` 220 crores, then find out the per cent age of cur rent as sets to to tal assets., [Ans. Cur rent As sets = 331% of To tal As sets., 3, , Working : To tal As sets = ` 780 + 500 + 220 crores = 1,500 crores, ∴ % of Cur rent As sets = 500 × 100 = 33 1 %.], 1,500, 3, , 9. If to tal li a bil i ties stand at ` 4,38,000 and cur rent li a bil i ties are ` 87,600, cal cu late the, per cent age of cur rent li a bil i ties to to tal liabilities., [Ans. 20%., Work ing : % of Cur rent Li a bil i ties =, , 87,600, × 100 = 20%.], 4,38,000, , 10. A com pany has share cap i tal ` 8,00,000 and other li a bil i ties ` 2,00,000. Cal cu late the, per cent age of share cap i tal to to tal liabilities., [Ans. 80%., Working : ` 8,00,000 + 2,00,000 = ` 10,00,000 (To tal Li a bil i ties), ∴ Per cent age of Share Cap i tal = 8,00,000 × 100 = 80%.], 10,00,000, , 11. If a com pany has share cap i tal of ` 2,80,000, re serves and sur plus ` 24,000 and cur rent, li a bil i ties ` 96,000, then calculate the percentage of reserves and surplus to total, liabilities., [Ans. 6%., Working :, , 24,000, 24,000, × 100 =, × 100 = 6%.], (2,80,000 + 24,000 + 96,000), 4,00,000, , (D) Objective Type Questions, I. Se lect the cor rect alternative :, 1. Com mon-size State ments are also known as ....................... :, (a) Dy namic Anal y sis, (b) Hor i zon tal Anal y sis, (c) Ver ti cal Anal y sis, (d) None of these, 2. The common base of the Income Statement is :, (a) Rev e nue from Op er a tions, (b) To tal Ex penses, (c) To tal of Bal ance Sheet, (d) None of these, 3. In a Com mon-size Bal ance Sheet, to tal eq uity and li a bil i ties are as sumed to be equal to :, (a) 1, (b) 10, (c) 100, (d) 1,000, , 306
Page 793 :
Com mon-size Statements, 4. In a Common-size State ment, the amount of net sales is as sumed to be equal to :, (a) 1, (b) 10, (c) 100, (d) 1,000, [Ans. 1. (c), 2. (a), 3. (c), 4. (c).], II. State whether the fol low ing state ments are True or False :, 1. Common-size In come State ment pres ents the var i ous items as a per cent age of Rev e nue from, Operations., 2. Com mon-size Bal ance Sheets shows rel a tive val ues of var i ous items., 3. Com mon-size State ment Anal y sis is also known as Com po nent Per cent age Anal y sis., 4. Com mon-size State ments are called Hor i zon tal Anal y sis., [Ans. 1. True, 2. True, 3. True, 4. False.], , PRACTICAL PROBLEMS, ❏ Common-size In come State ment, 1. From the fol low ing information, prepare Common-size Statement of the year ended 31st March,, 2020 :, Particulars, , Note No., , 31-03-2020, `, , Revenue from Operations (Net Sales), Employees Benefit Ex penses, Other Expenses, , 50,00,000, 20,00,000, 5,00,000, , [Ans. Em ploy ees Ben e fit Ex penses 40% of Rev e nue from Op er a tions, Other Ex penses 10% of, Rev e nue from Op er a tions, Profit be fore Tax 50% of Rev e nue from Op er a tions.], 2A. From the fol low ing in for ma tion, prepare a Common-size Statement of Profit & Loss :, Particulars, , Note No., , 31st, March,, 2020, , 31st, March,, 2019, , `, , Revenue from Operations, Employees Benefit Expenses, Other Expenses, [Ans., Particulars, , `, , 20,00,000 16,00,000, 1,0,00,000 8,00,000, 1,00,000 2,00,000, , Revenue from Operations, , Total Expenses, , Profit before Tax, , 100, 100, , 55%, 62.5, , 45%, 37.5%], , 2019-20, 2018-19, , 2B. From the fol low ing Statement of Profit and Loss of Sun Ltd., for the years ended 31st March, 2018, and 2019, prepare a Common Size Statement :, Particulars, , Note No., , 2018-19, , 2017-18, , `, , Revenue from Operations, Expenses, Other Income, Income Tax, , `, , 30,00,000 20,00,000, 12,00,000 10,00,000, 3,60,000 4,00,000, 50%, 40%, , [Ans., Items, , Revenue, , % of Revenue 2018, % of Revenue 2019, , 100, 100, , Other Incomes Expenses Profit before Tax Profit after Tax, 20, 12, , 50, 40, , 70, 72, , 42, 36], , 307
Page 794 :
SBPD Pub li ca tions Accountancy (XII), 3. From the following information, prepare a Common-size Income Statement :, 2017, , Particulars, , 2018, , `, , I. Revenue from Operations, II. Expenses : Cost of Materials Consumed, Employees Benefit Expenses, , `, , 12,000, 3,000, 4,000, , 16,000, 4,000, 6,000, , 7,000, 5,000, , 10,000, 6,000, , Total Expenses, III.Profit before Tax, Income-tax 50%., [Ans., Particulars, , Revenue from, Operations, , Cost of Materials, Employees, Consumed, Benefit Expenses, , Total, Expenses, , 2017, , 100, , 25%, , 33.33%, , 58.33, , 2018, , 25%, I.T., 20.83, , 37.5%, NPAT, 20.83, , 62.5, , 2017, , 100, PBT, 41.67, , 2018, , 37.5, , 18.75, , 18.75], , 4. From the fol low ing in for ma tion, pre pare a Com mon-size Income State ment :, 2017, , Particulars, , `, , Sales, Cost of Goods Sold, Administrative Expenses, Selling Expenses, , 2,00,000, 75,000, 15,000, 5,000, , 2018, `, , 2,25,000, 90,000, 15,000, 7,500, , [Ans., COGS, Other Exps., To tal Exps., PBT, 2018, 40%, 10%, 50%, 50%, 2017, 37.5, 10%, 47.5%, 52.5%], 5. Pre pare a Com mon-size Statement from the following Income Statement and interpret. Assume, total revenue as a common base.:, 31st, March,, 2020, , Particulars, , `, , Revenue from Operations, , 31st, March,, 2019, `, , 20,00,000 20,00,000, , Other Income, , 5,00,000, , Cost of Materials Consumed, , 4,00,000, , 15,00,000 12,00,000, , Finance Cost, , 5,00,000, , 3,00,000, , Other Expenses, , 2,50,000, , 3,00,000, , [Ans. Par tic u lars : Rev e nue from Op., 2020, 80%, 2019, 83.33%, , Other In come., 20%, 16.67%, , To tal Rev. To tal Exps., 100%, 90%, 100%, 75%, , Note : All the per cent ages are cal cu lated on the ba sis of to tal rev e nue from op er a tions., , 308, , PBT, 10%, 25%]
Page 795 :
Com mon-size Statements, 6. From the following Statement of Profit and Loss, prepare Common-size Statement of Profit and, Loss :, 31st March, 31st March,, 2020, 2019, , Particulars, , `, , I. Revenue from Operations, , `, , 12,50,000, , 10,00,000, , Purchases of Stock-in-trade, , 8,70,000, , 7,20,000, , Changes in Inventories, , (20,000), , 30,000, , 30,000, , 20,000, , II. Expenses :, , Employees Benefit Expenses, Depreciation and Amortisation, , 50,000, , 30,000, , 9,30,000, , 8,00,000, , III. Profit before Tax (I – II), , 3,20,000, , 2,00,000, , IV. Less : Tax @ 40%, , 1,28,000, , 80,000, , V. Profit after Tax (III – IV), , 1,92,000, , 1,20,000, , Total Expenses, , [Ans., , To tal Exps., , PBT, , Tax, , PAT, , 74.40, 80.00, , 25.60, 20.00, , 10.24, 8.00, , 15.36, 12.0], , 2020 (in %), 2019 (in %), , ❏ Com mon-size Bal ance Sheet, 7. From the following Balance Sheet of Braj Mohan Ltd. given in conventional form, you are, re quired to pre pare a Com mon-size Bal ance Sheet for the pur pose of ver ti cal analysis :, Braj Mohan Ltd., Bal ance Sheet (as at 31st Dec., 2019), Particulars, , Note No., , I. EQ UITY AND LI A BIL I TIES, , Amount, `, , 1. Share holders’ Funds :, (a) Share Cap i tal, , 1,75,000, , (b) Re serves and Sur plus, , 90,000, , 2. Non-cur rent Li a bil i ties :, Long-term Borrowings (De ben tures), , 1,00,000, , 3. Cur rent Li a bil i ties, , 1,35,000, Total, , 5,00,000, , II. AS SETS, 1. Non-cur rent As sets :, Fixed As sets, , 3,50,000, , 2. Cur rent As sets, , 1,50,000, Total, , 5,00,000, , [Ans. Share Capital 35%, Reserves and Surplus 18%, Non-current Liabilities 20%, Current, Liabilities 27%, Total Fixed Assets 70%, Current Assets 30%.], , 309
Page 796 :
SBPD Pub li ca tions Accountancy (XII), 8. From the following Balance Sheets of Sun Ltd., as on 31st March, 2019 and 2020, prepare a, Common-size Balance Sheet :, Particulars, , Note No., , I. EQ UITY AND LI A BIL I TIES, 1. Share hold ers’ Funds :, (a) Share Cap i tal, (b) Re serves and Sur plus, 2. Non-cur rent Li a bil i ties :, Long-term Borrowings, 3. Cur rent Li a bil i ties :, Trade Payables, Total, II. AS SETS, 1. Non-cur rent As sets :, (a) Fixed As sets :, (i) Tan gi ble As sets, (ii) In tan gi ble As sets, 2. Cur rent As sets :, (a) In ven to ries, (b) Cash and Cash Equiv a lents, Total, , 2018-19, , 2019-20, , `, , `, , 30,00,000, 4,00,000, , 40,00,000, 6,00,000, , 10,00,000, , 12,00,000, , 6,00,000, 50,00,000, , 2,00,000, 60,00,000, , 30,00,000, 6,00,000, , 40,00,000, 2,00,000, , 10,00,000, 4,00,000, 50,00,000, , 12,00,000, 6,00,000, 60,00,000, , [Ans. Share Capital (2018-19) 60%, (2019-20) 66.7%; Non-current Liabilities 2018-19 & 2019-20, 20%; Trade Payables (2018-19) 12%, (2019-20) 3.3%; Cash and Cash Equiv a lents (2018-19), 8%, (2019-20) 10%.], 9. From the following information, prepare the Common-size Balance Sheet :, 31.3.2019, , Particulars, , `, , Fixed Assets, Investments, Current Assets, Equity Share Capital, Reserves and Surplus, Current Liabilities, , 2,50,000, 1,20,000, 1,30,000, 3,00,000, 1,25,000, 75,000, , 31.3.2020, `, , 5,60,000, 1,12,000, 1,28,000, 5,20,000, 1,36,000, 1,44,000, , [Ans. 2019 : Equity Share Capital 60%, Reserves and Surplus 25%, Current Liabilities 15%., 2020 : Equity Share Capital 65%, Reserves and Surplus 17%, Current Liabilities 18%., 2019 : Fixed Assets 50%, Investments 24%, Current Assets 26%., 2020 : Fixed Assets 70%, Investments 14%, Current Assets 16%.], 10. Prepare a Common-size Balance Sheet and comment on the financial position of X Ltd and Y Ltd., The Balance Sheets of X Ltd. and Y Ltd. as at 31st March, 2020 are as under :, Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders' Funds :, (a) Share Capital, (b) Reserves and Surplus, , 310, , Note No., , X Ltd., , Y Ltd., , `, , `, , 9,60,000, 2,40,000, , 12,00,000, 3,00,000
Page 797 :
Com mon-size Statements, 2. Non-current Liabilities, 3. Current Liabilities, Total, , 7,20,000, 4,80,000, 24,00,000, , 12,00,000, 3,00,000, 30,00,000, , Total, , 15,00,000, 9,00,000, 24,00,000, , 18,00,000, 12,00,000, 30,00,000, , II. ASSETS, 1. Non-current Assets, 2. Current Assets, , [Ans., , Share Cap., 40, 40, , X:, Y:, , Res. & Sur., 10, 10, , N.C.L., 30, 40, , C.L., 20, 10, , N.C.A., 62.50, 60.00, , C.A., 37.50, 40.00], , ❏ Trend Anal y sis, 11. Cal cu late the trend per cent age from the fol low ing fig ures re lat ing to the Bal ance Sheet b y tak ing, 2016 as the base year :, Particulars, , 2016, , 2017, , `, , Eq uity Share Cap i tal, , 2018, `, , 2019, `, , `, , 2,00,000, , 3,00,000, , 4,00,000, , 5,00,000, , Long-term Loans, , 80,000, , 1,00,000, , 60,000, , 90,000, , Cur rent Li a bil i ties, , 50,000, , 80,000, , 40,000, , 60,000, , 2,00,000, , 3,00,000, , 3,50,000, , 2,50,000, , 80,000, , 1,00,000, , 70,000, , 90,000, , Fixed As sets, Cur rent As sets (Stock), , [Ans. Trend : To tal Li a bil i ties (2016) 100%, (2017) 145.45%, (2018) 151.52%, (2019) 196.97%,, Total Assets = % As per Total Liabilities], 12. Cal cu late the trend per cent ages from the fol low ing fig ures of sales, stock and profit of X Ltd., tak ing 2015 as the base year and interpret them :, (` in lakhs), Year, , Sales, , Stock, , Profit be fore Tax, , `, , `, , `, , 2015, 2016, 2017, , 1,881, 2,340, 2,655, , 709, 781, 816, , 321, 435, 458, , 2018, 2019, , 3,021, 3,768, , 944, 1,154, , 527, 627, , (N.C.E.R.T.), [Ans. Trend : To tal Sales (2015) 100%, (2016) 124%, (2017) 141%, (2018) 161%, (2019) 200%., Stock : (2015) 100%, (2016) 110%, (2017) 115% (2018) 133%, (2019) 163%., Total Profit (2015) 100%, (2016) 136%, (2017) 143%, (2018) 164%, (2019) 195%], , ❏ Miscellaneous and Boards’ Ques tions, 13. Following are the sales of different years of Pawan & Sons :, Year, , :, , Sales (` ) :, , 2014, , 2015, , 2016, , 2017, , 2018, , 2019, , 2,00,000, , 2,40,000, , 1,60,000, , 2,25,0000, , 2,50,000, , 3,00,000, , As sum ing 2014 year’s sales as a base, cal cu late (i) Per cent age change from base year; (ii) Trend, Ratio., , 311
Page 798 :
SBPD Pub li ca tions Accountancy (XII), [Ans., Year, Percentage (Base 2014), , 2014, —, , 2015, 20, , 2016, (20), , 2017, 12.5, , 2018, 25, , 2019, 50, , Trend Ratio, , 100, , 120, , 80, , 112.5, , 125, , 150, , Bracket ( ) denotes negative change., , 14. Pre pare com mon size Bal ance Sheet from the fol low ing informations :, 31.3.2019, , Particulars, , 31.3.2020, , `, , `, , Fixed Assets, , 5,00,000, , 7,00,000, , Investments, Current Assets, Equity Share Capital, Reserves and Surplus, , 2,00,000, 3,00,000, 6,00,000, 2,00,000, , 1,00,000, 5,00,000, 7,00,000, 3,00,000, , Current Liabilities, , 2,00,000, , 3,00,000, , [Ans. % of Balance Sheet Total 2019 & 2020 :, Liabilities : Share Cap i tal 60.00/53.85, Re serve and Sur plus 20.00/23.08, Cur rent Li a bil i ties, 20.00/23.07, Assets : Non-cur rent As sets (a) Fixed As sets 50.00/53.85 In vest ment 20.00/7.69, Cur rent As sets, 30.00/38.46], 15. Pre pare com mon size In come State ment of Virat Ltd., from the fol low ing in for ma tion., Particulars, , Note No., , 31.3.2020, , 31.3.2019, , `, , Cost of Materials Consumed, Revenue from Operations :, % of Cost of Materials Consumed, Employees Benefit Expenses :, % of Cost of Materials Consumed, Depreciation, Other Income (% of Revenue from Operations), , `, , 7,00,000, , 5,00,000, , 135%, , 140%, , 10.8%, 45,000, 8%, , 14%, 35,000, 10%, , Tax Rate 40%, , [Ans., Items, % of Revenue 2019, % of Revenue 2020, , Revenue Other, Income, 100, 10, 100, , 8, , Dep., , T. Exps., , PBT, , PAT, , 71.43, , Employees, 10, , 5, , 86.43, , 23.57, , 14.14, , 74.07, , 8, , 4.76, , 86.84, , 21.16, , 12.70, , T.R., , CMC, , 110, 108, , l, , 312
Page 799 :
11, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 11.1 Meaning of Accounting Ratios, , 314, , 11.2 Objectives (or Purposes) of Accounting Ratios, , 314, , 11.3 Importance of Accounting Ratios, , 315, , 11.4 Limitations of Accounting Ratios, , 316, , 11.5 Steps Involved in the Analysis of Accounting Ratios, , 316, , 11.6 Types or Classification of Accounting Ratios, , 317, , ● Liquidity Ratios ● Solvency Ratios ● Activity or Turnover or, , Performance Ratios or Efficiency Ratio ● Profitability Ratios or Income, Ratios, 11.7 Fast Revision, , 374, , ❑ Useful Questions, , 375, , ❑ Practical Problems, , 383, , 313
Page 800 :
SBPD Pub li ca tions Accountancy (XII), , 11.1 Meaning of Accounting Ratios, Ratio : ‘ ‘A ratio is an expression of the quantitative relationship between two numbers.’’, Analysis : Analysis means examination and interpretation of numerical relationship of two numbers., Ratio Analysis : Ratio analysis means examination and interpretation of numerical, relationship of two numbers. In financial analysis, a ratio is used as an index or yardstick for, evaluating the financial position and performance of a firm. According to Myers, ‘‘Ratio, analysis is a study of relationship among the various financial factors in business.’’, Accounting Ratios : The ratios based on financial statements are called ‘Financial, Ratios’ or ‘Accounting Ratios’. In short, when ‘‘ratios are expressed on the basis of accounting, information such ratios are called accounting ratios.’’, ‘‘A ratio is simply one number expressed in terms of another. It is found by dividing one, number by the other.’’, —R. N. An thony, According to J. Batty, ‘‘The term ‘accounting ratios’ is used to describe significant, relationship which exists between two figures shown in Balance Sheet and Profit & Loss, Account or in any part of the accounting organisation.’’, Expression of Ratios or Meth ods of Ratio Analysis, Accounting ratios can be expressed in various ways, such as :, (1) Pure Ratio or in fraction : The relationship between two figures can be presented, in pure ratio. For example, if current assets are worth ` 10,000 and current liabilities are, ` 5,000, then the relationship between current assets and current liabilities can be, expressed as 10,000 : 5,000 or 2 : 1 or 2/3 : 1/3., In this way, it is a common practice to present financial position ratios by pure ratio, method or in fraction., (2) Percentage Ratio : The relationship between two figures is presented in, percentage. For example, if sales is ` 50,000 and gross profit is` 12,500, the relationship can, be presented as gross profit to be 25% of sales, i.e.,, Gross Profit, 12,500, Gross Profit Ratio =, ´ 100 =, ´ 100 = 25%, Net Sales, 50,000, Net Sales means Sales less Sales Returns. If nothing is mentioned about sales returns,, ‘sales’ should be treated as ‘net sales’., In this way, it is a common practice to present gross profit, net profit, expenses and, operating ratio by percentage ratio method., (3) Rate Ratio or Quotient or Times : According to this method, one figure is, expressed in terms of other relative figure. For example, if cost of goods sold is ` 1,25,000 and, working capital is ` 25,000, the relationship between the two can be said that the cost of, goods sold is five times of working capital (i.e., 1,25,000 ¸ 25,000 ). Rate ratio is commonly, used in respect of activity ratios., , 11.2 Ob jec tives (or Pur poses) of Ac count ing Ra tios, The following are the main objects of ratio analysis :, (1) To Measure the Profitability of the Concern : The profitability can be, measured by gross profit, net profit, operating profit ratios., (2) To Determine the Operating Efficiency of the Business : Operational, efficiency of the business can be judged by calculating operating/activity ratios., (3) To Assess the Solvency of the Business : Solvency or otherwise of the business, concern may be assessed by calculating solvency ratios., , 314
Page 802 :
SBPD Pub li ca tions Accountancy (XII), the volume of profits earned by the concern. The employees make use of information, available in financial statements. Various profitability ratios relating to gross profit,, operating profit, net profit etc. enable employees to put forward their view point for the, increase of wages and other benefits., (E) Importance to Government, Government is interested to know overall strength of the industry. Various financial, statements published by industrial units are used to calculate ratios for determining, short-term, long-term and overall financial position of the concerns. Profitability indices can, also be prepared with the help of ratios. Government may base its future policies on the basis of, industrial information available from various units. The ratios may be used as indicators of, overall financial strength of public as well as private sector. In the absence of the reliable, economic information, governmental plans and policies may not prove successful., , 11.4 Lim i ta tions of Ac count ing Ra tios, The main limitations of accounting ratios are as follows :, (1) False Results : Ratios are based upon the financial statements. In case, financial, statements are incorrect or the data upon which ratios are based is incorrect, ratios, calculated will also be false and defective., (2) Limited Comparability : The ratio of the one firm can not always be compared, with the performance of other firm, if uniform accounting policies are not adopted by them., (3) Lack of Standard Universally accepted Terminology : The ratio can be, comparable only when uniform terminology is adopted by both the firms., (4) Limited Use of a Single Ratio : A single ratio, usually does not convey much of, sense. To make a better interpretation a number of ratios have to be calculated which is, likely to confuse the analyst than help him in making any meaningful conclusion., (5) Window Dressing : Financial statements can easily be a window dressed to, present a better picture of its financial and profitability position to outsiders. Hence, one has, to be very careful in making a decision from ratios calculated from such financial, statements. But, it may be very difficult for an outsider to know about the window dressing, made by a firm., (6) Personal Bias : Ratios are only means of financial analysis and not an end in itself., Ratios have to be interpreted and different people may interpret the same ratio in different, ways., (7) Price Level Changes affect Ratios : If the price level continues to change, the, ratios do not help in comparison. They become irrelevant as compared to past when the price, level was different., (8) Only a Method of Analysis : Ratio analysis is only a beginning and gives just a, fraction of information needed for decision-making. So, to have a comprehensive analysis of, financial statements, ratio should be used alongwith other methods of analysis., , 11.5 Steps In volved in the Anal y sis of Accounting Ratios, The following are the four steps involved in the analysis of accounting ratios :, (i) Selection of relevant data from the financial statements depending upon the, ob jec tive of the analysis., (ii) Calculation of ap pro pri ate ra tios from the above data., (iii) Com par i son of the cal cu lated ra tios with the ra tios of the same firm in the past or, the ra tios de vel oped from pro jected fi nan cial state ments or the ra tios of some other, firms or the com par i son with ra tios of the in dus try to which the firm belongs., (iv) In ter pre ta tion of the ratios., , 316
Page 803 :
Ac count ing Ra tios, , 11.6 Types or Classification of Ac count ing Ra tios, On the basis of purpose, ratios may be classified into four categories as given below :, 1. Liquidity Ratios, Accounting Ratios, , 2. Solvency Ratios, 3. Activity Ratios, 4. Profitability Ratios, , Liquidity Ratios measure the firm’s ability to meet current obligations. They are, essentially short-term in nature., Solvency Ratios : Ratios calculated to measure solvency position are known as, ‘Solvency Ratios’. Solvency denotes the ability to meet contractual obligations towards, stakeholders, particularly towards external stakeholders. Solvency Ratios are essentially, long-term in nature., Activity Ratios reflect the firm’s ability in utilising its resources or assets. These are, also known as ‘efficiency ratios’., Profitability Ratios measure the overall performance and effectiveness of the firm., They refer to the analysis of profits in relation to sales or funds employed in the business., Classification of Accounting Ratios, 1. Liquidity Ratio, , Current, Ratio, , Inventory, Turnover, Ratio, , Gross, Profit, Ratio, *, , 2. Solvency Ratio, , 3. Activity Ratio, , 4. Profitability Ratio, , Liquid/, Proprietary, Quick, Ratio, Interest, Ratio, Coverage, Debt-Equity, Total Assets Ratio, Ratio, to Debt Ratio, , Trade, Receivable, Turnover, Ratio, , Operating, Ratio, , Operating, Profit, Ratio, , Trade, Payable, Turnover, Ratio, , Working, Capital, Turnover, Ratio, , Net Profit, Ratio, , Fixed, Assets, Turnover, Ratio*, , Return on, Investment, , Earing, per, Share*, , Current, Assets, Turnover, Ratio*, , Dividend, per, Share*, , Profit, Earning, Ratio*, , Note : These ra tios are not pre scribed by the C.B.S.E., , 11.6.1 Liquidity Ratios, Meaning of Liquidity : Liquidity is the cash with which assets may be converted into, cash without loss., Liquidity Ratios : Liquidity ratios are the ratios meant for testing short-term, financial position of the firm. These ratios highlight the ability of the undertaking to pay its, , 317
Page 804 :
SBPD Pub li ca tions Accountancy (XII), short-term debts in time. In fact, these ratios indicate the firm's ability to meet the current, obligations out of current resources. Therefore, these ratios are called as S, ‘ hort-term, Solvency Ratios’., Parties Interested in the Liquidity Ratio : (i) Bankers, (ii) Suppliers of Goods, and, (iii) Other Short-term Creditors are interested in the liquidity of the business undertaking., Types of Liquidity Ratios : The most comman liquidity ratios are :, (1) Current Ratio, and, (2) Quick Ratio or Acid-test Ratio or Liquid Ratio., (1) Current Ratio, Meaning : It is a ra tio of cur rent as sets to cur rent li a bil i ties. It is also called working, capital ratio. It is computed to assess the short-term financial position of the enterprise., Calculation : The current ratio is calculated by dividing cur rent as sets by cur rent, liabilities., The ra tio is cal cu lated on the ba sis of the fol low ing for mula :, Current Ratio =, , Current Assets, Current Liabilities, , ...(1), , where,, (1) Cur rent As sets : Cur rent as sets are those as sets which can be con verted into cash, within a year (i.e., within 12 months)., (2) Current Liabilities : Current liabilities are amount owed by a business to other, organisations and individuals that should be paid within one year., Components (or Examples) of Current Ratio, Current Assets, 1. Cash and Cash Equivalents (Cash in hand,, Cash at Bank, Cheques/Draft in hand), 2. Stock (Inventories) 1, 3. Trade Receivables (Debtors + Bills, Receivables less Provision for Doubtful, Debts), 4. Short-term Investments/Current Investments, 5. Short-term Loans and Advances, 6. Other Current Assets (Prepaid Expenses,, Interest accrued on Investments, Advance, Payment of Taxes etc.), , Current Liabilities, 1. Short-term Borrowings, 2. Trade Payables (Creditors + Bills Payable), 3. Other Current Liabilities (e.g., Outstanding, interest on loan, Interest Payable, Unpaid, Dividends, Outstanding Expenses, Calls-inadvance, Unclaimed Dividend, etc.), 4. Short-term Provision :, (a) Provision for Employee Benefits, (b) Provision for Tax etc., , Note : Stock/Inventories = Stock of Finished Goods + Stock of Raw Material + Work-in-progress., , Do not include the following in Current Assets :, (i) Stores and Spares, Loose Tools., (ii) Fictitious Assets such as Unamortised Expenses/Loss such as Preliminary, Expenses, Share Issue Ex penses, Un derwrit ing Ex penses, Dis count on Is sue of, Shares/Loss on Issue of Debentures.., Do not include the following in Current Liabilities :, (i) Bank Loan, Loan, Loan on Mortgage; (ii) De ben tures., Example :, Current Assets of X Co. Ltd. = ` 5,00,000, Current Liabilities of X Co. Ltd. = ` 4,00,000, , 318
Page 805 :
Ac count ing Ra tios, Hence, for the X Co. Ltd. the Current Ratio is :, ` 5,00,000, = 1.25 : 1, ` 4,00,000, Significance and Interpretation of Current Ratio : Generally 2 : 1 is considered as, ideal ratio for a concern i.e., current assets should be twice of current liabilities. If the current, assets are two times of the current liabilities, there will be no adverse effect on business, operation when the payment of current liabilities is made. If the ratio is less than 2,, difficulties may arise in payment of current liabilities and day-to-day operations of the, business may suffer. If the ratio is higher than 2, it is very comfortable for the creditors but, for the concern, it is indicator of idle funds and a lack of enthusiasm for work., A high current ratio may not be favourable due to the following reasons :, 1. There may be slow moving stocks. The stocks will pile up due to poor sale., 2. The figures of debtors may go up because debt collection is not satisfactory., 3. The cash or bank balances may be lying idle because of insufficient investment, opportunities., Reasons for low current ratio :, 1. There may not be sufficient funds to pay off liabilities., 2. The business may be trading beyond its capacity. The resources may not warrant the, activities., ❏ Im por tance and Lim i ta tions of Cur rent Ra tio, Importance : Current ratio is a general and quick measure of liquidity of a firm. It, represents the ‘margin of safety’ i.e., a ‘cushion’ of protection for the creditors and other, liabilities. It is most widely used for making short-term analysis of the financial position or, short-term solvency of a firm. The higher the current ratio, the greater the margin of safety., Limitations : Current Ratio suffers from the following limitations :, (1) It is a Crude Ratio : It is a crude ratio because it measures only the quantity and, not the quality of current assets., (2) Window Dressing : Valuation of current assets and window dressing is another, problem of current ratio., Window dressing is done to show current ratio at a particular figure. It does not present, the real financial position of the concern. The inference drawn on such a ratio will be faulty, and deceptive., ILLUSTRATIONS AND PRAC TICAL PROB LEMS : AT A GLANCE, Il lus tra tion No., —, —, 1 to 15, 1(A) to 3, 4(A), (B), 6, 7, 5, 8, 9 to 15, —, 16(A) to 21, 16(A), (B), (C),, 17, 18(A), (B), , Details, , Practical, Prob lem No., 1 to 12, , Very Short Answer Type Numerical Questions, Long Answer Type Numerical Questions, (A) Li quid ity Ra tio :, 1 to 14, Cur rent Ra tio, 1, 5, Liq uid Ra tio/Quick Ra tio, 2 to 4, Cur rent Ra tio and Liq uid Ra tio, 6, 7, Cal cu la tion of Cur rent As sets, Liquid Assets and Cur rent Li a bil i ties, 8 to 10, Cal cu la tion of Stock, 11 to 14, (B) Sol vency Ra tio :, 15 to 22, Debt-eq uity Ra tio, 15(A), 15(B), 16, To tal As sets to Debt Ra tio, , 17, , 319
Page 806 :
SBPD Pub li ca tions Accountancy (XII), 19(A), (B), (C), 20(A), (B), 21, 22(A) to 35, 22(A) to 24, 25, 26, 27, 28(A), 28(B), 29 to 31, 32(A), 32(B),, 32(C), 33(A), (B), 34, 35, 36 to 50, 36(A) to 41, 42(A) to 44, 45, 46, 47(A), 47(B), 48, 49, 50, —, 51 to 54, 55 to 59, 59, , Proprietary Ratio, In ter est Cov er age Ra tio, Debt-Equity Ratio, Proprietary Ratio, (C) Ac tiv ity (Performance/Turnover) Ra tio :, Stock Turn over Ra tio, Cal cu la tion of Gross Profit, Cal cu la tion of Open ing Stock and Clos ing Stock, Debtors Turnover Ratio (DTR), Average Collection Period, Payable Turnover Ratio, Working Capital Turnover Ratio, Fixed Assets Turnover Ratio, Current Assets Turnover Ratio, (D) Profitability Ratio :, Gross Profit Ra tio, Operating Ratio, Operating Profit Ratio Net Profit Ratio, Re turn on In vest ment, Earn ing per Share, Dividend per Share, Price Earn ing Ra tio, Com pre hen sive Ques tions, Miscellaneous and Boards' Ques tions, Total, , 18 to 20, 21, 22, —, 23 to 41, 23 to 26(A) to (C), 27, 28 to 30, 31, 32, 33 to 35, 36 to 38, 39, 40, 41, —, 42 to 62, 42 to 47, 48, 49, 50, 51 to 53, 54, 55, 56, 56, 57, 58 to 61, 62 to 74, 12 + 74, , Illustration 1(A) (Current Ratio), From the following particulars, you are required to calculate Current Ratio :, Particulars, , Amount, , Particulars, , `, , Inventory, Debtors, B/R, Ad vance Tax, , 50,000, 40,000, 10,000, 4,000, , Amount, `, , Cash in hand, Creditors, B/P, Bank Overdraft, , 30,000, 60,000, 40,000, 4,000, , (N.C.E.R.T.), Solution, Current Assets, Current Liabilities, Current As sets = Inventory + Debtors + B/R + Advance Tax + Cash in hand, = ` 50,000 + 40,000 + 10,000 + 4,000 + 30,000, = ` 1,34,000, Current Liabilities = Creditors + B/P + Bank Overdraft, = ` 60,000 + 40,000 + 4,000 = ` 1,04,000, 1,34,000, Current Ratio =, = 134 : 104 or 67 : 52 or 1.29 : 1, 1,04,000, Since the cur rent ra tio is less than the stan dard cur rent ra tio of 2 : 1, it in di cates that, the firm will not be able to pay its cur rent li a bil i ties., Current Ratio =, , 320
Page 807 :
Ac count ing Ra tios, Illustration 1(B), From the following, compute Current Ratio :, S.N., 1., 2., 3., 4., , Items, Total Assets, Shareholders’ Funds, Non-current Liabilities, Non-current Assets, , Amount (` ), 1,00,000, 60,000, 20,000, 50,000, , Solution, Current Assets, Current Liabilities, Current Assets = Total Assets – Non-current Assets, = ` 1,00,000 – 50,000 = ` 50,000, Current Liabilities = Total Assets – Shareholders’ Funds – Non-current Liabilities, = 1,00,000 – 60,000 – 20,000 = ` 20,000, 50,000, Current Ratio =, = 2.5 : 1, 20,000, Current Ratio =, , Illustration 2(A), The cur rent ra tio of a Com pany is 2 : 1. State giv ing rea sons which of the fol low ing, would (i) im prove, (ii) re duce, or (iii) not change the cur rent ra tio :, (a) Repayment of a Cur rent Li a bil ity,, (b) Pur chase of Goods for Cash,, (c) Sale of Of fice Equip ment for ` 4,000 (Book Value ` 5,000),, (d) Sale of Goods ` 11,000 (Cost ` 10,000),, (e) Pay ment of Div i dend., Solution, Current Assets, Current Ratio =, = 2 : 1, Current Liabilities, It means current assets are twice the current liabilities., Let us as sume cur rent li a bil i ties are ` 1,00,000. Since cur rent as sets are twice (or two, times) the cur rent li a bil i ties, the cur rent as sets will be ` 2,00,000. Now we should see the, effect of each trans ac tion on the cur rent as sets and cur rent li a bil i ties which in turn will, decrease or in crease the current ratio., (a) Re pay ment of cur rent li a bil ity will de crease the cur rent li a bil i ties and also de crease, the cur rent as sets (cash) which in turn will in crease the ratio., For ex am ple, sup pose the cur rent li a bil ity paid was` 50,000. Our new cur rent ra tio will be :, Current Assets ( ` 2,00,000 – 50,000), =, Current Liabilities (1,00,000 – 50,000), 1,50,000, =, =3: 1, 50,000, Thus, it will in crease from 2 : 1 to 3 : 1., (b) Pur chase of goods on cash will not change the cur rent ra tio as it will nei ther in crease, nor de crease the cur rent as sets or the cur rent li a bil i ties. There is con ver sion of one current, as set (cash) into an other (goods). In other words, one cur rent as set (cash) will go out and the, other cur rent as set (goods) will come in., , 321
Page 808 :
SBPD Pub li ca tions Accountancy (XII), (c) Sale of of fice equip ment for ` 4,000 in cash shall im prove the cur rent ra tio as it will, increase current assets without any change in current liabilities. Needless to say office, equip ment is a fixed asset., 2,00,000, (Current Assets), Our old equa tion of Cur rent Ra tio is `, 1,00,000 (Current Liabilities), Af ter sale of of fice equip ment Cur rent Ra tios will be :, Current Assets = ` 2,00,000 + 4,000 (Cash), = ` 2,04,000, Current Liabilities = ` 1,00,000, 2,04,000, =, = 2.04 : 1, 1,00,000, There is an im prove ment in cur rent ra tio from 2 : 1 to 2.04 : 1., (d) Sale of goods cost ing ` 10,000 for ` 11,000 shall im prove the cur rent ra tio as fol lows :, ` 2,00,000, Our old equa tion of cur rent ra tio is, ` 1,00,000, ` 2,00,000 + 11,000 (Cash) – 10,000 (Stock), After Sale of Goods =, ` 1, 00,000, 2,01,000, =, = 2.01 : 1, 1,00,000, Cur rent ra tio has im proved from 2 : 1 to 2.01 : 1, There is an im prove ment in cur rent ra tio., (e) Pay ment of div i dend will re duce the cur rent ra tio as it will de crease cur rent as sets, (cash) with out any change in cur rent li a bil i ties., Illustration 2(B), The Quick Ratio of a Company is 1.5 : 1, State with reason which of the following, transactions would (i) increase, (ii) decrease, or (iii) not change the ratio., 1. Paid rent ` 3,000 in ad vance., 2. Trade receivables included a debtor Shri Ashok who paid his entire amount due, ` 9,700., (C.B.S.E., A.I., 2014 Set I), 3. Company issued 1,00,000 equity shares of ` 10 each to the vendor of machinery, purchased., 4. In cluded in trade payables was a bill pay able of` 9,000 which was met on ma tu rity., (C.B.S.E. (Delhi), 2014 Set I), Solution, S. No., , Effect on C/R, , Reason, , 1., , Decrease, , Liquid assets will decrease with no change in current liabilities., , 2., , No Change, , Cash will increase but trade receivables will decrease by the same, amount without affecting the liquid assets., , 3., , No Change, , Neither Current Assets nor Current Liabilities are changing., , 4., , Increase, , Both Current Assets and Current Liabilities are decreasing with the, same amount., , Illustration 3, The ra tio of cur rent as sets ( ` 6,00,000) and cur rent li a bil i ties ( ` 4,00,000) is 1.5 : 1. The, Ac coun tant of the firm is in ter ested in main tain ing a Cur rent Ra tio of 2 : 1, by pay ing off a, , 322
Page 809 :
Ac count ing Ra tios, part of the cur rent li a bil i ties. Com pute the amount of cur rent li a bil i ties that should be paid,, so that the cur rent ra tio at the level of 2 : 1 may be maintained., (J.A.C., 2010), Solution, Current Assets, Current Ratio =, Current Liabilities, 1.5 6,00,000, =, 1, 4,00,000, Af ter the pay ment (Let pay ment be x) :, 2 6,00,000 – x, =, 1, 4,00,000 – x, Þ, 8,00,000 – 2x = 6,00,000 – x, Þ, 8,00,000 – 6,00,000 = 2x – x, Þ, 2,00,000 = x, ∴, Current Liabilities paid off = ` 2,00,000, (2) Liquid or Quick Ratio or Acid-test Ratio, Mean ing : Liq uid ra tio shows the re la tion ship be tween quick as sets or liq uid as sets and, cur rent or liq uid li a bil i ties. An as set is said to be liq uid if it can be con verted into cash within a, short pe riod with out loss of value. In that sense cash in hand and cash at bank are the most, liquid assets. The other assets which can be included in liquid assets are B/R, Sundry, Debtors, Mar ket able Securities and Short-term Investments., In ven tory (stock) can not be treated as liq uid as set be cause they can not be con verted, into cash immediately without a sufficient loss of value. In the same manner, prepaid, ex penses are also ex cluded from the list of liq uid as sets, be cause they are not ex pected to be, converted into cash. Liquid ratio is also known as Quick or Acid-test Ratio., Computation : The quick ra tio can be cal cu lated by dividing the to tal of the quick, assets/liquid as sets by to tal cur rent li a bil i ties :, Quick or Liquidity Ratio =, , Total Liquid Assets, Total Current Liabilities, , ...(1), , Or, Liquidity Ratio =, , Current Assets – (Stock + Prepaid Exp.), Current Liabilities, , ...(2), , Liquid (or Quick) Assets = Current Assets – (Stock + Prepaid Expenses), Com po nents of Liq uid Ra tio, 1. Liq uid As sets, Cash in hand, Cash at Bank, Bills Re ceiv able, Trade Receivables, Sun dry Debt ors, Mar ket able Se cu ri ties, Tem po rary In vest ments/Short-term In vest ment, Short-term Loans & Ad vances (Dr. Bal ance), , }, , 2. Cur rent Li a bil i ties, Out stand ing Ex penses, Bills Pay able, Trade Payables, Sun dry Cred i tors, Short-term Ad vances (Credit Bal ance), Loans Pay able within one year, In come-tax Pay able, Dividend Payable, Bank Over draft, Provision for Tax, , }, , 323
Page 810 :
SBPD Pub li ca tions Accountancy (XII), Significance and In ter pre ta tion of Liquid Ratio : Gen er ally a high liq uid ra tio is, an in di ca tion that the firm is liq uid and has the abil ity to meet its cur rent or liq uid li a bilities, in time and on the other hand, a low liq uid ra tio rep re sents that the firm's li quid ity po sition, is not good. As a rule of thumb liq uid ra tio of 1 : 1 is con sid ered sat is fac tory. It is gen er ally, thought that if quick as sets are equal to cur rent li a bil i ties, then the con cern may be able to, meet its short-term ob li ga tions. Al though quick ra tio is more rig or ous test of li quid ity than, the cur rent ra tio, it should be used cau tiously and 1 : 1 rule should not be used blindly., The liq uid ra tio is very use ful in mea sur ing the li quid ity po si tion of a firm. It mea sures, the firm's ca pac ity to pay off cur rent ob li ga tions im me di ately and is more rig or ous test of, li quid ity than the cur rent ra tio. It is used as a com ple men tary ratio to the current ratio., Il lus tra tion 4(A) (Liquid Ratio), Cal cu late Liq uid Ra tio from the in for ma tion given in Il lus tra tion 1(A)., (N.C.E.R.T.), Solution, Liquid Assets = Current Assets – [Inventory + Advance Tax], = ` 1,34,000 – [` 50,000 + 4,000] = ` 80,000, Current Liabilities = ` 1,04,000, Liquid Ratio = Liquid Assets : Current Liabilities, = ` 80,000 : ` 1,04,000, = 10 : 13 or 0.77 : 1, Illustration 4(B), Cal cu late ‘Liq uid Ra tio’ from the fol low ing in for ma tion :, Current Li a bil i ties ` 50,000; Inventory ` 25,000; Current As sets ` 80,000; Prepaid, Expenses ` 5,000., (N.C.E.R.T.), Solution, Liq uid As sets = Cur rent As sets – Clos ing Inventory – Pre paid Ex penses, = ` 80,000 – 25,000 – 5,000 = ` 50,000, Liquid Assets, 50,000, Liquidity Ra tio =, =, =1 : 1, Current Liabilities 50,000, Comment : Liquid ratio of 1 : 1 is usually considered satisfactory, since it indicates that, for every rupee of current debt there is one rupee of quick assets which can be converted into, cash on short notice to meet immediate obligations., Illustration 5 (Current Ratio and Liq uid Ratio), Calculate Current Ratio and Liquid Ratio from the following information :, Cash in hand, `, 500, Bank Overdraft, ` 2,000, Inventory, ` 2,000, Investment in Govt. Securities ` 2,500, Debtors, ` 4,000, Bills Payable, `, 4,000, Bills Receivable, ` 3,000, Creditors, `, 3,000, (U.S.E.B., 2014), Solution, Current Assets, (i), Current Ratio =, Current Liabilities, Current Assets = Cash in hand + Inventory + Debtors + Bills, Receivable + Investment in Government, Securities (assumed Short-term Investment), = ` 500 + 2,000 + 4,000 + 3,000 + 2,500, = ` 12,000, , 324
Page 811 :
Ac count ing Ra tios, , ∴, (ii), , Current Liabilities = Bank Overdraft + Bills Payable + Creditors, = ` 2,000 + 4,000 + 3,000 = ` 9,000, ` 12,000, Current Ratio =, = 1.33 : 1, ` 9,000, Liquid Assets, Liquid Ratio =, Current Liabilities, Liquid Assets = Current Assets – Inventory, = ` 12,000 – 2,000 = ` 10,000, Current Liabilities = As in (i), ` 10,000, Liquid Ratio =, = 1.1 : 1, ` 9,000, , Illustration 6, Ramu Ltd. has a current ratio of 3 : 1. If its inventory is ` 30,000 and total current, liabilities are ` 60,000, find out its Quick Ratio., Solution, Given, C.A. : C. L. = 3 : 1, Current Assets = Current Liabilities´ 3, = ` 60,000 ´ 3 = ` 1,80,000, Quick As sets = Current Assets – Inventory, = ` 1,80,000 – 30,000, = ` 1,50,000, Quick Assets, ` 1,50,000, Quick Ratio =, =, = 2.5 : 1, Current Liabilities, ` 60,000, Illustration 7, Calculate the Liquid (Quick) Ratio from the following information :, Current Assets ` 5,50,000, Inventory ` 90,000, Prepaid Expenses ` 10,000, Current, Liabilities ` 4,50,000., Solution, Liq uid (Quick) As sets = Cur rent As sets – (Inventory + Pre paid Ex penses), = ` 5,50,000 – (90,000 + 10,000) = ` 4,50,000, Current Liabilities = ` 4,50,000, Liquid Assets, ` 4,50,000, Now, Liquid or Quick Ratio =, =, = 1:1, Current Liabilities ` 4,50,000, Illustration 8, Calculate Liquidity Ratios from the following information :, Total Current Assets, Stock (included in Current Assets), Prepaid Expenses, Current Liabilities, Solution, Current Assets, 90,000, (A), Current Ratio =, =, = 3 : 2 or 1.5 : 1, Current Liabilities 60,000, Current Assets – (Stock + Prepaid Expenses), (B), Liquid Ratio =, Current Liabilities, , `, , 90,000, 30,000, 3,000, 60,000, , 325
Page 812 :
SBPD Pub li ca tions Accountancy (XII), ∴, , Liquid Ratio =, =, , ` 90,000 – (30,000 + 3,000), ` 60,000, ` 57,000, ` 60,000, , = 19 : 20 = 0.95 : 1, , Illustration 9 (Calculation of Current Assets, Liquid Assets and Current Liabilities), (a) If current ratio is 1.5 times and current liabilities are` 60,000, calculate current assets., (b) Calculate current liabilities, if current assets are ` 2,00,000 and current ratio is 2.5 times., Solution, Current Assets, (a), Current Ratio =, = 1.5 times (given), Current Liabilities, It means that cur rent as sets are 1.5 times of the cur rent li a bil i ties, that is, Current Assets = ` 60,000´ 1.5 = ` 90,000, (b), Current Assets = ` 2,00,000 (given), Current Assets, Current Ratio =, = 2.5 times (given), Current Liabilities, The ratio indicates that current assets are 2.5 times of the current liabilities., 1, Therefore, the current liabilities will be, th of the current assets., 2.5, or when, Current Assets, Current Liabilities, 2.5, 1, ` 2,00,000, ?, 2,00,000´ 1 2,00,000´ 10, Current Liabilities (?) =, =, = ` 80,000, 2.5, 25, Illustration 10, Current ratio is 2.5; Working capital is ` 60,000. Calculate the amount of Current, Assets and Current Liabilities., Solution, Current Assets (C. A.), Current Ratio =, = 2.5, Let C.L. = x, Current Liabilities (C.L.), Working Capital = Current Assets – Current Liabilities, 60,000 = 2.5x – x, Þ, 60,000 = 1.5x, 60,000, \, x =, = ` 40,000, 1.5, \, Current Liabilities = ` 40,000, Now,, Current Assets = ` 40,000 ´ 2.5 = ` 1,00,000, Illustration 11(A), The Current Ratio of A Ltd. is 4.5 : 1 and Liquid Ratio is 3 : 1. Inventories are, ` 3,00,000. Calculate Current Liabilities., Solution, Let Current Liabilities be x, Current Ratio = 4.5 : 1, so Current Assets = 4.5x, Liquid Ratio 3 : 1, so Liquid Assets = 3x, Liquid Assets = Current Assets – Inventories, or, 3x = 4.5x – ` 3,00,000, or, 1.5x = 3,00,000, , 326
Page 813 :
Ac count ing Ra tios, 3,00,000, = ` 2,00,000, 1.5, ∴, Current Liabilities = ` 2,00,000, Illustration 11(B), Current Ratio 5 : 1, Quick Ratio 3.5 : 1., Assuming Inventory ` 1,20,000, find out the total current assets and current liabilities., Solution, Current Ratio is 5 : 1 and Quick Ratio is 3.5 : 1. Difference between these two ratios is, value of stock (or inventory)., Therefore,, Inventory = Current Assets – Liquid Assets, Let, Current Liabilities = x, \, Current Assets = 5x, \, Liquid Assets = 3.5x, Inventory = Current Assets – Liquid Assets, ⇒, 5x - 3.5x = ` 1,20,000, Þ, 1.5x = ` 1,20,000, 1,20,000, \, x =, = ` 80,000, 1.5, \, Current Liabilities = ` 80,000, Now, Current Assets = 5x, Since, x = ` 80,000, \, 5x = 80,000´ 5 = ` 4,00,000, \, Current Assets = ` 4,00,000, or, , x =, , Illustration 12, The current ra tio is 2.5 : 1. Current assets are ` 50,000 and current liabilities are, ` 20,000. How much must be the decline in the cur rent as sets to bring the ra tio 2 : 1 ?, (N.C.E.R.T.), Solution, Current Liabilities = ` 20,000, For a Current Ra tio of 2 : 1, the Cur rent As sets must be, 2 ´ ` 20,000 = ` 40,000, Pres ent Cur rent As sets = ` 50,000, Nec es sary de cline in Cur rent As sets = ` 50,000 – 40,000 = ` 10,000, Illustration 13, A firm’s cur rent ra tio is 2.5 : 1. Its liq uid ra tio is 1.5 : 1. If cur rent li a bil i ties are ` 60,000,, calculate the amount of cur rent as sets and stock., Solution, Current Ratio 2.5 : 1,, Current Assets, Current Ratio =, Current Liabilities, Current Liabilities 1, then Current Assets = 2.5, Current Liabilities = ` 60,000 (Given), Therefore,, Current Assets = ` 60,000 × 2.5 = ` 1,50,000, ...(I), Liquid Ratio = 1.5 : 1, Liquid Assets, Liquid Ratio =, Current Liabilities, , 327
Page 814 :
SBPD Pub li ca tions Accountancy (XII), There fore,, , Liquid Assets = ` 60,000 × 1.5 = ` 90,000, Inventory = Current Assets (I) – Liquid Assets (II), = ` 1,50,000 – 90,000 = ` 60,000, C.A. ` 1,50,000; Inventory ` 60,000, , ...(II), , Illustration 14, The Current Assets of a company are ` 15,00,000. Its Current Ratio is 3 : 1 and Liquid, Ratio is 1.25 : 1. Calculate the amount of Current Liabilities, Liquid Assets and Inventory., Solution, Current Assets, Current Ratio =, Current Liabilities, 3, 15,00,000, (Given), =, 1, Current Liabilities, \, Current Liabilities = 15,00,000/3 = ` 5,00,000, Quick Assets, Liquid Ratio =, Current Liabilities, 1.25 Quick Assets, (Given), =, 1, 5,00,000, \ Liquid (Quick) Assets = (5,00,000 ´ 1.25) = ` 6,25,000, Inventory = Current Assets – Quick Assets, = ` 15,00,000 – 6,25,000 = ` 8,75,000, Illustration 15, Calculate Current Assets from the following :, `, Sundry Creditors, 80,000, Bills Payable, 30,000, Tax Payable, 2,30,000, Working Capital, 2,50,000, Solution, Working Capital = Current Assets – Current Liabilities, Where,, Working Capital = ` 2,50,000, Current Liabilities = ` 80,000 + 30,000 + 2,30,000 = ` 3,40,000, \, Working Capital = Current Assets – Current Liabilities, or, 2,50,000 = Current Assets – 3,40,000, \, Current Assets = ` 2,50,000 + 3,40,000 = ` 5,90,000, Difference between Cur rent Ratio and Quick Ratio, Ba sis of Dis tinc tion, 1. Re la tion ship, , Cur rent Ra tio, , Cur rent Ra tio shows the re la tion ship, between Current Assets (C.A.) and, Cur rent Li a bil i ties (C.L.)., 2. Formula, for Current Ratio = Current Assets, Com pu ta tion, Current Liabilities, 3. Objective, The objective of the current ratio is, whether an or gani sa tion can pay off its, current liabilities out of its current, as sets within a short time i.e., a year or, not., 4. Ideal Ratio, The ideal Cur rent Ra tio is 2 : 1., , 328, , Quick Ra tio, Quick Ratio shows the relationship, between Liquid As sets (L.A.) and, Cur rent Li a bil i ties (C.L.)., Liquid Assets, Quick Ratio =, Current Liabilities, The objective of quick ratio is to, ascertain whether the firm shall be, able to dis charge its cur rent li a bil i ties, quickly, that is within a month or, immediately., The ideal Quick Ra tio is 1 : 1.
Page 815 :
Ac count ing Ra tios, 5. Assets included, 6. Re li abil ity, , In computing Current Ratio all, current assets are included., Current Ratio is not a true test of, short-term sol vency., , In computing Quick Ratio stock and, prepaid expenses are not included., Quick Ratio is not a true test of, short-term sol vency. Hence, it is more, reliable., , 11.6.2 Solvency Ratios, Meaning : Solvency is a state, where the company is supposed to be financially sound, and capable of meeting its long-term liability out of its assets. Solvency ratios are calculated, to judge the long-term financial solvency of the business. These ratios measure the ability of, the enterprise to pay interest charges regularly and its ability to repay the principal (that is,, capital) on maturity., These ratios focus on the long-term financial soundness of the business unit. Solvency, ratios measure the relationship between external equities and internal equities (i.e.,, shareholders' funds)., Interested Parties in the Solvency Ratio. (i) Debentureholders, (ii) Financial, institutions, (iii) Other Long-term creditors are interested in the solvency of the business, undertaking, and (iv) Interest Coverage Ratio., Types of Solvency Ratio :, (1) Debt-Equity Ratio, Important Solvency Ratios, , (2) Total Assets to Debt Ratio, (3) Proprietary Ratio, (4) Interest Coverage Ratio, , 1. Debt-Equity Ratio, Meaning : Debt-Equity Ratio is computed to find out the long-term financial, soundness of the enterprise. Debt-Equity Ratio shows a relationship between long-term, debts and shareholders' funds. In other words, this ratio indicates the relationship between, outsiders' funds (i.e., lenders' contribution) and shareholders' funds (i.e., owner's, contribution). It is also known as External-Internal Equity Ratio. This ratio is calculated to, measure the relative claims of outsiders and the shareholders against the firm's assets., Method, Computation : It is calculated on the basis of the following formula :, Long-term Debts, Long-term Debt, Debt, Debt- equity Ratio =, =, or, ...(3), Equity Shareholders' Funds, Net Worth, (i), , Shareholders' Funds = (Equity Share Capital + Preference Share Capital +, or Net Worth or, Capital Reserve + Revenue Reserve + Reserve for, Internal Equity, Contingencies + Retained Earnings + Sinking Funds), – Fictitious* Assets., , *Fictitious Assets, Unamortised expenses and losses such as,, (i) Preliminary Expenses,, (ii) Underwriting Commission,, (iii) Dis count on Is sue of Shares, Expenses on Issue of Shares., (iv) Accumulated Losses,, (v) Discount or Loss on Issue of Debentures,, (vi) Debit Balance of Statement of Profit & Loss etc., , Shareholders’, Fund is also called as, Proprietor’s Fund., , 329
Page 816 :
SBPD Pub li ca tions Accountancy (XII), (ii) Debt or Long-term Debt = Debenture + Mortgage Loans + Bank Loan + Public, Deposits and Other Long-term Loan, Long-term Debt refers to debt or debts payable after one year., Interpretation and Significance : A ratio of 1 : 1 may be usually considered to be a, satisfactory ratio although there cannot be any ‘rule of thumb’ for all types of business. In, some businesses a high ratio 2 : 1 or even more is considered satisfactory, say, for example, in, the case of contractor's business. However, interpretation of this ratio depends upon the, purpose of analysis, the financial policy and the nature of business of the firm., Remember, (i) Debt = Long-term Borrowings + Long-term Provisions, Or, Debt = Total External Liabilities – Current Liabilities, (ii) (a) Shareholders’ Funds/Equity = Share Capital + Reserves and Surplus, [where, Share Capital = Equity Share Capital + Preference Share, Cap i tal], Or, (b) Shareholders’ Funds/Equity = Non-current Assets + Working Capital, – Non-current Liabilities, Non-current Assets = Tangible Assets + Intangible Assets, + Non-current Investments + Long-term, Loans and Advances, Working Capital = Current Assets – Current Liabilities, Non-current Liabilities = Long-term Borrowings + Long-term, Provisions, Illustration 16(A) (Debt-equity Ratio), From the following information, calculate the Debt-equity Ratio :, `, Debentures, 1,40,000, Long-term Loans, 70,000, Bank Balance, 30,000, Trade Receivables, 70,000, General Reserve, 40,000, Creditors, 66,000, Share Capital, 1,20,000, Bills Payable, 14,000, Solution, Long-term Debt, Debt-equity Ratio =, Shareholders' Funds, Long-term Debt = Debentures + Long-term Loans, = ` 1,40,000 + 70,000 = ` 2,10,000, Shareholders' Funds = Share Capital + General Reserve, = ` 1,20,000 + 40,000 = ` 1,60,000, Long-term Debt, 2,10,000, Debt-equity Ratio =, =, = 21 : 16 = 1.31 : 1, Shareholders' Funds 1,60,000, Illustration 16(B), Cal cu late the Debt-eq uity Ra tio from the fol low ing in for ma tion :, Total External Liabilities, Balance Sheet Total, , 330, , `, , 5,00,000, 10,10,000
Page 817 :
Ac count ing Ra tios, Current Liabilities, Fictitious Assets, Solution, Debt-Equity Ratio =, , 1,00,000, 10,000, (N.C.E.R.T.), Long-term Debt, , Shareholders’ Funds, Long-term Debt = To tal Ex ter nal Li a bil i ties – Cur rent Li a bil i ties, = ` 5,00,000 – 1,00,000 = ` 4,00,000, Share hold ers' Funds= To tal As sets – Fic ti tious As sets – To tal External Li a bil i ties, = ` 10,10,000 – 10,000 – 5,00,000, = ` 5,00,000, Long- term Debt, 4,00,000, Debt- equity Ratio =, =, = 4 : 5 or 0.8 : 1, Shareholders' Funds 5,00,000, Illustration 16(C), The comparative figures of A Ltd. and B Ltd. are given below :, A Ltd., `, , Total Assets, Total Liabilities, Proprietor’s Fund, Calculate the Debt-Equity Ratio for each company., Solution, Long-term Debt, Debt-Equity Ratio =, Shareholders' Fund, , 4,00,000, 80,000, 3,20,000, , A Ltd., `, , B Ltd., `, , 6,00,000, 2,00,000, 4,00,000, (U.S.E.B., 2016), , B Ltd., `, , Long-term Debt, 80,000 *, 2,00,000*, Shareholders’ Fund or Proprietars’ Fund, 3,20,000, 4,00,000, * Total Liabilities assumed to be Long-term Debt., 80,000, ∴ Debt-Equity Ratio of A Ltd. =, = 0.25 : 1, 3,20,000, 2,00,000, Debt-Equity Ratio of B Ltd. =, = 0.5 : 1, 4,00,000, Il lus tra tion 17, Assuming that the Debt-Equity Ratio is 2 : 1, state giving reasons, whether this ratio, would increase, decrease or remain unchanged in the following cases :, (i) Is sue New Shares for Cash., (ii) Pur chase of Fixed As set on a credit of 3 months., (iii) Sale of Fixed As set at a loss of ` 5,000., (iv) Sale of Fixed As set at a profit of ` 10,000., (v) Pur chase of Fixed Asset on a long-term de ferred pay ment ba sis., (vi) Re demp tion of De ben tures., (vii) Is sue of Bo nus Shares., (viii) Con ver sion of De ben tures into Eq uity Shares., (ix) Is sue of De ben tures for Cash., (x) Sale of Fixed As set at par., , 331
Page 818 :
SBPD Pub li ca tions Accountancy (XII), Solution, S.No., , Effect on, Debt-equity Ratio, , Reasons, , (i), , Decrease, , Total Shareholders’ Funds are increased by the amount of cash, received but long-term debts remain unchanged., , (ii), , No change, , Neither the long-term debts nor the total equity (shareholders’ funds), is affected., , (iii), , Increase, , Long-term debts remain unchanged but Total Shareholders’ Funds (or, Total Equity) are decreased by the amount of loss., , (iv), , Decrease, , Long-term debts remain unchanged but total equity (Total, Shareholders’ Funds) is increased by the amount of profit., , (v), , Increase, , Long-term debts are increased but the Shareholders’ Funds (Equity), remain unchanged., , (vi), , Decrease, , Long-term debts are decreased but Shareholders' Funds remain, unchanged., , (vii) No change, , Neither the long-term debts nor the Shareholders’ Funds are affected, since there is only conversion of accumulated profits into share capital., , (viii) Decrease, , Total long-term debts are decreased and Total Equity (Shareholders’, Funds) is increased by the same amount., , (ix), , Increase, , Long-term debts are increased but Total Equity (Shareholders’ Funds), remain unchanged., , (x), , No change, , Neither the long-term debt nor the Shareholders’ Funds are affected., , 2. Total Assets to Debt Ratio, Meaning : Total Assets to Debt Ratio shows relationship between total assets and total, long-term debts of the business. It is computed to measure the safety margin available to the, suppliers of long-term debts. It determines the extent to which debt is being covered by assets., Computation : This ratio is calculated by dividing the total assets by the long-term, debts. This ratio is generally expressed as a pure ratio, e.g., 2 : 1., Formula :, Total Assets to Debt Ratio =, , Total Assets, Total Assets, or, Long-term Debts, Debt, , ...(4), , It may also be calculated in the form of percentage by multiplying the above formula, by 100., Where,, Total Assets = All Assets excluding Fictitious Assets, (like Preliminary Expenses, Discount/Expenses, on Issue of Shares & Loss on Issue of Debentures, etc.), Long-term Debts = Long-term Loans (whether secured or unsecured),, e.g., Debentures, Bonds, Loans from Financial, Institutions + Long-term Provisions, In ter pre ta tion : A high To tal As sets to Debt Ra tio im plies the use of more eq uity than, debt which means a larger safety mar gin for cred i tors. The rea son is that owner's eq uity is, treated as a mar gin of safety by cred i tors and vice versa., , 332
Page 819 :
Ac count ing Ra tios, Remember, Total Assets, Total Assets include :, ➤ Non-current Assets (Tangible and Intangible Assets), ➤ Non-current Investments, ➤ Long-term Loans and Advances, ➤ Current Assets (Other than Fictitious Assets), In short, Total Assets = Non-current Assets + Current Assets, – Fictitious Assets, , Long-term Debt, Long-term Debt includes :, ➤ Long-term Borrowings, ➤ Other Non-current Liabilities, ➤ Long-term Provisions, , Illustration 18(A) (Total Assets to Debt Ratio), `, Shareholders' Funds, 2,00,000, Total Debts, 4,50,000, Current Liabilities, 50,000, Cal cu late the To tal As sets to Debt Ra tio., Solution, Long-term Debt = Total Debt – Current Liabilities, = ` 4,50,000 – 50,000 = ` 4,00,000, Total As sets = Long-term Debt + Share hold ers' Funds + Cur rent, Liabilities, = ` 4,00,000 + 2,00,000 + 50,000 = ` 6,50,000, Total Assets, ` 6,50,000, 13, To tal As sets to Debt Ra tio =, =, =, = 13 : 8 or 1.625 : 1, Long-term Debt ` 4,00,000, 8, Illustration 18(B), From the following information, calculate Total Assets to Debt Ratio :, `, , Capital Employed, Land and Building, Trade Receivables, Cash, Solution, , 25,00,000, 20,60,000, 2,75,000, 2,65,000, , `, , Share Capital, 10% Debentures, Capital Reserve, Surplus, , 14,30,000, 4,00,000, 2,70,000, 1,50,000, , Total Assets, Total Debts, where,, Total Assets = Land and Building + Total Receivables + Cash, = ` 20,60,000 + 2,75,000 + 2,65,000 = ` 26,00,000, Debt = Capital Employed – Equity*, = ` 2,50,000 – 18,50,000 = ` 6,50,000, *Equity = Share Capital + Capital Reserve + Surplus, = ` 14,30,000 + 2,70,000 + 1,50,000 = ` 18,50,000, ` 26,00,000, =4:1, \ To tal As sets to Debt Ra tio =, ` 6,50,000, To tal As sets to Debt Ra tio =, , 3. Proprietary Ra tio, Mean ing : This ra tio es tab lishes the re la tion ship be tween share hold ers' funds to to tal, assets of the firm. Proprietary ra tio is an important ratio for determining long-term, sol vency of the firm. This ra tio is also known as ‘Eq uity Ra tio’ or ‘Net Worth to Total Assets, Ratio’., , 333
Page 820 :
SBPD Pub li ca tions Accountancy (XII), Com po nents : The com po nents of this ra tio are Share hold ers' Funds and To tal (Real), Assets., Real Total Assets = Total Assets – Fictitious or Proprietar’s Funds Assets, if any, Cal cu la tion: Pro pri etary Ra tio can be cal cu lated by di vid ing the Share hold ers' Funds, or Net Worth (N.W.) by the total assets., In the form of for mula, this ra tio may be ex pressed as un der :, Proprietary Ratio =, , Shareholders' Funds, Equity, or, Total Assets, Total Assets, , ...(5), , ❂ Shareholders’ Funds/Equity = Share Capital + Reserves and Surplus, Or, ❂ Shareholders’ Funds/Equity = Non-current Assets + Working Capital – Non-current, Liabilities, Working Capital = Current Assets – Current Liabilities, Non-current Liabilities = Long-term Borrowings + Long-term Provisions, ❂, Total Assets = Non-current Assets + Current Assets, (Ex cluding Fictitious Assets), In ter pre ta tion : This ra tio in di cates the ex tent to which the as sets of the firm have, been fi nanced out of pro pri etor's funds. This ra tio in di cates the ex tent to which the as sets of, the com pany can be lost with out af fect ing the in ter est of cred i tors of the com pany. 1 : 1 is, con sid ered as the ideal ra tio. If higher the ra tio, better is the long-term sol vency position of, the company., Illustration 18(C), (a) Calculate ‘Total Assets to Debt ratio’ from the following information :, `, Equity Share Capital, 4,00,000, Long-term Borrowings, 1,80,000, Surplus i.e. Balance in Statement of Profit and Loss, 1,00,000, General Reserve, 70,000, Current Liabilities, 30,000, Long-term Provisions, 1,20,000, (b) The Debt Equity Ratio of a company is 1 : 2. State whether 'Issue of bonus shares', will increase, decrease or not change the Debt Equity Ratio. (C.B.S.E., All India, 2019), Solution, Total Assets, Debt, Total Assets = Non-current Assets + Cur rent Assets or Total Liabilities, = ` 4,00,000 + 1,80,000 + 1,00,000 + 70,000 + 1,20,000, + 30,000 = ` 9,00,000, Debt = Long-term Borrowings + Long-term Provisions, = ` 1,80,000 + 1,20,000 = ` 3,00,000, 9,00,000, ∴ Total Assets to Debt Ratio =, = 3 : 1, 3,00,000, (c) Debt Equity Ratio 1 : 2, Issue of bonus shares will not change the debt equity ratio, because issue of bonus share neither shareholders’ fund (or Net worth) nor Long-term debts, are affected since it is conversion of accumulated profit into share capital., (a) Total Assets to Debt Ratio =, , 334
Page 821 :
Ac count ing Ra tios, Illustration 19(A) (Proprietary Ratio), From the following information, compute ‘Proprietary Ratio’ :, `, Long-term Borrowings, 2,00,000, Long-term Provisions, 1,00,000, Current Liabilities, 50,000, Non-current Assets, 3,60,000, Current Assets, 90,000, (CBSE, All India, 2014), Solution, Shareholders' Funds/ Equity, Proprietary Ratio =, Total Assets, Shareholders' Funds = Non-current Assets + Current Assets, – Out side Liabilities, = ` 3,60,000 + 90,000 – [2,00,000 + 1,00,000 + 50,000], = ` 4,50,000 – 3,50,000 = ` 1,00,000, Total Assets = Non-current Assets + Current Assets, = ` 3,60,000 + 90,000 = ` 4,50,000, ` 1,00,000, \, Proprietary Ratio =, = 2 : 9 or 0.222 : 1 or 22.2%, ` 4,50,000, Illustration 19(B) (Comprehensive), From the following Balance Sheet, calculate the (i) Proprietary Ratio, and (ii) Total, Assets to Deft Ratio :, Bal ance Sheet, (as on 31st March, 2018), Particulars, , Note No., , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, Long-term Borrowings, , `, , 3. Current Liabilities, , 1, 2, , 6,00,000, Nil, , 3, , 2,00,000, , Total, , 1,00,000, 9,00,000, , Total, , 4,00,000, 3,00,000, 2,00,000, 9,00,000, , II. ASSETS, 1. Non-current Assets :, Fixed Assets, Investments, 2. Current Assets, Notes to Accounts :, 1. Share Capital :, Preference Share Cap i tal, (of ` 100 each), Equity Share Cap i tal, (of ` 100 each), 3. Long-term Borrowings :, 12% De ben tures, , Amount, , `, 2,00,000, 4,00,000, 6,00,000, , 2. Reserves and Surplus :, Re serve, Profit & Loss State ment (Sur plus), Less : Preliminary Ex penses, , `, 60,000, 40,000, 1,00,000, (1,00,000), Nil, , 2,00,000, , 335
Page 822 :
SBPD Pub li ca tions Accountancy (XII), Solution, Proprietors’ Funds/Shareholders’ Funds :, Equity Share Capital, Preference Share Cap i tal, Re serve, Profit & Loss Statement (Surplus), , `, , 4,00,000, 2,00,000, 60,000, 40,000, 7,00,000, (1,00,000), Total (a) 6,00,000, , Less : Preliminary Expenses, Total Assets :, Fixed Assets, Cur rent As sets, In vest ments, (i), , (ii), , `, , 4,00,000, 2,00,000, 3,00,000, Total (b) 9,00,000, , Shareholders' Funds, (a), or, Total Assets, (b), 6,00,000 6, =, = or 6 : 9 or 0.6 : 1 or 66.7%, 9,00,000 9, Total Assets, Total Assets to Debt Ratio =, Debt, 9,00,000, =, = 4.5 : 1, 2,00,000, Proprietary Ra tio =, , Illustration 19(C) (Comprehensive), From the following Balance Sheet of Skanda-Ananya Ltd., compute (i) Proprietary, Ratio, (ii) Debt-Equity Ratio, (iii) Current Ratio, and (iv) Total Assets to Debt Ratio :, Particulars, , Note No., , I. EQUITY AND LIABILITIES, 1. Shareholders' Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, (a) Trade Payables, (b) Other Currrent Liabilities, , `, , 4,00,000, 3,30,000, 5,60,000, 1,00,000, 40,000, 14,30,000, , To tal, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets : Tangibles, (b) Other Non-current Assets, 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, (d) Other Current Assets, , 1, , 2, To tal, , 336, , Amount, , 7,68,000, 20,000, 2,50,000, 2,30,000, 1,50,000, 12,000, 14,30,000
Page 823 :
Ac count ing Ra tios, Notes to Ac counts :, 1. Other Non-current As sets :, `, Unamortised Dis count on Is sue of Shares 20,000, , 2. Other Current As sets :, `, Unamortised Discount on Issue of, Shares, 10,000, Prepaid Expenses, 2,000, 12,000, , Solution, (i), , Proprietary Ratio = Shareholders' Fund, Total Assets, Shareholders' Funds = Share Capital + Reserves and Surplus –, Fictitious Assets (See Note), = ` 4,00,000 + 3,30,000 – 30,000 = ` 7,00,000, Total Assets = Non-current Assets + Current Assets –, Fictitious Assets, = ` 14,30,000 – 30,000 = ` 14,00,000, Note :, Fictitious Assets = Unamortised Discount on Issue of Shares, (Other Current/Non-current Assets), = ` 20,000 + 10,000 = ` 30,000, ` 7,00,000, \, Proprietary Ratio =, = 0.50 : 1, ` 14,00,000, Debt (Long- term Loans), (ii), Debt-equity Ratio =, Shareholder’ s Funds, 5,60,000, =, = 0.8 : 1, 7,00,000, Current Assets, (iii), Current Ratio =, Current Liabilities, Current Assets = Inventories + Trade Receivables + Cash, and Cash Equivalents + Prepaid Expenses, = ` 2,50,000 + 2,30,000 + 1,50,000 + 2,000, = ` 6,32,000, Current Liabilities = Trade Payables + Other Current Liabilities, = ` 1,00,000 + 40,000 = ` 1,40,000, ` 6 ,32,000, \, Current Ratio =, = 4.5 : 1, ` 1, 40,000, Total Assets, ` 14,00,000, (iv), Total Assets to Debt Ratio =, =, = 2.5 : 1, Debt, ` 5,60,000, , 4. Interest Converage Ratio, Meaning : It is a ratio which deals with the servicing of interest on loan. It is measure, of security of interest payable on long-term debt. It expresses the relationship between, profits available for payment of interest and the amount of interest payable., Calculation : It is calculated as follows :, Interest Coverage Ratio =, , Net Profit before Interest and Tax, ...(6), Interest on Long- term Debt or Fixed Interest Charges, , Significance : It reveals the number of times interest on long-term debt is covered by, the profits available for interest. A high ratio ensures safety of interest payment of debt. It, also indicates availability of surplus for shareholders., , 337
Page 824 :
SBPD Pub li ca tions Accountancy (XII), Illustration 20(A) (Interest Coverage Ratio), Akshara Ltd. has 8% Debentures of ` 5,00,000. Its profit before interest and tax is, ` 2,00,000. Calculate Interest Coverage Ratio., Solution, Profit before Interest & Tax, Interest Coverage Ratio =, Interest Long- term Debt, Profit before Interest and Tax = ` 2,00,000, 8, Interest on Debentures = 5,00,000 ×, = ` 40,000, 100, 2,00,000, Interest Coverage Ratio =, = 5 times, 40,000, Illustration 20(B), From the following information, calculate Interest Coverage Ratio :, Net Profit after Tax ` 60,000; 10% Long-term Debt ` 10,00,000; Tax Rate 40%., Solution, Given NPAT ` 60,000; Long-term Debt ` 10,00,000; Rate of Interest 10%; Tax Rate 40%., Calculation of Interest Coverage Ratio, Net Profit before Interest and Tax, Interest Coverage Ratio =, Interest on Long- term Debt, 100, Net Profit before Tax = Net Profit after Tax ×, (100 – Tax %), 100, = 60,000 ×, = ` 1,00,000, ...(1), (100 – 40), 10, Interest on Long-term Debt = 10,00,000 ´, = ` 1,00,000, ...(2), 100, Net Profit before Interest and Tax = Net Profit before Tax + Interest, = ` 1,00,000 + 1,00,000 = ` 2,00,000, ` 2,00,000, Interest Coverage Ratio =, = 2 times, ` 1,00,000, Illustration 21 (Comprehensive), The Bal ance Sheet of Abhishek Co. as at 31st March, 2018 was as fol lows :, Particulars, , Note No., , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, 10% Debentures, 3. Current Liabilties, , 1,60,000, 48,000, , Total, , 40,000, 72,000, 3,20,000, , Total, , 1,70,000, 1,50,000, 3,20,000, , 1, , II. ASSETS, 1. Non-current Assets, 2. Current Assets, , 338, , `
Page 825 :
Ac count ing Ra tios, Notes to Ac counts :, 1. Current Liabilities :, Bank Overdraft, Trade Payables, , `, 30,000, 42,000, 72,000, , Cal cu late the fol low ing ra tios :, (i) Debt-Eq uity Ra tio, (ii) Total Assets to Debt Ratio, (iii) Proprietary Ratio., Solution, Long-term Debt, 40,000, (i), Debt-Equity Ratio =, =, Shareholders' Funds 2,08,000, = 5 : 26 or 0.19 : 1, Shareholders’ Funds = Share Capital + Reserves and Surplus, = ` 1,60,000 + 48,000 = ` 2,08,000, Total Assets, (ii) Total Assets to Debt Ratio =, Long- term Liabilities, 3, 20,000, =, = 8 : 1, 40 ,000, , (iii), , Total Assets = Non-current Assets + Current Assets, = ` 1,70,000 + 1,50,000 = ` 3,20,000, Shareholders' Funds/Proprietor’s Funds, Proprietary Ratio =, Total Assets, Shareholders’ Funds = Share Capital + Reserves and Surplus, = ` 1,60,000 + 48,000 = ` 2,08,000, Total Assets = Non-current Assets + Current Assets, = ` 1,70,000 + 1,50,000 = 3,20,000, ` 2,08,000, Proprietary Ratio =, = 0.65 : 1, ` 3, 20,000, , 11.6.3 Activity or Turnover or Performance Ratios or Efficiency Ratio, Mean ing : Ac tiv ity ra tios are those ra tios, which in di cate the ac tiv ity and op er a tional, ef fi ciency of the busi ness con cern. The better the man age ment of as sets, the larger is the, amount of sales and the profit. Ac tiv ity ra tios mea sure the ef fi ciency or ef fec tive ness with, which a firm man ages and utilises its re sources. These ra tios are also called ‘ Performance’ or, ‘Turn over Ra tios’ be cause they in di cate the speed with which assets are converted into sales., Computation : These ra tios are usu ally cal cu lated on the ba sis of cost of goods sold (or, Net Sales) and are al ways ex pressed in num ber of times. Such ra tios should be cal cu lated, sep a rately for each type of asset., Interpretation : If this ratio is higher, it indicates good profitability and proper, utilisation of resources. Following are the important turnover (activity) ratios usually, cal cu lated by a concern., Types of Activity Ratio :, 1. Inventory or Stock Turnover Ra tio, 2. Debtors/Trade Receivable Turnover Ratio, 3. Average Collection Pe riod, 4. Trade Payables Turnover (or Creditors Turnover) Ratio, 5. Working Capital Turnover Ratio, 6. Fixed Assets Turnover Ratio, (Not in CBSE Syllabus), 7. Current Assets Turnover Ratio, (Not in CBSE Syllabus), , 339
Page 826 :
SBPD Pub li ca tions Accountancy (XII), 1. Inventory Turnover Ratio or Stock Turnover Ra tio, Meaning : This ratio establishes relationship between cost of goods sold during a given, period and the average amount of inventory (Stock) held during the period. This ratio, reveals the number of times in which the finished stock is turned over during a given, accounting period. Thus, this ratio indicates the efficiency of the firm in selling its product., It is calculated by dividing the cost of goods sold by the average inventory/stock., Computation : This ratio is calculated with the help of following formula :, Cost of Goods Sold/ Cost of Revenue, Inventory/Stock Turnover Ra tio =, , from Operations, Average Stock /Inventories, , ...(7), , where,, 1., , Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses, – Closing Stock, or, Cost of Revenue from Operations = Cost of Materials Consumed + Purchase of Stock-intrade + Changes in Inventories (of Finished Goods,, Work-in-progress and Stock-in-trade) + Direct, Expenses, or, = Net Sales – Gross Profit, Opening Stock / Inventory + Closing Stock / Inventory, 2. Average Stock/Inventory =, 2, Average stock is generally found by adding opening stock and closing stock and then, dividing the total by two. But in the case of concern like Sugar Mills, Tea Gardens etc. which, have high seasonal factors, average stock calculated in the above fashion may be, misleading. In such cases, it would be proper to divide the total monthly stocks for the full, year by 12., 1. In the absence of Average Inventory (Stock) (or Opening Inventory not given in the, question), closing inventory may be used as ‘Average Inventory’., 2. If cost of goods sold or Cost of Revenue from Operations is not given and neither can be, assumed nor calculated, then stock turnover ratio will be calculated on the basis of net sales., Formula : Stock or Inventory Turnover Ratio =, , Net Sales / Revenue from Operations, Average Stock / Inventory, , ...(8), Or, In case, amount of cost of Revenue from Operations (Cost of goods sold) is not given but, instead amount of Revenue from operations is given, amount of Revenue from Operations is, used for calculating Inventory Turnover Ratio., Interpretation of Stock/Inventory Turnover Ratio (Importance) : Stock, turnover ratio measures the velocity of conversion of stock into sales. Usually, a high, inventory (stock) turnover indicates efficient management of inventory because more, frequently the stocks are sold, the lesser amount of money is required to finance the, inventory. A low inventory turnover ratio indicates an inefficient management of inventory., A low inventory turnover ratio implies over-investment in inventories, dull business, poor, quality of goods, stock accumulation and low profits as compared to total investments. Thus,, higher the ratio, the better it is., , 340
Page 827 :
Ac count ing Ra tios, Average Age of Inventory, Inventory Turnover Ratio can also be converted into number of days or number of, months. The number of days can be calculated as under :, Days in a year, Average Age of Inventory =, Inventory Turnover, Av er age Age of Inventory is also known as In ven tory Hold ing Pe riod., Average Age of Inventory shows the period in which the stock is cleared., Illustration 22(A), Calculate Inventory or Stock Turnover Ratio from the following information :, Revenue from operations ` 5,00,000, Gross Profit ` 1,40,000, Inventory in the beginning, of the year ` 1,50,000, Inventory at the end of the year ` 30,000., Solution, Cost of Revenue from Operations, Inventory Turnover Ratio =, Average Inventory, (i) Cost of Revenue from Operations = Revenue from Operations – Gross Profit, = ` 5,00,000 – ` 1,40,000 = ` 3,60,000, Opening Inventory + Closing Inventory, (ii), Average Inventory =, 2, ` 1,50,000 + 30,000, =, = ` 90,000, 2, ` 3,60,000, \, Inventory Turnover Ratio =, = 4 times, ` 90,000, Illustration 22(B) (Inventory Turnover Ratio), Cal cu late Inventory Turn over Ra tio from the fol low ing in for ma tion :, `, Sales, 4,00,000, Av er age Inventory, 55,000, Gross Loss Ratio, 10%, (N.C.E.R.T.), Solution, Sales = ` 4,00,000, Gross Loss = 10% of ` 4,00,000 = ` 40,000, Cost of Revenue from Operations = Sales + Gross Loss, = ` 4,00,000 + 40,000, = ` 4,40,000, Cost of Revenue from Operations 4,40,000, Inventory Turnover Ratio =, =, Average Inventory, 55,000, = 8 times, Illustration 22(C), From the following information, calculate the Inventory Turnover Ratio :, `, Opening Inventory, 50,000, Closing Inventory, 70,000, Revenue from Operations, 6,40,000, Gross Profit Ratio : 25% on revenue from operations., Solution, Cost of Revenue from Operations, Inventory Turnover Ratio =, Average Inventory, , 341
Page 828 :
SBPD Pub li ca tions Accountancy (XII), (i) Cost of Revenue from Operations = Revenue from Operations – Gross Profit, = ` 6,40,000 – 25% of ` 6,40,000, = ` 6,40,000 – 1,60,000 = ` 4,80,000, Opening Inventory + Closing Inventory, (ii), Average Inventory =, 2, ` 50,000 + 70,000, =, = ` 60,000, 2, ` 4,80,000, \ Inventory Turnover Ratio =, = 8 times, ` 60,000, Illustration 22(D), Calculate Inventory Turnover Ratio from the following details :, `, Annual Revenue from Operation, 4,00,000, Gross Profit, 25% on Cost, Opening Inventory, 38,500, Closing Inventory, 41,500, Cash Revenue from Operation, 60,000, Solution, Cost of Revenue from Operations, Inventory Turnover Ratio =, Average Inventory, Cost of Revenue from Operations = Revenue from Operations – Gross Profit, = ` 4,00,000 – Gross Profit, Gross Profit = 25% on Cost, We know that,, Alternatively :, 25% on Cost = 20% of Revenue, When, from Operations*, C. P. G. Profit, S.P., Gross Profit = Revenue from, 20, 100, 25, 125, Operations ´, —, ?, 4,00,000, 100, 20, 25 ´ 4,00,000, = 4,00,000 ´, \, ?=, = ` 80,000, 100, 125, = ` 8 0,000, Cost of Revenue from Operations = Sales – G.P. * For mula of con vert ing % of Profit, = ` 4,00,000 – 80,000 on Cost to % of profit on Revenue, = ` 3,20,000, from Operations, Average Inventory, % of Profit on Cost ´ 100, Opening Inventory + Closing Inventory, =, =, 100 + % of Profit on Cost, 2, ` 38,500 + 41,500, 25 ´ 100, =, = ` 40,000, e.g.,, = 20 %, 2, (100 + 25), 3,20,000, Inventory Turnover Ra tio =, = 8 times, 40,000, Note : If no in for ma tion is given re gard ing cost of goods sold, then ‘Net Sales’ should be taken as a cost of goods sold., , Il lus tra tion 23, From the fol low ing par tic u lars, cal cu late the In ven tory Ra tio for the year 2017-18 :, Opening Inventory, Purchases during the year, , 342, , `, , 65,000, 3,40,000
Page 829 :
Ac count ing Ra tios, Sales during the year, Closing Inventory, , 4,00,000, 50,000, (U.S.E.B., 2014), , Solution, (i) Cost of Revenue from Operations = Open ing Inventory + Pur chases – Clos ing In ven tory, = ` 65,000 + 3,40,000 – 50,000 = ` 3,55,000, Opening Inventory + Closing Inventory, (ii), Average Inventory =, 2, 65,000 + 50,000, =, = ` 57,500, 2, Cost of Revenue from Operations 3,55,000, (iii) Inventory Ra tio =, =, = 6.17 times, Average Inventory, 57,500, Illustration 24, Calculate Inventory Turnover Ratio from the following information :, `, Cost of Revenue from Operations, 2,70,000, Purchases, 2,75,000, Direct Expenses, 15,000, Opening Inventory, 35,000, Solution, Cost of Revenue from Operations = Opening Inventory + Purchases + Direct, Expenses – Closing Inventory, = ` 2,70,000 = ` 35,000 + 2,75,000 + 15,000 – Closing Inventory, Closing Inventory = ` 3,25,000 – 2,70,000 = ` 55,000, Opening Inventory + Closing Inventory, Average Inventory =, 2, ` 35,000 + 55,000, =, = ` 45,000, 2, Cost of Revenue from Operations, Inventory Turnover Ratio =, Average Inventory, ` 2,70,000, =, = 6 times, ` 45,000, Il lus tra tion 25 (Calculation of Gross Profit), Determine the amount of Gross Profit from the following details :, Average Inventory, ` 50,000, Inventory Turnover Ratio, 5 times, Selling Price, 25% on Cost, Solution, Cost of Revenue from Operations, Inventory Turnover Ratio =, Average Inventory, Cost of Revenue from Operations, or, 5 =, 50,000, or, 5 ´ 50,000 = Cost of Revenue from Operations, or, 2,50,000 = Cost of Revenue from Operations, \, Cost of Revenue from Operations = ` 2,50,000, 2,50,000´ 25, \, Gross Profit =, = ` 62,500, 100, , 343
Page 830 :
SBPD Pub li ca tions Accountancy (XII), Illustration 26 (Calculation of Opening Inventory and Closing Inventory), From the following details, cal cu late (i) Open ing Inventory, (ii) Clos ing Inventory :, Inventory Turn over Ra tio 6 times, Gross Profit 20% on Revenue from Operations, Revenue, from Operations ` 1,80,000. Clos ing Inventory is ` 15,000 in ex cess of Open ing Inventory., Solution, Gross Profit 20% of ` 1,80,000 = ` 36,000, Cost of Revenue from Operations = Revenue from Operations – Gross Profit, = ` 1,80,000 – 36,000 = ` 1,44,000, Cost of Revenue from Operations, Inventory Turn over Ra tio =, = 6 (times) (given), Average Inventory, or, 6 Average Inventory = Cost of Revenue from Operations = ` 1,44,000, ` 1,44,000, or, Av er age Inventory =, = ` 24,000, 6, Opening Inventory + Closing Inventory, Now, Av er age Inventory =, 2, or, Opening Inventory + Clos ing Inventory = ` 24,000 ´ 2, or Open ing Inventory + Clos ing Inventory =` 48,000, ...(i), Clos ing Inventory – Open ing Inventory = ` 15,000 (given), ...(ii), Add ing both the equa tions,, 2 Closing Inventory = ` 48,000 + 15,000 = ` 63,000, 63,000, ∴, Closing Inventory =, = ` 31,500, 2, and, Opening Inventory = ` 31,500 – 15,000 = ` 16,500, Alternatively :, `, Revenue from Operations, 1,80,000, Less : Gross Profit : 20% of ` 1,80,000, 36,000, Cost of Revenue from Operations, 1,44,000, Cost of Revenue from Operations, Inventory Turnover Ratio =, Average Inventory, ` 1,44,000, or, 6 =, Average Inventory, or, 6 Average Inventory = ` 1,44,000, ` 1,44,000, \, Average Inventory =, = ` 24,000, 6, `, Open ing Inventory + Clos ing Inventory ( ` 24,000 × 2), 48,000, Less : Ex cess Amount of Clos ing Inventory, 15,000, 33,000, Opening Inventory = ` 33,000 ´ 1/2 = ` 16,500, Closing Inventory = ` 16,500 + 15,000 = ` 31,500, Illustration 27, ` 4,00,000 is the cost of revenue from operations, inventory turnover ratio 5 times,, Inventory at the be gin ning is 1.5 times of the Inventory at the end. Cal cu late the val ues of, open ing and clos ing Inventory., Solution, Cost of Revenue from Operations, Inventory Turnover Ratio =, Average Inventory, , 344
Page 831 :
Ac count ing Ra tios, 4,00,000, Average Inventory, 4,00,000, Average Inventory =, = ` 80,000, 5, Closing Inventory = x, Opening Inventory = 1.5x, Opening Inventory + Closing Inventory, Average Inventory =, 2, 1.5x + x, 80,000 =, 2, 1,60,000 = 1.5x + x, Þ, 1,60,000 = 2.5x, 1,60,000, x=, = ` 64,000, 2.5, Closing Inventory = ` 64,000, Opening Inventory = ` 64,000 ´ 1.5 = ` 96,000, 5=, , \, Let, , Þ, Þ, \, \, , 2. Debtors Turnover Ratio/Trade Receivable Turnover Ratio, This is also known as Trade Receivable Turnover Ra tio. It establishes relationship, between credit sales and av er age trade re ceiv ables., Trade Receivables = Sundry Debtors + Bills Receivable, Computation : This is cal cu lated on the ba sis of the fol low ing for mula :, Debtors Turnover Ra tio =, , Net Credit Sales / Revenue from Operations, , Average Debtors or Trade Receivables, = .... Times, , where,, 1. (i) Av er age Trade Re ceiv able =, , ...(9), , Opening (Debtors + B/R) + Closing (Debtors + B/R), 2, , 2. Credit sales is sep a rately given or it may be the dif fer ence be tween to tal sales and, cash sales., 3. In case of Trade Re ceiv able Turn over Ra tio, Debt ors and B/R are added to gether to, de ter mine the re ceiv able. In case of newly started busi ness debt ors in the be gin ning will not, be avail able so debt ors at the end will be sup posed to be av er age debt ors., 4. In computing Debtors Turnover Ratio, Provision for Doubtful Debts are not deducted, from trade receivables since the purpose is to find out the number of days for which sales are, tied up in debtors., Important to Remember, ❂ The Debtors/Sundry Debtors and Bills Receivable together are known as Trade, Receivables., ❂ In the Sched ule III of the Com pa nies Act, 2013, the word ‘Sun dry Debt ors and Bills, Re ceiv able’ have been re placed by ‘Trade Re ceiv ables’ and ‘Sun dry Cred i tors and, Bills Pay able’ by ‘Trade Payables’., Significance : Debtors turnover ratio in di cates the ef fi ciency with which debts are, col lected. It will be in the in ter est of busi ness, if the ra tio is higher which will in di cate that, debts are collected quickly., Illustration 28(A) (Trade Receivables Turnover Ratio), Cal cu late the Trade Receivables Turn over Ra tio from the fol low ing in for ma tion :, Total Revenue from Operations, ` 4,00,000, , 345
Page 832 :
SBPD Pub li ca tions Accountancy (XII), Cash Revenue from Operations, 20% of To tal Sales, Trade Receivables on 1.1.2017, `, 40,000, Trade Receivables on 31.12.2017, ` 1,20,000, Solution, Opening Trade Receivables + Closing Trade Receivables, Average Trade Receivables =, 2, 40,000 + 1,20,000, 1,60,000, =, =, = ` 80,000, 2, 2, Net Credit Revenue from Operations = Total Revenue from Operations – Cash, Revenue from Operations = ` 4,00,000 – 80,000 (20% of ` 4,00,000) = ` 3,20,000, Trade Receivables Turnover Ratio =, , Net Credit Revenue from Operations, Average Trade Receivables, , =, , 3,20,000, 80,000, , = 4 times, 3. Average Collection Period or Debt Collection Pe riod, Prompt debt col lec tion is al ways in the in ter est of the busi ness, be cause cash will be, readily avail able., Computation : It can be cal cu lated on the ba sis of fol low ing for mula :, (1) Av er age Col lec tion Pe riod (per day), Average Trade Receivables, , ´ 365, Net Credit Sales / Revenue from Operations for the year, Average Trade Receivables, (2) Average Collection Period (per week) =, ´ 52, Net Credit Sales / Revenue from Operations, , =, , ...(10), Average Trade Receivables, ´ 12, Net Credit Sales / Revenue from Operations, 12 months/52 weeks/365 days, Debt Collection Period =, Trade Receivable Turnover Ratio, , (3) Av er age Col lec tion Pe riod (per month) =, (4), , where,, , Trade Re ceiv ables = Debt ors + Bills Re ceiv able, , Notes : 1. Debt col lec tion pe riod re fers to an av er age pe riod for which the credit sales re main un paid. It in di cates, the av er age time at which money is col lected from debt ors., 2. If open ing and clos ing bal ances of debt ors and B/R are not given, then, Av er age Trade Re ceiv able = Debt ors + B/R, , Illustration 28(B), Cal cu late Debtors Velocity or Turn over Ra tio from the fol low ing in for ma tion :, `, Opening Debtors, 30,000, Credit Sales, 2,50,000, Cash Received from Debtors, 2,40,000, Discount Allowed, 20,000, Goods Returned by Debtors, 5,000, Solution, (J.A.C., 2017), Closing Debtors :, `, `, Opening Debtors, 30,000, Credit Sales, 2,50,000, 2,80,000, Less : Cash Received from Debtors, 2,40,000, Discount Allowed, 20,000, Goods Returned, 5,000, 2,65,000, Closing Debtors, 15,000, , 346
Page 833 :
Ac count ing Ra tios, 30,000 + 15,000, 45,000, =, = ` 22,500, 2, 2, Net Credit Sales, 2,45,000, Debtors Turnover Ra tio =, =, = 10.89 times, Average Debtors, 22,500, Average Debt ors =, , Net Credit Sales = Credit Sales - Goods Returned, = ` 2,50,000 - 5,000 = ` 2,45,000, 12, Debtors Velocity (in months) =, = 1.1 months (Approx.), 10.89, 365, Debtors Velocity (in days) =, = 33.5 days (Approx.), 10.89, Illustration 29 (Average Collection Period), Cal cu late Monthly Col lec tion Pe riod from the fol low ing in for ma tion :, `, Opening Debtors, 18,000, Closing Debtors, 22,000, Opening Bills Receivable, 11,000, Closing Bills Receivable, 9,000, Total Sales, 2,00,600, Sales Returns, 600, You are also re quired to com ment on the re sult., Solution, 18,000 + 22,000, 40,000, 1., Average Debtors =, =, = ` 20,000, 2, 2, 11,000 + 9,000, 20,000, 2., Average B/R =, =, = ` 10,000, 2, 2, 3., Net Sales = Total Sales – Sales Returns, = ` 2,00,600 - 600 = ` 2,00,000, Average Debtors + Average B/R, \ Debt Collection Period =, ´ 12, Net Credit Sales, 20,000 + 10,000, 30,000, =, ´ 12 =, ´ 12 = 1.8 months., 2,00,000, 2,00,000, where,, , Com ment : In this ques tion debts col lec tion pe riod is fa vour able, be cause it is, 1.8 months, which is be low than the gen eral credit pol icy of the firms., Note : If, it is asked to cal cu late weekly col lec tion pe riod, then fol low ing for mula will be used :, 52 ´ Average Receivable, =, Net Credit Sales, , Illustration 30, Raj & Sons sells their goods on cash as well as on credit. The fol low ing par tic u lars, ex tracted from their books of account for the year 2017-18 :, `, Total Sales, Cash Sales, Sales Returns, Total Debtors (31-3-2018), B/R (31-3-2018), Calculate Average Collection Pe riod., , 1,50,000, 30,000, 10,500, 13,500, 3,000, , 347
Page 834 :
SBPD Pub li ca tions Accountancy (XII), Solution, , Average Debtors + Average B/R, , ´ 365, Net Credit Sales, Net Credit Sales = ` 1,50,000 - 30,000 - 10,500 = ` 1,09,500, 13,500 + 3,000, Average Collection Pe riod =, ´ 365 = 55 days, 1,09,500, Average Collection Pe riod =, , \, , Illustration 31, Opening Debt ors, Cash Received from Debt ors, Closing Debtors, Sales Re turns, Cal cu late Debt ors Turn over Ra tio and Debt Col lec tion Pe riod., Solution, Dr., Debtors Account, Amount, , Particulars, , Particulars, , `, , To Bal ance b/d, To Credit Sales (Bal . fig.), , `, , 10,000, 70,000, 15,000, 5,000, , Cr., Amount, `, , 10,000 By Cash, 80,000 By Sales Re turns, By Bal ance c/d, , 70,000, 5,000, 15,000, , 90,000, , 90,000, , Debtors Turnover Ratio =, Credit Sales, Re turns, Net Credit Sales, , Net Credit Sales, Average Receivable, ` 80,000, ` 5,000, ` 75,000, , Opening Debtors + Closing Debtors, 2, 10,000 + 15,000, =, = ` 12,500, 2, 75,000, Debtors Turnover Ra tio =, = 6 times, 12,500, 12, 12, Debt Collection Period (in months) =, =, = 2 months, Debtors Turnover Ratio, 6, Average Receivable =, , 4. Trade Payables or Creditors Turnover Ra tio, This ratio ex plains the ve loc ity with which cred i tors or trade payables are paid and, establishes relationship between net credit purchases and total payables or average, payables. Trade payables in cludes cred i tors plus bills pay able., Computation : The fol low ing for mula is used to cal cu late it :, Trade Pay able Turn over Ra tio =, or, , 348, , Net Credit Purchases, , Total or Average Trade Payables, Net Credit Purchases *, = ... Times, Average Creditors + Average B/P, , = ... times ...(11)
Page 835 :
Ac count ing Ra tios, * If the amount of credit pur chases is not given in the ques tion, as sume to tal pur chases, as be ing the credit pur chases., Average Payment Period or Average Credit Period, Av er age Pay ment Period is cal cu lated to have knowl edge about the av er age time pe riod, taken to pay off cred i tors. This ra tio is cal cu lated as fol lows :, No. of Days/Months/Weeks in a year, (i) Average Payment Pe riod =, Trade Payables (or Creditors) Turnover Ratio, Total or Average Trade Payables, (ii) Average Payment Period Ratio =, Net Credit Purchases, Notes : 1. For cal cu la tion of days, week or month, 365, 52 and 12 are used re spec tively., 2. Pro vi sion for dis count on cred i tor is not taken into con sid er ation while cal cu lat ing av er age pay ment pe riod., 3. Where open ing cred i tors and open ing bills payables are not given, clos ing cred i tors and bills payable are taken as av er age ac count payables., , where,, 1., Ac counts Pay able = Cred i tors + Bills Pay able, Opening Balance + Closing Balance, 2. Av er age Ac counts Pay able =, 2, Illustration 32(A) (Payable or Creditors Turnover Ratio), Cal cu late the Cred i tors or Trade Payable Turn over Ra tio from the fol low ing fig ures :, Credit Purchases during 2017, ` 12,00,000, Creditors + Bills Payable on 1.1.2017, ` 4,00,000, Creditors + Bills Payable on 31.12.2017, ` 2,00,000, (N.C.E.R.T.), Solution, Creditors or Trade Payable Turnover Ratio, Net Credit Purchases, 12,00,000, =, =, = 4 times, Average Trade Payables, 3,00,000, (Opening Creditors + Bills Payable), Average Creditors =, , + (Closing Creditors + Bills Payable), , 2, 4,00,000 + 2,00,000, =, = ` 3,00,000, 2, , Illustration 32(B), From the fol low ing par tic u lars, find out the Pay able Turn over for each of the fol low ing, years :, 2016, 2017, `, , `, , Net Credit Purchases, 16,00,000, 21,00,000, Trade Payables, 4,00,000, 6,00,000, If the Pay able Turn over Ra tio for the year 2017 would be 3 times, what would be the, impact on the work ing cap i tal ?, Solution, Net Credit Purchases, Trade Payable Turnover =, Total Trade Payables, ` 16,00,000, For 2016 =, = 4 times, ` 4,00,000, , 349
Page 836 :
SBPD Pub li ca tions Accountancy (XII), For 2017 =, , ` 21,00,000, ` 6,00,000, , = 3.5 times, , If the Pay able Turn over Ra tio for the year 2017 would be 3 times, then the cred i tors, would be ` 7,00,000 (21,00,000 ¸ 3)., Hence, the com pany can fur ther pur chase on credit ` 1,00,000 and work ing cap i tal will, increase by ` 1,00,000., Illustration 32(C), Cal cu late Cred i tors Turn over Ra tio and Av er age Age of Payables :, `, Credit Purchases during the year, 14,40,000, Closing Creditors, 1,44,000, Closing Bills Payable, 96,000, Solution, Net Credit Purchases, (A), Creditors Turnover Ratio =, Total Trade Payables, =, (B), , Average Age of Payables =, , ` 14,40,000, ` 1,44,000 + 96,000, , =, , ` 14,40,000, , 2,40,000, , = 6 times, , Months in a year, 12, =, = 2 months, Credit Turnover Ratio, 6, , 5. Working Capital Turnover Ra tio, Working capital means, excess of current assets over current li a bil i ties. This ratio, shows the re la tion ship be tween work ing cap i tal and cost of goods sold or net sales., Computation : It is cal cu lated as un der :, Working Capital Turnover Ra tio, =, , Revenue from Operations or Net Sales, = ... Times ...(12), Net Working Capital, Or, Cost of Revenue from Operations, = ..... Times, Working Capital, , where,, (i) Net Working Capital = Current Assets – Current Liabilities, (ii), Current Assets = Current Investments + Inventories + Trade, Receivables + Cash and Cash Eqivalents +, Short-term Loans and Advances + Other Current, Assets excluding Fictitious Assets, (iii) Current Liabilities = Short-term Borrowings + Trade Payables, + Other Current Liabilities + Short-term Provisions, Interpretation : Working Capital Turnover Ra tio indicates the velocity of new, work ing cap i tal. This ra tio in di cates the num ber of times the work ing cap i tal is turned o ver, in the course of a year. This ra tio mea sures the ef fi ciency with which the work ing cap i tal is, be ing used by a firm. A higher ra tio in di cates ef fi cient uti li sa tion of work ing cap i tal and a, low ra tio in di cates oth er wise. But a very high ra tio is not a good symp tom for any busi ness., Hence, care must be taken while interpreting the ratio., , 350
Page 837 :
Ac count ing Ra tios, Illustration 33(A) (Working Capital Turnover Ratio), Calculate Working Capital Turnover Ratio from the following :, `, Revenue from Operations, 24,00,000, Current Assets, 9,00,000, Current Liabilities, 1,00,000, Solution, Revenue from Operations, Working Capital Turnover Ratio =, Working Capital, Working Capital = Current Assets – Current Liabilities, = ` 9,00,000 – 1,00,000 = ` 8,00,000, ` 24,00,000, ∴ Working Capital Turnover Ratio =, = 3 times, ` 8,00,000, Illustration 33(B) (Working Cap i tal Turn over Ra tio), Cal cu late Work ing Cap i tal Turn over Ra tio from the fol low ing in for ma tion :, `, Revenue from Operations, 10,00,000, Gross Profit, 25%, Debtors, 2,50,000, Inventory, 1,80,000, Bills Receivable, 80,000, Prepaid Expenses, 60,000, Creditors, 1,30,000, Bills Payable, 50,000, Outstanding Expenses, 10,000, Solution, 1. Cost of Revenue from Operations = Revenue from Operations – Gross Profit, é, 25 ù, = ` 10,00,000 – ê10,00,000 ´, ú, êë, 100 úû, = ` 10,00,000 – 2,50,000 = ` 7,50,000, 2. Work ing Cap i tal = Cur rent As sets – Cur rent Li a bil i ties, Current Assets = Debtors + Inventory + B/R + Prepaid Expenses, = ` 2,50,000 + 1,80,000 + 80,000 + 60,000 = ` 5,70,000, Current Liabilities = Creditors + B/P + Outstanding Expenses, = ` 1,30,000 + 50,000 + 10,000 = ` 1,90,000, \ Working Capital = ` 5,70,000 – 1,90,000 = ` 3,80,000, \ Work ing Cap i tal Turn over Ra tio =, , Cost of Revenue from Operations, Working Capital, , =, , 7,50,000, 3,80,000, , = 1.97 times, , 6. Fixed Assets Turnover Ra tio, As sets are used to gen er ate sales. There fore, a firm should man age its as sets ef fi ciently, to maxi mise sales. The re la tion ship be tween sales and fixed as sets is called As sets Turn over, Ra tios. Fixed Assets Turnover Ra tio ex presses the num ber of times fixed as sets are be ing, turned-over in a stated period. It is cal cu lated as un der :, Fixed As sets Turn over Ra tio, Cost of Goods Sold or Net Sales/Revenue from Operations, =, Net Fixed Assets, , ...(13), , Interpretation of Fixed Assets Turn over Ra tio : This ra tio shows how well the, fixed assets are being used in the business. The ratio is more important in case of, , 351
Page 838 :
SBPD Pub li ca tions Accountancy (XII), man u fac tur ing con cerns be cause sales are pro duced not only by the use of cur rent as setsbut, also by amount in vested in fixed as sets. The higher the ra tio, the better is the per for mance. On, the other hand, a low ra tio in di cates that fixed as sets are not be ing ef fi ciently uti lised., Illustration 34 (Fixed As sets Turn over Ra tio), Calculate Fixed Assets Turnover Ratio from the following in for ma tion re lat ing to a, firm for the year ended 31st Dec., 2017 :, `, Sales, 20,00,000, Gross Profit, 40%, Fixed Assets at Cost, 5,00,000, Rate of Depreciation, 20%, Current Assets, 2,00,000, Fictitious Assets, 1,00,000, Goodwill, 50,000, Solution, 20,00,000 ´ 40, 1., Gross Profit =, = ` 8,00,000, 100, 2., Cost of Sales = Sell ing Price – Gross Profit, = ` 20,00,000 – 8,00,000 = ` 12,00,000, 3., , Net Fixed As sets = ( ` 5,00,000 – 1,00,000 Dep.) = ` 4,00,000, Cost of Sales, 12,00,000, Fixed As sets Turn over Ra tio =, =, = 3 times, Net Fixed Assets, 4,00,000, , 7. Current Assets Turnover Ra tio, Cur rent As sets Turn over Ra tio ex presses the re la tion ship be tween cost of goods sold, and cur rent as sets. The firm can com pute cur rent as sets turn over ra tio sim ply by di vid ing, cost of goods sold by cur rent as sets., Current Asset Turnover Ratio, Cost of Goods Sold (COGS) / Net Sales /Revenue from Operations Times, =, ...(14), Current Assets, Note : If in for ma tion re lat ing to COGS is not avail able use ‘Net Sales’ in place of COGS., , Il lus tra tion 35 (Current Assets Turnover Ratio), Cal cu late Cur rent As sets Turn over Ra tio from the fol low ing in for ma tion :, Particulars, Cash Sales, Credit Sales, Sales Re turn s, , `, Particulars, 17,00,000 Debtors, 3,20,000 Inventory, 20,000 Cash at Bank, Machinery, , `, , 4,00,000, 2,00,000, 2,00,000, 3,00,000, , Solution, Total Net Sales = Cash Sales + Credit Sales – Sales Returns, = ` 17,00,000 + 3,20,000 – 20,000 = ` 20,00,000, Total Current Assets = Debtors + Inventory + Cash at Bank, = ` 4,00,000 + 2,00,000 + 2,00,000 = ` 8,00,000, Net Sales, 20,00,000, Current Assets Turnover Ratio =, =, = 2.5 times, Current Assets, 8,00,000, , 352
Page 840 :
SBPD Pub li ca tions Accountancy (XII), Opening Inventories + Net Purchases + Direct Expenses –, Closing Inventories., or, Revenue from Operations – Gross Profit, ❂ Inventories = Finished Goods, Work-in-Progress (WIP) and Stock-in-trade, Significance of Gross Profit Ratio/Interpretation : Gross Profit Ratio reveals, profit earn ing ca pac ity of the busi ness with ref er ence to its sale. In crease in gross profit ra tio, will mean re duc tion in cost and de crease in gross profit ra tio will mean in crease in cost or, sales at lesser price., The gross profit ra tio also works as a guide to the man age ment in de ter min ing its selling and dis tri bu tion ex penses. The ef fec tive con trol sys tem can be adopted on the ba sis of, gross profit ra tio. Higher gross profit ra tio is al ways in the in ter est of the busi ness., Illustration 36(A) (Gross Profit Ra tio), Calculate the Gross Profit Ratio from of the following :, 2016, `, , 3,00,000, 60,000, , Revenue from Operations (Sale), Gross Profit, , 2017, `, , 4,00,000, 1,00,000, , Solution, , Gross Profit, ´ 10 0, Net Revenue from Operations (Sales), 60 ,000, =, ´ 100 = 20%, 3,00,000, 1,00,000, Gross Profit Ratio (2017) =, ´ 100 = 25%, 4,00,000, Gross Profit Ratio (2016) =, , Illustration 36(B) (Gross Profit Ratio), Com pute the Gross Profit and Gross Profit Ra tio from the fol low ing in for ma tion :, Sales ` 4,00,000 and gross profit 25% on cost., Cost Profit S.P., Solution, Gross Profit, 100, 25, 125, Gross Profit Ratio =, ´ 100, —, ?, 100, Net Revenue from Operations, 25 ´ 100, ?=, = 20%, Gross Profit = 25% on Cost or 20% of Revenue from Operations, 125, 20, \, Gross Profit = 4,00,000 ´, = ` 80,000, 100, Gross Profit, 80,000, Gross Profit Ratio =, ´ 100 =, ´ 100 = 20%, Net Revenue from Operations, 4,00,000, Illustration 37, Cal cu late Gross Profit Ra tio from the fol low ing information :, `, , Revenue from Operations, 8,50,000 Purchases, Opening Inventory, 1,30,000 Closing Inventory, Revenue from Operations Returns 30,000 Carriage Inward, Solution, , `, , 4,30,000, 90,000, 22,000, , (U.S.E.B., 2012), , Gross Profit, × 100, Net Revenue from Operations, Gross Profit = Net Revenue from Operations – Cost of Revenue from Operations, Gross Profit Ratio =, , 354
Page 841 :
Ac count ing Ra tios, Net Revenue from Operations = Revenue from Operations – Revenue from Operations, Returns, = ` 8,50,000 – 30,000 = ` 8,20,000, Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage, Inward – Closing Inventory, = ` 1,30,000 + 4,30,000 + 22,000 – 90,000, = ` 4,92,000, Gross Profit = ` 8,20,000 – 4,92,000 = ` 3,28,000, 3,28,000, Hence,, Gross Profit Ratio =, × 100 = 40%, 8,20,000, Illustration 38, Inventory in the beginning of the year, `, 60,000, Inventory at the end of the year, ` 1,00,000, Inventory Turnover Ratio, 8 Times, Selling Price, 25% above Cost, Com pute the amount of gross profit and sales., Solution, Average Inventory = (Opening Inventory + Closing Inventory) ¸ 2, ` (60,000 + 1,00,000), ` 1,60,000, =, =, = ` 80,000, 2, 2, Cost of Revenue from Operation = Average Inventory ´ Inventory Turnover Ratio, = ` 80,000 ´ 8 = ` 6,40,000, Gross Profit = 25% of ` 6,40,000 = ` 1,60,000, Revenue from Operations = Cost of Revenue from Operations + Gross Profit, = ` 6,40,000 + 1,60,000 = ` 8,00,000, Illustration 39, The fol low ing fig ures were ex tracted from the books of Magadh Corp. Ltd. :, 2016-17, 2017-18, Units sold (No.), 5,000, 6,000, Cost of Revenue from operations (` ), 9,50,000, 11,85,600, Revenue from operations (` ), 12,50,000, 15,60,000, Find out Gross Profit Ratio and ana lyse the vari a tions in Gross Profit., Solution, Gross Profit, Gross Profit Ra tio =, ´ 100, Revenue from Operations, Gross Profit = Revenue from Operations – Cost of Revenue from Operations, 12,50,000 – 9,50,000, Gross Profit Ratio (2016-17) =, ´ 100, 12,50,000, 3,00,000, =, ´ 100 = 24%, 12,50,000, 15,60,000 – 11,85,600, 3,74,400, Gross Profit Ratio (2017-18) =, ´ 100 =, ´ 100 = 24%, 15,60,000, 15,6 0,000, Gross Profit = ` 15,60,000 - 11,85,600 = ` 3,74,400, Analysis : Gross Profit for the year 2016-17 is ` 3,00,000 and for the year 2017-18, ` 3,74,400. Gross Profit Ratio for both the years is 24%. Net increase in Gross Profit is, ` 74,400. This is ac counted for in crease in sales vol ume by ` 3,10,000 and in crease in cost of, revenue from operations by ` 2,35,600 ( ` 11,85,600 – 9,50,000)., , 355
Page 842 :
SBPD Pub li ca tions Accountancy (XII), Illustration 40, Calculate the Gross Profit Ratio from the following information :, Cash Revenue from Operations being 20% of total revenue from operations, Purchase, ` 7,10,000, Credit Revenue from Operations ` 6,20,000, Excess of closing inventory over, opening inventory ` 40,000., (J.A.C., 2015), Solution, Total Revenue from Operations = Credit Revenue from Operations + Cash Revenue, from Operations = ` 6,20,000 + 20% of Total Revenue from Operations, Let, Total Revenue from Operations = 100, \, When, Total Revenue, Cash Revenue, Credit Revenue, from Operations from Operations, from Operations, 100, 20, 80, ?, 6,20,000, 20´ 6,20,000, \, Cash Revenue from Operations =, = ` 1,55,000, 80, \, Total Revenue from Operations = ` 6,20,000 + 1,55,000 = ` 7,75,000, Cost of Revenue from Operations = Purchases – Excess of Closing, Inventory over Opening Inventory, = ` 7,10,000 – 40,000 = ` 6,70,000, Gross Profit = Total Revenue from Operations – Cost of Revenue from Operations, = ` 7,75,000 – 6,70,000 = ` 1,05,000, Gross Profit, Gross Profit Ratio =, ´100, (Net) Revenue from Operations, 1 ,05 ,000 ´ 100, =, = 13.55%, 7 ,75 ,000, Illustration 41, Mr. Arun Birla owns a busi ness and gives the fol low ing fig ures for two suc ces sive years :, Year I, Year II, `, , `, , Turnover, 60,000, 1,20,000, Gross Profit, 15,000, 24,000, Mr. Arun speaks very high of his man ager who has in creased the prof its from ` 15,000, to ` 24,000 and describes him ‘dynamically successful’., Do you agree with him ? If not, why ?, Solution, Gross Profit Ra tio, Gross Profit, ´ 100, Sales or Turnover, , Year I, 15,000, ´ 100 = 25%, 60,000, , Year II, 24,000, ´ 100 = 20%, 1,20,000, , An ab so lute in crease in fig ure of prof its from` 15,000 to ` 24,000 is due to an in crease in, turn over and not due to any ex tra ef fi ciency on part of man ager. Ac tu ally there is a fall in, Gross Profit Ra tio which ap par ently re flects in ef fi cient pur chase/pro duc tion and/or sales, operations. So we do not agree with him., 2. Operating Ra tio, Meaning : Operating Ratio estalishes relationship between Operating Costs and, Revenue from Operations. In other words, this ra tio in di cates the pro por tion that the cost of, , 356
Page 843 :
Ac count ing Ra tios, goods sold plus op er at ing ex penses bears to Sales i.e., Revenue from Operations. Cost of, goods sold includes direct costs of goods sold as well as other operating expenses,, ad min is tra tion, sell ing and dis tri bu tion ex penses which have match ing re la tion ship with, sales. It ex cludes in come and ex penses which have no bear ing on pro duc tion and sales, i.e.,, non-op er at ing in comes and ex penses such as, in ter est and div i dend re ceived on in vest ment,, interest paid on long-term loans and de ben tures, profit or loss on sale of fixed as sets or, long-term in vest ments, loss from fire., Computation : This ra tio is cal cu lated on the ba sis of for mula given be low :, Cost of Goods Sold + Operating Expenses, ´ 100, Net Sales/ Net Revenue from Operations, Cost of Revenue from Operations, Operating Ratio =, ´ 100, Revenue from Operations, , 1. Operating Ra tio =, , or, 2. Operating Ra tio = 100 – Net Op er at ing Profit Ra tio, , ...(16), , where,, (a) Cost of Goods Sold = (Opening Stock + Purchases + Direct Expenses (such, as Wages, Carriage Inward, etc. – Closing Stock), or, Cost of Goods Sold or Cost of Revenue from Operations, = Cost of Materials Consumed + Purchases of Stockin-trade + Changes in Inventories (Finished Goods,, Work-in-progress and Stock-in-trade) + Direct Expenses, or, Cost of Revenue from Operations = Revenue from Operations – Profit, Im por tant to Note :, 1. Depreciation is included in Operating Expenses, 2. Cost of Goods Sold = Cost of Revenue from Operations, 3. Operating Expenses = Employees Benefit Expenses + Depreciation + Other, Expenses (Other than Non-operating Expenses), Examples : Salaries, Staff Welfare Exps., Administrative Exps., Selling and Distribution Expenses, Discount Allowed, Bad Debts., (b) Operating Expenses = Administrative Expenses + Selling and Distribution, Expenses + Short-term Financial Expenses, Illustration 42(A) (Op er at ing Ra tio), Calculate Operating Ratio from the following information :, `, Revenue from Operations, 4,20,000, Cost of Revenue from Operations, 2,50,000, Operating Expenses, 50,000, Revenue from Operation Returns, 20,000, Solution, Operating Ratio =, , Cost of Revenue from Operations + Operating Exps., ´ 100, Net Revenue from Operations, , 357
Page 844 :
SBPD Pub li ca tions Accountancy (XII), =, , 2,50,000 + 50,000, 3,00,000, ´ 100 =, ´ 100 = 75%, 4,00,000, 4,00,000, , Work ing Note :, Net Rev e nue from Op er a tions = To tal Rev e nue from Op er a tions – Rev e nue from Op er a tions Re turns, = ` 4,20,000 – 20,000 = ` 4,00,000, , Illustration 42(B), From the following par tic u lars, cal cu late Op er at ing Ra tio :, `, Revenue from Operations, 4,40,000, Opening Inventory, 50,000, Purchases, 2,10,000, Closing Inventory, 40,000, Office and Administrative Expenses, 30,000, Selling and Distribution Ex penses, 36,000, Solution, Cost of Revenue from Operations + Operating Expenses, Operating Ratio =, ´ 100, Net Revenue from Operations, `, , (a), , Cost of Revenue from Operations : Opening Inventory, Add : Purchases, Less : Closing Inventory, Cost of Revenue from Operations, , (b), , Operating Expenses : Office and Administrative Expenses, Add : Selling and Distribution Ex penses, Operating Ex penses, , Now,, , Operating Ra tio =, , 50,000, 2,10,000, 2,60,000, 40,000, 2,20,000, 30,000, 36,000, 66,000, , 2,20,000 + 66,000, 2,86,000, ´ 100 =, ´ 100 = 65%, 4,40,000, 4,40,000, , Illustration 43, Calculate Operating Ratio from the following information :, `, Revenue from Operations, 1,40,000, Revenue from Operations Return, 15,000, Cost of Revenue from Operations, 75,000, Selling Expenses, 15,000, Administrative Expenses, 10,000, Depreciation, 5,000, Solution, Operating Expenses = Selling Expenses + Administrative Expenses, + Depreciation, = ` 15,000 + 10,000 + 5,000 = ` 30,000, Cost of Revenue from Operations + Operating Expenses, Operating Ratio =, ´ 100, Net Revenue from Operations, Net Revenue from Operations= Revenue from Operations, – Revenue from Operations Return, = ` 1,40,000 – 15,000 = ` 1,25,000, , 358
Page 845 :
Ac count ing Ra tios, \, , Operating Ratio =, =, , ` 75,000 + 30,000, ` 1,25,000, , ` 1 ,05 ,000 ´ 100, ` 1 , 25 ,000, , ´ 100, , = 84%, , 3. Operating Profit Ratio, Operating Profit Ratio shows the relationship between Operating Profit and Net Sales/, Revenue from Operations., It is cal cu lated to re veal op er at ing mar gin. It may be com puted di rectly or as a re sid ual, of op er at ing ra tio. Thus,, Operating Profit ´ 100, Op er at ing Profit Ra tio =, Net Sales (Revenue from Operati ons), or, Op er at ing Profit Ra tio = 100 – Op er at ing Ra tio, where, Op er at ing Profit = Net Sales – Op er a ting Cost, or, Operating Profit = Net Profit (Before tax) + Non-operating, Expenses – Non-operating Income*, or, Gross Profit + Other Operating Income, – Other Operating Expenses, * Non-operating Income : It includes income from non-trading activities, such as, interest received, dividend received, refund of tax, profit on sale of fixed assets and, investments etc., Significance : Operating ratio is computed to express cost of operations excluding, fi nan cial charges in re la tion to sales. A cor ol lary of it is ‘Op er at ing Profit Ra tio’. It helps to, ana lyse the per for mance of busi ness and throws light on the op er a tional ef fi ciency of the, busi ness. It is very use ful for inter-firm as well as intra-firm com par i sons. Lower op er at ing, ratio is a very healthy sign., Illustration 44(A) (Op er at ing Profit Ra tio), Calculate Operating Profit Ratio in the following cases :, `, Case (i) Revenue from Operations (Net Sales), 15,00,000, Operating Cost, 13,20,000, Sales Returns, 1,00,000, Case (ii) Net Sales, 14,40,000, Gross Profit : 20% on Sales, Operating Expenses, 72,000, Solution, Case (i) :, Operating Profit = Net Sales – Operating Cost, = ` 15,00,000 – 13,20,000 = ` 1,80,000, Operating Profit, Operating Profit Ratio =, ´ 100, Revenue from Operations (Net Sales), ` 1 ,80 ,000 ´ 100, =, = 12%, 15 ,00 ,000, Note : Sales Re turns have al ready been ad justed as Net Sales are given., , Case (ii) :, \, , Operating Profit = Gross Profit – Operating Expenses, 20, Gross Profit = ` 14,40,000 ´, = ` 2,88,000, 100, Operating Profit = ` 2,88,000 – 72,000 = ` 2,16,000, , 359
Page 846 :
SBPD Pub li ca tions Accountancy (XII), Operating Profit, ´ 100, Revenue from Operations (Net Sales), ` 2 ,16 ,000 ´ 100, =, = 15%, ` 14 ,40 ,000, , Operating Profit Ratio =, , Illustration 44(B), Calculate operating profit ratio form the following information., Sales, Sales Returns, Gross profit, Office Exps., Selling Exps., Solution, Calculation of Operating Profit Ratio, Operating Profit = Gross Profit – Operating Expenses, Gross Profit = ` 1,50,000, Operating Expenses = Office Exps. + Selling Exps., = ` 15,000 + 26,000 = ` 41,000, \, Operating Profit = ` 1,50,000 – 41,000 = ` 1,09,000, Operating Profit (a), Operating Profit Ratio =, ´ 100, Net Sales (b), Net Sales = Sales – Sales Returns, = ` 4,10,000 – 10,000 = ` 4,00,000, 1,09,000, Therefore Operating Profit Ratio =, ´ 100 = 27.25%, 4,00,000, , `, , 4,10,000, 10,000, 1,50,000, 15,000, 26,000, , ...(a), , ...(b), , 4. Net Profit Ratio, Meaning : This ra tio es tab lishes re la tion ship be tween net profit and net sales. Net, profit is the gross profit less sell ing, dis tri bu tion and fi nan cial ex pense. It should be noted, that the net profit is as cer tained af ter add ing op er at ing and non-op er at ing in come to gross, profit and deducting both operating and non-operating expenses therefrom. We can, understand net profit better in this way :, Net Profit = (Gross Profit + Op er at ing and Non-op er at ing In come, – Operating and Non-op er at ing Ex penses), Or, Net Profit = Revenue from Operations – Cost of Goods Sold, – Employee Benefit Expenses – Depreciation, – Finance Cost – Other Expenses, Com pu ta tion : Net Profit Ra tio can be cal cu lated with the help of fol low ing for mula :, Net Profit Ratio =, , Net Profit, Net Sales (Revenue from Operations), , ´ 100, , ...(17), , (a) Op er at ing In come : Op er at ing in come is that which is earned in the or di nary life, of the business from trad ing ac tiv i ties., (b) Non-operating Income : It includes income from non-trading activities, such as, re fund of tax, in ter est and div i dend re ceived, gain on sale of as sets, com pen sa tion re ceived, etc., (c) Operating Expenses : It includes administrative, selling, distribution and, financial ex penses in curred in the day-to-day af fairs of the busi ness., (d) Non-operating Expenses : These expenses include the expenses, such as,, de pre ci a tion, loss on sale of as sets, dis count on is sue of shares and de ben tures, good will, and preliminary ex penses writ ten off, pay ment of div i dend and in ter est etc., , 360
Page 847 :
Ac count ing Ra tios, Significance : Net profit ratio shows the operational efficiency of the business., De crease in the ra tio in di cates man a ge rial in ef fi ciency and ex ces sive sell ing and distribution, ex penses. On the other hand, in crease in net profit ra tio shows better per for mance. In case of, in crease in the net profit ra tio, per for mance of the man age ment should be ap pre ci ated and, plus points should be re in forced. In case of de cline in the net profit ra tio, an in ves ti ga tion to, find out causes for the de cline in the net profit be made and cor rec tive ac tion should be taken, to re move the causes re spon si ble for the fall in the net profit ra tio., Illustration 45 (Net Profit Ratio), Calculate Net Profit Ratio from the following data :, `, Revenue from Operations, 5,60,000, Cost of Revenue from Operations, 3,20,000, Indirect Expenses, 1,00,000, Solution, `, Revenue from Operations, 5,60,000, Less : Cost of Revenue from Operations, 3,20,000, Gross Profit, 2,40,000, Less : Indirect Expenses, 1,00,000, Net Profit, 1,40,000, Net Profit, 1,40,000, Net Profit Ratio =, ´ 10 0 =, ´ 100 = 25%, Revenue from Operations, 5,60,000, Il lus tra tion 46 (Op er at ing Profit Ra tio and Net Profit Ra tio), From the following, calculate (a) Net Profit Ratio, and (b) Operating Profit Ratio :, Items, 1., 2., 3., 4., , Revenue from Operations, Gross Profit, Office Expenses, Selling Expenses, , 2,00,000, 75,000, 15,000, 26,000, , Solution, (a), , Items, , `, , Net Profit Ratio =, , 5., 6., 7., 8., , Interest on Debentures, Accidental Losses, Income from Rent, Commission Received, , `, , 5,000, 12,000, 2,500, 2,000, , Net Profit, ´ 100, Revenue form Operations, , Net Profit = Gross Profit – Indirect Expenses and Losses, + Other Incomes, Indirect Expenses and Losses = Office Expenses + Selling Expenses + Interest, on Debentures + Accidental Losses, = ` 15,000 + 26,000 + 5,000 + 12,000 = ` 58,000, Other Incomes = Income from Rent + Commission Received, = ` 2,500 + 2,000 = ` 4,500, \, Net Profit = ` 75,000 – 58,000 + 4,500 = ` 21,500, Revenue from Operations = ` 2,00,000, 21,500, \, Net Profit Ratio =, × 100 = 10.75%, 2,00,000, Operating Profit, (b), Operating Profit Ratio =, ´ 100, Revenue from Operations, Operating Profit = Gross Profit + Other Operating Income, – Other Operating Expenses, , 361
Page 848 :
SBPD Pub li ca tions Accountancy (XII), , \, , = ` 75,000 + 2,000 – 15,000 – 26,000, = ` 36,000, Revenue from Operations = ` 2,00,000, 36,000, Operating Profit Ratio =, ´ 100 = 18%, 2,00,000, , 5. Return on Investment or Capital Em ployed, Mean ing : This ra tio es tab lishes re la tion ship be tween the net profit (be fore in ter est,, tax and dividend) and cap i tal em ployed. This is the ba sic prof it abil ity ra tio., Return on investment is also called as return on capital em ployed. The term, in vest ment may re fer to to tal long-term funds in vested in busi ness. The funds em ployed in, net as sets is known as cap i tal em ployed. Al ter na tively, cap i tal em ployed is equal to net, worth plus to tal debt., Re turn on In vest ment is cal cu lated to find out the rate of re turn on in vest ment made in, busi ness. Higher of this ra tio is better for the busi ness., Calculation : This ra tio is cal cu lated as fol lows :, Re turn on In vest ment (ROI), (Net) Profit before Interest, Tax and Dividends, =, ´ 100 = ...%, Capital Employed, , ...(18), , Capital Employed : Capital employed may be computed either by Liabilities, Approach or Assets Approach., When Li a bil i ties Ap proach is adopted, Capital Employed = Shareholders’ Funds + Reserves and Surplus + Non-current, Liabilities, e.g., Long-term Borrowings + Long-term Provisions, Less : (i) Non-trade Investments (ii) Fictitious Assets, When Assets Approach is adopted, Capital Employed = Non-current Assets + Working Capital, Where,, Non-current Assets = (a) Fixed Assets (Tangible and Intangible) + (b), Non-current Trade Investments + (c) Long-term Loans, and Advances and (d) Other Non-current Assets, (excluding Unamortised Expenses and Losses), Working Capital = Current Assets – Current Liabilities, Note : It is as sumed that all in vest ments are Trade In vest ments., Note : If net profit af ter in ter est, tax and div i dend is given, the amount of in ter est, tax and div i dend should be, added back to cal cu late the net profit be fore in ter est, tax and div i dend., , Av er age Cap i tal Em ployed :, Capital Employed at the beginning + Capital Employed at the end, (a), 2, Or, (b) Cap i tal Em ployed at the end – 1/2 of Net Profit af ter Tax and In ter est, Illustration 47(A) (Re turn on In vest ment or Re turn on Cap i tal Employed), From the following, calculate Return on Investment (or Return on Capital Employed) :, Items, 1. Share Capital, 2. Reserves and Surplus, 3. Net Fixed Assets, , 362, , `, , 50,000, 25,000, 2,25,000
Page 849 :
Ac count ing Ra tios, 4., 5., 6., 7., , Non-current Trade Investments, Current Assets, 12% Long-term Borrowings, Current Liabilities, , 25,000, 1,10,000, 2,00,000, 85,000, , Net Profit before Tax ` 60,000., Solution, Return on Investment or Return on Capital Employed, Profit before Interest, Tax and Dividend, =, ´100, Capital Employed, Net Profit before Interest and Tax, = ` 60,000 + 24,000 = ` 84,000, Capital Employed = Share Capital + Reserves and Surplus + 12%, Long-term Borrowings, = ` 50,000 + 25,000 + 2,00,000 = ` 2,75,000, \ Return on Investment or Return on Capital Employed, ` 84,000, =, ´ 100 = 30.54%, 2,75,000, Illustration 47(B), The fol low ing in for ma tion are pro vided to you :, `, Share Capital, 80,000, General Re serve, 40,000, 15% Loan, 50,000, Sales for the year, 1,00,000, Tax paid during the year, 20,000, Profit after Interest and Tax, 40,000, From the above in for ma tion, cal cu late Return on Investment., Solution, Profit before Interest and Tax (PBIT), Return on Investment (ROI) =, ´ 100, Capital Employed, Profit before Interest and Tax = Profit after Interest and Tax + Interest and Tax, paid, = ` 40,000 + 7,500 (Interest on Loan) + 20,000, (Tax paid), = ` 67,500, Capital Em ployed = Share Capital + General Reserves + Profit, af ter Interest and Tax + Loan, = ` 80,000 + 40,000 + 40,000 + 50,000, = ` 2,10,000, 67,500, Return on Investment =, ´ 100 = 32.14%, 2,10,000, 6. Earning per Share (E.P.S.), Mean ing : If there are both pref er ence and eq uity share cap i tal, then out of net profit, first of all pref er ence div i dend should be de ducted in or der to find out the net in come available, for eq uity share hold ers. This ra tio shows the re la tion ship be tween net profit af ter pref e rence, dividend and number of equity shares., , 363
Page 851 :
Ac count ing Ra tios, D.P. S. =, , ` 45 lakh, Dividend Paid, =, = ` 2.00 per Share, No. of Shares, 22.5 lakh, , Illustration 50, From the following information, cal cu late Div i dend per Share :, Equity Share Capital (Divided into Shares of ` 10 each), Profit before Tax (PBT), Provision for Tax, Retained Earn ings, , `, , 2,00,000, 1,60,000, 80,000, 20,000, , Solution, Tax pay able ` 80,000, Profit before Tax = ` 1,60,000, `, Profit after Tax (` 1,60,000 – 80,000), 80,000, Less : Re tained Earn ings, 20,000, Balance treated as Dividend dis trib uted 60,000, Dividend per Share =, Work ing Note :, 1. No. of Shares =, , Dividend paid to Equity Shareholders, Number of Equity Shares1, , =, , 60,000, =`3, 20,000, , 2,00,000, = 20,000, 10, , 8. Price Earning Ratio (P. E. Ratio), This ra tio mea sures the num ber of times the earn ings of the lat est year at which the, share price of a com pany is quoted. It ex presses the re la tion ship be tween cur rent mar ket, price of share and earn ing per share., For mula :, Price Earning Ratio =, , Current Market Price per Share (M.P. S.), Earning per Share (E.P. S.), , ...(21), , Sig nif i cance : A high P/E Ra tio re flects earn ing po ten tial and a low P/E Ra tio re flects, low earn ings po ten tial. P/E ra tio re flects the mar ket con fi dence in the com pany’s eq uity. So, the P/E ra tio is a ba rom e ter of the mar ket sen ti ment., P/E ratios vary from industry to industry and company to company in the same, in dus try de pend ing upon in ves tors per cep tion of their future., Comprehensive Ques tions, Illustration 51, The fol low ing is the Bal ance Sheet of X Ltd. as at 31st March, 2018 :, Particulars, , Note No., , I. EQUITY & LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Long-term Borrowings :, 8% Debentures, 3. Current Liabilities :, Trade Payables, , Amount, `, , 11,00,000, 1,20,000, 3,00,000, , Total, , 2,80,000, 18,00,000, , 365
Page 852 :
SBPD Pub li ca tions Accountancy (XII), II. ASSETS, 1. Fixed Assets, 2. Current Assets (including Inventories ` 2,00,000, Debtors ` 3,00,000,, B/R ` 70,000, Bank ` 30,000), Total, , 12,00,000, 6,00,000, 18,00,000, , Comment on the financial position of the company by calculation of different, ra tios—cur rent ra tio, liq uid ratio, debt-eq uity ra tio, fixed as sets ra tio., Solution, (1), Current Assets = Inventories + Debtors + B / R + Bank, = ` 2,00,000 + 3,00,000 + 70,000 + 30,000, = ` 6,00,000, (2), Liquid Assets = Current Assets – Inventories, = ` 6,00,000 – 2,00,000 = ` 4,00,000, (3), Shareholders' Funds = Share Capital + Reserve Fund, = ` 11,00,000 + 1,20,000 = ` 12,20,000, (4) Total Outside Liabilities = Debentures + Trade Payables, = ` 3,00,000 + 2,80,000 = ` 5,80,000, Current Assets, 6,00,000, (i), Current Ratio =, =, = 2.14 : 1, Current Liabilities, 2,80,000, Liquid Assets, 4,00,000, (ii), Liquid Ratio =, =, = 1.43 : 1, Current Liabilities 2,80,000, Long-term Loans, 3,00,000, (iii) Debt- Equity Ratio =, =, = 0.245 : 1, Shareholders' Funds 12,20,000, (iv) Fixed Assets Ratio =, , or 0.25 : 1, Shareholders' Funds + Long-term Loan, , Fixed Assets, 12,20,000 + 3,00,000, =, 12,00,000, 15,20,000, =, = 1.27 : 1, 12,00,000, , Il lus tra tion 52, From the following Balance Sheet, calculate :, (i) Debt-Equity Ra tio, (ii) Proprietary Ra tio, and (iii) Ra tio of To tal As sets to Debt., Balance Sheet of A. K. Ltd., (as on March 31st, 2018), Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital (Preference Share ` 1,00,000 and Equity, Shares ` 3,00,000, (b) Reserves and Surplus, 2. Non-current Liabilities :, Long-term Borrowings (10% Debentures), , 366, , Note No., , Amount, `, , 1, , 4,00,000, 1,00,000, 1,50,000
Page 853 :
Ac count ing Ra tios, 3. Current Liabilities, , Total, , 50,000, 7,00,000, , Total, , 4,00,000, 1,00,000, 2,00,000, 7,00,000, , II. ASSETS, 1. Non-current Assets :, Fixed Assets, Investment (Short-term), 2. Current Assets, Note to Ac counts :, 1. Reserves and Surplus :, Reserves and Surplus, Less : Preliminary Expenses, , `, 1,10,000, 10,000, 1,00,000, , Solution, , (i), , To tal As sets = Non-cur rent As sets + Cur rent As sets (Ex cept ing, Fic ti tious As sets), = ` 4,00,000 + 1,00,000 + 2,00,000 = ` 7,00,000, Share hold ers' Funds = Pref er ence Shares + Eq uity Shares + Re serves, and Sur plus – Pre lim i nary Ex penses, = ` 1,00,000 + 3,00,000 + 1,10,000 – 10,000, = ` 5,00,000, Long-term Debts, 1,50,000, Debt-Eq uity Ra tio =, =, = 0.3 : 1, Shareholders' Funds 5,00,00 0, , Shareholders' Funds 5,00,000, =, = 0.71 : 1, Total Assets, 7,00,000, Total Assets, 7,00 ,000, (iii) To tal As sets to Debt Ra tio =, =, = 4.67 : 1, Long- term Debt 1,50 ,000, (ii), , Pro pri etary Ra tio =, , Illustration 53, Calculate Inventory Turn over Ra tio and Trade Receivable Turnover Ratio from the, following details :, `, Annual Revenue from Operations, 2,00,000, Gross Profit, 25% on Cost, Opening Inventory, 38,500, Closing Inventory, 41,500, Credit Revenue from Operations, 60,000, Debtors, 5,000, Bills Receivable, 5,000, Solution, Cost of Revenue from Operations, Inventory Turn over Ra tio =, Average Inventory, Cost of Rev e nue from Op er a tions = Rev e nue from Op er a tions – Gross Profit, , \, , = ` 2,00,000 – Gross Profit, Gross Profit = 25% on Cost, We know that,, 25% on Cost = 20% of Rev e nue from Operations, , 367
Page 854 :
SBPD Pub li ca tions Accountancy (XII), 20, 20, = 2,00,000 ×, = ` 40,000, 100, 100, Cost of Rev e nue from Operations = Rev e nue from Operations – Gross Profit, Gross Profit = Rev e nue from Operations ×, , = ` 2,00,000 – 40,000 = ` 1,60,000, Opening Inventory + Closing Inventory, Av er age Inventory =, 2, 38,500 + 41,500, =, = ` 40,000, 2, 1,60,000, Inventory Turnover Ratio =, = 4 times, 40,000, Debtors Turnover Ratio =, =, , Net Credit Revenue from Operations, (B / R + Debtors), 60,000, 60,000, =, = 6 times, (5,000 + 5,000) 10,000, , Il lus tra tion 54, From the following particulars, calculate (i) Gross Profit Ratio (ii) Net Profit Ratio, (iii) Operating Ratio :, `, Sales, 10,00,000, Cost of Sales, 6,00,000, Gross Profit, 4,00,000, Operating Expenses, 60,000, Operating Income, 3,40,000, Non Operating Income, 12,000, Non Operating Expenses, 9,000, Net Profit, Total Assets, Solution, (i), , (ii), , (iii), , 3,43,000, 51,45,000, , Gross Profit, × 10 0, Revenue from Operations (Net Sales), 4,00,000, =, × 100, 10,00,000, = 40%, Net Profit, Net Profit Ratio =, × 100, Revenue from Operations (Net Sales), 3,43,000, =, × 100, 10,00,000, = 34.3%, Operating Profit, Operating Ratio =, × 100, Revenue from Operations (Net Sales), 3,40,000, =, × 100, 10,00,000, , Gross Profit Ratio =, , = 34%, , 368
Page 855 :
Ac count ing Ra tios, Miscellaneous and Boards' Questions, Illustration 55, Calculate Current Ratio, Liquid Ratio, Gross Profit Ratio :, Current Assets ` 70,000, Current Liabilities ` 17,500, Revenue from Operations, ` 1,40,000, Inventory ` 30,000, Cost of Revenue from Operations ` 68,000., Solution, Net Revenue from Operations = ` 1,40,000, Gross Profit = Revenue from Operations – Cost of Revenue from Operations, = ` 1,40,000 – 68,000 = ` 72,000, Gross Profit, 72,000, Gross Profit Ra tio =, × 100 =, × 100 = 51.43%, Net Revenue from Operations, 1,40,000, Current Assets, 70,000, Current Ra tio =, =, =4:1, Current Liabilities 17,500, Liq uid Ra tio =, , Liquid Assets, 40,000, =, = 2.3 : 1, Current Liabilities 17,500, , Liq uid As sets = Cur rent As sets – Inventory =` 70,000 – 30,000 = ` 40,000, Illustration 56, On the ba sis of the fol low ing in for ma tion, cal cu late (i) Gross Profit Ra tio, (ii) Work ing, Cap i tal Turn over Ra tio, (iii) Debt-Eq uity Ra tio :, Net Revenue from Operations ` 30,00,000; Cost of Revenue from Operations, ` 20,00,000; Cur rent As sets ` 6,00,000; Cur rent Li a bil i ties ` 2,00,000; Paid-up Cap i tal, ` 5,00,000; De ben tures ` 2,50,000; Loan ` 1,25,000., Solution, Gross Profit, (i), Gross Profit Ra tio =, × 100, Net Revenue from Operations, Gross Profit = Revenue from Operations – Cost of Revenue from Operations, , ∴, , = ` 30,00,000 – 20,00,000 = ` 10,00,000, 10,00,000, Gross Profit Ratio =, × 100 = 33.3%, 30,00,000, , (ii) Working Capital Turn over Ratio (W. C. T. R.), Cost of Revenue from Operations, =, Net Working Capital, , (iii), , Net Working Cap i tal = Current Assets – Current Liabilities, = ` 6,00,000 – 2,00,000 = ` 4,00,000, 20,00,000, W. C. T. R. =, = 5 times, 4,00,000, Long-term Debt, Debt-Equity Ratio =, Shareholders' Funds, 2,50,000 + 1,25,000, =, 5,00,000, 3,75,000, =, = 0.75 times, 5,00,000, , 369
Page 856 :
SBPD Pub li ca tions Accountancy (XII), Illustration 57, (i) From the following information, calculate (a) Inventory Turnover Ratio, and (b) Trade, Receiveble Turnover Ratio :, Revenue from Operations ` 1,00,000, Gross Profit ` 50,000, Opening Inventory ` 10,000,, Closing Inventory ` 15,000, Average Trade Receivables ` 12,500., (ii) From the following information, com pute Gross Profit Ra tio :, Opening Inventory ` 50,000, Closing Inventory 1.2 times of Opening Inventory,, Inventory Turnover Ratio 4 times, Revenue from Operations ` 2,50,000., Solution, Net Revenue from Operations 1,00,000, (i) (a) Inventory Turn over Ra tio =, =, = 8 times, Average Inventory, 12,500, 10,000 + 15,000, Average Inventory =, = ` 12,500, 2, (b) Trade Receivables Turnover Ra tio, Net Credit Revenue from Operations 1,00,000, =, =, = 8 times, Average Debtors, 12,500, Opening Inventory + Closing Inventory, (ii), Average Stock =, 2, 50,000 + 60,000, =, = ` 55,000, 2, Cost of Revenue from Operations = Av er age Inventory × Inventory Turn over Ra tio, = ` 55,000 × 4 = ` 2,20,000, Revenue from Operations = ` 2,50,000, Gross Profit = Revenue from Operations – Cost of Revenue from Operations, = ` 2,50,000 – 2,20,000 = ` 30,000, Gross Profit, 30,000, Gross Profit Ra tio =, × 100 =, = 12%, Revenue from Operations, 2,50,000 × 100, Il lus tra tion 58, Calculate (i) Gross Profit Ratio, (ii) Operating Ratio, (iii) Operating Profit Ratio,, (iv) Net Profit Ratio from the following information :, Revenue from Operation ` 2,00,000; Cost of Revenue from Operation ` 1,20,000;, Administration Expenses ` 20,000; Selling Expenses ` 15,000; Loss by Fire ` 10,000; Income, from Investment ` 5,000., Solution, Gross Profit, (i), Gross Profit Ratio =, × 100, Sales, Gross Profit = Revenue from Operations or Sales – Cost of Goods Sold, = ` 2,00,000 – 1,20,000 = ` 80,000, 80,000 × 100, Gross Profit Ratio =, = 40%, 2,00,000, Cost of Revenue from Operations + Expenses, (ii), Operating Ratio =, × 100, Revenue from Operations, or, Cost of Revenue from Operation + All Operating Expenses, × 100, Net Revenue from Operation, Cost of Revenue from Operation = ` 1,20,000, Operating Exps. = Administration Expenses + Selling Expenses, = ` 20,000 + 15,000 = ` 35,000, , 370
Page 857 :
Ac count ing Ra tios, ` 1,20,000 + 35,000, , × 100, 2,00,000, 1,55,000, =, × 100 = 77.5%, 2,00,000, Operating Profit, Operating Profit Ratio =, × 100, Sales or Revenue from Operations, , Now, Operating Ratio =, , (iii), Where,, ∴, (iv), , Operating Profit = Gross Profit – Operating Expenses, = ` 80,000 – 35,000 = ` 45,000, 45,000 × 100, Operating Profit Ratio =, = 22.5%, 2,00,000, Net Profit, Net Profit Ratio =, × 100, Revenue from Operations (Sales), Net Profit = Gross Profit – Indirect Expenses & Losses + Other Incomes, = ` 80,000 – 20,000 – 15,000 – 10,000 + 5,000 = ` 40,000, 40,000 × 100, Net Profit Ratio =, = 20%, 2,00,000, , Illustration 59, The Bal ance Sheet of Sudha Ltd. as on 31st March, 2020 was as un der :, Particulars, I. EQ UITY & LI A BIL I TIES, 1. Share hold ers’ Funds :, (a) Share Cap i tal, (b) Re serves and Sur plus, 2. Long-term Borrowings (De ben tures), 3. Cur rent Li a bil i ties :, (a) Trade Payables, (b) Other Cur rent Li a bil i ties, II. AS SETS, 1. Fixed As sets :, (a) Tan gi ble (Plant & Ma chin ery), (b) In tan gi ble (Good will), 2. Cur rent As sets :, (a) Cash, (b) Stock/In ven to ries, (c) Trade Receivables, (d) Other Cur rent As sets, , Amount, `, , 2,00,000, 58,000, 1,00,000, 60,000, 2,000, 4,20,000, , 1,50,000, 1,20,000, 17,000, 80,000, 45,000, 8,000, 4,20,000, , Revenue from operation during the year ` 4,00,000; Cost of Revenue from operation, , ` 2,40,000., , You are re quired to cal cu late the fol low ing ra tios :, (a) Current Ra tio, (b) Quick Ratio, (c) Inventory Turn over Ratio, (d) Proprietor’s, Li a bil i ties Ra tio, (U.S.E.B., Modified 2011), Solution, Current Assets, (a), Current Ra tio =, Current Liabilities, , 371
Page 858 :
SBPD Pub li ca tions Accountancy (XII), Cur rent As sets = Inventories + Trade Receivables + Cash + Cur rent As sets, = ` 80,000 + 45,000 + 17,000 + 8,000 = ` 1,50,000, Current Liabilities = Trade Payables + Other Current Liabilities, = ` 60,000 + 2,000 = ` 62,000, 1,50,000, Current Ra tio =, = 150 : 62 = 2.42 : 1, 62,000, Liquid Assets, (b), Quick Ratio =, Current Liabilities, Liq uid As sets = Cur rent As sets – Inventories = ` 1,50,000 – 80,000 = ` 70,000, 70,000, Quick Ratio =, = 70 : 62 = 1.13 : 1, 62,000, Cost of Revenue from Operation, (c) Inventory Turnover Ratio =, Average Inventories, 2,40,000, =, = 3 times, 80,000, Shareholders' Funds, (d) Proprietary Liabilities Ratio =, Outside Liabilities, Shareholders’ Funds = Share Capital + Reserves and Surplus, = ` 2,00,000 + 58,000 = ` 2,58,000, Outside Liabilities = Total Liabilities – Shareholders’ Funds, = ` 4,20,000 – 2,58,000 = ` 1,62,000, 2,58,000, Proprietary Liabilities Ratio =, = 1.59 : 1, 1,62,000, SUMMARY OF ACCOUNTING RATIOS : AT A GLANCE, Name of the Ra tio, , Formula, , How, Expressed, , (A) Liquidty Ratios, , 1., , Cur rent Ra tio, , 2., , Liq uid Ra tio or, Quick Ra tio or, Acid-test Ra tio, , Current Assets, = ..... : ........, Current Liabilities, Gen er ally 2 : 1 is con sid ered as ideal ra tio., Quick Assets, =, = ..... : ......., Current Liabilities, Usu ally 1 : 1 is con sid ered as ideal ra tio., =, , Pure Ratio, , Pure Ratio, , Note : Quick As sets = Cur rent As sets – (Inventory + Pre paid, Expenses), , (B) Sol vency Ra tios (Or Long-term Sol vency Ra tio), Long-term Debt / Loans, Debt, 1. Debt-Eq uity Ra tio, =, or, Shareholders' Funds, Equity, A ra tio of 1 : 1 may be considered to be satisfac tory, ratio., Notes : (i) Long-term Debt (Loans), = De ben tures + Loans + Mort gage etc., (ii) Share hold ers’ Funds, = Eq uity & Pref. Share Cap i tal + Re serves and, Sur plus, Re tained Earn ings etc., Less : Ac cu mu lated Losses and Fic ti tious As sets, , 372, , Pure Ratio
Page 859 :
Ac count ing Ra tios, 2., , To tal As sets to, Debt Ra tio, , =, , Total Assets, Long-term Debts, , Pure Ratio, , Notes : (i) To tal As sets = All As sets ex clud ing Fic ti tious, As sets, (ii) Long-term Debts = Long-term Loans (Se cured or, Un se cured) + De ben tures + Bonds), , 3., , Proprietary Ratio, , 4., , Interest Coverage, Ratio, , =, , Shareholders' (Proprietors' ) Funds, Total Assets, , Pure Ratio, , Note : For Pro pri etor’s or Share hold ers’ Funds (See ‘3’ above), , =, , Net Profit before Interest & Tax, Interest on Long-term Debt, , Times, , (C) Ac tiv ity or Turn over or Per for mance Ra tios, 1., , In ven tory or Stock, Times, Cost of Goods Sold / Cost of Revenue from Operations, Turn over Ra tio, =, =, Average Stock / Inventory, .......... Times, Notes : (i) Cost of Goods Sold, = Open ing Stock + Pur chases + Manu. Exp., or Di rect Exps. less Clos ing Stock, or Net Sales – Gross Profit, Cost of Revenue from Operations :, = Cost of Materials Consumed + Purchases of, Stock-in-trade + Changes in Inventories (of, Finished Goods, Work-in-progress and Inventoryin-trade), Opening Inventory + Closing Inventory, (ii)Average Inventory =, 2, , 2., , Working Capital, Turn over Ra tio, , =, , Revenue from Operations / Net Sales, Net Working Capital, , Times, , Note : Work ing Cap i tal = Cur rent As sets – Cur rent Li a bil i ties, , 3., , Debt ors Turn over, Ra tio or, Trade Receivable, Turnover Ratio, , =, , Net Credit Sales (Revenue from Operations), Average Trade Receivables, , Notes : (i) Av er age Trade Receivables, Opening (Debtors & B/R) + Closing (Debtors & B/R), =, 2, (ii) Net Credit Sales = Gross Credit Sales – Sales, Re turns or Net Sales – Cash Sales, Cost of Revenue from Operation or Net Revenue from Oper., =, (Net) Fixed Assets, , 4., , Fixed As sets, Turn over Ra tio, , 5., , Cur rent As sets, Turn over Ra tio, , 6., , Net Credit Purchases, Trade Pay ables, =, Average Trade Payables, Turn over Ra tio (or, Creditors Turnover Notes : (i) Trade Pay ables = Cred i tors + Bills Pay able, (ii) Av er age Trade Pay ables, Ratio), , =, , =, , Net Sales (or Cost of Goods Sold), Current Assets, , Times, , Times, Times, Times, , Opening + Closing Trade Payables, 2, , 373
Page 860 :
SBPD Pub li ca tions Accountancy (XII), 7., , Av er age Col lec tion, Period, , =, , Average Trade Receivables, × 365/52/12, Net Credit Sales or Revenue from Oper., , Note : Trade Re ceiv ables = Debt ors + Bills Re ceiv able, , or, , 365 /52/12, , Trade Receivables Turnover Ratio, , Months/Day, s/ Weeks,, , as the, case may, be, , (D) Prof it abil ity Ra tios, , 1., , Gross Profit Ra tio, or Gross Mar gin, , 2., , Op er at ing Ra tio, , 3., , Operating Profit, Ratio, , 4., , Net Profit Ra tio, , 5., , Return on, In vest ment (ROI), , 6., , (a) Based on Sales, Gross Profit, =, × 100, Net Sales / Revenue from Operations, = ...............%, , Percent, , Note : Gross Profit = Net Sales – Cost of Goods Sold, , Cost of Goods Sold + Operating Exps., × 100 = ... %, Net Sales, or 100 – Operating Profit Ra tio, Operating Cost × 100, or, Net Sales, Operating Profit, =, Net Sales, Note : Op er at ing Cost = Cost of Goods Sold + Op er at ing Ex p., Net Profit, =, × 100, Net Sales/Revenue from Operations, , Percent, , =, , Profit before Interest, Tax & Dividend, × 100, Capital Employed, , Percent, , Earn ing per Share, (E.P.S.), , =, , Net Profit after Tax and Pref. Dividend, Number of Equity Shares, , Per share, , 7., , Dividend for Share, , =, , 8., , Price Earn ing, Ratio, , =, , Dividend paid or Proposed, Earning per Share (EPS), Current Market Price per Share, =, Earning per Share (EPS), , Percent, , Times, Times, , 11.7 FAST RE VI SION, l Accounting Ratio : The relationship between the two accounting figures, expressed, , math e mat i cally, is known as ac count ing ra tio (or sim ply as a ra tio). It is ex pressed in ratio,, per cent age or rate., l Na ture of Ac count ing Ra tio : Ra tio in di cates a quan ti ta tive re la tion ship, which can be, in, turn, used to make a quan ti ta tive judge ment such is the na ture of all ac count ing ra tios., l Objectives of Accounting Ra tios :, (i) To mea sure the prof it abil ity of the firm., (ii) To de ter mine the op er at ing ef fi ciency of the firm., (iii) To judge li quid ity po si tion of the firm., (iv) To assess the sol vency po si tion of the busi ness., (v) To help in decision-making., (vi) To help in fi nan cial plan ning., , 374
Page 863 :
Ac count ing Ra tios, 8. Men tion any two Li quid ity Ra tios., [Ans. (i) Cur rent Ra tio, (ii) Quick Ra tio or Acid-Test Ra tio.], 9. What is a Current Ra tio ?, [Ans. Cur rent As sets Ra tio is a ra tio be tween cur rent as sets and cur rent li a bil i ties of a firm for a, par tic u lar pe riod. This ra tio es tab lishes a re la tion ship be tween cur rent as sets and current liabilities.], 10. What is Quick Ra tio or Liq uid Ra tio or Acid-Test Ra tio ?, [Ans. This ra tio es tab lishes a re la tion ship be tween quick/liq uid as sets and cur rent li a bil ities., Liquid Assets, Q. R. =, ], Current Assets, 11. Quick Ra tio of a com pany is 1.5 : 1. State giv ing rea son whether the ra tio will im prove,, decline or not change on pay ment of div i dend of the com pany., Liquid (Quick) Assets, Q.A., [Ans. Quick Ratio (Q.R.) =, or, Current Liabilities, C. L., Q.R. will be re duced af ter pay ment of div i dend., Rea son : Pay ment of div i dend will re duce cash.], 12. What are Cur rent As sets ?, [Ans. Cur rent As sets are cash and other such as sets which can be con verted into cash within a, short pe riod (nor mally within one year). Thus,, Cur rent As sets = Cash + Cash at Bank + Bills Re ceiv able + Clos ing Stock + Short-term, In vest ments + Sun dry Debt ors + Pre paid Ex penses.], 13. What are Cur rent Li a bil i ties ?, [Ans. Cur rent Li a bil i ties are those li a bil i ties which are ex pected to be paid within a year. It, in cludes the fol low ing :, Bills Payables, Sun dry Cred i tors, Out stand ing Ex penses, Bank Over draft, Pro vi sion for, Tax.], 14. What do you mean by Liq uid or Quick As sets ?, [Ans. Liq uid as sets are those as sets which can be con verted into cash very shortly and eas ily., Cur rent as sets ex clud ing stock and pre paid ex penses are de scribed as liq uid as sets., In short, Liq uid As sets = Cur rent As sets – (Stock + Pre paid Exps.)], 15. (A) Give the for mula of Cur rent Ra tio., C.A., [Ans. (i) C. R. =, , where C.A. = Cur rent As sets, C.L. = Cur rent Li a bil i ties.], C. L., (B) Give the for mula of Quick Ra tio., L.A., [Ans. Q. R. =, , where L.A. = Liq uid As sets, C.L. = Cur rent Li a bil i ties.], C. L., 16. What is the Ideal Current Ra tio ?, [Ans. An ideal cur rent ra tio is 2 : 1.], 17. What is the Ideal Liq uid Ra tio ?, [Ans. An ideal liq uid ra tio is 1 : 1.], 18. Give one point of dif fer ence be tween Cur rent Ra tio and Liq uid Ra tio., Ans., Ba sis of, Distinction, , Cur rent Ra tio, , Liq uid Ra tio, , Relationship Cur rent Ra tio shows the re la tion ship Liquid Ratio shows the relationship, between Cur rent As sets and Cur rent between Liquid As sets and Current, Liabilities., Liabilities., 19. Can Cur rent Ra tio and Quick Ra tio be same at any point ?, [Ans. Yes. If there is no clos ing stock and pre paid ex penses in the busi ness, both C.R. and Q.R., will be the same.], , 377
Page 869 :
Ac count ing Ra tios, 5. Stock turn over ra tio co mes un der :, (a) Li quid ity Ra tio, (b) Prof it abil ity Ra tio, (c) Ac tiv ity Ra tio, (d) None of these, 6. The Ideal Cur rent Ra tio is :, (a) 2 : 1, (b) 1 : 2, (c) 3 : 2, (d) 3 : 4, 7. The Ideal Liquid Ra tio is :, (a) 2 : 1, (b) 1 : 1, (c) 0.5 : 1, (d) 1 : 5, [Ans. 1. (a), 2. (b), 3. (a), 4. (c), 5. (c), 6. (a), 7. (b).], II. State, whether the following statements are ‘True’ or ‘False’ :, 1. Current ratio measures long-term solvency of a concern., 2. ‘Rule of thumb’ for Current Ratio is 2 : 1., 3. ‘Rule of thumb’ for Acid-test Ratio is 1 : 1., 4. Working capital is the excess of current assets over current liabilities., 5. Activity Ratios and Turnover Ratios are the same., [Ans. 1. False, 2. True, 3. True, 4. True, 5. True.], , PRACTICAL PROB LEMS, ❐ Very Short An swer Type Numerical Ques tions, 1. Current Assets of a company were ` 1,40,000 and Current Liabilities ` 70,000. Calculate Current, Ratio., [Ans. 2 : 1], 2. Calculate Liquid Ratio from the following particulars :, Current Assets ` 70,000, Current Liabilities ` 35,000, Stock ` 30,000., [Ans. 1.14 : 1], 3. Calculate Current Ratio from the following information :, Closing Inventory ` 16,000, Trade Receivables ` 14,000, Trade Payables ` 20,000, Prepaid, Expenses ` 2,000, Short- term Investment ` 18,000., [Ans. 2.5 : 1], 4. A company had Current Assets of ` 2,60,000 and Current Liabilities of ` 1,10,000. Thereafter, it, purchased goods from Rajesh for ` 40,000. Compute Current Ratio after purchase of goods., [Ans. 2 : 1], 5. From the following information, calculate Net Profit Ratio for the years ending 31st March, 2017, and 2018 :, 2016-17, 2017-18, `, , `, , Rev e nue from Op er a tions, 20,00,000, 3,00,000, Net Profit af ter Tax, 6,00,000 12,00,000, [Ans. 2016-17 : 30%, 2017-18 : 40%], 6. From the following information related to Naveen Ltd., calculate Total Assets to Debt Ratio :, Fixed Assets ` 75,00,000, Current Assets ` 45,00,000, Debentures ` 80,00,000., [Ans. 1.5 : 1], 7. From the following information, calculate Return on Investment :, `, Fixed As sets, 70,00,000, Cur rent As sets, 30,00,000, Cur rent Li a bil i ties, 27,50,000, Net Profit be fore In ter est, Tax and Div i dend, 1,45,000, [Ans. 20%], 8. Cal cu late Debt-Eq uity Ra tio from the fol low ing in for ma tion :, `, To tal As sets, 3,50,000, , 383
Page 870 :
SBPD Pub li ca tions Accountancy (XII), To tal Debt, 2,50,000, Cur rent Li a bil i ties, 80,000, [Ans. 1.7 : 1], 9. From the fol low ing in for ma tion, cal cu late Work ing Cap i tal Turn over Ra tio :, Creditors ` 15,000, Current Assets ` 20,000, Revenue from Operation ` 1,50,000., [Ans. 30 times], 10. Calculate (i) Operating Ratio, and (ii) Gross Profit Ratio from the following particulars :, Operating Expenses ` 40,000, Sales ` 1,20,000, Cost of Goods Sold ` 60,000., 1, [Ans. (i) 33 %, (ii) 50%.], 3, 11. Compute Total Assets to Debt Ratio from the following information :, `, (i) Non-cur rent As sets, 8,90,000, (ii) Cur rent As sets, 4,10,000, (iii) Non-cur rent Li a bil i ties, 6,50,000, [Ans. 2 : 1], 12. From the following, calculate Operating Ratio :, `, Rev e nue from Op er a tions, 1,50,000, Cost of Rev e nue from Op er a tions, 50,000, Other Op er at ing Ex penses, 20,000, [Ans. 46.6%], ❐ Long Answer Type Numerical Questions, (A) Li quid ity Ra tio, ❐ Current Ratio, 1. From the fol low ing in for ma tion, cal cu late Cur rent Ra tio :, Particulars, `, Particulars, `, 12,000 Trade Cred i tors, 4,000, Inventory, 8,000 Bills Pay able, 3,000, Debtors, 2,500 Provisions, 3,000, Cash and Bank Bal ances, 10,000 Long-term Debt, Fixed As sets, 8,000, [Ans. Cur rent Ra tio 2.25 : 1], ❐ Liq uid Ra tio/Quick Ra tio, 2. From the following information, calculate Quick Ratio :, `, Current Assets, 4,00,000, Inventory, 80,000, Current Liabilities, 2,40,000, Prepaid Expenses, 20,000, [Ans. Quick Ratio 1.25 : 1], 3. The fol low ing is the Bal ance Sheet of X Ltd. as on 31st March, 2018 :, Particulars, , Amount, , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities, 3. Current Liabilities :, Trade Payables, Other Liabilities, , II. ASSETS, 1. Non-current Assets :, Fixed Assets, , 384, , `, , 2,00,000, 1,50,000, —, , Total, , 1,00,000, 30,000, 4,80,000, , 2,30,000
Page 871 :
Ac count ing Ra tios, 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, , Total, , 1,40,000, 80,000, 30,000, 4,80,000, , Cal cu late Quick Ra tio., [Ans. Quick Ra tio 11 : 13 or 0.846 : 1], 4. Sonu Ltd. has a current ratio of 3 : 1. If its stock is ` 40,000 and its total current liabilities are, ` 75,000, find out its quick ratio., [Ans. 2.47 : 1], 5. The Current Ratio of a company is 2.1 : 1.2. State with reasons which of the following transactions, will increase, decrease or not change the ratio :, (i), Re deemed 9% de ben tures of ` 1,00,000 at a pre mium of 10%., (ii), Re ceived from Debt ors ` 17,000., (iii) Is sued ` 2,00,000 eq uity shares to the ven dors of ma chin ery., (iv) Ac cepted bills of ex change drawn by the cred i tors., (C.B.S.E. A.I., 2015 Set 3), [Ans. (i) Decreases, (ii) No change, (iii) No change, (iv) No change.], ❐ Current Ra tio and Liq uid Ra tio, 6A. The working capital position of a company is as under :, Creditors, Bank Over draft, Stock, Debtors, Cash, Com pute the Cur rent Ra tio and Quick Ra tio., [Ans. C.R. = 1.4 : 1, Q.R. = 0.6 : 1], 6B. Calculate Current Ratio and Liquid Ratio from the following information :, Cash in hand, Stock, Debtors, Bank Over draft, In vest ment in Govt. Se cu ri ties, Bills Re ceiv able, Bills Pay able, Creditors, , `, , 24,500, 10,500, 28,000, 17,500, 3,500, (U.S.E.B., 2015), `, , 6,000, 20,000, 40,000, 20,000, 25,000, 80,000, 40,000, 30,000, (J.A.C., 2018), , [Ans. C.R. = 1.9 : 1, L.R. = 1.67 : 1 or 1.68 : 1], 7. A busi ness has a cur rent ra tio of 3 : 1. Its net work ing cap i tal is ` 4,00,000 and its stock are val ued, at ` 2,50,000. Cal cu late Quick Ra tio., [Ans. 7 : 4 or 1.75 : 1], ❐ Cal cu la tion of Cur rent As sets, Liq uid As sets and Cur rent Li a bil i ties, 8. A Ltd. has a cur rent ra tio of 3.5 : 1 and acid-test ra tio of 2 : 1. If the in ven tory is ` 30,000, find out, its cur rent as sets and to tal cur rent li a bil i ties., [Ans. C.L. ` 20,000; C.A. ` 70,000], 9. A busi ness has cur rent ra tio of 3 : 1, quick ra tio of 1.2 : 1 and the work ing cap i tal is ` 1,80,000., Cal cu late the cur rent li a bil i ties and stock., (C.B.S.E. Delhi & A.I., 2010), [Ans. C.L. ` 90,000; Stock ` 1,62,000], 10. X Ltd. has a cur rent ra tio of 4.5 : 1 and quick ra tio of 3 : 1. If its in ven tory is ` 72,000, find out its, To tal Cur rent As sets and To tal Cur rent Li a bil i ties., [Ans. C.L. ` 48,000; C.A. ` 2,16,000], , 385
Page 872 :
SBPD Pub li ca tions Accountancy (XII), ❐ Cal cu la tion of Stock, 11. Quick Ra tio is 1.5, Cur rent As sets ` 1,00,000, Cur rent Li a bil i ties ` 40,000. Cal cu late value of, Stock., [Ans. ` 40,000], 12. A firm’s current ratio is 2.5 : 1. Its liquid ratio is 1.5 : 1. If current liabilities are ` 15,000, calculate, the amounts of current assets and stock., [ Ans. Current Assets ` 37,500; Stock ` 15,000.], 13. The ratio of Current Assets (` 3,00,000) and Current Liabilities (` 2,00,000) is 1.5 : 1. The, ac coun tant of the firm is in ter ested in main tain ing a Cur rent Ra tio of 2 : 1, by pay ing off a part of, the Cur rent Li a bil i ties. Com pute the amount of cur rent li a bil i ties that should be paid,so that the, Cur rent Ra tio at the level of 2 : 1 may be main tained., [Ans. ` 1,00,000], 14. The Current Assets of a Company are ` 15,00,000. Its Current ratio is 3 : 1 and Liquid Ratio is, 1.25 : 1. Calculate the amount of Current Liabilities, Liquid Assets and Inventory., [Ans. CL : ` 5,00,000; LA : ` 6,25,000, Inventory : ` 8,75,000], (B) Sol vency Ra tio, ❐ Debt-Eq uity Ra tio, 15A. From the fol low ing, as cer tain the Debt-Eq uity Ra tio :, `, Eq uity Share Cap i tal, 2,00,000, General Re serve, 1,60,000, 10% De ben tures, 1,50,000, Cur rent Li a bil i ties, 1,00,000, Pre lim i nary Ex penses, 10,000, [Ans. 3 : 7 or 0.43 : 1], 15B. From the following information, compute ‘Debt-Equity Ratio’ :, `, Long-term Borrowings, 2,00,000, Long-term Provisions, 1,00,000, Cur rent Li a bil i ties, 50,000, Non-cur rent As sets, 3,60,000, Cur rent As sets, 90,000, [Ans. Debt-Eq uity Ra tio 3 : 1.], (C.B.S.E., A.I., 2014), 16. The com par a tive fig ures of R.S. Ltd. and Modi Ltd. are given be low :, R.S. Ltd. Modi Ltd., `, , `, , To tal As sets, 5,00,000, 8,00,000, To tal Li a bil i ties, 2,00,000, 3,00,000, Pro pri etor’s Fund, 3,00,000, 5,00,000, Cal cu late the Debt Equity Ratio for each Company., (J.A.C., 2018), [Ans. R.S.Ltd. 0.67 : 1, Modi Ltd. 0.6 : 1], ❐ To tal As sets to Debt Ra tio, 17. Cal cu late To tal As sets to Debt Ra tio from the fol low ing :, `, Share hold ers’ Funds, 4,00,000, To tal Debts, 9,00,000, Cur rent Li a bil i ties, 1,00,000, [Ans. To tal As sets to Debt Ra tio 13 : 8], ❐ Pro pri etary Ra tio, 18. Calculate (i) Debt-Equity Ratio, and (ii) Proprietary Ratio from the following data :, `, Eq uity Share Capital, 8,00,000, 6% De ben tures, 3,00,000, Loan, 4,00,000, , 386
Page 873 :
Ac count ing Ra tios, Cur rent Li a bil i ties, 1,00,000, Fixed As sets, 9,00,000, Cur rent As sets, 7,00,000, [Ans. (i) 0.875 : 1 (ii) 0.5 : 1 or 50%], (J.A.C., 2016), 19. From the following information, compute (i) Debt-Equity Ratio, and (ii) Proprietary Ratio : `, Long-term Borrowings, 8,00,000, Long-term Provisions, 4,00,000, Cur rent Li a bil i ties, 2,00,000, Non-cur rent As sets, 14,40,000, Cur rent As sets, 3,60,000, [Ans. (i) 3 : 1, (ii) 0.22 : 1 or 22.2%], (J.A.C., 2016), 20. From the fol low ing, cal cu late (i) Pro pri etary Ra tio, and (ii) Total Assets to Debt Ratio :, Bal ance Sheet of Meenakshi Ltd., Particulars, Note No., I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital (Equity Shares ` 20,00,000 and Preference, Shares ` 10,00,000), (b) Reserves and Surplus, 1, 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, Trade Payables, To tal, II. ASSETS, 1. Non-current Assets :, Fixed Assets, Investments, 2. Current Assets, Total, , Amount, `, , 30,00,000, 6,00,000, 10,00,000, 2,00,000, 48,00,000, , 20,00,000, 12,00,000, 16,00,000, 48,00,000, , Note to Ac counts :, 1. Re serves and Sur plus :, Re serve, Less : Pre lim i nary Ex penses, , `, 8,00,000, (2,00,000), 6,00,000, , [Ans. (i) 0.75 : 1, (ii) 4.8 : 1], ❐ In ter est Cov er age Ra tio, 21. Find in ter est cov er age ra tio :, Net Profit af ter In ter est and Tax, Rate of In come-tax, 10% Mort gage Loan, 10% De ben tures, [Ans. 6 times], 22. From the fol low ing, com pute :, (a) Debt-Eq uity Ra tio, (b) To tal As sets to Debt Ra tio, (c) Pro pri etary Ra tio :, S.No., , Items, , (J.A.C., 2009), , 60,000, 40%, ` 1,00,000, ` 1,00,000, `, , Amount, `, , 1., , Long-term Borrowings, , 1,00,000, , 387
Page 874 :
SBPD Pub li ca tions Accountancy (XII), 2., 3., 4., 5., , Long-term Provisions, Current Liabilities, Non-current Assets, Current Assets, , 50,000, 25,000, 1,80,000, 45,000, , [Ans. (a) 3 : 1, (b) 1.5 : 1, (c) 0.22 : 1], (C) Ac tiv ity (Per for mance)/Turn over Ra tio, ❐ Stock/Inventory Turn over Ra tio, 23. Cal cu late the Stock Turn over Ra tio from the fol low ing :, Opening Stock ` 29,000; Clos ing Stock ` 31,000; Revenue from Operations ` 3,20,000; Gross, Profit Ra tio : 25% on Revenue from Operations., [Ans. 8 times], 24. From the following information, calculate Stock Turnover Ratio :, Opening Stock ` 18,000, Wages ` 14,000, Closing Stock ` 22,000, Sales ` 80,000, Purchases, ` 46,000, Carriage Inward ` 4,000., [Ans. 3 times], 25. (a) What is meant by ‘Activity Ratios’ ?, (b) From the following information, calculate inventory turnover ratio :, Revenue from operations ` 16,00,000; Average Inventory ` 2,20,000; Gross Loss Ratio 5%., [Ans. 7.27 times], (C.B.S.E., A.I., 2016), 26A. Cal cu late Stock Turn over Ra tio :, Annual Sales ` 2,00,000, Opening Stock ` 38,500, Gross Profit 25% on Cost of Goods Sold, Closing, Stock ` 41,500., (N.C.E.R.T.), [Ans. 4 times], 26B. From the given information, Calculate the Inventory Turnover Ratio :, Revenue from Operations ` 2,00,000; Opening Inventory ` 20,000; Closing Inventory ` 60,000., Gross Profit is 25% on Cost of Revenue from Operations., [Ans. Stock Turnover Ratio 4 times], 26C. Calculate Inventory Turnover Ratio from the following information :, Rev e nue from Op er a tions, :, ` 20,00,000, Gross Profit, :, 20% of Rev e nue from Operations, Purchases, :, ` 16,80,000, Clos ing Stock, :, ` 3,60,000, [Ans. In ven tory Turn over Ra tio 5 times], [Hint : Open ing Stock ` 2,80,000], ❐ Calculation of Gross Profit, 27. A trader car ries an av er age stock of ` 40,000. His stock turn over ra tio is 8 times. If he sells goods, at a profit of 20% on sales, find out his profit., [Ans. ` 80,000], ❐ Cal cu la tion of Open ing and Clos ing Inventories, 28. Cost of Revenue from Operations = ` 3,00,000, In ven tory Turn over Ra tio = 6 times, Find out the value of Open ing In ven tory, if open ing in ven tory is ` 10,000 less than the clos ing, inventory., [Ans. ` 45,000], 29. From the fol low ing in for ma tion, de ter mine the open ing stock and clos ing stock :, Stock Turn over Ra tio 5 times, To tal Sales ` 2,00,000, Gross Profit Ra tio 25%, Clos ing Stock is, more by ` 4,000 than the opening stock., [Ans. Open ing Stock ` 28,000, Clos ing Stock ` 32,000.], 30. ` 3,00,000 is the cost of goods sold, in ven tory turn over 8 times; stock at the be gin ning is 2 times, more than the stock at the end. Cal cu late the val ues of open ing and clos ing stocks., [Ans. Open ing Stock ` 56,250; Clos ing Stock ` 18,750], , 388
Page 875 :
Ac count ing Ra tios, ❐ Debtors Turn over Ra tio, 31. From the fol low ing de tails, cal cu late Debt ors Turn over Ra tio :, To tal Sales for the year, ` 1,75,000, Cash Sales, 20% of To tal Sales, Sales Re turns out of Credit Sales, ` 10,000, Sun dry Debt ors :, Open ing Bal ance, ` 8,000, Clos ing Bal ance, ` 12,000, [Ans. 13 times], (N.C.E.R.T.), 32. Cal cu late Debt ors Turn over Ra tio from the fol low ing :, `, To tal Sales for the year, 6,00,000, Credit Sales : 70% of To tal Sales, Sales Re turns (4/5th out of Credit Sales), 25,000, Open ing Debt ors, 36,625, Clos ing Debt ors, 43,375, [Ans. Debt ors Turn over Ra tio 10 times], ❐ Debtors Turn over Ra tio and Av er age Col lec tion Pe riod, 33. Com pute Debt ors Turn over Ra tio and Av er age Col lec tion Pe riod from the fol low ing :, `, Net Credit Sales, 27,00,000, Debtors, 4,20,000, Bills Re ceiv able, 30,000, [Ans. Debt ors Turn over Ra tio 6 times; Av er age Col lec tion Pe riod 60.8 or 61 days.], 34. From the following information, calculate Debtors Turnover Ratio and Average Collection, Pe riod :, `, Open ing Debt ors, 37,000, Clos ing Debt ors, 43,000, Sales, 6,00,000, Cash Sales, 80,000, [Ans. Debt ors Turn over Ra tio 13 times; Av er age Col lec tion Pe riod 28 days (Approx.)], 35. Calculate average collection period from the following :, `, To tal Sales, 1,00,000, Cash Sales, 20,000, Sales Re turns, 7,000, To tal Debt ors, 9,000, Bills Re ceiv able, 2,000, Pro vi sion for Bad Debts, 1,000, [Ans. 55 days, Hint : Trade Re ceiv able Turn over Ra tio 6.6 times.], (U.S.E.B., 2015), [Note : Pro vi sion for B.D. is not de ducted from debt ors.], , ❐ Pay able Turn over Ra tio, 36. From the fol low ing par tic u lars re lat ing to Z Ltd., find out the Pay able Turn over Ratio for the, year :, To tal Pur chases ` 4,00,000; Cash Pur chases ` 40,000; Pur chases Re turns ` 68,000; Cred i tors, ` 1,40,000; Bills Pay able ` 80,000., [Ans. 1.327 or 1.33 times], 37. Cal cu late the Cred i tors or Trade Payables Turn over Ra tio and Av er age Debt Pay ment Pe riod for, the year 2017-18 from the fol low ing in for ma tion :, Particulars, Sun dry Cred i tors, Bills Pay able, , 1.4.2017, , 31.3.2018, , `, , `, , 1,50,000, 50,000, , 4,50,000, 1,50,000, , 389
Page 876 :
SBPD Pub li ca tions Accountancy (XII), To tal Pur chases ` 21,00,000, Pur chases Re turns ` 1,00,000, Cash Pur chases ` 4,00,000., [Ans. Cred i tors Turn over Ra tio : 4 times, Av er age Debt Pay ment Pe riod : 3 months.], ❐ Debtors Turnover Ratio, Creditors Turnover Ratio and Average Collection Period, 38. From the following information, calculate :, (i) Debtors Turnover Ratio, (ii) Creditors Turnover Ratio, (iii) Av er age Col lec tion Pe riod, `, Sales, 8,75,000, Bills Re ceiv able, 48,000, Pur chases, 4,20,000, Cred i tors, 90,000, Bills Pay able, 52,000, Debt ors, 59,000, [Ans. (i) 8.18 times, (ii) 2.96 times (iii) 45 days or 1.47 months], ❐ Working Cap i tal Turn over Ra tio, 39. Find out Work ing Cap i tal Turn over Ra tio :, Cash ` 20,000, Bills Re ceiv able ` 10,000, Sun dry Debt ors ` 50,000, Stock ` 40,000, Sun dry, Creditors ` 60,000, Cost of Goods Sold ` 3,00,000., [Ans. 5 times], 40. Cal cu late Work ing Cap i tal Turn over Ra tio from the fol low ing in for ma tions :, `, Rev e nue from Op er a tions, 5,00,000, Gross Profit, 25%, Trade Debt ors, 1,25,000, Stock, 90,000, Bills Re ceiv able, 70,000, Trade Cred i tors, 67,500, Bills Pay able, 30,000, [Ans. Work ing Cap i tal Turn over Ra tio 2 times], ❐ Fixed As sets and Cur rent As sets Turn over Ra tio, 41. From the fol low ing in for ma tion, cal cu late :, (i) Fixed As sets Turn over Ra tio, and (ii) Cur rent As sets Turn over Ra tio., Fixed As sets ` 3,20,000, Debt ors ` 1,20,000, Bills Re ceiv able ` 40,000; Cash at Bank ` 50,000,, Stock ` 46,000, Sales for the year 2017-18 ` 3,20,000., [Ans. (i) 1 time, (ii) 1.25 times], , (D) Profitability Ratio, , ❐ Gross Profit Ratio, 42. Compute the Gross Profit from the following information :, Sales ` 1,00,000; Gross Profit 20% on Cost., (J.A.C., 2013), [Ans. Gross Profit ` 16,667], 43. Cal cu late the Gross Profit Ra tio from the fol low ing par tic u lars :, Sales ` 5,00,000; Pur chases ` 2,50,000; Sales Re turns ` 20,000; Pur chases Re turns ` 40,000;, Open ing Stock ` 40,000; Clos ing Stock ` 10,000., (J.A.C., 2011), [Ans. 50%], 44. Cal cu late the Gross Profit Ra tio from the fol low ing in for ma tion :, Cash Sales be ing 25% of To tal Sales; Pur chases ` 6,90,000, Credit Sales ` 6,00,000, Ex cess of, Clos ing Stock over Open ing Stock ` 50,000., [Ans. 20%], 45. Cal cu late Gross Profit Ra tio from the fol low ing :, Items, Amount, `, , Opening Inventories, , 390, , 50,000
Page 877 :
Ac count ing Ra tios, Purchases, Purchases Returns, Wages, Revenue from Operations, Closing Inventories, , 1,50,000, 20,000, 10,000, 2,50,000, 40,000, , [Ans. 40%], 46. Cal cu late Gross Profit Ra tio from the fol low ing in for ma tion :, Net Profit ` 2,80,000; Selling and Distribution Expenses ` 25,000; Establishment Expenses, ` 60,000; In ter est Re ceived ` 5,000; Sales ` 40,00,000., [Ans. 9%], 47. Calculate Gross Profit Ratio from the following particulars :, `, Open ing Stock, 60,000, Clos ing Stock, 20,000, Pur chases, 3,00,000, Sales, 5,00,000, Pur chases Re turns, 30,000, [Ans. 38%], (J.A.C., 2016), ❐ Op er at ing Ra tio, 48. Calculate Operating Ratio from the following information :, Cost of goods sold ` 3,00,000; Operating expenses ` 1,20,000; Sales ` 5,20,000 and Sales returns, ` 20,000., (U.S.E.B., 2018), [Ans. Op er at ing Ra tio 84%], 49. Calculate operating ratio from the following data :, `, Sales, Sales Re turns, Cost of Goods Sold, Operating Expenses, [Ans. 83.33%], 50. From the fol low ing par tic u lars, cal cu late Op er at ing Ra tio :, Sales, Open ing Stock, Pur chases, Man u fac tur ing Ex penses, Clos ing Stock, Sell ing Ex penses, De pre ci a tion, [Ans. 62%], ❐ Op er at ing Profit Ra tio, 51. From the following, calculate Operating Profit Ratio :, (i), Rev e nue from Op er a tions, (ii), Gross Profit, (iii) Office Expenses, (iv) Sell ing Ex penses, (v), In ter est on De ben tures, (vi) Ac ci den tal Losses, (vii) In come from Rent, (viii) Com mis sion Re ceived, [Ans. Op er at ing Profit Ra tio 18%.], , 6,40,000, 40,000, 4,60,000, 40,000, `, , 10,00,000, 1,80,000, 3,80,000, 40,000, 50,000, 20,000, 50,000, , `, , 1,00,000, 37,500, 7,500, 13,000, 2,500, 6,000, 1,250, 1,000, , 391
Page 878 :
SBPD Pub li ca tions Accountancy (XII), ❐ Net Profit Ra tio, 52. From the fol low ing data, cal cu late the Net Profit Ra tio : (i) Be fore Tax, and (ii) Af ter Tax :, Gross Sales ` 50,00,000, GST on Gross Sales ` 4,00,000, Income-tax 40%, Profit before Tax, ` 10,00,000., [Ans. (i) 21.74%, (ii) 13.04%], 53. From the fol low ing par tic u lars, cal cu late (a) Gross Profit Ra tio, and (b) Net Profit Ra tio :, Particulars, Sales, Less : Cost of Sales, Less : Op er at ing Ex penses, , 2017, , 2018, , `, , `, , 16,00,000 20,00,000, 11,20,000 12,00,000, Gross Profit 4,80,000 8,00,000, 80,000 1,20,000, Net Profit 4,00,000 6,80,000, , [Ans. (a) Gross Profit Ra tio : 2017—30%, 2018—40%, (b) Net Profit Ra tio : 2017—25%, 2018—34%], ❐ Return on In vest ment or Capital Employed, 54. From the fol low ing par tic u lars, cal cu late Re turn on In vest ment :, Particulars, , 2018, `, , Net Profit be fore Tax, To tal As sets, , 2019, `, , 4,04,000, 7,14,000, 80,80,000 1,02,00,000, , [Ans. ROI : 2018—5%, 2019—7%], 55. From the fol low ing in for ma tion given be low, cal cu late Re turn on In vest ment :, Net Profit for the year ` 80,000; Eq uity Share Cap i tal ` 1,00,000; Fixed As sets ` 2,00,000; 10%, De ben tures ` 40,000, Cur rent As sets ` 1,10,000, Cur rent Li a bil i ties ` 30,000., [Ans. ROI 30%], ❐ Earning per Share and Div i dend per Share, 56. The fol low ing data are avail able in re spect of Sweta Ltd. :, `, Profit be fore Tax (PBT), 4,26,000, Pro vi sion for Tax, 1,70,400, Eq uity Shares of ` 10 each, 5,00,000, Dividend Dis trib uted, 1,25,000, You are re quired to cal cu late (i) Earn ing per Share, and (ii) Div i dend per Share., [Ans. EPS ` 5.11, DPS ` 2.5], ❐ Price Earn ing Ra tio, 57. Cal cu late (i) Earn ings per Share, and (ii) Price Earn ing Ra tio from the fol low ing data : `, 10% Pref er ence Share Cap i tal of ` 10 each, 5,00,000, Profit (af ter Tax at 50%), 2,50,000, Mar ket Price of Eq uity Share, 30, Eq uity Share Cap i tal of ` 10 each, 5,00,000, [Ans. (i) ` 4 per Share, (ii) 7.5 times.], ❐ Comprehensive Questions, 58. From the following, calculate the (i) ‘Gross Profit Ratio’, and (ii) ‘Working Capital Turnover Ratio’ :, `, , Rev e nue from Op er a tions, Cost of Rev e nue from Op er a tions, Cur rent As sets, , 392, , 30,00,000, 20,00,000, 6,00,000
Page 879 :
Ac count ing Ra tios, Cur rent Li a bil i ties, Paid-up Share Cap i tal, , 2,00,000, 5,00,000, , 1, [Ans. (i) G.P. Ra tio 33 %, (ii) W.C.T.R. 7.5 times], 3, 59. On the basis of following information, calculate (i) Gross Profit Ratio, (ii) Working Capital, Turn over Ra tio, and (iii) Debt-Eq uity Ra tio :, `, Net Sales, 30,00,000, Cost of Goods sold, 20,00,000, Cur rent As sets, 6,00,000, Cur rent Li a bil i ties, 2,00,000, Paid-up Share Cap i tal, 5,00,000, Debentures, 2,50,000, Loan, 1,25,000, [Ans. (i) 33 1 %, (ii) 7.5 times, and (iii) 3 : 4 or 0.75 : 1], 3, , 60. Calculate : (i) Debt-Equity Ratio, and (ii) Proprietary Ratio from the following data :, `, Equity Share Capital, 4,00,000, 6% Debentures, 2,00,000, Loan from Bank, 2,00,000, Current Liabilities, 50,000, Fixed Assets, 5,00,000, Current Assets, 3,50,000, [Ans. (i) 1 : 1, (ii) 8 : 17 or 0.47 : 1 or 47%], (J.A.C., 2014), 61. The Bal ance Sheet of Mona Ltd. was as fol lows as on 31st March, 2018 :, Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, Trade Payables, Other Current Liabilities, , Note No., , Amount, `, , 3,00,000, 50,000, 1,50,000, 75,000, 25,000, 6,00,000, , Total, , II. ASSETS, 1. Non-current Assets :, Fixed Assets, 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, , 4,50,000, 50,000, 40,000, 60,000, 6,00,000, , Total, Rev e nue from op er a tion duringyear, Cost of Rev e nue from operation, Cal cu late the fol low ing :, (a) Cur rent Ra tio, (b) Liq uid Ra tio, [Ans. (a) 1.5 : 1, (b) 1 : 1, (c) 6.8 times], , ` 5,00,000, ` 3,40,000, , (c) Inventory Turn over Ra tio, , 393
Page 880 :
SBPD Pub li ca tions Accountancy (XII), ❐ Miscellaneous and Boards’ Questions, 62. A firm’s cur rent ra tio is 2.5 : 1. Its quick ra tio is 1.5 : 1. If cur rent li a bil i ties are ` 90,000, cal cu late, the amount of Cur rent As sets and Stock., (J.A.C., 2011), [Ans. Cur rent As sets ` 2,25,000, Stock ` 90,000], 63. From the following information obtained from the books of Kundan Ltd., calculate the inventory, turnover ratio for the years 2015-16 and 2016-17 :, 2015-16, 2016-17, `, , In ven tory on 31st March, Rev e nue from Op er a tions, Gross profit is 25% on cost of rev e nue from op er a tions, In the year 2015-16, in ven tory in creased by ` 2,00,000., 2, , 7,00,000, 50,00,000, , `, , 17,00,000, 75,00,000, , (C.B.S.E., A.I. , 2018), , [Ans. In ven tory Turn over Ra tio : 2015-16 6 times, 2016-17 5 times], 3, , 64. On the ba sis of the fol low ing in for ma tion, cal cu late :, (i) Debt-Eq uity Ra tio, (ii) Work ing Cap i tal Turn over Ratio, Information :, `, Net Sales, 60,00,000, Cost of Goods Sold, 45,00,000, Other Cur rent As sets, 11,00,000, Cur rent Li a bil i ties, 4,00,000, Paid-up Share Cap i tal, 6,00,000, 6% De ben tures, 3,00,000, 9% Loan, 1,00,000, De ben ture Re demp tion Re serve, 2,00,000, Clos ing Stock, 1,00,000, (C.B.S.E., Delhi, 2011), [Ans. (i) Debt-Eq uity Ra tio 0.5 : 1, (ii) Work ing Cap i tal Turn over Ra tio 7.5 times.], 65. The following information are given regarding a company :, `, Sales, 8,00,000, Operating Expenses, 64,000, Gross Profit, 1,20,000, Open ing Stock, 1,00,000, Clos ing Stock, 1,60,000, Debtors, 80,000, Net Profit, 60,000, Net Fixed As sets, 4,00,000, From the above information, calculate the following ratios assuming all sales as credit sales :, (i) Operating Ratio, (ii) Net Profit Ratio, (iii) Debtors Turnover Ratio, (iv) Fixed Assets Turnover Ratio, [Ans. (i) 93%, (ii) 7.5%, (iii) 10 times, (iv) 2 times], 66. Calculate Operating Ratio from the following informations :, `, Cost of Goods Sold, 3,00,000, Operating Expenses, 1,20,000, Sales, 5,20,000, Sales Re turns, 20,000, [Ans. Op er at ing Ra tio 84%], (U.S.E.B., 2010, 18), , 394
Page 881 :
Ac count ing Ra tios, 67. Calculate Current Ratio and Liquid Ratio from the following informations :, `, Cash in hand, 18,000, Cash at Bank, 9,000, Debtors, 1,08,000, Bills Pay able, 36,000, Creditors, 1,44,000, Bills Re ceiv able, 36,000, Pro vi sion for Tax, 63,000, Stock, 3,15,000, [Ans. (i) Cur rent Ra tio 2 : 1, (ii) Liq uid Ra tio 171 : 243 or 19 : 27], (U.S.E.B., 2010), 68. From the fol low ing data, cal cu late Cur rent Ra tio and Liq uid Ra tio :, Liq uid As sets` 40,000; Stock ` 6,000; Pre paid Ex penses` 2,000; Long-term Debt ` 20,000; To tal, Debt ` 40,000., (U.S.E.B., 2012), [Ans. Cur rent Ra tio 2.4 : 1, Liq uid Ra tio 2 : 1], 69. From the fol low ing in for ma tion, cal cu late (i) Gross Profit Ra tio, (ii) Stock Turn over Ra t io :, Sales ` 5,00,000, Pur chases ` 3,00,000, Open ing Stock ` 20,000, Clos ing Stock ` 40,000, Carriage, In ward ` 30,000, Car riage Out ward ` 15,000., [Ans. (i) 38% (ii) 10.3 times.], 70. Given :, Cur rent Ra tio, 2:1, Acid-test Ra tio, 1:1, Cur rent Li a bil i ties, ` 2,50,000, Then find out :, (i) Cur rent As sets, (ii) Liq uid As sets, (iii) Stock, (J.A.C., 2017), [Ans. (i) ` 5,00,000; (ii) ` 2,50,000; (iii) ` 2,50,000.], 71. Cal cu late fol low ing ra tios from the fol low ing par tic u lars :, (i) Cur rent Ra tio, (ii) Liq uid Ra tio, (iii) Operating Ratio, (iv) Gross Profit Ra tio, `, Cur rent As sets, 35,000, Cur rent Li a bil i ties, 17,500, Stock, 15,000, Operating Expenses, 20,000, Sales, 60,000, Cost of Goods Sold, 30,000, 1, , [Ans. (i) 2 : 1, (ii) 1.14 : 1, (iii) 33 % or 33.33%, (iv) 50%.], 3, , 72. From the following information, calculate :, (i) Current Ratio, (ii) Liquidity Ratio :, Creditors, Bills Pay able, Out stand ing Exp., Cash, Debtors, Cash at Bank, Stock, , (U.S.E.B., 2017), `, , 1,60,000, 40,000, 20,000, 1,00,000, 2,00,000, 50,000, 90,000, , 395
Page 882 :
SBPD Pub li ca tions Accountancy (XII), Pre paid Exp., 30,000, Bills Re ceiv able, 50,000, [Ans. Cur rent Ra tio 2.36 : 1, Liq uid Ra tio 1.8 : 1], 73. Sunil In dus tries has a liquidity ra tio of 2 : 1. If stock is ` 20,000 and current liabilities are, ` 50,000 then cal cu late cur rent ra tio., [Ans. Cur rent Ra tio 2.4 : 1], 74. The following are the inventory data of a company for two years :, 2018, 2019, `, , Opening Stock, Pur chases dur ing the year, Clos ing Stock, Calculate Stock Turnover Ratio for both years., [Ans. Stock Turn over Ra tio (2018) = 4.6 Times, (2019) = 6.17 Times], , 396, , `, , 35,000, 65,000, 2,60,000, 3,40,000, 65,000, 50,000, (U.S.E.B., 2019), , l
Page 883 :
12, Learning Objectives, After Studying this chapter, you would be able to understand :, , P.No., , 12.1 Meaning of Cash Flow Statement (C.F.S.), , 398, , 12.2 Nature of Cash Flow Statement, , 398, , 12.3 Objectives of Cash Flow Statement, , 398, , 12.4 Utility/Importance or Uses of Cash Flow Statement, , 399, , 12.5 Limitations of Cash Flow Statement, , 399, , 12.6 Preparation of Cash Flow Statement (As per AS-3 Revised), New Ind. AS-7, , 400, , ● Cash Flows from Operating Activities ● Cash Flows from Investing, , Activities ● Cash Flow from Financing Activities, 12.7 Method of Preparation of Cash Flow Statement as per AS-3 Revised 445, 12.8 Fast Revision, , 476, , ❑ Useful Questions, , 477, , ❑ Practical Problems, , 482, , 397
Page 884 :
SBPD Pub li ca tions Accountancy (XII), Cash Flow Statement is one of the important tools of cash management because it, throws light on cash inflows and out flows of cash and cash equivalents during a specific, period. This statement exhibits the flow of incoming and outgoing cash. This statement, assesses the ability of the enterprise to generate cash and utilise the cash. And so cash flow, statement is one of the tools for assessing the liquidity and solvency of the enterprise., Cash Flow Statement is one of the important tools for assessing the liquidity and, solvency of the enterprise., , 12.1 Meaning of Cash Flow State ment, A state ment of changes in fi nan cial po si tion on cash ba sis is com monly known as the, Cash Flow State ment. It shows the changes in cash po si tion from one ac count ing pe riod to, an other. In other words, cash flow state ment sum ma rises the causes of changes in cash and, cash equiv a lents po si tion be tween dates of two Bal ance Sheets. It in di cates the sources or, inflow and uses a outflow of cash., Thus, a Cash Flow State ment can be de fined as a state ment which sum ma rises sources, of cash in flows and out flows of cash and cash equivalents of the firm from various business, activities during a given period. Thus, this statement exhibits the flow of incoming and, outgoing cash., According to the Institute of Cost and Management Accountants (I.C.M.A.) India, ‘‘Cash, Flow statement is a statement setting out the flow of cash under different heads of sources, and their utilisation to determine the requirements of cash during the given period to, prepare for its adequate provisions.’’, , 12.2 Nature of Cash Flow State ment, 1. A Cash Flow State ment shows in flow and out flow of cash and cash equiv a lents from, var i ous ac tiv i ties of a busi ness con cern dur ing a spe cific period., 2. It pro vides in for ma tion about cash flows un der three heads, namely, (i) Op er at ing, activities, (ii) In vest ing ac tiv i ties, and (iii) Fi nanc ing ac tiv i ties., Cash Flows : ‘Cash Flows’ or ‘Flow of Cash’ are ‘in flows’ and ‘out flows’ of cash and cash, equivalents. In other words, cash flows im plies move ment of cash in and out of non-cash items., Types of Cash Flows : (1) Inflow of cash or cash inflow, (2) Outflow of cash or cash outflow., In flow of Cash, : Re ceipt of cash from non-cash items is termed as cash in flow., For example, sale of goods for cash, cash receipts from, customers, sale proceeds from sale of machinery, cash, pro ceeds from is sue of eq uity shares, etc. Cash received from, sale of Investment [other them morokotable securities], Out flow of Cash, : Cash pay ment in re spect of non-cash items is termed as cash, outflow. For example, cash paid to suppliers, purchase of, assets by pay ing cash, re pay ment of Bank loan etc., Cash, : Cash in cludes cash in hand and de mand de pos its with Banks., Cash Equiv a lents : Cash equivalents are the highly liquid short-term investments which can be con verted into cer tain known amount of, cash with out any risk of loss in value., For example, (i) Government securities, (ii) treasury bills,, (iii) short-term mar ket able se cu ri ties (i.e., hav ing ma tu rity, of say, three months or less from the date of ac qui si tion) etc., Cash and Cash Equiv a lents : Cash and Cash equivalents include the following items :, (i) Cash in hand, (ii) Cash at Bank, (iii) Current investments, (Marketable), (iv) Treasury Bills, (v) Commercial papers, (vi), Short-term Securities or (Marketable Securities)., , 12.3 Ob jec tives of Cash Flow State ment, The main ob jec tives of pre par ing Cash Flow State ment are as fol lows :, (1) To Throw Light on Spe cific Sources of Cash Flow : Cash Flow State ment is, prepared to highlight cash generated from various activities (i.e., inflow of Cash from, Op er at ing, In vest ing and Fi nanc ing Ac tiv i ties)., , 398
Page 886 :
SBPD Pub li ca tions Accountancy (XII), 2. There are con tro ver sies over a num ber of items like cheques, stamps, postal or ders, etc. to be included in cash or not., 3. It does not show non-cash transactions. So non-cash transactions are ignored., 4. It ig nores ba sic con cept of ac count ing, i.e., ac crual con cept., 5. It shows only the net cash in flows or out flows. Hence, it does not rep re sent net prof its, or losses of the enterprise., , 12.6 Preparation of Cash Flow Statement, [(As per AS-3 Revised) New Ind. AS-7], The cash flow statement is prepared according to Revised Accounting Standard-3 [AS-3, (Revised)] or New Indian Accounting Standard-7 (Ind. AS-7) on Cash Flow Statement which, has been made mandatory w.e.f. 1st April, 2001. With the introduction of Companies Act,, 2013, preparation of Cash Flow Statement is mandatory for every type of companies except, One Person Company (OPC), small company and dormant companies vide Section 2(40)., ❏ Applicability, This standard applies to the following entities :, ● Which have a turnover of more than ` 50 crore in a pre ced ing fi nan cial year., ● Which have Bor row ing more than ` 10 crore at any time dur ing the im me di ately, preceding ac count ing pe riod., ● Banks and Insurance companies., Objectives : The ob jec tives of the Cash Flow State ment as given in AS-3 (Re vised) are, as un der :, ‘’Information about the cash flows of an enterprise is useful in pro viding users of, fi nan cial state ment with a ba sis to as sess the abil ity of the en ter prise to gen er ate cash and, cash equiv a lents and the needs of the en ter prises to uti lize those cash flows. The eco nomic, de ci sions that are taken by us ers re quire an eval u a tion of the abil ity of an en ter prise to, gen er ate cash and cash equiv a lents and the tim ing and certainty of their generation., The state ment deals with the pro vi sion of in for ma tion about the his tor i cal changes in, cash and cash equiv a lent of an en ter prise by means of a cash flow state ment which clas si fies, cash flows during the period into three categories, namely, operating, investing and, financing activities., ❏ Important Definitions as per AS-3 (Revised), AS-3 (Revised) has defined cash and cash equiv a lent as un der :, 1. (a) Cash Fund : Cash Funds are following :, (i) Cash in hand, (ii) De mand De posit with Banks, and (iii) Cash Equiv a lents., (b) Cash : Cash com prises cash in hand and de mand de pos its with bank., 2. Cash Equiv a lents : Cash equiv a lents are short-term, highly liq uid in vest ments that, are readily con vert ible into known amount of cash and which are sub ject to an in sig nif i cant, risk of changes in value., Calculation of Cash and Cash Equivalents, Particulars, Cash in hand, Cash at Bank, Short-term Deposits, Marketable Securities, Cheques & Drafts in hand, Current Investments, , `, , ........., ........., ........., ........., ........., ........., , Note : (i) Vide Circular No. 43 of July 2, 2013 and Circular No. 17 of June 6, 2014 Bank Overdraft and, Cash Credit are to be taken as part of short-term borrowings, i.e., financing activity and not as, part of cash and cash Equivalent., (ii) Current Investment to be taken as Marketable Securities unless otherwise specified., , 3. Cash Flows : Cash flows are in flows and out flows of cash and cash equiv a lents., , 400
Page 887 :
Cash Flow State ment, ❏ Features, Cash Flow Statement explains cash movement under the following heads :, 1. Cash Flow from Operating Activities, 2. Cash Flow from Investing Activities,, 3. Cash Flow from Financing Activities., Sum of cash flow from these three types of activites reflects ‘net increase’ or ‘decrease’ of, cash and cash equivalents., ❏ Clas si fi ca tion of Business Ac tiv i ties or Clas si fi ca tion of Cash Flows, AS-3 (Revised), divides all business activities into three parts :, (1) Op er at ing Ac tiv i ties, (2) In vest ing Ac tiv i ties, and (3) Fi nanc ing Ac tiv i ties., The Accounting Standard lays down the procedure to identify the ‘cash inflows’ and, ‘cash outflows' in each of the above activities., (1) Op er at ing Ac tiv i ties : Op er at ing ac tiv i ties are the prin ci pal rev e nue gen er at ing, activities of the enterprise. The term Operating Activities means business transactions, relating to regular business activities, e.g., purchase and sale of goods and services., (2) Investing Activities : Investing Activities refer to transactions that affect the, purchase and sale of fixed (or non-current) assets (both tangible and intangible) and, investments which are not included in cash equivalent., (3) Fi nanc ing Ac tiv i ties : Fi nanc ing ac tiv i ties are ac tiv i ties that re sult in change in, the size and com po si tion of the owner’s cap i tal (in clud ing pref er ence share cap i tal in the, case of a company) and long-term bor row ing of the enterprise., Activity-wise Examples of Inflows and Outflows of Cash, Cash Inflows, Cash Outflows, From sale of goods and services, to customers, Cash received from Debtors, Receipt from royalties, fees,, commission and other revenues, (i) Sale of fixed property, plant, equipment, (ii) Sale of long-term, investment, (iii) Sale of Shares, of other enterprises, , (i) Cash Purchase of Inventory, (ii) Cash paid to Creditors, 1., Operating, Activities, , (iv) Payment of Operating Expenses, (v) Payment of Taxes and Interest, 2., Investing, Activities, , (iv) Receipts from Interest, and, (v) Dividends, Issue of Shares and, Debentures, Issuance of Bonds, Borrowings and Loans (Longterm), , (iii) Payment of Wages and Salaries, to Employees, , Purchase of property, plant, equipment and Long-term investments,, Payment to acquire shares, (i) Redemption of Debentures/Payment of Long-term Debts/Loan, (ii) Redemp. of Pref. Shares, , 3., Financing, Activities, , (iii) Buy-back of Equity Shares, (iv) Payment of Interest on Debt./, Loans, (v) Payment of Dividend, , Bank overdraft and Cash credit, (Part of short-term borrowing, Fig. 12.1 : Clas si fi ca tion of Cash In flows and Cash Out flows Ac tiv i ties, , 401
Page 888 :
SBPD Pub li ca tions Accountancy (XII), ILLUSTRATIONS AND PRAC TICAL PROB LEMS : AT A GLANCE, Illustration, No., 1(A), 1(B), 2(A), 2(C), 3(A) to 3(E), 4(A) to 11, 12, 13, 14, , Details, Very Short Answer Type Numerical Questions, Classification of Transactions Activity-wise, Direct Method, Preparation of Cash Flow Statement, Dividend Ef fect of Pro vi sion for Tax, Indirect Method, (i) Cal cu la tion of Cash Flow from Op er at ing Ac tiv i ties, , (ii) Cal cu la tion of Cash Flow from Op er at ing Ac tiv i ties from, Profit & Loss Statement, 15, (iii) Cal cu la tion of Cash Flow from Op er at ing Ac tiv i ties on, the ba sis of Bal ance Sheets, 16, (iv) Cal cu la tion of Cash Flow from Op er at ing Ac tiv i ties when, In come State ment, Cur rent As sets and Li a bil i ties are given, 17(A) to 22, Cash Flows from In vest ing Ac tiv i ties, 23 to 26, Cash Flows from Fi nanc ing Ac tiv i ties, 27(A), 28(A), (B) Prep a ra tion of Cash Flow State ment (A) without Adjustments, 29 to 44, — Do —, (B) With Adjustments, Miscellaneous and Boards’ Ques tions, 44, To tal, , Prac ti cal Prob lem, No., 1 to 3, 1, 2, —, 3, 6 to 13 &, 16(A), (B), 14, 15, 4, 5, 17 to 23, 24 to 27, 28 to 33, 34(A) to 44, 45 to 49, 3 + 49, , Illustration 1(A) (Classification of Transaction Activity-wise), Classify the following into (i) Operating Activities, (ii) Investing Activities,, (iii) Financing Activities, and (iv) Cash equivalents, while preparing Cash Flow Statement :, 1. Cash Sales of Goods-in-trade, 2. Cash Sales, 3. Cash received from Debtors, 4. Purchase of Building, 5. Sale of Building, (C.B.S.E., 2010), 6. Dividend paid, 7. Interest paid on Debentures, 8. Income-tax paid, 9. Cash paid to Creditors/Supplier of Goods, 10. Commission received, 11. Cash Payment of Long-term Loans, 12. Interest received on Investments., 13. Office Expenses, 14. Finance Expenses, 15. Purchase of Long-term Investment, 16. Investment in (Marketable) Short-term Securities, 17. Sale of Investments by Finance Company, 18. Redemption of Debentures, 19. Cash Proceeds received from Issuing Shares at Premium, 20. Bank Balance, Solution, (i) Operating Activities : 1, 2, 3, 8, 9, 10, 13, 17, (ii) Investing Activities : 4, 5, 12, 15,, (iii) Financing Activities : 6, 7, 11, 14, 18, 19, (iv) Cash and Cash Equivalents : 16, 20, , 402
Page 889 :
Cash Flow State ment, Illustration 1(B), State which of the following would result in ‘inflow’ or ‘outflow’ of Cash or Cash, Equivalents :, 1. Sale of Fixed Asset book value ` 15,000 at a loss of ` 5,000., 2. Declaration of final dividend, 3. Cash deposited into Bank, 4. Sale of Marketable Securities for Cash, 5. Purchase of Marketable Securities for Cash, 6. Paid ` 20,000 to acquire shares in Infosys Ltd., Solution, Statement showing the effect of transactions on Cash or Cash Equivalents :, , 1., , Effect on Cash or Cash, Equivalents, Inflow, , 2., , No Effect (Non-cash activities), , 3., , No Effect, , 4., , No Effect, , 5., , No Effect, , It is merely a conversion of cash equivalent into, cash., It is merely a conversion of cash into cash equivalent., , 6., , Outflow, , Cash is decreased., , Transaction, , Reason, Cash is increased by ` 10,000., Cash is not affected because final dividend will, be paid in the next year., Cash included Bank deposits also., , 12.6.1 Cash Flows from Operating Ac tiv i ties, Cash flows from operating activities are the cash flows from the principal revenue, producing activities of the enterprise. For a sugar mill the principal revenue pro ducing, ac tiv i ties are to pur chase sug ar cane and other in puts, pay ment of wages and sal a ries, sale of, sugar and by-products., Examples of Cash Flow from Operating Ac tivities : As per AS-3 revised the, ‘in flow’ and ‘out flow’ of cash from op er at ing ac tiv i ties are as fol lows :, Op er at ing Ac tiv i ties, , Cash Inflow, Cash Outflow, In case of Non-Financial Companies, In case of Non-Financial Companies, (i) Cash Sale of Goods and Services, (i) Cash Purchases, (ii) Cash received from Debtors, (ii) Payment to Creditors/, (iii) Cash received from Royalty, Fees,, Sup pliers of In puts and, Commission etc., Services used, (iv) Cash Receipts from Future, (iii) Cash Operating Expenses, Contracts, (iv) Pay ments of Wages & Salaries etc., (v) Refund of In come-tax, (v) Payment of In come-tax, (vi) Other Cash Rev e nue, (vi) Payment on behalf of, Re ceipts, Employees, In case of Financial Companies, In case of Financial Companies, (vii) Cash received for interest and, (vii) Cash paid for Interest, dividend, (viii) Purchase of Securities, (viii) Sale of Securities, , 403
Page 890 :
SBPD Pub li ca tions Accountancy (XII), ❏ Cal cu la tion of Cash Flow from Op er at ing Ac tiv i ties, Al most all the com pa nies pre pare its In come State ment on ac crual ba sis of ac count ing, un der which rev e nues are re corded when earned and ex penses are re corded when in curred., Be cause of this, net profit, as shown by In come State ment will not be equal to cash gen er ated, by op er at ing ac tiv i ties. AS-3 (Re vised) sug gests two meth ods of re port ing cash flows from, operating activities :, (1) Direct Method (Not in Syllabus of C.B.S.E.), (2) In di rect Method., (1) Direct Method of Cal cu la ting Cash Flow from Op er at ing Ac tiv i ties : Under, method, cash re ceipts from op er at ing activities, i.e., cash re ceived from the sale of goods and, rendering services, cash collected from customers and cash received from trading, com mis sion and royalties and cash pay ments for op er at ing ac tiv i ties such as pay ment to, creditors for goods and services, employees for their services etc. are disclosed. The, difference between cash re ceipts and cash pay ments is the net cash flow from operating, activities. A cash flow state ment based on di rect method is a Profit & Loss Statement on cash, ba sis. The format of the direct method is as follows :, Calculation of Cash Flow from Operating Ac tivities, (Direct Method), Particulars, , Amount, `, , Cash Flow from Op er at ing Ac tiv i ties :, (A) Op er at ing Cash Re ceipts :, Cash Sales, Cash re ceived from Cus tom ers/Debtors, Trad ing Com mis sion re ceived, Roy al ties re ceived, Gross Cash Re ceipts from Op er at ing Ac tiv i ties, (B) Less : Op er at ing Cash Pay ments :, Cash Purchases, Cash paid to the Creditors/Suppliers, Cash paid to the Employees, Cash paid for Other Op er at ing Ex penses like Of fice Ex penses,, Man u fac tur ing Ex penses, Sell ing and Dis tri bu tion Expenses, (C) Cash Gen er ated from Op er at ing Ac tiv i ties (A – B), (D) Less : In come-tax paid (Net of Tax Re funds re ceived, i.e., Income-tax, paid less Tax Refunds received), Cash Flow be fore Ex tra-or di nary In come, (E) Add : Ad justed Ex tra-or di nary Items (+/–) Re ceipt/Pay ment, Net Cash Flow from (or Used in) Op er at ing Ac tiv i ties, , Amount, `, , ............., ............., ............., ............., ............., ............., ............., ............., ............., , (...........), ............., (...........), ............., ............., ............., , Un der di rect method we have to con vert ac crual ba sis rev e nue and ex penses to equiv a lent, cash re ceipts and pay ments. As such, in order to find out Cash Flow from Operating Activities,, non-cash items are eliminated from the net profit disclosed by Profit and Loss Statement., Infact items are recorded on accrual basis in Profit and Loss Statement. Hence, certain, adjustments are made to convert them into cash basis. These adjustments generally relate, to :, (1) Credit Sale (Debtors and Bills Receivable), (2) Credit Purchases (Creditors and Bills Payable), (3) Opening and Closing Stocks, , 404
Page 891 :
Cash Flow State ment, (4) Expenses Incurred :, (a) Outstanding Expenses, (b) Prepaid Expenses, (5) Revenue Earned :, (a) Accrued Income, (b) Income Received in Advance., These adjustments are required to calculate :, (i) Cash received from debtors, (ii) Cash paid to creditors, (iii) Cash outflow for, operating expenses, and (iv) Cash received from operating income., 1. Cash Receipts from Cus tom ers/Debt ors for Sales, `, , Credit Sales*, Add : Opening Debtors, Add : Opening Bills Receivable, , ×××, ×××, , Less :, Less :, Less :, Less :, Less :, , ×××, ×××, ×××, ×××, ×××, , `, , ×××, , Closing Debtors, Closing Bills Receivable, Bad Debts, Sales Returns, Discount Allowed, Cash received from Debtors, , ×××, ×××, , ×××, ×××, , * Total Cash Generated from Sales = Cash Sales + Cash received from Debtors, Alternatively,, Cash received from Debtors can also be ascertained as balancing figure by preparing, Total Debtors Account as follows :, Total Debt ors Ac count, , Dr., Particulars, To Balance b/d, To Sales (Credit), To Bills Receivable (Dishonoured), , `, , ×××, ×××, ×××, , ×××, , By, By, By, By, By, By, , Particulars, Bills Receivable* (Bills Drawn), Discount Allowed, Bad Debts, Sales Returns, Cash Received (Bal. fig.), Balance c/d (Closing), , Cr., `, , ×××, ×××, ×××, ×××, ×××, ×××, ×××, , *, Bills drawn can be calculated as a bal anc ing fig ure by pre par ing Bills Re ceiv able Ac count., 2. Cash Payments to Suppliers or Cash Outflow to Creditors for Purchases, Cash paid to Suppliers = Credit Purchases + Opening Creditors + Opening Bills, Payable – Closing Creditors – Closing Bills Payable, – Discount received – Purchase Returns., Note : If Pur chases are given in the ques tion in stead of cost of goods sold, ad just ment will not be made for, stock at the end and stock in the be gin ning., , Alternatively,, Cash paid to Suppliers/Creditors can also be calculated as balancing figure by, preparing Total Creditors Account as ahead :, , 405
Page 892 :
SBPD Pub li ca tions Accountancy (XII), Total Creditors Account, , Dr., Particulars, Bills Payable A/c*, Discount (Received), Purchases Returns, Cash/Bank (Paid), [Outflow (Bal. fig.)], To Balance c/d (Closing), , `, , To, To, To, To, , ×××, ×××, ×××, ×××, ×××, ×××, , Cr., , Particulars, By Balance b/d (Opening), By Credit Purchases, By Bills Payable, (Dishonour or Cancelled), By Bank (Cheque Dishonoured), , `, , ×××, ×××, ×××, ×××, ×××, , *, Bills Payable accepted can be calculated as a balancing figure by preparing the Bills Payable Account, 3. Outflow of Cash on Expenses, The amounts of expenses in the Profit and Loss Statement have to be adjusted to find, out the cash outflows. Following adjustments are made for this purpose :, (i) Expenses outstanding at the end of the year., (ii) Ex penses out stand ing in the be gin ning of the year (or at the end of the pre vi ous year), (iii) Expenses prepaid (or paid in advance) at the end of the year, and, (iv) Expenses prepaid in the beginning of the year (or at the end of the previous year), These adjustments can be made either in the form of ‘Statement' or by preparing an, account for each item., Statement of Cash Outflow on Expense Item, `, , Expenses on Accrued Basis (as per P & L Statement), Add : Outstanding Expenses in the beginning, , ×××, , Add : Prepaid Expenses at the end, , ×××, , Less : Outstanding Expenses at the end, Less : Prepaid Expenses in the beginning, , ×××, , `, , ×××, , ×××, , Cash Out flow on Ac count of Ex penses Item, , ×××, ×××, ×××, ×××, , Calculation of Cash Outflow on Expenses :, Wages and Salaries on accrual basis, Add : Outstanding in the beginning, , `, , Less : Outstanding at the end, Add : Prepaid at the end, Less : Prepaid at the beginning, Outflow of Cash on Expenses, , —, —, —, —, —, —, —, —, —, , 4. Cash Inflows from Revenues/Operating Income, In order to find out operating cash flow from sundry revenues or operating income like,, commission (interest and dividend in case of finance companies), adjustments have to be, made for accrued income and income received in advance., These adjustments can be made either in the form of statement or by preparing account, for each item., , 406
Page 893 :
Cash Flow State ment, Statement of Cash Inflow from Revenue Item (e.g. Com mission), `, , Revenue (Income) earned during the year as per Profit & Loss Statement, Add : (i) Accrued Income in the beginning of the year, (ii) Income received in Advance at the end of the year, Less : (i) Revenue received in Advance in the beginning of the year, (ii) Accrued Revenue at the end of the year, Cash In flow on Ac count of Rev e nue dur ing the year, , `, , ×××, ×××, ×××, ×××, ×××, , ×××, ×××, (×××), ×××, , Please Remember, , Non-cash Ex penses and Ap pro pri a tions of Profit are ig nored while pre par ing Cash Flow Statement un der Di rect Method be cause they do not af fect Cash., , Non-cash Expenses, Such as,, (i), Depreciation on Fixed, (Tangible) Assets, (ii) Writing off Goodwill, (iii) Amortisation (or writing off) of, Fictitious Assets, such as,, ➤ Preliminary Expenses, ➤ Writing off Discount on Issue, of Shares or Debentures, ➤ Share Issue Expenses, , Appropriations of Profits, Such as,, (i) Transfer to General Reserve, (ii) Provision of Taxation, (iii) Proposed Dividend, , ❏ Cal cu la tion of Cash Flow from Op er at ing Ac tiv i ties by Di rect Method, Illustration 2(A) (Cal cu la tion of Cash In flow from Op er at ing Ac tiv i ties—With out, Miss ing In for ma tion), Calculate Cash Flow from Operating Activities of D.K. Ltd. from the following, information by Direct Method :, (J.A.C., 2019), Particulars, Cash Sales, Cash Received from Debtors, Cash Purchases, Cash Paid to Creditors, Salaries Paid, Commission Received, , `, , 2,40,000, 1,80,000, 1,00,000, 1,20,000, 48,000, 40,000, , Particulars, Rent Paid, Office Expenses Paid, Royalties Received, Income-tax Paid, Tax Refund Received, Insurance Claim for Earthquakes, , `, , 20,000, 16,000, 1,00,000, 52,000, 8,000, 1,00,000, , Solution, Cash Flow from Operating Activities (Di rect Method), Particulars, (A) Operating Cash Receipts (Inflows) :, Cash Sales, Cash received from Debtors, Commission received, Royalties received, , `, , 2,40,000, 1,80,000, 40,000, 1,00,000, , `, , 5,60,000, , 407
Page 894 :
SBPD Pub li ca tions Accountancy (XII), (B) Operating Cash Payments (Outflows) :, Cash Purchases, Cash paid to Creditors, Salaries paid, Rent paid, Office Expenses paid, (C) Cash Generated from Operating Activities before Tax (A – B), (D) Less : Income-tax paid, Add : Tax Refund Received, (E) Cash Generated from Operating Activities before Extra-ordinary Items, Add : Extra-ordinary Item : Insurance Claim for Earthquake Loss, (F) Net Cash Generated from Operating Activities, , 1,00,000, 1,20,000, 48,000, 20,000, 16,000 (3,04,000), 2,56,000, (52,000), 8,000, (44,000), 2,12,000, 1,00,000, 3,12,000, , Illustration 2(B) (Cash Flow from Operating Activities with Missing Amounts), From the following information, calculate Cash Flow from Operating Activities using, direct method :, Statement of Profit and Loss, (for the year ended on March, 2020), Particulars, , `, , I. Revenue from Operations (Sales), , 2,20,000, , II. Expenses :, (a) Cost of Materials Consumed, (b) Employee Benefit Expenses, (c) Depreciation, (d) Other Expenses (Insurance Premium), Total Expenses, III. Profit before Tax (I – II), IV. Less : Income-tax, V. Profit after Tax (III – IV), , 1,20,000, 30,000, 20,000, 8,000, 1,78,000, 42,000, (10,000), 32,000, , Additional Information :, April 01, 2019, , March 31, 2020, , `, , `, , Debt ors, 25,000, Bills Re ceiv ables, 8,000, Creditors, 17,000, Stock, 22,000, Salaries Outstanding, 2,000, Prepaid Insurance, 5,000, Income-tax Outstanding, 3,000, Solution, Cash Flow from Operating Activities, Particulars, (A) Operating Cash Receipts (See Note 1), (B) Operating Cash Payments :, Cash paid to Suppliers (See Note 2 and 3), , 408, , 30,000, 6,000, 15,000, 27,000, 3,000, 5,500, 2,000, `, , `, , 2,17,000, (1,27,000)
Page 895 :
Cash Flow State ment, Cash paid to Employees (See Note 4), Cash paid for Insurance Premium (See Note 5), (C) Cash Generated before Tax from Operating (A – B), (D) Income-tax Paid (See Note 6), (E) Net Cash Flow from Operating Activities, , (29,000), (8,500) (1,64,500), 52,500, (11,000), 41,500, , Work ing Notes :, 1. Cash Re ceipts from Cus tom ers is cal cu lated as un der :, Cash Re ceipts from Cus tom ers = Sales + Debt ors and Bills Re ceiv ables in the be gin ning – Debtors and, Bills Re ceiv ables in the end, = ` 2,20,000 + 25,000 + 8,000 – 30,000 – 6,000 = ` 2,17,000, 2. Pur chases = Cost of Goods Sold – Open ing Stock + Clos ing Stock, = ` 1,20,000 – 22,000 + 27,000 = ` 1,25,000, 3., Cash Pay ments to Sup pli ers = Pur chases + Cred i tors and Bills Payables in the be gin ning, – Creditors and Bills Pay able in the end, = ` 1,25,000 + 17,000 – 15,000 = ` 1,27,000, 4., Cash Ex penses = Ex penses on Ac crual ba sis – Pre paid Ex penses in the beginning, and Out stand ing Ex penses in the end + Pre paid Ex penses at the, end and Out stand ing Ex penses in the be gin ning, Cash Paid to Em ploy ees = ` 30,000 + 2,000 – 3,000 = ` 29,000, 5. Cash Paid for In sur ance Pre mium = ` 8,000 – 5,000 + 5,500 = ` 8,500, 6., In come-tax Paid = ` 10,000 + 3,000 – 2,000 = ` 11,000, Note : It is im por tant to note here that there are no ex tra-or di nary items., , Illustration 2(C), Calculate Cash Flow from Operating Activities by Direct Method from the following, information for the year ended 31st March, 2020 :, `, Cash Sales, 1,00,000, Receipts from Debtors, 3,00,000, Commission Received, 50,000, Payment to Suppliers, 80,000, Cash Purchases, 20,000, Cash Payment for :, `, Salaries, 8,000, Rent, 15,000, 23,000, Proceeds from Flood Relief Settlement, 15,000, Taxable Income (Assumed), 80,000, Rate of Income-tax 30% (Assumed), Solution, Cash Flow from Operating Activities (Di rect Method), (for the year ended 31st March, 2020), Particulars, Gross Cash Receipt :, Cash Sales, Receipt from Debtors, Commission Received, Less : Gross Cash Operating Payment :, Payment to Suppliers, Cash Purchases, Payment for Salaries, Payment for Rent, Cash Gen er ated from Op er at ing Ac tiv i ties, , `, , 1,00,000, 3,00,000, 50,000, , `, , 4,50,000, , (80,000), (20,000), (8,000), (15,000) (1,23,000), 3,27,000, , 409
Page 896 :
SBPD Pub li ca tions Accountancy (XII), Less : Income-tax Paid, Cash Flow before Extra-ordinary Item, Add : Proceeds from Flood Relief Settlement, Net Cash from Op er at ing Ac tiv i ties, , 24,000, 3,03,000, 15,000, 3,18,000, , (2) Indirect Method of Calculating Cash Flow from Operating Ac tivities :, Un der this method, net profit or loss is ad justed for the ef fects of trans ac tions of non-cash, na ture and non-oper at ing nature and changes in cur rent assets and li a bil i ties. Under, this method start with profit be fore tax a tion and then make ad just ments., Calculation of Cash Flow from Operating Activities consists of two stages haveing five, steps :, Stage 1 : Cal cu la tion of Op er at ing Profit be fore Work ing Cap i tal Changes (Step 1, and Step 2), Stage 2 : Cal cu la tion of Cash Gen er ated from (or Used in) Op er at ing Ac tiv i ties (Step 3, 4 & 5), Steps In volved in the Prep a ra tion of Cash Flow from Op er at ing Ac tiv i ties, (In di rect Method), Step 1 : De ter mine Net Profit be fore Tax and Ex tra-or di nary Items. (This has, been explained in detail lateron)., Step 2 : Ad just Net Profit be fore Tax and Ex tra-or di nary Items for Non-cash, and Non-operating Items. In this stage for calculating operating profit, be fore work ing cap i tal changes, make ad just ments for the fol low ing items by, adding them to Net Profit before Tax, because they have already been, debited, such as,, (i) Depreciation, (ii) Goodwill Written off, (ii) Amortised Fictitious Assets,, (iii) Loss on Sale of Fixed Assets and Investments, (iv) Interest on Long-term, Borrowings (Debentures etc.), etc., Then deduct the following non-cash and non-operating items (already, credited to Statement of Profit and Loss)., (i) Profit on Sale of Fixed Assets and (Long-term) Investment, (ii) Interest, Received, (iii) Dividend Received, (iv) Rental Income., Thus, after making adjustments for above items we get ‘‘Operating Profit, before Working Capital Changes’’., Step 3 : In this stage adjustment are made for changes in the Current Assets and, Current Liabilities related to Operating Activities :, Add : (i) Decrease in Current Assets (excluding Cash and Cash Equiv a lents), and (ii) Increase in Current Liabilities, and, Deduct : (i) In crease in Cur rent Assets (excluding Cash and Cash Equivalents), and (ii) Decrease in Current Liabilities., The amount after above adjustments is Cash Generated from (or Used in), Operating Activities., Step 4 : De duct In come-tax paid (net of re fund of In come-tax) from Cash Gen er ated, from (or Used in) Operating Ac tivities., The amount so obtained is called Cash Flow from (or Used in) Operating, Activities before Extra-ordinary Items., Step 5 : Add or Deduct Extra-ordinary Items, if any., The amount after above adjustment is Net Cash Flow (Generated from or, Used in) Operating Activities., , 410
Page 897 :
Cash Flow State ment, Format of Cash Flow from Operating Activities, Particulars, Stage I, Net Profit before tax and extra-ordinary items, Adjustments for, (Non-cash and Non-op er at ing Items which have al ready been deb ited to, Statement of Profit & Loss), Add : De pre ci a tion, Provision for Doubtful Debts, Good will Writ ten off, Am or ti sa tion of In tan gi ble As sets (Pre lim i nary Ex penses, Dis count on, Issue of Shares and De ben tures Writ ten off, Underwriting Commission, Written off, Expenses on Issue of Shares), Loss on Sale of Long-term or Fixed As sets/Non-current Assets, Loss on Sale of Long-term Investments, In ter est on Borrowings & De ben tures, Less : Non-op er at ing Items which have al ready been cred ited, to Statement of Profit and Loss, i.e.,, Div i dend received, In ter est Income, Profit on Sale of Fixed As sets (Ma chin ery, Build ing etc.), Profit on Sale of Long-term Investments, Pro vi sion for Bad Debts written off, Provision for Discount on Debtors, Op er at ing Profit be fore Work ing Cap i tal Changes, Stage II, Af ter get ting op er at ing profit be fore work ing cap i tal changes as per, Stage I, ad just in crease or de crease in the cur rent as sets and cur rent, liabilities., Add : In crease in Items of Cur rent Li a bil i ties, De crease in Items of Cur rent As sets, Less : In crease in Items of Cur rent As sets, De crease in Items of Cur rent Li a bil i ties, Cash Gen er ated from (or Used in) Op er at ing Ac tiv i ties, Less : In come-tax paid (Net of Tax Re fund re ceived), Extra-ordinary item (+/–), Net Cash Flow from (or Used in) Op er at ing Ac tiv i ties, , Amount, `, , Amount, `, , ×××, , ×××, ×××, ×××, ×, ×, ×, ×, , ×, ×, ×, ×, , ×, ×, ×, ×, , ×××, ×××, , ×××, ×××, ×, ×, ×, ×, , ×, ×, ×, ×, , ×, ×, ×, ×, , ×, ×, ×, ×, , ×, ×, ×, ×, , ×, ×, ×, ×, , (× × ×), ×××, , ×××, ×××, ×××, ×××, ×××, ×××, , Im por tant Note, 1. In di rect method helps in ex plain ing the rea sons for the dif fer ence be tween net, income and net cash inflow from operating activities. Hence, most of the, com pa nies use the in di rect method. Stu dents are ad vised to use In di rect Method,, al though di rect method gives the same re sult as the in di rect method., 2. While calculating cash flows from operating activities under indirect method, var i ous ad just ments in the net profit are made un der two head ings; namely :, First Head ing : Ad just ments for Non-cash and non-op er at ing items., Sec ond Head ing : Ad just ments in re spect of changes in cur rent as sets and cur rent, liabilities., , 411
Page 898 :
SBPD Pub li ca tions Accountancy (XII), ❏ Treatment of Some Items in Cash Flow Statement, 1. Net Profit before Tax and Extraordinary Items, According to Accounting Standard-3 (AS-3) (Revised), the calculation of cash flow from, operating activities under indirect method has to start with Net Profit before Tax (PBT)., Profit before tax will always be profit before appropriation for general reserves, dividends, and provision for taxes etc., Net Profit before Tax and Extraordinary Items is calculated by two methods :, (i) If Profit is given as per the Statement of Profit and Loss, (ii) If Surplus, i.e., Balance in Statement of Profit and Loss is given., (i) If Profit is given as per the statement of Profit and Loss :, Statement of Profit and Loss is a statement that shows profit earned or loss incurred by, the company during the year. It is prepared as per Part II of Schedule III of the Companies, Act, 2013 and, therefore, it will not have items of appropriation such as transfer to reserves,, payment of dividend, etc. Since, these are not debited to Statement of Profit and Loss, they, will not be adjusted in Net Profit as per Statement of Profit and Loss. Net Profit before Tax, and Extraordinary Items in this case, is calculated as follows :, Net Profit before Tax and Extraordinary Items, Profit after Tax as per Statement of Profit and Loss, Add : Provision for Income Tax made during the year, Extraordinary Items debited as Expenses to Statement of Profit and Loss, , `, , `, , ..., ..., ..., , ..., ..., , Less : Refund of Income Tax credited as income to Statement of Profit and Loss ..., Extraordinary Items credited as income to Statement of Profit and Loss, ..., Net Profit before Tax and Extraordinary Items, , ..., ..., , (ii) If Surplus, i.e., Balance in Statement of Profit and Loss is given :, Surplus, i.e., Balance in Statement of Profit and Loss is part of Reserves and Surplus, and is accumulated profit from which appropriations towards reserves and dividend are, made. Transfer to Reserves and payment of dividend is an appropriation of profit., Therefore, these are shown as deduction from Surplus, i.e., Balance in Statement of Profit, and Loss. Net Profit before Tax and Extraordinary Items, in this case, is calculate as follows :, Net Profit before Tax and Extraordinary Items, Difference between Closing Balance and Opening Balance of Surplus, i.e.,, Balance in Statement of Profit and Loss (under Reserves and Surplus), Add : (i) Dividend (Final or Proposed) paid during the year, (ii) Interim Dividend paid during the year, (iii) Transfer to Reserves (Say DRR, General Reserve), (iv) Provision for Tax made during the year, (v) Provision for Expenses, (vi) Deferred Tax Liabilities (Net), (vii) Extraordinary Items debited as expenses to Statement of Profit, & Loss, Less : (i) Deferred Tax Assets (Net), (ii) Refund of Income Tax credited to Statement of Profit & Loss, (iii) Extra-ordinary Items credited to Statement of P & L, Net Profit be fore Tax and Ex traor di nary Items, , 412, , `, , `, , ...., ...., ...., ...., ...., ...., ...., ...., ...., ...., ...., ...., , ...., ×××
Page 899 :
Cash Flow State ment, If no appropriations have been made, only tax provision will be added back to profit, after tax to arrive at profit before tax., Calculation of Net Profit before Tax and Extra-ordinary Items :, Net Profit as per Cur rent Bal ance Sheet, Or (Difference between Closing and Opening Balance of Profit), Add : (i) Transfer to Reserves, General Reserve etc., (ii) Provision for Dividend or Interim Dividend paid during the year, (iii) Proposed Dividend (Current year), (iv) Provision for Tax during the year (Current year), (v) Provision for Expenses, (vi) Deferred Tax Liabilities (Net), (vii) Extra-ordinary expenses debited to Statement of Profit & Loss, (Like Compensation fund paid to employees etc.), , `, , ×××, ×××, ×××, ×××, ×××, ×××, ×××, , `, , Less : (i) Deferred Tax Assets (Net), (ii) Refund of Tax credited to Statement of Profit & Loss, (iii) Extra-ordinary incomes credited to Statement of P & L, (Like Insurance Claim for Goods cost by fire), Profit be fore Tax and Ex tra-or di nary Items, , ×××, ×××, , ×××, ×××, ×××, , (×××), ×××, , Transfer to Reserve and Fund : If reserve has been created out of profit, it should be, added back to net profit to calculate profit before taxes and extra-ordinary items. For, example, (i) Transfer to General Reserve, (ii) Transfer to Sinking Fund, (iii) Transfer to, Debenture Redemption Reserve, (iv) Transfer to Dividend Equalisation Fund., If neither provision for tax nor any appropriation is given then start from net, profit during the year under indirect method. Net profit then should be treated as, Profit before Tax., 2. Dividend, 2(A). Accounting for Proposed Dividend, Proposed Dividend is paid after declared by shareholders in the Annual General, meeting of the company. As Annual General meeting is held after the end of financial year, i.e. it is held in next financial year., As per Revised Accounting Standard-4, Proposed Dividend is not shown as Short-term Provision in the Balance Sheet but is, disclosed in the Notes to Accounts as contingent liability. After it is approved by the, shareholders in their meeting which is held after closure of accounting year, i.e., in the next, year, it is accounted as a liability and is paid., The effect of amendment in Accounting Standard-4 on Cash Flow Statement is as, follows :, (i) Proposed Dividend for previous year is shown as outflow of cash assuming that the, shareholders have approved the proposed dividend as was recommended., (ii) No effect is given to Proposed Dividend for the current year as it is not provided., Illustration 3(A) (Proposed Dividend), Following is the extract from the Balance Sheets of XYZ Ltd. :, Equity and Liabilities, Surplus, i.e., Balance in Statement of Profit and Loss, Dividend Payable, , 31.3.2018 31.3.2017, `, , `, , 9,00,000, 40,000, , 6,00,000, —, , 413
Page 900 :
SBPD Pub li ca tions Accountancy (XII), Dividend Proposed for the year ended 31st March, 2017 was ` 4,00,000 and for the, current year ` 4,50,000., Prepare the Note to show Net Profit before Tax and Extraordinary Items., Solution, Calculation of Net Profit before Tax and Extraordinary Items :, `, Surplus, i.e., Balance in Statement of Profit and Loss (Closing), 9,00,000, Less : surplus, i.e., Balance in Statement of Profit and Loss (Opening), 6,00,000, 3,00,000, Add : Dividend Paid during the year, 4,00,000, Net Profit before Tax and Extraordinary Items, 7,00,000, Illustration 3(B) (Proposed Dividend), Following are the information from Balance Sheet of ABC Ltd. :, Liabilities, , 31.3.2017, `, , 2,00,000, —, , Statement of Profit and Loss, Dividend Payable, , 31.3.2018, `, , 4,00,000, 40,000, , Proposed Dividend for the year ended 31st March, 2017 and 2018 were ` 1,00,000 and, , ` 1,50,000 respectively., , Show how these items will appear in Cash Flow Statement ?, Solution, (A) Cash Flow from Operating Activities :, Closing Balance of Profit as per Statement of Profit and Loss, Less : Opening Balance as per Statement of Profit and Loss, Add : Proposed paid (2017), Net Cash from Operating Activities, (B) Cash Flow from Financing Activities :, Final Dividend Paid (` 1,00,000 − 40,000), Net Cash Used in Financing Activities, , `, , 4,00,000, 2,00,000, 2,00,000, 1,00,000, 3,00,000, (60,000), (60,000), , Working Note :, Dividend Payable Account, , Particulars, To Bank A/c, To Bal ance c/d, , Particulars, `, 60,000 By Pro posed Div i dend A/c, 40,000, 1,00,000, , `, 1,00,000, 1,00,000, , 2(B). Payment of Dividend, If dividend paid is given in adjustments,, (i) It will be added back to profits, and, (ii) It will be shown as payment of cash under the heading Cash Flow from Financing, Activities, 2(C). Payment of Interim Dividend, The fol low ing pro ce dure is fol lowed :, (i) The amount of in terim div i dend paid dur ing the year is shown as out flow of cash i.e.,, Cash used under Financing Activities., (ii) It is added back to the current year’s prof its for the pur pose of cal cu lat ing Cash Flow, from Op er at ing Ac tiv i ties., , 414
Page 901 :
Cash Flow State ment, (iii) No ad just ment is re quired if the cash flow from op er at ing ac tiv i ties is cal cu lated on, the ba sis of re vised fig ure of net profit., Effects on Cash Flow Statement : (1) Dividend paid will be deducted for, as cer tain ing ‘Cash Flow from Fi nanc ing Ac tiv i ties’., (2) Balancing figure of Proposed Dividend Ac count will be added to net profit as, ad di tional pro posed div i dend since it is a non-op er at ing expense., Illustration 3(C), Following is the extract from the Balance Sheets of Mohan Ltd. :, Liabilities, , 31.3.2018 31.3.2017, `, , Equity Share Capital, 8% Redeemable Preference Share Capital, Surplus, i.e., Balance in Statement of Profit and Loss, Dividend Payable, , 5,00,000, 5,00,000, 4,50,000, 20,000, , `, , 5,00,000, 5,00,000, 2,50,000, —, , Additional Informations :, (a) Proposed equity dividends for the years ended 31st March, 2017 and 2018 were, ` 1,50,000 and ` 1,00,000 respectively., (b) An Interim Dividend of ` 50,000 on Equity Shares was paid on 31st October, 2017., Show Net Profit before Tax and Extraordinary Items., Solution, Net Profit before Tax and Extraordinary Items :, `, Surplus, i.e., Balance in Statement of Profit and Loss (Closing Balance) 4,50,000, Less : Surplus, i.e., Balance in Statement of Profit and Loss, (Opening Balance), 2,50,000, 2,00,000, Add : Dividend paid (Proposed Equity Dividend for the year, `, ended on 31st March, 2017) during the year, 1,50,000, Dividend on Preference Shares for the year ended, 31st March, 2017, 40,000, Interim Dividend paid during the year, 50,000, 2,40,000, Net Profit before Tax and Extraordinary Items, 4,40,000, Illustration 3(D), From the following information, calculate the Net Profit before Tax and Extra-ordinary, Items :, Particulars, , 2017, , 2018, , `, , Statement of Profit and Loss Balance, General Reserve, , 3,00,000, 60,000, , `, , 4,50,000, 80,000, , Proposed dividend for the year 2017 and 2018 were ` 80,000 and ` 1,00,000 respectively., Interim Dividend paid during the year was ` 20,000., Solution, Calculation of Net Profit before Tax and Extra-ordinary Items, Particulars, Net Profit for the year (` 4,50,000 – 3,00,000), Add :, Transfer to General Reserve (` 80,000 – 60,000), , `, , 1,50,000, 20,000, , 415
Page 902 :
SBPD Pub li ca tions Accountancy (XII), Proposed Dividend (March, 2017), Interim Dividend paid during the year, Net Profit before Tax and Extra-ordinary Items, , 80,000, 20,000, 2,70,000, , 2(D). Dividend Received, (1) For Financial Enterprises : Show in Operating Activities., (2) For other Enterprises : Show in Investing Activities., 3. Provision for Taxation, It is a non-operating ex pense or an item of ap pro pri a tion in the In come State ment., (i) Previous Year’s Provision : The amount of provision for taxation given in the, pre vi ous year’s Bal ance Sheet will be as sumed to be paid dur ing the cur rent year and hence,, it will be deducted while cal cu lat ing ‘Net Cash Flows from Op er at ing Activities’., (ii) Current Year’s Provision: The pro vi sion for tax a tion given in the cur rent year’s, Bal ance Sheet will be added back to the profit to find out net profit be fore tax as a start ing, fig ure for cal cu lat ing ‘Cash Flows from Op er at ing Activities’., (iii) If provision for taxation is given both in the Balance Sheet as well as in the, adjustment as ad di tional in for ma tion, it will be better to prepare Pro vi sion for Tax a tion, Ac count to find out hid den in for ma tion, that is, tax pro vi sion or amount of tax paid., Notes :, 1. Unless oth er wise stated, it is pre sumed the pro vi sion for tax ap pear ing in the pre vi ous year’s Bal ance, Sheet has been paid sub se quently dur ing the cur rent year., 2. From the ‘Pro vi sion for Tax Ac count’ we can as cer tain the fig ure of ‘Pro vi sion for Tax made’ or ‘Tax, paid’., , Provision for Tax Account, , Dr., Particulars, , Amount, , Cr., , Particulars, , Amount, , `, , ......, ......, , To Bank A/c (Tax Paid), To Balance c/d (Current Year), , `, , By Balance b/d, By Statement of Profit and Loss, (Provision made during the year), , ......, , ......, ......, ......, , Illustration 3(E), Following is the abstract of Balance Sheet of XYZ Ltd. :, Particulars, , 31.3.2017 31.3.2018, `, , Balance of Statement of Profit and Loss, Provision for Taxation, , 1,00,000, 40,000, , `, , 2,00,000, 50,000, , How these items will be shown in the Cash Flow Statement in the following cases :, (i) If no other information is given., (ii) If tax paid during the year is ` 10,000., (iii) If provision for taxation created during the year is ` 40,000., Solution, Cash Flow Statement, (i) Cash Flow from Operating Activities :, `, Profit during the year (` 2,00,000 – 1,00,000), 1,00,000, Add : Provision for Taxation (Current year), 50,000, 1,50,000, , 416
Page 903 :
Cash Flow State ment, Less : Provision for Taxation (Previous year), Net Cash from Operating Activities, (ii) Profit during the year (` 2,00,000 – 1,00,000), Add : Provision for Tax (Working Note 1), Less : Tax paid (Outflow), Net Cash Flow from Operating Activities, (iii) Cash Flow from Operating Activities :, Profit during the year (` 2,00,000 – 1,00,000), Add : Provision of Tax (Current year), Less : Tax paid (Working Note 2), Net Cash Flow from Operating Activities, , 40,000, 1,10,000, 1,00,000, 20,000, 1,20,000, (10,000), 1,10,000, 1,00,000, 50,000, 1,50,000, 30,000, 1,20,000, , Working Notes :, 1. Provision for Tax Account, , Dr., Particulars, To Bank A/c, To Balance c/d, , Amount, Particulars, `, 10,000 By Balance b/d, 50,000 By Statement of Profit & Loss, (Provision for Tax) (Bal. fig. ), 60,000, 2. Pro vi sion for Tax Ac count, , Dr., Particulars, To Bank (Bal. fig.), To Balance c/d, , Amount, Particulars, `, 30,000 By Balance b/d, 50,000 By Statement of Profit & Loss (given), 80,000, , Cr., Amount, `, 40,000, 20,000, 60,000, Cr., Amount, `, 40,000, 40,000, 80,000, , 4. Transfer to Reserve, If reserve has been created out of profit, it should be added back to net profit to calculate, profit from operations or operating activities. For examples : (i) Transfer to G/R, (ii) Transfer, to Sinking Fund, (iii) Transfer to Debenture Redemption Reserve., I. Treatment of Adjustments for Non-cash Items, (A) Items to be added back to Net Profit :, (i) Depreciation : It is added back to the net profit to find out profit from operation., (ii) Loss on Sale of Fixed Assets : This loss is added back to net profit to obtain, profit from operation., (iii) Amortisation of Fictitious Assets or Intangible Assets : It is added back to, net profit in order to find out operating profit. Examples of such assets are : (i) Goodwill, written off, (ii) Preliminary Exp. Written off, (iii) Trade Mark and Patents, written of (iv), Discount on Issue of Shares and Debentures, (v) Share Issue Expenses etc., (iv) Creation of Provision : If any provision has been made out of profit then such, provision or provisions should be added back to net profit. For examples : (i) Provision for, Bad and Doubtful Debts, (ii) Provision for Discount on Debtors., , 417
Page 904 :
SBPD Pub li ca tions Accountancy (XII), (B) Items to be de ducted from Net Profit :, (i), , Profit on sale of assets,, , (ii) Retransfer of excess provisions,, (iii) Refund of tax,, (iv) Non-trading Income like (i) Interest received, and (ii) Dividend received., After adjustments for non-cash items, operating profit before working capital changes, is obtained., II. Adjustments in respects of Change in Current Assets and Current Liabilities, (i) If there is a decrease in current assets like B/R, Debtors, Trade Receivables,, Stock, Prepaid Exp. etc. The amount of decrease will be added in operating profit., (ii) If there is an increase in current liabilities such as B/P, Creditors, Trade, Payables, O/S Expenses, Income received in advance, such increase should be added in, operating profit., (iii) If there is increase in the amount of current assets such as B/R, Debtors, Stock,, Prepaid exp. etc. such increase should be deducted from operating profit., (iv) If the current liabilities decrease, the amount of decrease should be deducted, from operating profit., Treatment of Some Special Items, AS-3 (Revised) pro vides for the treat ment of cer tain spe cial items as under :, (1) Non-cash Items/Non-cash Transactions : As per AS-3, investing and financing, transaction that do not require the use of cash or cash equivalents should not be shown in, cash flow statement. Examples of such transactions are—acquisition of machinery by issue, of equity shares or redemption of debentures by issue of equity shares or any other mode of, conversion. Such transactions should be disclosed elsewhere in the financial statements in a, way that provide all the relevant information about these investing and financing activities., Hence, stocks acquired by issue of shares are not disclosed in cash flow investment., (2) Extra-ordinary Items : Extra-ordinary items are not the regular phenomenon,, e.g., loss due to theft or earthquake or flood, bad debts recovered, winning of a law suit,, insurance claim for earthquake loss, compensation paid to employees under voluntary, retirement scheme, payment made for buy-back of shares etc. Extra-ordinary items should, be classified and disclosed separately as arising from operating, investing or financing, activities. This is done to enable users to understand their nature and effect on the present, and future cash flows of an enterprise., (3) In ter est and Div i dends : In case of fi nan cial en ter prises, cash flows from in ter est, and div i dends re ceived will be in cluded in cash flows from operating activities. In case of, non-fi nan cial en ter prises, cash flows from in ter est and div i dends paid will be in cluded in, cash flows from fi nanc ing ac tiv i ties, while in ter est and div i dend re ceived will be in cluded in, cash flows from in vest ing ac tiv i ties., Thus the treat ment of interest and dividend re ceived and paid de pends on the na ture of, busi ness en ter prise. So it has to be seen that whether the busi ness en ter prise is of fi nan c ial, na ture or non-fi nan cial na ture. The treat ment of in ter est and div i dend, in the con text of, Cash Flow State ment, can be shown through the following chart :, , 418
Page 905 :
Cash Flow State ment, Business Enterprise, , Financial Institutions,, e.g., Bank, , Non-financial Institutions, i.e., Other Enterprises, , Cash Flow, Arising from, , Interest paid, and Interest, Received, , Op er at ing, Ac tiv i ties, , Cash Flows, Arising from, , Div i dend, Received, , Div i dend, Paid, , Financial, Activities, , Interest, Paid, , Financial, Activities, , Interest, Received/, Div i dend, Received, , Investing, Ac tivities, , Div i dend, Paid, , Financial, Ac tiv ities, , Point to Remember, Div i dend paid is al ways clas si fied as a fi nanc ing ac tiv ity. It is cash out flow on ac count, of financing activity irrespective of whether the company is a financial company or a, non-fi nan cial company., (4) Taxes on In come and Gains : Taxes may be income-tax (tax on normal profit),, capital gains tax (tax on capital profits), dividend tax (tax on the amount distributed as, dividend to shareholders). AS-3 requires that cash flows arising from taxes on income, should be separately disclosed. It should be classified as cash flows from operating activities, unless they can be specifically identified with financing and investing activities. This clearly, implies that :, ● Tax on op er at ing profit should be clas si fied as operating cash flows., ● Div i dend tax should be classfied as fi nanc ing ac tiv ity along with div i dend paid., ● Cap i tal gains paid on sale of fixed as sets should be classified un derin vest ing ac tiv ities., In come-tax : Cash flows from taxes in in come gen er ation or dis trib ution, should be, sep a rately dis closed as cash flows from op er at ing ac tiv i ties un less they can be especially, identified with financing and investing activities. For example, corporate di vid end tax, should be re corded as part of fi nanc ing ac tiv i ties and cap i tal gain tax on sale of prop erty, should be re garded as in vest ing activities., (5) Cash Flow from For eign Cur rency Transactions : For eign cur rency cash flows, should be re corded into re ported cur rency of the com pany on the ba sis of ex change rates on, the date of cash flow. Any loss or gain on ac count of for eign cur rency is not a cash flow but it, , 419
Page 906 :
SBPD Pub li ca tions Accountancy (XII), is re ported in Cash Flow State ment to rec on cile cash bal ances at the be gin ning and at the, end of the period., (6) Share Cap i tal : (i) The in crease in share cap i tal is re garded as in flow of cash only, when there is an increase in share capital. It should be treated as inflow of cash from, fi nanc ing ac tiv i ties in case of a company., (ii) But where the share cap i tal is is sued to fi nance the pur chase of fixed as sets or the, debentures are con verted into eq uity shares, there is no cash in flow., (iii) Fur ther, the is sue of bo nus shares does not cause any cash inflow., (iv) Difference between the closing capital and opening capital is treated as profit, earned during the year. In case of sole trader., (7) Profit or Loss on Sale of Fixed As sets : The amount of profit on sale of fixed as set, will be debited to Asset Account and loss on sale of fixed asset will be cred ited to As set, Ac count. Profit from sale of fixed assets and Investments are deducted from profit and loss, while calculating operating profit before working capital changes., (8) Investments : Investments can be of two types, viz., (i) Short-term Investments or, Current Investments, (ii) Long-term Investments., ● If in vest ments have been made in short-term se cu ri ties then such in vest ments are, called mar ket able se cu ri ties and they are con sid ered as cash equiv a lents. So, current investments (marketable) are part of cash and cash equivalents. Current, Invest ments should be ig nored while com put ing Cash Flow from Op er at ing Ac tiv i ties., ● If investments are made in the long-term se cu ri ties, it is called long-term in vest ments., Investment Account is opened to find out the amount of sale or purchase of, long-term investments during the year. The amount spent on purchase of, long-term in vest ments and amount re ceived from sale of long-term in vest ments, are shown un der the head cash flow from in vest ing ac tiv i ties., (9) Redemption of Preference Shares :, ● Pref er ence shares can be re deemed ac cord ing to the terms and con di tions of is sue of, Pref er ence Shares. They can be re deemed at par, at pre mium or at dis count., ● If pref er ence shares are re deemed at pre mium then the amount of pre mium will be, added to profit., ● Pre mium on re demp tion of pref er ence shares is shown as out flow of cash from, fi nanc ing ac tiv i ties by add ing it to the face value of the pref er ence shares., ● Sim i larly, if pref er ence shares are re deemed at dis count, the amount of dis count, will be de ducted from (i) profit and (ii) from the face value of re deem able pref er ence, shares. The net value will be shown as out flow of cash from fi nanc ing ac tiv i ties., (10) Redemption of Debentures :, ● A com pany can is sue and re deem de ben tures in ac cor dance with the terms and, con di tions of their is sue., [Sec. 71(8)], ● Gen er ally de ben tures are re deemed at par or at pre mium. (In some cases they may, be redeemed at discount.), ● If de ben tures are re deemed at pre mium, the amount of pre mium will be ad justed, with profit and the amount of premium on re demp tion will be added to the face, value of re deem able de ben tures. Re demp tion is treated as out flow of cash from, fi nanc ing activities., ● If de ben tures are re deemed through con ver sion then there is no flow of cash., ● If de ben tures are re deemed by pur chas ing own de ben tures at pre mium or at discount from open market, such premium or discount amount should be adjusted, with profit., (11) Decrease or Increase in the value of goodwill : For determining net cash flow, from operating activities :, , 420
Page 907 :
Cash Flow State ment, De crease in the value of good will is treated as Good will writ ten off and is added, back to Net Profit., ● In crease in the value of good will or ad di tion of good will is treated as pur chase of, good will. It is shown as out flow of cash un der the head ‘‘In vest ing Ac tiv i ties’’ because it is an investing activity., Hence, addition of goodwill should never be shown under the head operating, activities., Ef fect on Cash Flow State ment : For cal cu lat ing cash flow from op er at ing ac tiv i ties,, the profit on sale of fixed as set will be deducted from the net profit and the loss on sale of, fixed assets will be added back to net profit., Ef fect of Changes in Cur rent As sets and Li a bil i ties on Cash from Op er at ing, Ac tiv i ties : In nut shell, the ef fect of changes in cur rent as sets and cur rent li a bil i ties on cash, from op er at ing ac tiv i ties may be il lus trated with the help of the following formula :, + Decrease in Debtors, + Decrease in Bills Receivable, Decrease, , + Decrease in Stock, in Current, , , + Decrease in Prepaid Expenses, Assets, , + Decrease in Accrued Income, , , + Increase in Creditors, , + Increase in Outstanding Expenses, Increase, , + Increase in Bills Payable, in Cur rent, , + Increase in Unearned Income, Liabilities, , – Increase in Debtors, , , – Increase in Bills Receivable, Increase, , – Increase in Inventory, in Cur rent, , – Increase in Prepaid Expenses, Assets, , , – Increase in Accrued Income, , – Decrease in Creditors, , – Decrease in Outstanding Ex penses, Decrease, , – Decrease in Bills Payable, in Current, , , – Decrease in Unearned Income, Liabilities, , Thus,, ●, , Cash from Operating Activities = Op er at ing Profit + De crease in Cur rent Assets, + Increase in Cur rent Li a bil i ties – Increase in, Cur rent As sets – De crease in Cur rent Li a bili ties, The ba sic points to re mem ber are :, (i) In crease in cur rent as sets causes de crease in cash from op er at ing ac tiv i ties., (ii) De crease in cur rent as sets re sult in an in crease in cash from op er at ing ac tiv i ties., (iii) In crease in cur rent li a bil i ties, in creases the cash from op er at ing ac tiv i ties., (iv) De crease in cur rent li a bil i ties, de creases the cash from op er at ing ac tiv i ties., It should be noted that changes in cash and cash equivalents are not taken into ac count to, as cer tain cash from op er at ing ac tiv i ties., It should be fur ther noted that while cal cu lat ing cash from op er at ing ac tiv i ties, first of all, cal cu late (a) Operating Profit before Working Capital Changes and then (b) use the above for mula to, ad just the changes in cur rent as sets and cur rent li a bil i ties., , 421
Page 908 :
SBPD Pub li ca tions Accountancy (XII), ❏ Calculation of Cash Flow from Operating Activities by Indirect Method, Illustration 4(A), The fol low ing is the po si tion of cur rent as sets and cur rent li a bil i ties of X Ltd. :, Particulars, Debt ors, Cred i tors, Bills Re ceiv able, Pre paid Ex penses, , 2017, , 2018, , `, , `, , 20,000, 10,000, 6,000, 8,000, , 15,000, 8,000, 8,000, 7,000, , The com pany in curred a loss of ` 50,000 dur ing the year. Cal cu late Cash Flow from, Op er a ting Activities., (J.A.C., 2018), Solution, Calculation of Cash from Operating Activities, Particulars, , Amount, `, , Amount, `, , (–) 50,000, , Loss dur ing the year, Add : De crease in Debt ors, De crease in Pre paid Ex penses, , 5,000, 1,000, , Less : De crease in Cred i tors, In crease in Bills Re ceiv able, , 2,000, 2,000, Cash Loss from Op er at ing Ac tiv i ties, , 6,000, (–) 44,000, (–) 4,000, (–) 48,000, , Illustration 4(B), Com pute Cash from Op er a ting Activities by Indirect Method from the fol low ing de tails :, Particulars, Balance in Statement of Profit & Loss, Trade Receivables, Out stand ing Rent, Good will, Pre paid In sur ance, Trade Payables, , Solution, , 2017, , `, , `, , 55,000, 25,000, 12,000, , 60,000, 31,000, 21,000, , 40,000, 4,000, 13,000, , 38,000, 2,000, 19,000, , Calculation of Cash from Operations, , Particulars, Profit before Tax :, Statement of Profit & Loss (Bal ance of Profit 2018), Less : Bal ance of Profit (2017), Net Loss made dur ing the year, being Net Loss before Tax, Add : De crease in Cur rent As sets :, Trade Receivables, Less : In crease in Cur rent As sets and Decrease in Current Liabilities :, Pre paid In sur ance, Out stand ing Rent, Trade Payables, Cash used in Op er at ing Ac tiv i ties, , 422, , 2018, , Amount, `, , Amount, `, , 55,000, (60,000), (–) 5,000, 6,000, 1,000, 2,000, 9,000, 6,000, , (17,000), (16,000)
Page 909 :
Cash Flow State ment, Work ing Note :, ` 2,000 has been paid for the pur chase of fixed as set, i.e., Good will. It will not be shown in the above, state ment be cause pur chase of a fixed as set does not af fect Cash from Op er at ing Ac tiv i ties. Purchased, goodwill, i.e., addition to goodwill is shown under investing activities as out flow of cash., , Illustration 5, Compute Cash Flow from Operating Activities from following information :, Net Profit after Provision for Tax and Dividend, Provision for Tax, Depreciation, Loss on Sale of Plant, Goodwill Written off, Refund of Income-tax, Solution, Computation of Cash Flow from Op er at ing Ac tiv i ties, (In di rect Method), Particulars, Net Profit before Tax (Working Note 1), Adjustments for Non-cash/Non-operating Items :, Add : Depreciation, Goodwill Written off, Loss on Sale of Plant, Cash from Op er a tions be fore Taxes, Less : Income-tax paid (` 12,000 – 8,000), Net Cash Flow from Op er at ing Ac tiv i ties, , `, , 25,000, 12,000, 5,000, 3,000, 10,000, 8,000, , `, , `, , 29,000, 5,000, 10,000, 3,000, , 18,000, 47,000, 4,000, 43,000, , Work ing Note :, 1. Net Profit be fore Tax = Net Profit + Pro vi sion for Tax – Re fund of Tax, = ` 25,000 + 12,000 – 8,000 = ` 29,000., , Illustration 6, Compute Cash Flow from Operating Activities from the following :, Particulars, , 31.3.2019 31.3.2020, `, , `, , 2,50,000, 20,000, 1,00,000, 4,00,000, —, 50,000, 30,000, , Trade Receivables, Provision for Doubtful Debts, Trade Payables, Inventories, Accrued Income, Cash and Cash Equivalents, Very Short-term Investment, , 2,05,000, 25,000, 1,10,000, 5,00,000, 10,000, 70,000, 50,000, , Profit for the year ended 31st March, 2020 ` 5,00,000 provided for depreciation ` 50,000., Solution, Calculation of Cash Flow from Operating Activities, (Indirect Method), Particulars, , Amount, `, , Net Profit before Taxation, Adjustments for Non-cash/Non-operating Items :, Add : Depreciation, Provision for Doubtful Debts (25,000 – 20,000), Profit be fore Work ing Cap i tal Changes, , Amount, `, , 5,00,000, 50,000, 5,000, , 55,000, 5,55,000, , 423
Page 910 :
SBPD Pub li ca tions Accountancy (XII), Add : Decrease in Current Assets :, Trade Receivables, Increase in Current Liabilities :, Trade Payables, Less : Increase in Current Assets :, Inventories, Accrued Income, Net Cash Flow from Op er at ing Ac tiv i ties, , 45,000, 10,000, , 55,000, 6,10,000, , 1,00,000, 10,000 (1,10,000), 5,00,000, , Work ing Note :, Cash and Cash Equiv a lents and Very Short-term In vest ments will not af fect Cash from OperatingActivities., , Illustration 7, Compute Cash Flow from Operating Activities of Seemanchal Ltd. from the following, details :, Particulars, , 31.3.2019 31.3.2020, `, , `, , 1,50,000, , 1,80,000, , Trade Payables, , 70,000, , 80,000, , Prepaid Expenses, , 15,000, , 10,000, , Outstanding Expenses, , 20,000, , 12,000, , Bank Overdraft, , 20,000, , 50,000, , Short-term Loan, , 10,000, , 20,000, , Trade Receivables, , Seemanchal Ltd. earned a profit of ` 65,000 during the year after taking into account the, following adjustment :, (i) Depreciation charged ` 20,000., (ii) Loss on Sale of Machine ` 10,000., Solution, Cash flow from Op er at ing Ac tiv i ties (In di rect Method), (for the year ended 31st March, 2020), Particulars, , Amount, `, , Net Profit before tax and extra-ordinary items, Adjustments for :, Add : Depreciation charged, Loss on Sale of Machine, , Increase in Current Liabilities :, Trade Payables, , 424, , `, , 65,000, 20,000, 10,000, , Op er at ing Profit from Work ing Cap i tal Changes, Add : Decrease in Current Assets :, Prepaid Expenses, , Amount, , 30,000, 95,000, , 5,000, 10,000, , 15,000, 1,10,000
Page 911 :
Cash Flow State ment, Less : Increase in Current Assets :, 30,000, , Trade Receivables, Decrease in Current Liabilities :, Outstanding Expenses, Net Cash Flow from Op er at ing Ac tiv i ties, , 8,000, , (38,000), 72,000, , As per Circular No. 17 of June 6, 2014, Bank Overdraft and Cash Credit are to be taken, as part of short-term Borrowings, i.e., financing activity and not as a part of cash and cash, Equivalent. Short-term loan., Illustration 8, From the following information, prepare Cash Flow Statement from Operating, Activities :, `, Net Profit of Current Year, 1,00,000, Transfer to General Reserve, 10,000, Decrease in Debtors, 25,000, Decrease in Bills Payable, 20,000, Discount on Shares Written-off, 5,000, Increase in Inventory, 18,000, Loss on Sale of Machine, 12,000, Profit on Sale of Investment, 4,000, (U.S.E.B., 2019), Solution, , Cash Flow Statement from Operating Activities, (Indirect Method), Particulars, , Amount, `, , Net Profit of Current Year, Add : Transfer to General Reserve, Net Profit before Tax, Adjustments for Non-cash/Non-operating Items :, Add : Discount on Shares Written-off, Loss on Sale of Machine, , `, , 1,00,000, 10,000, 1,10,000, 5,000, 12,000, , Less : Profit on Sale of Investment, Operating Profit before Working Capital Changes, Add : Decrease in Current Assets :, Decrease in Debtors, Less : Increase in Current Assets :, Increase in Inventory, Less : Decrease in Current Liabilities :, Decrease in Bills Payable, Cash Generated from Operating Activities, , Amount, , 17,000, 1,27,000, (4,000), 1,23,000, 25,000, 1,48,000, , 18,000, 20,000, , (38,000), 1,10,000, , Illustration 9, X Ltd. made a profit of ` 1,00,000 af ter charg ing de pre ci a tion of ` 20,000 on as sets and, trans fer to Gen eral Re serve of ` 30,000. The good will writ ten off was ` 7,000 and the gain on, sale of ma chin ery was ` 3,000. The other in for ma tion avail able to you (change in the value of, cur rent as sets and cur rent li a bil i ties) is as follows :, , 425
Page 912 :
SBPD Pub li ca tions Accountancy (XII), At the end of the year Debt ors showed an in crease of ` 6,000, Cred i tors an in crease of, ` 10,000, Pre paid ex penses an in crease of ` 200, Bills re ceiv able a de crease of ` 3,000, Bills, pay able a de crease of ` 4,000 and Out stand ing ex penses a de crease of ` 2,000., , Ascertain the Cash flow from Operating Activities., (U.S.E.B., 2017), Solution Statement show ing Cash Flow from Op er at ing Ac tiv i ties, Particulars, , Amount, , Amount, , `, , Net Profit before Tax and Extra-ordinary Items :, Net Profit, Add : Trans fer to Gen eral Re serve, Ad just ment for Non-op er at ing Items/Non-cash Items, Add : De pre ci a tion, Good will Writ ten-off, , `, , 1,00,000, 30,000 1,30,000, 20,000, 7,000, 27,000, (3,000), , Less : Gain on Sale of Ma chin ery, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : In crease in Cred i tors, De crease in Bills Re ceiv able, , 10,000, 3,000, (6,000), (200), (4,000), (2,000), , Less : In crease in Debt ors, In crease in Pre paid Ex penses, De crease in Bills Pay able, De crease in Out stand ing Ex penses, Cash Flow from Op er at ing Ac tiv i ties, , 24,000, 1,54,000, 13,000, 1,67,000, , (12,200), 1,54,800, , Il lus tra tion 10, On 31st March, 2020 Ramesh & Co. in di cated a profit of ` 1,25,000 af ter con sid er ing the, following :, `, Depreciation on Build ings, 25,000, Depreciation on Plant and Ma chin ery, 45,000, Amortisation of Good will, 20,000, Gain on Sale of Ma chin ery, 10,000, The cur rent as sets and cur rent li a bil i ties at the beginning and at the end of the year are :, Particulars, , 1.4.2019, `, , 35,000, 75,000, 18,000, 30,000, 10,000, 60,000, , Trade Re ceiv ables, Inventory, Cash, Trade Pay ables, Outstanding Expenses, Bank Loan, , 31.3.2020, `, , 45,000, 69,000, 30,000, 32,000, 5,000, 35,000, , Ascertain Net Cash flow from Op er at ing Ac tiv i ties., Solution, Cash from Operating Ac tiv i ties (In di rect Method), (for the year ended 31.3.2020), Particulars, , Amount, `, , Net Profit be fore Tax a tion and Ex tra-or di nary Items, Add : Non-cash/Non-operating Expenses :, De pre ci a tion on Build ings, , 426, , Amount, `, , 1,25,000, 25,000
Page 913 :
Cash Flow State ment, 45,000, 20,000, 2,15,000, (10,000), 2,05,000, , De pre ci a tion on Plant & Ma chin ery, Am or ti sa tion of Good will, Less : Gain on Sale of Ma chin ery, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : De crease in Inventory, In crease in Trade Pay ables, Less : In crease in Trade Re ceiv ables, Decrease in Outstanding Expenses, Net Cash from Op er at ing Ac tiv i ties, , 6,000, 2,000, 10,000, 5,000, , 8,000, 2,13,000, (15,000), 1,98,000, , Illustration 11, The fol low ing in for ma tion was pro vided by Manju Plas tic Man u fac tur ing Ltd. for the, year end ing 31st March, 2020 :, Particulars, , Amount, `, , Revenue from Operations (Sales), Operating Ex penses (ex clud ing De pre ci a tion), Depreciation, Net Profit be fore Tax, Ex tra-or di nary In come—Gain on Spec u la tion, Pro vi sion for Taxes @ 40%, Net Profit af ter Taxes, , 20,00,000, (14,00,000), (2,00,000), 4,00,000, 1,00,000, 5,00,000, 2,00,000, 3,00,000, , Additional Information :, (1) In cluded in op er at ing ex penses is loss on sale of ma chin ery ` 40,000., (2) Actual taxes paid in respect of 2018-19 ` 1,80,000., (3) Following are the balances of cur rent items :, 31.3.2020, 31.3.2019, `, , `, , 1,20,000, Trade Receivables, 1,60,000, 1,40,000, In ven to ries, 1,30,000, 1,70,000, Trade Payables, 1,80,000, You are re quired to cal cu late Cash Flow from Op er at ing Ac tiv i ties by In di rect Method., Solution, Cash Flow from Operating Activities, (Indi rect Method), Particulars, , Amount, `, , Net Profit before Tax and Extra-ordinary Items, Adjustments for Non-cash/Non-operating Expenses :, Add : Depreciation, Add : Loss on Sale of Machinery, Operating Profit before Working Capital Changes, Less : Increase in Trade Receivables, Add : Decrease in Inventories, , 2,00,000, 40,000, , Amount, `, , 4,00,000, , 2,40,000, 6,40,000, (40,000), 6,00,000, , 10,000, , 427
Page 914 :
SBPD Pub li ca tions Accountancy (XII), Add : Increase in Trade Payables, Cash Flow from Operating Activities before Tax, Less : Income-tax Paid, Cash Generated from Operating Activities after Tax but before, Extra-ordinary Item, Add : Extra-ordinary Item (Income from Speculation Gain), Net Cash Flow from Op er at ing Ac tiv i ties, , 10,000, , 20,000, 6,20,000, (1,80,000), 4,40,000, 1,00,000, 5,40,000, , ❏ Treat ment of De ferred Tax Li a bil ity and De ferred Tax As set, Adjustment in respect of Deferred Tax Liability or Deferred tax Asset is made while, calculating Profit before Tax in order to find out Cash Flow from Operating Activities., Deferred Tax : The difference between ‘Accounting Income’ and ‘Taxable Income’ is, called Deferred Tax. It may be either a liability or an asset., Deferred Tax, , Deferred Tax Liability, Deferred Tax Asset, Deferred Tax Liability : A deferred tax liability comes into existence when, Accounting Income is more than Taxable Income. For example,, Accounting Income ` 10,00,000, Taxable Income ` 8,00,000., Here,, 40, (A) Tax on Accounting Income = ` 10,00,000 ×, =, ` 4,00,000, 100, 40, (B), Tax on Taxable Income = ` 8,00,000 ×, =, ` 3,20,000, 100, (C) Deferred Tax Liability, i.e. tax liability for future years = ` 80,000, Deferred Tax Asset : A Deferred Tax Asset arises when Taxable Income is more than, the Accounting Income (i.e. accounting income is less than taxable income)., l Deferred Tax Li a bil ity and De ferred Tax As sets are shown in the Bal ance Sheet., ❏ Treatment of Deferred Tax Liability and Deferred Tax Asset in Cash Flow, Statement, 1. Increase in Deferred Tax Liability (i.e., difference between the closing and opening, balance) reduces the current year’s profit. Hence, it is added back to the profit to, arrive at current year’s Profit before Tax., 2. Decrease in Deferred Tax Liability (i.e., difference between opening and closing balance), increases the current year’s profit. Hence, it is deducted from the profit to arrive at, current year’s Profit before Tax., 3. Increase in Deferred Tax Asset (i.e., difference between closing and opening balance), increases the current year's profit. Hence, it is deducted from the profit to determine, current year’s Profit before Tax., 4. Decrease in De ferred Tax As set (i.e., dif fer ence be tween open ing and clos ing bal ance), re duces the cur rent year’s profit. Hence, it is added back to de ter mine cur rent year’s, Profit be fore tax., ❏ Cal cu la tion of Cash from Op er at ing Ac tiv i ties when State ment of Profit & Loss, and Ad di tional In for ma tion are avail able, Illustration 12, Following is the Statement of Profit and Loss and additional information of Octavia, Ltd. for the year ended 31st March, 2020. Calculate the Cash Flow from Operating, Activities :, , 428
Page 915 :
Cash Flow State ment, Statement of Profit and Loss, (for the year ended 31st March, 2020), Particulars, , Note No., , Amount, `, , I. Revenue from Operations, II. Other Income, III.Total Revenue (I + II), IV. Expenses :, (a) Purchase of Stock-in-trade, (b) Changes in Inventory of Stock-in-trade (Opening Inventories, ` 30,000 and Closing Inventories ` 40,000), (c) Employee Benefit Expenses, (d) Depreciation, (e) Other Expenses, Total Expenses, V. Profit from Operations (III – IV), , 31st March, 2019, , Additional Information, , 10,00,000, 20,000, 10,20,000, 6,00,000, (10,000), 80,000, 30,000, 60,000, 7,60,000, 2,60,000, , 31st March, 2020, , `, , `, , (i), Outstanding Salaries, —, (ii) Share Issue Expenses, 20,000, (iii) Prepaid Insurance, —, Solution, Cash Flow from Op er at ing Ac tiv i ties (In di rect Method), Particulars, , 10,000, —, 5,000, , Amount, , Amount, , `, , Profit before Tax as per Statement of Profit and Loss, Adjustments for Non-cash and Non-operationg Items :, Add : Depreciation, Share Issue Expenses Written off, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : Increase in Current Liabilities :, Outstanding Salaries, Less : Increase in Current Assets :, Inventories of Inventory, Prepaid Insurance, , `, , 2,60,000, 30,000, 20,000, , 10,000, 3,20,000, (10,000), (5,000), , Net Cash Flow from Op er at ing Ac tiv i ties, , 50,000, 3,10,000, , (15,000), 3,05,000, , ❏ Calculation of Cash from Operating Activities when both Income Statement, and Current Assets and Current Liabilities are given, Illustration 13, Cal cu late Cash Flow from Op er at ing Ac tiv i ties from the fol low ing in for ma tion :, Income Statement, (for the year ended 31st March, 2020), `, , Sales, Less : Cost of Goods Sold, Gross Profit, , 30,10,000, (24,00,000), 6,10,000, , 429
Page 916 :
SBPD Pub li ca tions Accountancy (XII), `, , Less : Ad ministrative Expenses, Selling Expenses, Depreciation, Preliminary Expenses Written off, Income-tax, , 1,80,000, 1,00,000, 60,000, 40,000, 40,000 (4,20,000), Net Profit after Tax, 1,90,000, Current Assets and Current Liabilities, Particulars, , 31st March, 31st March,, 2019, 2020, `, , Solution, , `, , 1,00,000, 8,000, 30,000, 80,000, 10,000, 4,000, 1,50,000, , Debt ors, Bills Re ceiv able, Bills Pay able, Cred i tors, Out stand ing Ex penses, Pre paid Ex penses, Stock, , Cash Flow from Operating Activities, Particulars, , Amount, `, , Net Profit be fore Tax (` 1,90,000 + 40,000), Ad just ments for Non-cash/Non-operating Expenses :, Add : De pre ci a tion, Pre lim i nary Ex penses Writ ten off, Operating Profit before Working Capital Changes, Add : De crease in Cur rent As sets :, Debt ors, Pre paid Ex penses, Stock, Add : In crease in Cur rent Li a bil i ties :, Bills Pay able, Cred i tors, Less : In crease in Cur rent As sets :, Bills Re ceiv able, Less : De crease in Cur rent Li a bil i ties :, Out stand ing Ex penses, Cash Gen er ated from Op er a tions be fore Tax, Less : In come-tax paid, Net Cash from Op er at ing Ac tiv i ties, , Amount, `, , 2,30,000, 60,000, 40,000 1,00,000, 3,30,000, 10,000, 1,000, 25,000, 10,000, 10,000, , 56,000, 3,86,000, , (4,000), (2,000) (–) 6,000, 3,80,000, (–)40,000, 3,40,000, , Illustration 14, X Ltd. made a profit of ` 3,00,000 after con sid er ing the fol low ing items :, (i) Depreciation on Fixed As sets, (ii) Pre lim i nary Ex penses Written off, (iii) Loss on Sale of Ma chin ery, (iv) Gain on Sale of Land, (v) Provision for Doubt ful Debts, , 430, , 90,000, 12,000, 40,000, 90,000, 8,000, 3,000, 1,25,000, , `, , 30,000, 5,000, 15,000, 3,500, 4,000
Page 917 :
Cash Flow State ment, The po si tion of cur rent as sets and cur rent li a bil i ties was as fol lows :, 2018-19, , 2019-20, , `, , `, , Trade Receivables, 35,000, Prepaid Expenses, 1,500, Trade Payables, 31,500, Outstanding Expenses, 16,000, You are re quired to cal cu late Cash Flow from Op er at ing Ac tiv i ties., Solution, Calculation of Cash Flow from Operating Ac tivities, Particulars, , Amount, , 45,000, 2,000, 35,000, 9,000, , Amount, , `, , Net Profit before tax, Ad just ments for Non-cash/Non-operating Items :, Add : De pre ci a tion, Pre lim i nary Ex penses, Loss on Sale of Ma chin ery, Pro vi sion for Doubt ful Debts, , 30,000, 5,000, 15,000, 4,000, , Less : Gain on Sale of Land, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : In crease in Cur rent Li a bil i ties :, Trade Payables, Less : In crease in Cur rent As sets :, Trade Receivables, Pre paid Ex penses, Less : De crease in Cur rent Li a bil i ties :, Out stand ing Ex penses, Cash Flow from Op er at ing Ac tiv i ties, , `, , 3,00,000, , 54,000, 3,54,000, (–) 3,500, 3,50,500, 3,500, 3,54,000, , (10,000), (500), 7,000 (–)17,500, 3,36,500, , Illustration 15, From the following Balance Sheet on 31st March, 2019 and 2020, you are required to, calculate Cash Flow from Operating Activities for the year ended 31st March, 2020 :, Particulars, , 31.3.2019 31.3.2020, `, , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus : (Balance of Statement of Profit & Loss), 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, (a) Trade Payables, (b) Outstanding Expenses, Total, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets, , `, , 4,00,000, 1,61,000, , 5,00,000, 1,81,200, , 1,40,000, , 50,400, , 3,00,000 2,20,000, 65,000, 75,000, 10,66,000 10,26,600, , 7,00,000, , 7,18,000, , 431
Page 918 :
SBPD Pub li ca tions Accountancy (XII), 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, Total, , Solution, , 2,00,000 1,48,000, 1,60,000 1,28,400, 6,000, 32,200, 10,66,000 10,26,600, , Calculation of Cash Flow from Operating Activities, Particulars, , Amount, `, , Amount, `, , 20,200, , Net Profit before Tax (` 1,81,200 – 1,61,000), Add : Decrease in Current Assets :, Inventories, Trade Receivables, , 52,000, 31,600, , Add : Increase in Current Liabilities :, Outstanding Expenses, , 83,600, 1,03,800, 10,000, 1,13,800, , Less : Decrease in Current Liabilities :, Trade Payables, Cash Flow from Op er at ing Ac tiv i ties, , (80,000), 33,800, , Illustration 16, From the following Balance Sheets of Blue Star Company, calculate Cash Flow from, Operating Activities :, 31.3.2019 31.3.2020, , Particulars, I. EQUITY AND LIABILITIES, Shareholders’ Funds :, Equity Share Capital, Reserves & Surplus (Statement of Profit & Loss : Balance), Non-current Liabilities :, 6% Debentures, Current Liabilities :, Trade Payables :, Creditors, Bills Payable, Other Current Liabilities, , `, , Total, II. ASSETS, Non-current Assets :, Fixed Assets, Non-current Investments, Current Assets :, Inventories, Trade Receivables, Cash & Cash Equivalents, Total, , 432, , `, , 1,00,000, 30,000, , 1,00,000, 60,000, , 60,000, , 80,000, , 30,000, 30,000, 40,000, 2,90,000, , 35,000, 10,000, 45,000, 3,30,000, , 1,50,000, 40,000, , 1,90,000, 30,000, , 40,000, 40,000, 20,000, 2,90,000, , 55,000, 45,000, 10,000, 3,30,000
Page 919 :
Cash Flow State ment, Additional Information :, (i) A piece of machinery costing ` 5,000, on which depreciation of ` 2,000 had been, charged was sold for ` 1,000. Depreciation charged during the year was ` 17,000., (ii) New debentures have been issued on 1st Aug., 2019., Solution, Calculation of Cash Flow from Operating Activities, Particulars, Cash Flow from Operating Activities :, Net Profit before Tax and Extra-ordinary Items (Working Note 1), Adjustment for Non-cash/Non-operating Items :, Depreciation, Interest on Debentures (Working Note 2), Loss on Sale of Machinery, Operating Profit before Working Capital Changes, Add : Increase in Current Liabilities :, Increase in Creditors, Increase in other Current Liabilities, Less : Decrease in Current Liabilities :, Bills Payables, Increase in Current Assets :, Stock, Trade Receivables, Net Cash Flow from Op er at ing Ac tiv i ties, , `, , `, , 30,000, 17,000, 4,400, 2,000, , 23,400, 53,400, , 5,000, 5,000, , 10,000, 63,400, , (20,000), (15,000), (5,000), , (40,000), 23,400, , Working Notes :, , `, , 1. Closing Balance of Profit & Loss Statement, Less : Opening Balance of Profit & Loss Statement, , 60,000, 30,000, , Net Profit for the year (before Tax), 4, 6, 2. Interest on Debentures = 60,000 × ×, = ` 1,200, 12 100, April to July = 4 months, August to March = 8 months, 8, 6, Interest on Debentures = 80,000 ×, ×, = ` 3,200, 12 100, Total Interest = ` 1,200 + 3,200 = ` 4,400, , 30,000, , 12.6.2 Cash Flows from Investing Ac tiv i ties, Cash flows from in vest ing ac tiv i ties are the cash flows from the trans ac tions in volv ing, purchase and sale of non-current assets, i.e., fixed assets (both tangible and intangible, assets) and long-term investment, i.e., long-term productive assets in tended to gen er ate, fu ture in come and cash flows., Ex am ples of Cash Flow from In vest ing Ac tiv i ties AS-3 (Re vised) : Fol low ing are, the ex am ples of Cash Flow from In vest ing Activities :, (i) Cash pay ments to ac quire fixed as sets in clud ing in tan gi ble as sets such as good will,, pat ents and copy rights. It also in cludes pay ment made to con struct fixed assets., (ii) Cash receipts from sale (dis posal) of fixed as sets in clud ing in tan gi ble/assets., (iii) Payment to ac quire shares or de ben tures as in vest ments., (iv) Cash receipts from sale of shares, debentures etc. of other companies. Kept as, investment., (v) Cash advances and loans made to third parties (other than loans and advances, made by a fi nan cial en ter prise)., (vi) Cash receipts from the repayment of loans and advances made to third parties., , 433
Page 920 :
SBPD Pub li ca tions Accountancy (XII), (vii) Cash pay ments for fu ture con tracts, op tional con tracts etc., when the pay ments, are clas si fied as fi nanc ing ac tiv i ties., (viii) Buy-back of shares., The fol low ing chart shows Cash In flow and Cash Out flow from In vest ing Ac tiv i ties :, Investing Ac tivities, , Cash Inflow, , Cash Outflow, , Sale of Fixed Assets, Purchase of Fixed Assets, e.g., Plant & Machinery etc., Purchase of Investments, Sale of Investments, (Excluding marketable, (Excluding Marketable, Securities), Securities), Purchase of In tan gi ble, (made in Shares & Debentures, Assets like Goodwill,, of Other Companies), Copyrights etc., Interest received on Investments, Dividend received, Proceeds from Sale of Intangible Assets, Cash Receipts from Repayment of Loans and Advances., Rent received from Asset held as investment, Please Remember, (i) Increase in Fixed Asset : It is treated as purchased of fixed asset. It is treated as, Investing Activity. It is cash outflow from Investing Activities., (ii) Decrease in Fixed Assets : Generally it is treated as sale of fixed asset. It is cash, inflow from Investing Activities., ● Small de crease in fixed as set may be treated as de pre ci a tion., ● Decrease in any intangible asset like Goodwill should be treated as Goodwill, Written off., ● Decrease in Fictitious Assets like Preliminary Expenses should be treated as, Amortisation of such item., Investments : In a business enterprise, investments may be of two types :, Investments, 1. Long-term Investments, , 2. Temporary Investments, (Marketable Securities), 1. Long-term Investments (show them under Investment Activities) :, (i) Any sale of long-term investments is an inflow of cash., (ii) Any Purchase of long-term investments is an outflow of cash., (iii) Any gain or loss on the sale of such in vest ments must be de ducted from or, added to, as the case may be, the net profit since it is a non-cash and, non-operating item., 2. Temporary or Short-term Investments (Marketable Securities) : Shortterm or temporary investments or marketable securities are treated as current, assets. They do not form the part of investing activities., ● Any gain or loss on the sale of such in vest ments does not re quire any ad just ment in, the re ported in come or profit., , 434
Page 921 :
Cash Flow State ment, Calculation of Cash Flow from Investing Activities, Calculation of Cash Flow from Investing Activities involve the following steps :, Particulars, A. Pro ceeds from Dis posal of Non-cur rent As sets :, (Whether tan gi ble or in tan gi ble or de pre cia ble or non-de pre cia ble), For Ex am ple :, Pro ceeds from Sale of Land & Build ing/Furniture, Pro ceeds from Sale of Ma chin ery/Equipment, Proceeds from Sale of Long-term Investments, B. Add : Non-op er at ing In comes from In vest ments :, For Ex am ple :, In ter est re ceived on De ben tures held as In vest ments, Dividend re ceived on Shares held as In vest ments, Rent re ceived from Prop erty held as In vest ments, C. Less : Pur chase of Non-cur rent As sets :, (Whether tan gi ble or in tan gi ble or de pre cia ble or non-de pre cia ble), For Ex am ple :, Pur chase of Land and Build ing, Pur chase of Plant and Ma chin ery, Pur chase of Fur ni ture and Fix tures, Pur chase of Non-current (Long-term) In vest ments, Purchase of Intangible Assets, like Goodwill, D. Net Cash Flow from In vest ing Ac tiv i ties, [If (A + B) greater than C], Or, Net Cash Used in In vest ing Ac tiv i ties, [If (A + B) less than C], , Amount, `, , ......, ......, ......, ......, , ......, ......, ......, ......, , ......, ......, ......, ......, ......, ......, ......, , ❏ Depreciation, Provision for Depreciation : When provision for depreciation or accumulated, depreciation for two periods is given in the Balance Sheets, it means fixed assets are at, orig i nal cost. In such a case, both of these ac counts should be pre pared sep a rately. From the, provision for Depreciation Account we can find out the amount of de pre ci a tion provided, during the year., By pre par ing Fixed As set Ac count, we can know the as set pur chased or sold dur ing the year., If there are ad just ments re lat ing to fixed as sets, stu dents are ad vised to pre pare As set Account., Fixed As set Ac count can also be pre pared on writ ten down value ba sis by de duct ing the, amount of ac cu mu lated de pre ci a tion from the re spec tive bal ances of fixed as sets given the, Balance Sheets at original cost. In case the current year’s depreciation is given in the, ad just ments, it will be shown on the credit side of the As set Ac count and added back to net, profit to cal cu late cash from op er at ing ac tiv i ties. The dif fer ence of both sides of the As set, Ac count will be ‘purchase’ or ‘sale’ of as set dur ing the year. It should be noted that if credit, side ex ceeds the debit side, the bal ance will be treated as ‘pur chase of as set’ and if debit side, ex ceeds the credit side, the difference will be the ‘sale of asset’., ❏ Ascertaining Missing Amounts regarding Pur chase or Sale of Fixed As sets, Case 1. When the Fixed Asset is shown at Written Down Value, The fig ures ap pear ing in the Com par a tive Bal ance Sheets at two dates in re spect of, fixed assets might indicate whether a particular fixed asset has been purchased or sold, during the year. This would enable to determine the inflows or outflows of cash. For, example, if the plant and machinery ap pears at ` 1,20,000 in the current year’s Balance, Sheet and ` 1,00,000 in the pre vi ous year’s Bal ance Sheet, it ap pears that there is pur chase, of fixed as sets, i.e., out flow of cash for ` 20,000. If ad di tional in for ma tion is given with re gard, , 435
Page 922 :
SBPD Pub li ca tions Accountancy (XII), to plant and ma chin ery or de pre ci a tion on plant and ma chin ery, cash in flows or out flows, should be determined by preparing Plant and Machinery A/c., Finding out Missing Amounts regarding Fixed Assets or Depreciation., Fixed As set Ac count, Dr., (at Written Down Value), Cr., Particulars, To Balance b/d (given), To Statement of Profit & Loss, (Profit on Sale of Fixed Asset), To Cash A/c (Purchase), (Bal. fig.), , `, , √√, √√, √√, √√, , Particulars, By Cash A/c (Proceeds from, Sale of Fixed Asset), By Statement of Profit & Loss, (Loss on Sale of Asset), By Depreciation A/c, By Balance c/d (given), , `, , √√, √√, √√, √√, √√, , Notes : 1. The purchase of fixed assets is a balancing amount on the debit side of the account., 2. Depreciation and Sale of Fixed Assets is on the credit side of the account in the balancing amount., , Case 2 : When the Fixed Assets is shown at original cost and Provision for, Depreciation or Accumulated Depreciation is separately maintained, ● Un der this method, sep a rate ac counts are pre pared for Fixed As set and Accumulated De pre ci a tion (or Pro vi sion for De pre ci a tion)., ● Under this method, asset appears at its Original cost and Depreciation is not, charged to the Assets Account., ● De pre ci a tion for the pe riod is deb ited to the De pre ci a tion Ac count and cred ited to, Accumulated Depreciation Account., ● Depreciation is trans ferred state ment of P/L., ● De pre ci a tion for the year can be ar rived at by pre par ing Ac cu mu lated De pre ci a tion, A/c or Pro vi sion for De pre ci a tion A/c., Formats, Dr., (1) Fixed Asset Ac count, Cr., Particulars, To Balance b/d, To Statement of Profit & Loss, (Profit on Sale of Fixed Asset), To Bank/Cash A/c, (Purchase of Fixed Asset), (Bal. fig.), , `, , ×××, ×××, , ×××, , Particulars, By Bank/Cash A/c, (Sale of Fixed Asset), By Accumulated Depreciation A/c, (Accumulated Depreciation, on Fixed Asset Sold), By Statement of Profit & Loss, (Loss on Sale of Fixed Asset), By Balance c/d, , ×××, , `, , ×××, , ×××, ×××, ×××, ×××, , Note : Gen er ally the purchase of fixed as set is bal anc ing amount on the debit side of the ac count and the sale of, fixed as set on the credit side of the ac count., , Dr., , (2) Accumulated Depreciation Account, , Particulars, To Fixed Asset A/c, (Accumulated Dep. on Fixed, Assets Sold), To Balance c/d, , 436, , `, , ×××, ×××, ×××, , Particulars, By Balance b/d, By Statement of Profit & Loss, (Dep. Charged for the Current, year), , Cr., `, , ×××, , ×××, ×××
Page 923 :
Cash Flow State ment, Important Note, 1. If the balances of Fixed Assets and Provision for Depreciation Account are given in the, question separately, it will be better to prepare these two accounts separately., 2. There are no Direct and Indirect methods in the calculation of Cash Flow from Investing and, Financing Activities. It is same under both methods., , ❏ Cash Flow from In vest ing Ac tiv i ties, Illustration 17(A), Amit Ltd. had the following balances :, `, Non-current In vest ment at the end of 2017, 40,000, Non-current In vest ment at the end of 2018, 33,200, Dur ing the year the com pany had sold 25% of its in vest ments at a profit of ` 9,000., Cal cu late Cash from Op er at ing Ac tiv i ties and In vest ing Ac tiv i ties if the com pany has, earned a profit of ` 20,000 dur ing the year., Solution, Cal cu la tion of Cash from Op er at ing Ac tiv i ties :, `, Net Profit dur ing the year, 20,000, Less : Profit on Sale of In vest ment, (9,000), Net Cash from Op er at ing Ac tiv i ties, 11,000, Cal cu la tion of Cash from In vest ing Ac tiv i ties :, `, Sale of In vest ment, 19,000, Purchase of In vest ment, (3,200), 15,800, Net Cash from In vest ing Ac tiv i ties, 15,800, Work ing Note :, In vest ment Ac count, , Dr., Particulars, To Bal ance b/d, To Statement of Profit & Loss (Profit), To Cash A/c (Pur chases) (Bal. fig.), , Amount, Particulars, `, 40, 000 By Cash A/c (Sales), 9, 000 By Balance c/d, 3,200, 52,200, , Cr., Amount, `, 19,000, 33,200, 52,200, , Illustration 17(B), From the following par tic u lars, cal cu late Cash Flow from In vest ing Ac tiv i ties : `, In vest ment at the be gin ning of the pe riod, 5,80,000, In vest ment at the end of the pe riod, 3,40,000, Dur ing the year the com pany had sold 50% of its in vest ment held in the be gin ning of, the pe riod at a profit of ` 90,000., Solution, Cash Flow from Investing Activities, Particulars, Sale of In vest ment (Note 1), Add : Profit on Sale, Pur chase of In vest ments (Note 2), Net Cash Flow from In vest ing Ac tiv i ties, , Amount Amount, `, `, 2,90,000, 90,000 3,80,000, (50,000), 3,30,000, , Work ing Notes :, 1. ` 5,80,000 × 50/100 = ` 2,90,000. Profit = ` 90,000, Selling Price = ` 3,80,000., , 437
Page 924 :
SBPD Pub li ca tions Accountancy (XII), 2. Investment Account, , Dr., Particulars, To Bal ance b/d, To Profit on Sale of Investment, To Cash A/c (Purchase being Bal. fig.), , Cr., , Amount, Particulars, `, 5,80,000 By Cash A/c (Sales) (` 2,90,000 + 90,000), 90,000 By Balance c/d, 50,000, 7,20,000, , Amount, `, 3,80,000, 3,40,000, 7,20,000, , Illustration 18, From the following information, Calculate the amount of Cash Flows from Investing, Activities :, 31.3.2018, 31.3.2019, `, , `, , Plant and Machinery, 18,50,000, 22,00,000, Additional Information :, (i) Plant and Machinery with a book value of ` 60,000 was sold for ` 40,000., (ii) Depreciation charged on Plant and Machinery was ` 1,00,000., Solution, Calculation of Cash Flow from Investing Activities, Particulars, , Amount, , Sale of Plant and Machinery, Purchase of Plant and Machinery (See Note 1), Net Cash Flows (Out flow) from In vest ing Ac tiv i ties, , 40,000, (5,10,000), 4,70,000, , `, , Work ing Note 1 :, Plant and Ma chin ery Ac count, , Dr., Particulars, To Bal ance b/d, To Bank A/c (Balancing Figure being, Purchase), , Amount, Particulars, `, 18,50, 000 By Depreciation A/c, By Bank A/c (Sale of Machinery), 5,10,000 By Loss on Sale of Machinery, By Balance c/d, 23,60,000, , Cr., Amount, `, 1,00,000, 40,000, 20,000, 22,00,000, 23,60,000, , Illustration 19, Welprint Ltd. has given you the following informations :, `, Machinery as on April 1, 2017, 50,000, Machinery as on March 31, 2018, 60,000, Accumulated Depreciation on April 1, 2017, 25,000, Accumulated Depreciation on March 31, 2018, 15,000, During the year, a Machinery cost ing ` 25,000 with Accumulated Depreciation of, ` 15,000 was sold for ` 13,000., Cal cu late Cash Flow from In vest ing Activities on the basis of the above information., (N.C.E.R.T.), Solution, Calculation of Cash Flow from Investing Activities, Particulars, , Amount, `, , Sale of Machinery, Purchase of Machinery, Net Cash Used in In vest ing Ac tiv i ties, , 438, , 13,000, (35,000), (22,000)
Page 925 :
Cash Flow State ment, Work ing Notes :, Ma chin ery Ac count, , Dr., Particulars, To Bal ance b/d, To Statement of Profit & Loss (Profit on, Sale of Machine) 1, To Cash A/c (Bal. fig .—New Machinery, Purchased), , Cr., , Amount, Particulars, `, 50, 000 By Cash A/c (Proceeds from Sale of, Machine)—Inflow, 3,000 By Accumulated Depreciation, By Balance c/d, 35, 000, 88,000, , Amount, `, 13,000, 15,000, 60,000, 88,000, , Work ing Note :, 1, Profit = Sale Price – (Cost – Ac cu mu lated Dep.) = ` 13,000 – (25,000 – 15,000) = ` 3,000., Dr., Accumulated Depreciation Account, Particulars, To Machinery A/c, (Accumulated Dep. on Machinery Sold), To Balance c/d, , Amount, `, , Particulars, , By Balance b/d, 15,000 By Statement of Profit and Loss, 15,000, (Depreciation provided during the, year), 30,000, , Cr., Amount, `, 25,000, 5,000, 30,000, , Illustration 20, From the following information, cal cu late Cash Flow from In vest ing Ac tiv i ties :, Purchased, Sold, `, , Land, In vest ments, Machinery, Patents, Interest re ceived on de ben tures held as in vest ments ` 10,000., Dividend re ceived on shares held as in vest ments ` 15,000., Solution, Cash Flow from Investing Activities, , 5,00,000, 2,20,000, 3,00,000, —, , Particulars, , `, , 1,00,000, 1,20,000, 2,00,000, 50,000, , Amount, `, , A. Pro ceeds from Dis posal of Non-cur rent As sets :, Pro ceeds from Sale of Land, Pro ceeds from Ma chin ery, Pro ceeds from Sale of In vest ments, Pro ceeds from Pat ents, , 1,00,000, 2,00,000, 1,20,000, 50,000, 4,70,000, , B. Add : In comes from In vest ments :, In ter est re ceived, Div i dend re ceived, (A + B), C. Less : Pur chase of Non-cur rent As sets :, Pur chase of Land, Pur chase of Ma chin ery, Pur chase of In vest ments, D. Net Cash Used in In vest ing Ac tiv i ties [C – (A + B)], , 10,000, 15,000, 4,95,000, (5,00,000), (3,00,000), (2,20,000), 10,20,000, (5,25,000), , 439
Page 926 :
SBPD Pub li ca tions Accountancy (XII), Il lus tra tion 21, From the following information, calculate Cash Flow from Investing Activities of, Simplex Ltd. :, Particulars, , 31.3.2019, `, , `, , 5,00,000, 2,00,000, , Fixed Assets, Investments @ 10%, , 31.3.2020, 6,50,000, 4,00,000, , Additional Information :, (i) Half of the investments held in the beginning of the year were sold at 10% profit., (ii) Depreciation on Fixed Assets was for the year, ` 60,000, (iii) Interest received on Investments, ` 25,000, (iv) Dividend received on Investments, ` 10,000, (v) Rent received, ` 5,000, Solution, Cash Flow from Investing Activities, Particulars, , Amount, `, , 1, 10 , Proceeds from Sale of Investments ` 2,00,000 × + 1,00,000 ×, , , 2, 100, Purchase of Fixed Assets (Note 1), Purchases of Investments (Note 2), Interest received on Investments, Dividend received on Investments, Rent received, Net Cash Used in In vest ing Ac tiv i ties, , 1,10,000, (2,10,000), (3,00,000), 25,000, 10,000, 5,000, (3,60,000), , Work ing Notes :, 1. Fixed As sets Ac count, , Dr., Particulars, To Bal ance b/d (Open ing), To Bank A/c (Pur chases), (Bal . Fig .), , Cr., , Particulars, `, 5,00,000 By De pre ci a tion A/c, By Bal ance c/d, 2,10,000, 7,10,000, , `, 60,000, 6,50,000, 7,10,000, , 2. In vest ments Ac count, , Dr., Particulars, To Balance b/d, To Statement of Profit and Loss, — Profit on Sale, To Bank A/c (Purchases) (Bal. Fig.), , Cr., , Particulars, `, By, Bank, A/c, (Sale), 2,00,000, 1, 10 , , ` 2,00, 000 × + 1,00, 000 ×, , , 2, 100, 10,000, By, Balance, c/d, 3,00,000, , 1,10,000, , 5,10,000, , 5,10,000, , `, , 4,00,000, , Il lus tra tion 22 (Cash Flow from Operating and Investing Activities), From the following information. Calculate Cash Flow from Operating and investing, activities :, Particulars, , 31.3.2018 31.3.2019, `, , Credit Balance in Statement of Profit & Loss, Provision for Tax, , 440, , 2,00,000, 40,000, , `, , 4,00,000, 40,000
Page 927 :
Cash Flow State ment, 50,000 1,50,000, 5,00,000 6,00,000, 10,00,000 12,00,000, , Trade Payables, Current Assets-Trade Receivables, Fixed Assets, , Additional Information :, (i) A machine having a net book value of ` 50,000 was sold at a loss of ` 10,000., (ii) Tax paid during the year ` 40,000., Solution, Work ing Note :, 1 Calculation of Net Profit be fore tax, Clos ing Bal ance in State ment of Profit & Loss, Less : Open ing Bal ance in State ment of Profit & Loss, , `, 4,00,000, 2,00,000, 2,00,000, 40,000, 2,40,000, , Add : Pro vi sion for tax, , Cash Flow from Operating Activities and In vest ing Activities, Particulars, , Amount, , Amount, , `, , (A) Cash Flow from Operating Activities :, Net Profit before Tax, Add : Loss on Sale of Machinery, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : Increase in Current Liabilities : Trade Payables, Less : Increase in Current Assets : Trade Receivables, Net Cash Flow from Operating Activities before tax, Less : Tax Paid, Cash Flow from Op er at ing Ac tiv i ties af ter Tax, (B) Cash Flow from Investing Activities, Sale of Machinery, 40,000, Purchase of Fixed Assets (WN 2), (2,50,000), Cash used in In vest ing Activities, , `, , 2,40,000, 10,000, 2,50,000, 1,00,000, 3,50,000, 1,00,000, 2,50,000, 40,000, 2,10,000, , (2,10,000), , 2. Fixed Assets Account (at Cost), , Dr., Particulars, , Amount, , Particulars, , `, , To Bal ance b/d, To Bank A/c (Purchase), (Balancing Figure), , 10,00,000 By Bank A/c (Sale), (` 50,000 – 10,000), 2,50,000 By Loss on Sale of Asset A/c, By Bal ance c/d, 12,50,000, , Cr., Amount, `, , 40,000, 10,000, 12,00,000, 12,50,000, , 12.6.3 Cash Flow from Fi nanc ing Ac tiv i ties, Cash flows from fi nanc ing ac tiv i ties are the cash flows from the trans ac tions re lat ing to, pro vid ing funds (both cap i tal and borrowings) to the com pany, i.e., long-term li a bil i ties and, share capital., Ex am ples of Cash Flows from Fi nanc ing Ac tiv i ties AS-3 (Re vised) : Gives the, following ex am ples are given for cash flows from fi nanc ing activities :, (i) Cash proceeds from issuing shares or other sim i lar in stru ments,, (ii) Cash pro ceeds from is su ing de ben tures, loans, notes, bonds and other short-term, or long-term borrowings,, , 441
Page 928 :
SBPD Pub li ca tions Accountancy (XII), (iii) Cash re pay ment of amounts bor rowed, and, (iv) Payment of Interest and Dividend., The fol low ing chart shows cash in flow and cash out flow from fi nanc ing ac tiv i ties :, Fi nanc ing Ac tiv i ties, , Cash Inflow, , Cash Outflow, , Issue of Shares, Issue of Debentures in Cash, Proceeds from Long-term, Borrowings, Increase in Bank Overdraft, and Cash Credit, Interest on Calls-in-advance, , Cash Repayments of Loans, and Long-term Borrowings, Redemption of De bentures, in Cash, Interest paid on Loans/, Debentures, Dividend paid, Decrease in Bank Overdraft, and Cash Credit, Redemption of Preference, Share Capital, Buy-back of Own Shares, Financial activities will not include the following as there transactions do not involve cash :, (i) Issue of bonus/bonus shares., (ii) Conversion of Debentures into shares., (iii) Issue of Share Capital/Debentures against purchase of Fixed Assets., Important Note, 1. In case of fi nan cial com pa nies such as Bank or Mu tual Fund Com pany In ter est paid, and In ter est re ceived as well as dividends will be treated as Cash Flows from Op er at ing, Activities., 2. Sim i larly in case of Fi nan cial Com pa nies such as Bank and Mu tual Fund Com pany, cash out flow and in flow aris ing from the Pur chases and Sales of Se cu ri ties will be treated, as Cash Flow from Operating Activities., ●, ●, ●, , Dr., , Increase or Decrease in Capital/Share Capital, There is dif fer ence be tween cap i tal and share cap i tal. The amount con trib uted in, sole trad ing con cern and part ner ship is called ‘Cap i tal’ whereas the amount contributed in Joint Stock Com pany by share hold ers is called ‘Share Cap i tal’., Share Cap i tal is re ceived from is sue of shares and in crease or de crease in share, cap i tal forms the part of fi nanc ing ac tiv i ties., In case of Sole Trading concerns, profit of the business is added to and loss is, substracted from cap i tal. Similary draw ings or ad di tions to cap i tal by the pro prietor or part ners af fect cap i tal ac count. In such a sit u a tion, amount of draw ing or, profit and loss may be as cer tained by pre par ing Cap i tal Ac count., Capital Account, Cr., Particulars, , Amount, , To Cash A/c (Drawings), To Balance c/d (Closing), To Statement of Profit & Loss (Loss), , ×××, ×××, ×××, ×××, , Particulars, , `, , 442, , Amount, `, , By Balance b/d (Opening Capital), By Net Profit for the year, , ×××, ×××, ×××
Page 929 :
Cash Flow State ment, Computation of Cash Flow from Fi nanc ing Ac tiv i ties, Cash Flow from Fi nanc ing Ac tiv i ties is com puted as under :, Particulars, , Amount, , Amount, , `, , `, , ......., , A. Pro ceeds from Is su e of Shares and Debentures, Pro ceeds from Long-term Borrowings, (In clud ing pre mium but ex clud ing Dis count & Ex penses re lat ing, to is sue, such as un der writ ing com mis sion or brokerage), B. Less : Pay ment of Long-term Borrowings/Long-term Loans, Re demp tion of De ben tures, Buy Back (in clud ing Pre mium) of Equity Shares, Re demp tion of Pref er ence Shares, , ......., (.....), (.....), (.....), (.....), , ......., , (......), ......, , (.......), (.......), (.......), (.......), , C. Less : Interim Div i dend paid on Equity Shares, Final Div i dend paid on Equity Shares, Final Div i dend paid on Preference Shares, In ter est paid on Long-term Borrowings Loans or De ben tures, D. Net Cash Flow from Fi nanc ing Ac tiv i ties, [If A is greater than (B + C)], or, Net Cash Used in Fi nanc ing Ac tiv i ties, [If A is less than (B + C)], , (......), ......., ......, , Illustration 23 (Cash Flow from Financing Activities), XYZ Ltd., provided the following information, calculate Net Cash Flows from, Financing Activities :, 31.03.2019 31.03.2020, , Particulars, , `, , 10,00,000, 1,00,000, , Equity Share Capital, 12% Long-term Borrowings (Debentures), , Additional Information :, (i) Interest paid on Debentures, (ii) Dividend paid, Solution, Calculation of Cash from Financing Activities, , `, , 12,00,000, 2,00,000, `, `, , Particulars, , 12,000, 50,000, , Amount, `, , Cash received from Issue of Equity Share Capital, Cash received from Issue of Long-term Borrowings (12% Debentures), Cash Used in Payment of Interest on Long-term Borrowings (12% Debentures), Cash Used in Payment of Dividend, Net Cash Flow from Fi nanc ing Ac tiv i ties, , 2,00,000, 1,00,000, (12,000), (50,000), 2,38,000, , Il lus tra tion 24, From the following information, cal cu late Cash Flow from Fi nanc ing Ac tiv i ties :, Particulars, , 31.12.2018 31.12.2019, `, , Eq uity Share Cap i tal, , 4,00,000, , `, , 5,00,000, , 443
Page 931 :
Cash Flow State ment, Accumulated Depreciation on Ma chinery, 1,20,000 2,00,000, Capital, 10,00,000 15,00,000, Loan from I.D.B.I., 5,00,000 3,25,000, During the year machinery costing ` 1,00,000 was sold at a profit of ` 60,000., Depreciation on machinery charged during the year amounted to ` 1,00,000., Solution, Cash Flow from Investing and Fi nanc ing Ac tiv i ties, Particulars, , Cash Used in In vest ing Ac tiv i ties, , Amount, `, 1,40,000, (2,90,000), (1,50,000), , In flow from Ad di tion to Cap i tal (` 15,00,000 – 10,00,000), Outflow on Re pay ment of I.D.B.I.’s Loan (` 5,00,000 – 3,25,000), Net Cash Gen er ated from Fi nanc ing Ac tiv i ties, , 5,00,000, (1,75,000), 3,25,000, , In flow from Sale of Ma chin ery (Note 2), Outflow on Pur chase of Ma chin ery (Note 3), , Work ing Notes :, 1. Ac cu mu lated De pre ci a tion Ac count, , Dr., Particulars, To Ma chin ery A/c (Bal . fig .), To Bal ance c/d, , Amount, Particulars, `, 20,000 By Bal ance b/d, 2,00,000 By De pre ci a tion A/c, 2,20,000, , Cr., Amount, `, 1,20,000, 1,00,000, 2,20,000, , 2. Pro ceeds from Sale of Ma chin ery, = Cost – Ac cu mu lated De pre ci a tion + Profit on Sale, = ` 1,00,000 – 20,0001 + 60,000 = ` 1,40,000., 3. Ma chin ery Ac count, , Dr., Particulars, To Bal ance b/d, To Profit on Sale of Machinery, To Bank A/c (Pur chase of Ma chin ery), , Amount, Particulars, `, 2,00,000 By Bank A/c, 60,000 By Ac cu mu lated De pre ci a tion A/c, 2,90,000 By Bal ance c/d, 5,50,000, , Cr., Amount, `, 1,40,000, 20,000, 3,90,000, 5,50,000, , 12.7 Method of Prep a ra tion of Cash Flow State ment, as per AS-3 Revised, According to Accounting Standard (AS)-3 Revised (New Ind. AS-7), Cash Flow, Statement should be presented in a manner that it reports cash flows during the period, classified by :, (1) Cash Flow from Operating Activities, (2) Cash Flow from Investing Activities, (3) Cash, Flow from Financing Activities, and (4) Shows Net Change in Cash and Cash Equivalents., Hence, follow the following steps :, Step I : Compute the Cash Flow from Op er at ing Ac tiv i ties., Step II : Com pute the Cash Flow from In vest ing Ac tiv i ties., Step III : Com pute the Cash Flow from Fi nanc ing Ac tiv i ties., , 445
Page 933 :
Cash Flow State ment, INDIRECT METHOD, Format of Cash Flow Statement, (for the year ended....), [As per Ac count ing Stan dard-3 (Re vised)]/Ind. AS-7, Particulars, I. Cash Flow from Op er at ing Ac tiv i ties, (A) Net Profit be fore Tax a tion and Ex tra-or di nary Items, Ad just ment for Non-cash and Non-op er at ing Items :, (B) Add : Items to be Added (Non-op er at ing Ex penses) :, —Depreciation, —Pre lim i nary Ex penses/Dis count on Is sue of Shares and, De ben tures Writ ten off, —Good will, Pat ents and Trade Marks Am or tised, —In ter est on Borrowings and De ben tures, —Loss on Sale of Fixed Assets/Investments, (C) Less : Items to be De ducted (Non-op er at ing In come) :, —In ter est Re ceived, —Div i dend Re ceived, —Rental Received, —Profit on Sale of Fixed Assets/Investments, (D) Op er at ing Profit be fore Work ing Cap i tal Changes (A + B – C), (E) Add : De crease in Cur rent As sets and In crease in Cur rent, Liabilities :, —De crease in Stock/In ven to ries, —De crease in Debt ors/Bills Re ceiv ables, —De crease in Ac crued In comes, —De crease in Pre paid Ex penses, —In crease in Cred i tors/Bills Payable, —In crease in Out stand ing Ex penses, —In crease in Ad vance In come, —In crease in Pro vi sion for Doubt ful Debts, (F) Less : In crease in Cur rent As sets and De crease in Cur rent, Li a bil i ties :, —In crease in Stock/In ven to ries, —In crease in Debt ors/Bills Re ceiv able, —In crease in Ac crued In comes, —In crease in Pre paid Ex penses, —De crease in Cred i tors/Bills Payable, —De crease in Out stand ing Ex penses, —De crease in Ad vance In comes, —De crease in Pro vi sion for Doubt ful Debts, (G) Cash Gen er ated from Op er a tions (D + E – F), (H) Less : In come-tax Paid (Net of Tax Re fund re ceived), , Amount, , Amount, , `, , `, , ×××, , ×××, ×××, ×××, ×××, ×××, ×××, ×××, ×××, ×××, , ×××, ×××, ×××, ×××, ×××, ×××, ×××, ×××, , ×××, ×××, ×××, ×××, ×××, ×××, ×××, ×××, , ×××, , (×××), ×××, , ×××, ×××, , (×××), ×××, (×××), ×××, , 447
Page 935 :
Cash Flow State ment, 3. Profit or loss on sale of fixed asset is included in the determination of cash flow from, operating activities, the cash flows from the sale of fixed assets is a part of Investing, Activities., 4. Cash advances and loans made by financial enterprises are usually classified as, operating activities since they relate to the main revenue producing activities of the, enterprise., 5. Items of non-operating income are shown separately as sources of cash in the Cash, Flow Statement as per requirements of AS-3 (Revised)., 6. Cash flows associated with extra-ordinary items should be classified as arising from, operating, investing or financing activities as separately disclosed., 7. Cash flows from interest and dividend received and paid should each be disclosed, separately., 8. Provision for Tax (Current year) should be added back to current year’s Profit and, Loss Balance to arrive at Net Profit before Tax., 9. Income-tax paid after adjustment of refund of tax, if any, is deducted from cash, generated from operating activities to arrive at Cash Flows from Operating Activities before, extra-ordinary items., 10. Proposed Dividend :, (a) Proposed Dividend (Current year) : Add back to current year’s profit to find, out Cash Flows from Operating Activities., (b) Proposed Dividend (Previous year) : Net Dividend paid (i.e., Proposed, Dividend of previous year—Dividend still Payable) is shown as cash used under, the heading Financing Activities., 11. Share Issue Expenses, Discount on Issue of Shares/Debentures, Preliminary, Expenses, ● Sched ule III of the Com pa nies Act, 2013 does not con tain any spe cific dis clo sure for, items in cluded in old Sched ule un der the head, ‘Miscellaneous Expenditure’., ● As per Ac count ing Stan dard AS-16 Bor row ing Cost and Dis count or Pre mium relating to borrowings could be amortised over the loan period., ● Share Issue Expenses, Discount on Shares/Debentures, Premium relating to, borrowings etc. are ex cluded from AS-26 In tan gi ble As sets. These items should be, am or tised over the pe riod of ben e fit, i.e., nor mally 3 to 5 years., ● Unamortised por tion of such ex penses (i.e., unamortised ex penses) is shown un der, the head “Other Current/Non-current assets”, depending on whether the, amount will be amortised in the next 12 months or thereafter., ● Pre lim i nary Ex pensesmust be writ ten off in the year in which they are in curred, (AS-26)., (A) Prep a ra tion of Cash Flow State ment without Adjustment, Illustration 27(A), From the following information, prepare Cash Flow Statement for the year ended 31st, March, 2019 :, Particulars, Amount, `, , Net Profit before Tax 2018-19, Cash Balance 1.4.2018, Cash Balance 31.3.2019, , Decrease in Inventory, Increase in Trade Payables, Sale of Fixed Assets, Redemption of 10% Debentures, , 2,00,000, 1,10,000, 2,60,000, 50,000, 80,000, 2,20,000, 4,00,000, , 449
Page 936 :
SBPD Pub li ca tions Accountancy (XII), Solution, , Cash Flow Statement, (for the year ended 31st March, 2019), Particulars, , Amount, `, , Amount, `, , (A) Cash Flow from Op er at ing Ac tiv i ties :, 2,00,000, Net Profit for the year before tax, 80,000, Add : Increase in Trade Payables, 50,000 1,30,000, Decrease in Inventory, Cash Flow from Op er at ing Ac tiv i ties (A), 3,30,000, (B) Cash Flow from Investing Activities :, 2,20,000, Proceeds from Sale of Fixed Assets, 2,20,000, Cash Flow from In vest ing Ac tiv i ties (B), (C) Cash Flow from Financing Activities, (4,00,000), Redemption of 10% Debentures, (4,00,000), Cash used in Fi nanc ing Ac tiv i ties (C), 1,50,000, (D) Net Increase in Cash & Cash Equivalents (A + B + C), 1,10,000, Add : Cash & Cash Equivalents in the beginning of the year, 2,60,000, (E) Cash and Cash Equivalents at the end of the year, , Illustration 27(B), From the fol low ing Sum marised Cash Ac count of X Ltd., pre pare Cash Flow State ment, for the year ended 31st March, 2020 in ac cor dance with AS-3 (Re vised) by Direct Method :, Summarised Cash Account, (for the year ended 31st March, 2020), Receipts, Bal ance on 1.4.2019, Is sue of Eq uity Shares, Re ceipts from Debt ors, Pro ceeds from Sale of Ma chin ery, , Amount, `, 150, 1,000, 9,000, 300, , 10,450, , Solution, , Payments, Pay ment to Cred i tors, Pur chase of Ma chin ery, Wages and Sal a ries, Tax a tion, Div i dend, Pay ment of Bank Loan, Bal ance on 31.3.2020, , Cash Flow Statement of X Ltd., (for the year ending 31st March, 2020), (Using the Di rect Method), , Particulars, A. Cash Flow from Op er at ing Ac tiv i ties :, Cash Re ceipts from Debt ors, Less : Cash Pay ments to Cred i tors, Less : Cash paid to Em ploy ees, Cash Gen er ated from Op er a tions (be fore Taxes), Less : In come-tax Paid, Net Cash Flow from Op er at ing Ac tiv i ties, , 450, , ( ` in lakh), Amount, `, 6,500, 600, 300, 1,000, 150, 1,000, 900, 10,450, , ( ` in lakh), Amount, `, 9,000, (6,500), (300), 2,200, (1,000), 1,200
Page 937 :
Cash Flow State ment, B. Cash Flow from In vest ing Ac tiv i ties :, Pay ments for Pur chase of Ma chin ery, Pro ceeds from Sale of Ma chin ery, Net Cash Used in In vest ing Ac tiv i ties, , (600), 300, (300), , Net Cash Used in Fi nanc ing Ac tiv i ties, , 1,000, (1,000), (150), (150), , C. Cash Flow from Fi nanc ing Ac tiv i ties :, Pro ceeds from Is su e of Eq uity Shares, Less : Bank Loan Paid, Less : Div i dend Paid, , 750, 150, 900, , D. Net In crease in Cash & Cash Equivalents (A + B + C) (` 1,200 – 300 – 150), E. Add : Cash & Cash Equivalents in the be gin ning (1.4.2019), F. Cash & Cash Equivalents at the end (31.3.2020), , Illustration 28(A), From following Balance Sheet of ABC Ltd. as 31st March, 2019, prepare a Cash Flow, Statement :, Particulars, , Note No., , I. EQUITY AND LIABILITIES, (1) Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus—Balance in Statement of P/L, (2) Current Liabilities :, Trade Payables, To tal, , 1, , II. ASSETS, (1) Non-current Assets :, (a) Fixed Assets, Tangible Building, (2) Current Assets :, (a) Trade Receivables, (b) Cash and Cash Equivalents, To tal, , Solution, , 31.3.2019, , 31.3.2018, , `, , `, , 5,00,000, 2,00,000, , 4,00,000, 1,00,000, , 3,50,000, 10,50,000, , 2,75,000, 7,75,000, , 6,00,000, , 4,50,000, , 2,75,000, 1,75,000, 10,50,000, , 2,25,000, 1,00,000, 7,75,000, , ABC Ltd., Cash Flow Statement, (for the year ended 31st March, 2019), Particulars, , (A) Cash Flow from Op er at ing Ac tiv i ties :, Net Profit for the year, Closing Surplus (31.3.2019), Less : Opening Surplus (31.3.2018), Add : Increase in Current Liabilities :, Trade Payables (` 3,50,000 – 2,75,000), , Amount, `, , Amount, `, , 2,00,000, 1,00,000, 1,00,000, 75,000, 1,75,000, , 451
Page 938 :
SBPD Pub li ca tions Accountancy (XII), Less : Increase in Current Assets :, (50,000), Trade Receivables (` 2,75,000 – 2,25,000), 1,25,000, Cash Flow from Op er at ing Ac tiv i ties (A), (B) Cash Flow from In vest ing Ac tiv i ties :, (1,50,000), Pur chase Fixed Assets (` 6,00,000 – 4,50,000), (1,50,000), Cash used in In vest ing Ac tiv i ties (B), (C) Cash Flow from Fi nanc ing Ac tiv i ties :, 1,00,000, Proceeds from Issue of Share Capital (` 5,00,000 – 4,00,000), 1,00,000, Cash Flow from Fi nanc ing Ac tiv i ties (C), 75,000, (D) Net In crease in Cash and Cash Equivalents (A + B + C), 1,00,000, Add : Opening Cash and Cash Equivalents, 1,75,000, (E) Closing Cash and Cash Equivalents, , Illustration 28(B), From the following Balance Sheets of M Ltd., prepare Cash Flow State ment :, Particulars, 31.3.2019 31.3.2020, `, `, I. EQUITY AND LIABILITIES, 1. Shareholders' Funds :, 5,00,000 5,50,000, (a) Equity Share Capital, 50,000, 75,000, (b) Reserves and Surplus (Balance of Statement of Profit and Loss), 2. Non-current Liabilities :, —, Mortgage Loan, 20,000, 3. Current Liabilities :, 30,000, 20,000, Trade Payables, Total 5,80,000 6,65,000, II. ASSETS, 1. Non-current Assets :, Fixed Assets (Tangible), Investments, 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, , Solution, , 2,50,000, 1,25,000, , 75,000, 1,25,000, 30,000, 5,80,000, , 70,000, 1,70,000, 50,000, 6,65,000, , Amount, , Amount, , Cash Flow Statement, (for the year ended 31st March, 2020), (In di rect Method), , Particulars, I. Cash Flow from Op er at ing Ac tiv i ties :, Profit at the end of the year 2019-20, Less : Profit at the end of the year 2018-19, Net Profit for the year, Add : De crease in Cur rent As sets :, Inventories (` 75,000 – 70,000), Less : In crease in Cur rent As sets :, Trade Receivables (` 1,25,000 – 1,70,000), , 452, , To tal, , 2,50,000, 1,00,000, , `, , 75,000, (50,000), 25,000, 5,000, 30,000, (45,000), , `
Page 939 :
Cash Flow State ment, Less : De crease in Cur rent Li a bil i ties :, Trade Payables (` 20,000 – 30,000), Net Cash used in Op er at ing Ac tiv i ties, II. Cash Flow from In vest ing Ac tiv i ties :, Pur chase of Investments (` 1,00,000 – 1,25,000), Net Cash Used in In vest ing Ac tiv i ties, III. Cash Flow from Fi nanc ing Ac tiv i ties :, Is sue of Shares for Cash, Pro ceeds from Mort gage Loan, Net Cash Flow from Fi nanc ing Ac tiv i ties, IV. Net In crease in Cash and Cash Equivalents (I + II + III), Add : Cash and Cash Equivalents in the be gin ning of the year, Cash and Cash Equivalents at the end of the year, , (10,000), (25,000), (25,000), (25,000), 50,000, 20,000, 70,000, 20,000, 30,000, 50,000, , (B) Prep a ra tion of Cash Flow State ment from Bal ance Sheets and Ad di tional, Information, Illustration 29 (Depreciation on Machine), From the following Balance Sheets of Goodluck Ltd., prepare Cash Flow Statement, according to Revised Accounting Standard-3 by Indirect Method :, Particulars, I. EQUITY AND LIABILITIES, (1) Shareholders’ Funds :, Share Capital, Reserves and Surplus, , Note No. 31.12.2018, , 1, , (2) Current Liabilities :, Creditors, II. ASSETS, (1) Non-current Assets :, Tangible Fixed Assets (Plant and Machinery), Intangible Fixed Assets (Goodwill), (2) Current Assets :, (a) Stock, (b) Debtors, (c) Cash and Cash Equivalents, , 31.12.2019, , `, , `, , 2,25,000, 35,000, , 2,50,000, 59,000, , 38,500, 2,98,500, , 50,500, 3,59,500, , 1,20,000, 36,000, , 1,60,000, 20,000, , 10,000, 1,19,000, 13,500, 2,98,500, , 15,000, 1,54,500, 10,000, 3,59,500, , Depreciation charged on Machinery ` 30,000., Note to Ac counts :, 1., , 31.12.2018, `, 20,000, 15,000, 35,000, , Re serve and Sur plus :, Gen eral Re serve, State ment of Profit & Loss, , Solution, , 31.12.2019, `, 35,000, 24,000, 59,000, , Goodluck Ltd., Cash Flow Statement (Indirect Method), Particulars, , (A) Cash Flow from Operating Activities :, Net Profit for the year (` 24,000 – 15,000), , `, , `, , 9,000, , 453
Page 940 :
SBPD Pub li ca tions Accountancy (XII), Add : Transfer to Reserve (` 35,000 – 20,000), Net Profit before Tax, Adjustments for Non-cash/Non-operating Expenses :, Add : Depreciation of Machinery, Add : Goodwill Written off, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : Increase in Creditors, Less : Increase in Debtors, Increase in Stock, Net Cash Gen er ated from Op er at ing Activities (A), (B) Cash Flow for Investing Activities :, Purchase of Machinery, Net Cash Used in In vest ing Ac tiv i ties (B), (C) Cash Flow from Financing Activities :, Issue of Shares, Net Cash Gen er ated from Fi nanc ing Ac tiv i ties (C), Net Cash Decrease in Cash and Cash Equivalents (A + B + C), Add : Cash and Cash Equivalents in the beginning of the year, Cash and Cash Equivalents at the end of the year, Working Note :, Dr., , 15,000, 24,000, 30,000, 16,000, 70,000, 12,000, (35,500), (5,000), , (28,500), 41,500, , (70,000), (70,000), 25,000, 25,000, (3,500), 13,500, 10,000, , 1. Ma chin ery Ac count, , Particulars, To Balance b/d, To Bank A/c (Purchases) (Bal. fig.), , Cr., , `, Particulars, 1,20,000 By Depreciation A/c, 70,000 By Balance c/d, 1,90,000, , `, 30,000, 1,60,000, 1,90,000, , Illustration 30 (Depreciation on Assets), From the following Balance Sheet of Viram Ltd., prepare Cash Flow Statement :, Liabilities, , 31.3.2019 31.3.2020, `, , Creditors, Loan from Bank, Statement of Profits & Loss, Share Capital, , Assets, , `, , 40,000, 40,000, 5,000, 80,000, , 44,000, 30,000, 8,000, 1,03,000, , 1,65,000, , 1,85,000, , Cash, Debtors, Stock, Machinery, Building, , 31.3.2019 31.3.2020, `, , `, , 5,000, 25,000, 30,000, 60,000, 45,000, 1,65,000, , 3,000, 20,000, 42,000, 60,000, 60,000, 1,85,000, , Depreciation charged on Machinery was ` 6,000 and on Building ` 4,000., (J.A.C., 2014), Solution, Cash Flow Statement, Particulars, A. Cash Flow from Op er at ing Ac tiv i ties :, Net Profit before Tax (Note 1), Adjustments for Non-cash/Non-operating Expenses :, Add : Depreciation on Machinery, De pre ci a tion on Building, Op er at ing Profit be fore Work ing Cap i tal Changes, , 454, , Amount, `, , 3,000, 6,000, 4,000, 13,000, , Amount, `
Page 941 :
Cash Flow State ment, 4,000, 5,000, 22,000, (12,000), , Add : In crease in Cred i tors, De crease in Debtors, Less : In crease in Stock, Net Cash Flow from Op er at ing Ac tiv i ties, B. Cash Flow from In vest ing Ac tiv i ties :, Purchase of Ma chin ery (Note 2), Purchase of Building (Note 3), Net Cash Used in In vest ing Ac tiv i ties, C. Cash Flow from Fi nanc ing Ac tiv i ties :, Issue of Shares (1,03,000 – 80,000), Payment of Loan from Bank, Net Cash Used in Fi nanc ing Ac tiv i ties, D. Net Decrease in Cash and Cash Equivalents (A + B + C), Add : Cash and Cash Equivalents in the beginning of the year, Cash and Cash Equivalents at the end of year, Working Notes :, 1. Net Profit before Tax :, Statement of Profit and Loss as on 31.3.2020, Less : Profit as on 31.3.2019, , Particulars, , Amount, , (6,000), (19,000), (25,000), 23,000, (10,000), (13,000), (2,000), 5,000, 3,000, , Net Profit before Tax, , 2. Machinery Account, , Dr., , 10,000, , Particulars, , `, 44,000, 40,000, 4,000, Cr., Amount, , `, , `, , 60,000 By De pre ci a tion A/c, , To Bal ance b/d, , 6,000, , 6,000 By Bal ance c/d, , To Cash A/c (Balance being Purchase), , 60,000, , 66,000, , 66,000, , 3. Building Account, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, To Bal ance b/d, To Cash A/c (Balance being Purchase), , `, , 45,000 By De pre ci a tion A/c, 19,000 By Bal ance c/d, , 60,000, , 4,000, , 64,000, , 64,000, , Illustration 31, Fol low ing is the Balance Sheet of Wisben Ltd. as on 31st March 2020 :, Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, Shares Capital, Reserves and Surplus (Profit & Loss Balance), 2. Non-Current Liabilities :, Long-term Borrowings, , Note No. 31-3-2020 31-3-2019, `, , `, , 7,00,000, 2,00,000, , 6,00,000, 1,10,000, , 3,00,000, , 2,00,000, , 455
Page 942 :
SBPD Pub li ca tions Accountancy (XII), 3. Current Liabilities, Trade Payables, Total, II. ASSETS, 1. Non-current Assets :, Fixed Assets (Tangible Assets : Machinery), 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, Total, , 30,000, 12,30,000, , 25,000, 9,35,000, , 11,00,000, , 8,00,000, , 70,000, 32,000, 28,000, , 60,000, 40,000, 35,000, 9,35,000, , 12,30,000, , Adjustments : During the year a piece of machinery of the book value of ` 80,000 was, sold for ` 65,000. Depreciation provided on tangible assets during the year amounted to, ` 2,00,000., Prepare a Cash Flow Statement., Solution, Cash Flow Statement, (for the year ended March 31, 2020), Particulars, , Amount, , Amount, , `, `, A. Cash Flow from Op er at ing Ac tiv i ties :, 90,000, Net Profit (as per statement of profit and loss) (2,00,000 – 1,10,000), Adjustments for :, 2,00,000, Add : Depreciation, 15,000 2,15,000, Loss on Sale of Machinery, 3,05,000, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : Decrease in Current Assets and Increase in Current Liabilities :, 8,000, De crease in Trade Receivables, 5,000, 13,000, Increase in Trade Payables, Less : Increase in Current Assets and Decrease in Current Liabilities :, (10,000), In crease in Inventories, 3,08,000, Cash Generated from Operations, —, Less : Tax Paid, Net Cash Flow from Op er at ing Ac tiv i ties, 3,08,000, B. Cash Flow from In vest ing Ac tiv i ties :, (5,80,000), Purchase of Ma chin ery, 65,000, Proceeds from Sale of Machinery, Net Cash Used in In vest ing Ac tiv i ties, (5,15,000), C. Cash Flow from Fi nanc ing Ac tiv i ties :, 1,00,000, Proceeds from Issue of Equity Shares, 1,00,000, Long-term Borrowings raised, 2,00,000, Net Cash Flow from Fi nanc ing Ac tiv i ties, (7,000), D. Net Increase or Decrease in Cash and Cash Equivalents (A + B + C), 35,000, Add : Cash and Cash Equivalents in the beginning of the period, 28,000, Cash and Cash Equivalents at the end of the period, , 456
Page 943 :
Cash Flow State ment, Working Notes :, Dr., , Tangible Assets (Machinery) Account, Particulars, , Amount, , Cr., , Particulars, , Amount, , `, To Bal ance b/d, To Bank A/c (Purchase–Balancing figure), , `, , 8,00,000 By Bank A/c (Sale), 5,80,000 By Depreciation A/c, , 65,000, 2,00,000, , By Statement of Profit and Loss (Loss), , 15,000, 11,00,000, , By Balance c/d, 13,80,000, , 13,80,000, , Illustration 32, Prepare Cash Flow Statement from the following Balance Sheets of Philips Ltd. as at, 31st March, 2019 and 2020 :, Particulars, I. EQUITY AND LIABILITIES, (1) Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, (2) Current Liabilities :, (a) Trade Payables, (b) Short-term Provisions, , 2020, , 2019, , `, , `, , 5,00,000, 2,10,000, , 4,00,000, 1,30,000, , 2, , 70,000, 40,000, 8,20,000, , 50,000, 30,000, 6,10,000, , 3, , 5,20,000, , 3,60,000, , 4, , 30,000, , 40,000, , 50,000, , 40,000, , 30,000, , 20,000, , 50,000, 90,000, 50,000, 8,20,000, , 60,000, 70,000, 20,000, 6,10,000, , Note No., , 1, , Total, , II. ASSETS, (1) Non-current Assets :, (a) Fixed Assets, (i) Tangible Assets, (ii) Intangible Assets, (b) Non-current Investment, (2) Current Assets :, (a) Current Investments Marketable, , 5, , (b) Inventories, (c) Trade Receivables (Good), (d) Cash and Cash Equivalents, To tal, Notes to Ac counts :, Particulars, 1. Reserves and Surplus :, Securities Premium Reserve, Balance in Statement of Profit and Loss, 2. Short-term Provisions :, Provision for Tax, Provision for Doubtful Debts, , 2020, , 2019, , `, , `, , 30,000, 1,80,000, 2,10,000, , 20,000, 1,10,000, 1,30,000, , 25,000, 15,000, 40,000, , 20,000, 10,000, 30,000, , 457
Page 944 :
SBPD Pub li ca tions Accountancy (XII), 3. Fixed Assets – Tangible :, Land and Building, Plant & Machinery, 4. Fixed Assets – Intangible :, Trade Marks, 5. Current Investments :, Marketable Securities, , 2,50,000, 2,70,000, 5,20,000, , 2,10,000, 1,50,000, 3,60,000, , 30,000, , 40,000, , 30,000, , 20,000, , Other Information :, (i) Depreciation on Plant and Machinery ` 19,000., (ii) Interest on Investment is ` 4,000., Solution, Cash Flow Statement (Indirect Method), (for the year ended 31st March, 2020), Particulars, (A) Cash Flow from Operating Activities :, Net Profit before tax and extra-ordinary items :, Net Profit (` 1,80,000 – 1,10,000), Add : Provision for Tax, Add : Increase in Provision for D.D. (all good), Adjustments for :, Add : Depreciation, Trade Mark Written off, Less : Interest on Investment, Operating Profit before Working Capital Changes, Add : Decrease in Current Assets :, Inventories, Increase in Current Liabilities :, Trade Payables, Less : Increase in Current Assets :, Trade Receivables, Less : Tax Paid (2019), , Details, `, `, 70,000, 25,000, 5,000, 19,000, 10,000, (4,000), , 1,00,000, , 25,000, 1,25,000, , 10,000, 20,000, , 30,000, 1,55,000, , 20,000, , (20,000), 1,35,000, (20,000), , Net Cash Flow from Op er at ing Ac tiv i ties, (B) Cash Flow from Investing Activities :, Purchase of Land and Building, Purchase of Plant and Machinery [2,70,000 – (1,50,000 – 19,000)], Purchase of Investment, Interest on Investment received, Net Cash used in In vest ing Ac tiv i ties, (C) Cash Flow from Financing Activities :, Issued of Share Capital at Premium ( ` 1,00,000 + ` 10,000 Premium), Net Cash Flow from Fi nanc ing Ac tiv i ties, (D) Net Increase in Cash and Cash Equivalents (A + B + C), (E) Cash and Cash Equivalents : Opening Balance, (` 20,000 + ` 20,0003 ) (Marketable Securities), (F) Cash and Cash Equivalents : Closing Balance, (` 30,000 + ` 50,0003 ) (Marketable Securities), , 458, , Amount, `, , 1,15,000, (40,000), (1,39,000), (10,000), 4,000, 1,10,000, , (1,85,000), 1,10,000, 40,000, 40,000, 80,000
Page 945 :
Cash Flow State ment, Work ing Notes :, 1. Pro vi sion for Doubt ful rep re sents trans fer from Net Profit of the Cur rent year. It is just, like ad di tion to re serve as debt ors are all good., 2. Shares have been is sued at a pre mium., 3. Cash and cash equiv a lents = Cash and Cash Equivalents + mar ket able se cu ri ties., , Illustration 33 (Depreciation and In terim Div i dend Paid), From the following Bal ance Sheets of Vijaya Ltd. as on 31.3.2019 and 31.3.2020,, pre pare a Cash Flow State ment :, Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserve and Surplus, 2. Current Liabilities :, Trade Payables, , Note No. 31.3.2019 31.3.2020, `, , 1, , Total, , II. ASSETS, 1. Non-current Assets :, Fixed Assets, 2. Current Assets :, Inventories, Trade Receivables, Cash & Cash Equivalents, Total, , `, , 45,000, 24,000, , 65,000, 42,000, , 8,700, 77,700, , 11,000, 1,18,000, , 46,700, , 83,000, , 11,000, 18,000, 2,000, 77,700, , 13,000, 19,500, 2,500, 1,18,000, , Note to Accounts :, Particulars, 1. Reserves and Surplus :, General Reserve, Balance in Statement of Profit & Loss, Preliminary Expenses, , Current, Year, `, 27,500, 15,000, (500), 42,000, , Previous, Year, `, 15,000, 10,000, (1,000), 24,000, , Additional Information :, (i) De pre ci a tion on Fixed As sets for the year 2019-20 was ` 14,700., (ii) An in terim div i dend ` 7,000 has been paid to the share hold ers dur ing the year., (C.B.S.E., Delhi, Modified, 2011), Solution, Cash Flow Statement, (for the year ended 31.3.2020), Particulars, (A) Cash Flow from Op er at ing Ac tiv i ties :, Net Profit be fore Tax (Working Note 1), Ad just ments made for Non-cash/Non-operating Expenses :, Add : Pre lim i nary Ex penses Writ ten off (` 1,000 – 500), De pre ci a tion, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : In crease in Trade Payables, Less : In crease in Inventories (Stock), Less : In crease in Trade Receivables, Net Cash Flow from Op er at ing Ac tiv i ties, , Amount, `, , 500, 14,700, 2,300, (2,000), (1,500), , Amount, `, 24,500, , 15,200, 39,700, , (1,200), 38,500, , 459
Page 946 :
SBPD Pub li ca tions Accountancy (XII), (B) Cash Flow from Investing Activities :, Purchase of Fixed Assets (Working Note 2), Net Cash Used in In vest ing Ac tiv i ties, (C) Cash Flow from Financing Activities :, Proceeds from Issue of Shares, Interim Dividend Paid, Net Cash Flow from Fi nanc ing Ac tiv i ties, Net Increase in Cash and Cash Equivalents (A + B + C), Add : Opening Balance of Cash and Cash Equivalents, Closing Balance of Cash and Cash Equivalents, Work ing Note :, 1. Cal cu la tion of Net Profit be fore Tax :, Net Profit as per State ment of Profit & Loss (` 15,000 – 10,000), Add : Trans fer to Gen eral Re serve (` 27,500 – 15,000), In terim Div i dend paid dur ing the year, , Particulars, , Amount, `, , To Balance b/d, To Bank A/c (Being Purchase) (Bal. fig.), , (51,000), 20,000, (7,000), 13,000, 500, 2,000, 2,500, , Net Profit be fore Tax, , 2. Fixed As sets Ac count, , Dr., , (51,000), , Particulars, , `, 5,000, 12,500, 7,000, 24,500, Cr., Amount, `, , 46,700 By Depreciation A/c, 51,000 By Balance c/d, 97,700, , 14,700, 83,000, 97,700, , Il lus tra tion 34 (De pre ci a tion and Interest on Debentures), Prepare Cash Flow Statement on the basis of the information given in the Balance, Sheets of ABC Ltd., as at 31.03.2020 and 31.03.2019 :, Note No., , Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, (a) Long-term Borrowings, 3. Current Liabilities :, (a) Trade Payables, , 1, , Total, II. ASSETS, 1. Non-current Assets, (a) Fixed Assets :, (i) Tangible Assets (Machinery), (b) Non-current Investments, 2. Current Assets :, (a) Current Investments (Marketable), (b) Inventories, (c) Cash and Cash Equivalents, Total, , 31.03.2020 31.03.2019, `, , `, , 70,000, 44,000, , 60,000, 8,000, , 50,000, , 50,000, , 25,000, 1,89,000, , 9,000, 1,27,000, , 98,000, 16,000, , 84,000, 6,000, , 18,000, 49,000, 8,000, 1,89,000, , 20,000, 12,000, 5,000, 1,27,000, , Notes to Accounts :, Particulars, 1. Reserves & Surplus :, General Reserve, , 460, , 31.03.2020, `, 30,000, , 31.03.2019, `, 20,000
Page 947 :
Cash Flow State ment, Surplus i.e. Balance in Statement of Profit and Loss, , 14,000, , (12,000), , 44,000, , 8,000, , Ad di tional In for ma tion :, (i) Depreciation provided on tangible assets (machinery) during the year ` 8,000., (ii) Interest paid on debentures ` 5,000., Solution, Cash Flow State ment, (for the year ended 31.03.2020), (A) Cash Flow from Operating Activities, Net Profit before Tax (Note No. 1), Items to be added Non-operating Expenses :, `, Depreciation on Fixed Tangible Asset (Machinery), 8,000, Interest on Long-term Borrowings (Debentures), 5,000, Operating Profit before Working Capital Changes (A + B), Add : Increase in Current Liabilities :, Trade Payables, 16,000, Less : Increase in Current Assets :, Inventories, (37,000), Net Cash Flow from Operating Activities), (B) Cash Flow from Investing Activities :, Purchase of Tangible Fixed Assets (Machinery) (Note No. 2), Purchase of Non-current Investments, Net Cash Used in In vest ing Ac tiv i ties, (C) Cash Flow from Financing Activities :, Proceeds from Issue of Equity Share Capital, Interest on Long-term Borrowings paid (Debentures), Net Cash Flow from Fi nanc ing Ac tiv i ties, (D) Net Increase in Cash and Cash Equivalents (A + B + C), Add : Cash and Cash Equivalents in the beginning :, Short-term Marketable Securities, Cash and Cash Equivalents, Cash and Cash Equivalents at the end of the year :, Short-term Marketable Securities, 18,000, Cash and Cash Equivalents, 8,000, , `, , 13,000, 49,000, , (21,000), 28,000, (22,000), (10,000), (32,000), 10,000, (5,000), 5,000, 1,000, 20,000, 5,000, , Working Notes :, 1. Calculation of Net Profit before Tax :, Net Profit for the current year (` 14,000 + 12,000), Add : Transfer to General Reserve, Net Profit before Tax, 2. Fixed Tan gi ble As sets (Ma chin ery), , Dr., Particulars, , Amount, , Particulars, , To Balance b/d, , `, 84,000 By Depreciation A/c, , To Cash Purchases (Bal. fig.), , 22,000 By Balance c/d, 1,06,000, , `, , 36,000, , 25,000, , 26,000, `, 26,000, 10,000, 36,000, Cr., Amount, `, 8,000, 98,000, 1,06,000, , 461
Page 948 :
SBPD Pub li ca tions Accountancy (XII), Illustration 35, Following is the Balance Sheet of Thermal Power Ltd. as at 31-3-2019 and 31-3-2020 :, Particulars, , Note No., , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus (Statement of Profit & Loss), 2. Non-current Liabilities :, (a) Long-term Borrowings, 3. Current Liabilities :, (a) Trade Payables, (b) Short-term Provisions for Tax, Total, II. ASSETS, 1. Non-current Assets, (a) Fixed Assets :, (i) Tangible : Machinery, Less : Dep. Provision, (ii) Intangible : Goodwill, 2. Current Assets :, (a) Current Investments, (b) Inventories, (c) Trade Receivables, (d) Cash and Cash Equivalents, , 2019-20, , 2019-20, , 2018-19, , `, , `, , 12,00,000, 3,00,000, , 11,00,000, 2,00,000, , 2,40,000, , 1,70,000, , 1,79,000, 50,000, 19,69,000, , 2,04,000, 77,000, 17,51,000, , 10,70,000, 40,000, , 8,50,000, 1,12,000, , 2,40,000, 1,29,000, 1,70,000, 3,20,000, 19,69,000, , 1,50,000, 1,21,000, 1,43,000, 3,75,000, 17,51,000, , 2018-19, , 12,70,000 10,00,000, (2,00,000) (1,50,000), , Total, , Ad di tional In for ma tion :, During the year, a piece of machine costing` 24,000 on which accumulated depreciation was, ` 16,000 was sold for ` 6,000. Prepare Cash Flow Statement., Solution, Cash Flow State ment (In di rect Method), (for the year ending 31.03.2020), Particulars, (A) Cash Flow from Operating Activities :, Net Profit before tax (W/N 1), Items to be Added :, Goodwill (written-off), Depreciation (During the year) (W/N 3), Loss on sale of Tangible Assets, Op er at ing Profit be fore Work ing Cap i tal Changes, Less : Increase in Current Assets, Decrease in Current Liabilities, Decrase in Trade Payables, Increase in Inventories, Increase in Trade Receivables, Less : Tax Paid, Net Cash Flow from Op er at ing Ac tiv i ties, , 462, , Details, `, , Amount, `, , 1,50,000, 72,000, 66,000, 2,000, , (25,000), (8,000), (27,000), , 1,40,000, 2,90,000, , (60,000), 2,30,000, (77,000), 1,53,000
Page 949 :
Cash Flow State ment, (B) Cash Flow from Investing Activities :, (2,94,000), Purchase of Tangible Assets (Machinery) (W/N 2), 6,000, Sale of Tangible Assets (Machinery), Net Cash used in In vest ing Ac tiv i ties, (2,88,000), (C) Cash Flow from Financing Activities :, 1,00,000, Issue of Share Capital, 70,000, Long-term Borrowings, Net Cash Flow from Fi nanc ing Ac tiv i ties, 1,70,000, 35,000, Net Increase in Cash and Cash Equivalents (A + B + C), 5,25,000, (D) Cash and Cash Equivalents : Opening balance (` 1,50,000 + 3,75,000), 5,60,000, (E) Cash and Cash Equivalents : Closing balance (` 2,40,000 + 3,20,000), Note : As sume Short-term Pro vi sions as Pro vi sion for Tax., Working Notes :, 1. Calculation of Net Profit before Tax, Surplus i.e ., Balance in Statement of Profit & Loss (` 3,00,000 – 2,00,000), Add : Provision for tax, Net Profit before Tax, Dr., 2. Machinery Account, Particulars, To Balance b/d, To Bank A/c (Bal. fig.), , Amount, , Particulars, , `, 1,00,000, 50,000, 1,50,000, Cr., Amount, , `, 10,00,000 By Depreciation Provision A/c, 2,94,000 By Bank A/c (Sale), , `, , By Statement of Profit & Loss (Loss), , 16,000, 6,000, 2,000, 12,70,000, , By Balance c/d, 12,94,000, , 12,94,000, , 3. Provision for Depreciation Account, , Dr., Particulars, To Machinery A/c, To Balance c/d, , Amount, , Cr., , Particulars, , Amount, , `, 16,000 By Balance b/d, 2,00,000 By Statement of Profit and Loss (Dep.), , 1,50,000, 66,000, , `, , 2,16,000, , 2,16,000, , Illustration 36 (Sale of Ma chine and Pay ment of Div i dend), From the fol low ing Bal ance Sheets of XY Ltd. as on 31.3.2019 and 31.3.2020, pre pare, Cash Flow Statement :, 2019, , Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders' Funds :, Equity Share Capital, 8% Preference Share Capital, 2. Reserves and Surplus :, General Reserve, Statement of Profit and Loss (Balance), 3. Non-current Liabilities :, 10% Debentures, , `, , Total, , 2020, `, , 4,00,000, 60,000, , 7,50,000, 1,00,000, , 70,000, 1,70,000, , 50,000, 1,20,000, , 2,00,000, 9,00,000, , 1,80,000, 12,00,000, , 463
Page 950 :
SBPD Pub li ca tions Accountancy (XII), II. ASSETS, 1. Non-current Assets :, Fixed Assets, 2. Current Assets :, Inventories, Trade Receivables, Bank, , Total, , 5,00,000, , 7,00,000, , 2,10,000, 1,40,000, 50,000, 9,00,000, , 2,50,000, 1,90,000, 60,000, 12,00,000, , Additional Information :, Dur ing the year ma chine cost ing ` 80,000 was sold for ` 50,000. Div i dend paid ` 80,000., Solution, Cash Flow Statement, (for the year ending 31st March, 2020), Particulars, A. Cash Flow from Operating Activities :, Net Profit before Taxation and Extra-ordinary Items (Note 1), Adjustments for Non-cash/Non-operating Items :, Add : Loss on Sale of Machine, In ter est on De ben tures, Op er at ing Profit be fore Work ing Cap i tal Changes, Less : In crease in Inventories, In crease in Trade Receivables, Cash Flow from Op er at ing Ac tiv i ties (A), B. Cash Flow from Investing Activities :, Sale of Machine, Purchase of Fixed Assets, Cash Used in Investing Activities (B), C. Cash Flow from Fi nanc ing Ac tiv i ties :, Is sue of Eq uity Shares, Is sue of Pref er ence Shares, Re demp tion of De ben tures, Pay ment of In ter est on De ben tures, Pay ment of Div i dend, Cash Flow Gen er ated from Fi nanc ing Ac tiv i ties (C), D. Net Increase in Cash and Cash Equivalents (A + B + C), E. Add : Opening Balance of Cash and Cash Equivalents, F. Closing Balance of Cash and Cash Equivalents, Work ing Notes :, 1. Net Profit before Taxation and Extra-ordinary Items :, Profit and Loss Statement as on 31.03.2020, Less : Profit and Loss Statement as on 31.03.2019, , Amount, `, , Amount, `, , 10,000, 30,000, 20,000, (40,000), (50,000), , 50,000, (2,80,000), 3,50,000, 40,000, (20,000), (20,000), (80,000), , 50,000, 60,000, (90,000), (30,000), , (2,30,000), , 2,70,000, 10,000, 50,000, 60,000, , `, 1,20,000, 1,70,000, Net Loss during the year, (50,000), Less : Transfer from General Reserve, (20,000), Add : Dividend paid, 80,000, Net Profit before Tax, 10,000, 2. It is pre sumed that De ben tures are Re deemed on 31st March, 2020, i.e., at the end of current year., Accordingly, In ter est on De ben tures must have been paid on De ben tures of ` 2,00,000., 10, Interest on Debentures = 2,00, 000 ×, = ` 20,000., 100, 3. It is pre sumed that Div i dend paid in cludes Div i dend on Pref er ence Shares., , 464
Page 951 :
Cash Flow State ment, Fixed Assets Account, , 4., Dr., , Cr., Particulars, , To Bal ance b/d, To Bank A/c (Bal . fig .), , Amount, , Particulars, , Amount, , `, 5,00,000 By Bank A/c, 2,80,000 By Statement of Profit and Loss, By Bal ance c/d, 7,80,000, , `, 50,000, 30,000, 7,00,000, 7,80,000, , Illustration 37 (Depreciation, Interest Paid and Interest Received), Prepare Cash Flow Statement on the basis of the information given in the Balance, Sheets of ABC Ltd. as at 31.3.2019 and 31.3.2020 :, Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders' Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities, Long-term Borrowings : 10% Debentures, 3. Current Liabilities :, Trade Payables, , Note No., , 31.3.2020 31.3.2019, `, , 1, , 70,000, 44,000, , 60,000, 8,000, , 2, , 50,000, , 42,000, , 25,000, 1,89,000, , 17,000, 1,27,000, , 3, , 82,000, 16,000, 16,000, , 64,000, 20,000, 6,000, , 4, , 18,000, 49,000, 8,000, 1,89,000, , 20,000, 12,000, 5,000, 1,27,000, , Total, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets, (i) Tangible, (ii) Intangible (Goodwill), (b) Non-current Investments, 2. Current Assets :, (a) Current Investments (Markatable Securities), (b) Inventories, (c) Cash and Cash Equivalents, , `, , Total, Note to Ac counts :, , 31.3.2020 31.3.2019, `, `, 30,000, 20,000, 14,000, (12,000), 44,000, 8,000, , Particulars, 1. Reserves and Surplus :, General Reserve, Balance of Statement of Profit & Loss, , Ad just ments :, (i) Depreciation provided on tangible asset (Machinery) during the year ` 8,000., (ii) Interest paid on debentures ` 4,200., (iii) Interest received on Non-current Investment ` 600., Solution, Cash Flow Statement ABC Ltd. (Indirect Method), (for the year ended 31st March, 2020), Particulars, (A) Cash Flow from Operating Activities :, Net Profit before Tax and Extra-ordinary Items :, Net Profit (` 14,000 – (12,000)], , Amount, , Amount, , `, , `, , `, , 26,000, , 465
Page 952 :
SBPD Pub li ca tions Accountancy (XII), Add : General Reserve (` 30,000 – 20,000), Adjustments for :, Add : Depreciation on Fixed Tangible Asset (Machinery), Goodwill written off, Interest on Long-term Borrowings (Debentures), , 10,000, , Less : Interest received on Non-current Investments, Operating Profit before working capital charges, Add : Increase in Current Liabilities :, Trade Payables, Less : Increase in Current Assets, Inventories, Net Cash Flow from Op er at ing Ac tiv i ties (A), (B) Cash Flow from Investing Activities :, Purchase of Tangible Fixed Assets (Machinery), Purchase of Non-current Investments, Interest received on Non-current Investment, Net Cash Used in In vest ing Ac tiv i ties (B), (C) Cash Flow from Financing Activities :, Proceeds from Issue of Equity Share Capital, Proceeds from Issue of Long-term Borrowings (Debentures), Interest on Long-term Borrowings paid (Debentures), Net Cash Flow from Fi nanc ing Ac tiv i ties (C), (D) Net Increase in Cash and Cash Equivalents (A + B + C), (E) Cash and Cash Equivalents : Opening Balance, (F) Cash and Cash Equiv a lents : Closing Balance, Work ing Notes :, Dr., Particulars, , 36,000, 8,000, 4,000, 4,200, 52,200, (600), 51,600, 8,000, (37,000), 22,600, (26,000)1, (10,000), 600, 35,400, 10,000, 8,000, (4,200), 13,800, 1,000, 25,0002, 26,0002, , 1. Machinery Account, , To Balance b/d, To Bank A/c (Purchases Bal. fig.), , Cr., , Particulars, `, 64,000 By Depreciation A/c, 26,000 By Balance c/d, , `, 8,000, 82,000, 90,000, , 90,000, 2. Cash and Cash Equiv a lents in clude Cur rent In vest ment – Mar ketable Se cu ri ties., Particulars, ` 2019, Cash and Cash Equivalents, 5,000, Current Investment (Marketable), 20,000, Cash and Cash Equivalents, 25,000, , ` 2020, 8,000, 18,000, 26,000, , Illustration 38 (Provision for Tax and Tax Paid), Following are the balance Sheets of Krishna Ltd. as on 31st March, 2019 and 2020 :, Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus (Balancing in Statement of P & L), , 466, , Note, No., , 2019-20, `, , 2018-19, `, , 14,00,000 10,00,000, 5,00,000 4,00,000
Page 953 :
Cash Flow State ment, 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, Trade Payables, Short-term Provisions (Provision for Tax), , 5,00,000, , Total, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets :, (i) Tangible Assets, (ii) Intangible Assets (Goodwill), 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, , 1,00,000, 60,000, 80,000, 60,000, 25,80,000 16,60,000, , 16,00,000, 1,40,000, , To tal, , 1,40,000, , 9,00,000, 2,00,000, , 2,50,000 2,00,000, 5,00,000 3,00,000, 90,000, 60,000, 25,80,000 16,60,000, , Note to Ac counts :, Particulars, 1. Tangible Assets :, Machinery, Less : Accumulated Depreciation, , As on, 31.3.2020, 17,60,000, (1,60,000), 16,00,000, , As on, 31.3.2019, 10,00,000, (1,00,000), 9,00,000, , Prepare a Cash Flow Statement after taking into account the following adjustment :, Tax paid during the year amounted to ` 70,000., Solution, In the Books of Krishna Ltd., Cash Flow Statement, (for the year ended 31st March, 2020), Particulars, (A) Cash Flow from Operating Activities :, Net Profit before Tax (Working Note 1), Add : Non-operating/Non-cash Items :, Depreciation on Machinery, Goodwill Written off, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : Increase in Trade Payables, , Amount, `, , Amount, `, , 1,90,000, , 60,000, 60,000, 3,10,000, 40,000, 3,50,000, Less : Increase in Inventories, (50,000), Increase in Trade Receivables, (2,00,000), Cash Gen er ated from Op er a tions 1,00,000, Less : Income-Tax Paid, (70,000), Net Cash Flow (or Gen er ated) from Op er at ing Ac tiv i ties, 30,000, (B) Cash Flow from Investing Activities :, Purchase of Machinery, (7,60,000), Cash Used in In vest ing Ac tiv i ties, (7,60,000), , 467
Page 954 :
SBPD Pub li ca tions Accountancy (XII), (C) Cash Flow from Financing Activities :, Proceeds from Issue of Shares, Proceeds from Long-term Borrowings, Cash Flow from Fi nanc ing Ac tiv i ties, Net Increase in Cash and Cash Equivalents (A + B + C), Add : Cash and Cash Equivalents in the beginning of the period, Closing Balance of Cash and Cash Equivalents, , 4,00,000, 3,60,000, 7,60,000, 30,000, 60,000, 90,000, , Work ing Notes :, 1. Calculation of Net Profit before Tax :, Surplus i.e., Balance in Statement of Profit and Loss (` 5,00,000 – 4,00,000), Add : Provision for Tax 2, , `, 1,00,000, 90,000, 1,90,000, Cr., , 2. Provision for Tax Account, , Dr., Particulars, To Cash A/c (Tax paid), To Balance c/d, , Amount, , Particulars, , Amount, , `, 70,000 By Balance b/d, 80,000 By Provision made during the year, (Bal. fig.), 1,50,000, , `, 60,000, 90,000, 1,50,000, , Illustration 39, From the following Balance Sheets of B. C. R. Ltd. as on 31.03.2019 and 31.03.2020,, prepare a Cash Flow Statement :, Note No. 31.3.2019 31.3.2020, , Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Equity Share Capital, (b) Reserves and Surplus (Balance in Profit & Loss, Statement), 2. Current Liabilities :, (a) Short-term Loan (Bank Loan), (b) Trade Payables, (c) Outstanding Expenses, (d) Short-term Provision : Provision for Tax, , `, , To tal, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets :, Tangible Assets : Equipments, Intangible Assets : Patents, (b) Non-current Investments, 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents : Bank, , 5,00,000, , 7,00,000, , 2,00,000, , 3,50,000, , 1,00,000, 50,000, 55,000, 52,000, 50,000, 70,000, 30,000, 50,000, 9,35,000 12,72,000, , 5,00,000, 1,00,000, —, , To tal, , `, , 5,00,000, 95,000, 1,00,000, , 55,000 1,30,000, 80,000 1,47,000, 2,00,000 3,00,000, 9,35,000 12,72,000, , Ad di tional In for ma tion :, During the year equipment costing ` 1,00,000 was purchased. Loss on sale of equipment, amounted to ` 12,000. ` 18,000 depreciation was charged on equipment., , 468
Page 955 :
Cash Flow State ment, Solution, , Cash Flow State ment of B.C.R. Ltd., (for the year ended 31st March, 2020), Particulars, , Amount, , (A) Cash Flow from Operating Activities :, , `, , Net Profit before Tax (Working Note 1), Adjustments for Non-cash and Non-operating Expenses :, , 2,00,000, , Add : Depreciation on Equipment, , 18,000, 5,000, 12,000, 2,35,000, , Patents Written off, Loss on Sale of Equipment, Op er at ing Profit be fore Work ing Cap i tal Changes, Adjustments for Changes in Current Assets and Current Liabilities :, Add : Increase in Outstanding Expenses, Less : Increase in Inventories, Increase in Trade Receivables, Decrease in Trade Payables, Cash Gen er ated from Op er a tions be fore Tax, Less : Income-tax paid, Net Cash Flow from Op er at ing Ac tiv i ties, (B) Cash Flow from Investing Activities :, Cash Proceeds from Sale of Equipment (Working Note 2), Purchase of Equipment, Purchase of Investment, Net Cash Used in In vest ing Ac tiv i ties, (C) Cash Flow from Financing Activities :, Cash Proceeds from Issue of Equity Shares, Payment of Bank Loan, Net Cash Flow from Fi nanc ing Ac tiv i ties, , Amount, `, , 20,000, (75,000), (67,000), (3,000), 1,10,000, (30,000), 80,000, 70,000, (1,00,000), (1,00,000), (1,30,000), 2,00,000, (50,000), 1,50,000, 1,00,000, 2,00,000, 3,00,000, , Net In crease in Cash and Cash Equivalents (A + B + C), (D) Add : Opening Balance of Cash and Cash Equivalents, (E) Cash and Cash Equivalents at the end of the period, Working Notes :, 1. Net Profit before Tax :, , `, , Balance in Profit & Loss Statement (31.3.2020), Less : Balance in Profit & Loss Statement (31.3.2019), , 3,50,000, (2,00,000), 1,50,000, 50,000, , Add : Provision for Tax, , Net Profit before Tax 2,00,000, Dr., , 2., , Particulars, To Balance b/d, To Bank A/c (Purchase), , Equipment Account, , Cr., , `, Particulars, 5,00,000 By Depreciation A/c, 1,00,000 By Loss on Sale A/c, By Bank A/c (Sale) (Bal. fig.), By Balance c/d, , `, 18,000, 12,000, 70,000, 5,00,000, , 6,00,000, , 6,00,000, , 469
Page 956 :
SBPD Pub li ca tions Accountancy (XII), Illustration 40 (Tax Paid and In terim Div i dend Paid), From the following Balance Sheets of Mittal Ltd. as at 31st March, 2019, prepare Cash, Flow Statement :, Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus : Balance in the P. & L. Statement, 2. Long-term Borrowings : 12% Debentures, 3. Current Liabilities :, Short-term Borrowings : Bank Overdraft, II. ASSETS, 1. Non-current Assets :, Fixed Assets :, Tangible, Intangible, 2. Current Assets :, (a) Current Investments, (b) Inventory, (c) Cash and Cash Equivalents, , 31-3-2019 31-3-2018, `, , `, , 5,00,000, 2,00,000, 4,50,000, , 4,00,000, (50,000), 5,00,000, , 1,50,000, Total 13,00,000, , 50,000, 9,00,000, , 10,33,000, 20,000, , 7,05,000, 30,000, , 50,000, 1,07,000, 90,000, Total 13,00,000, , 60,000, 45,000, 60,000, 9,00,000, , Additional Information :, (i) 12% Debentures were redeemed on 31.3.2019., (ii) Depreciation Charged ` 70,000 on Tangible Fixed Assets., Solution, In the Books of Mittal Ltd., Cash Flow Statement, (for the year ended 31.03.2019), Particulars, , `, , `, , (A) Cash from Operating Activities :, , 2,50,000, Net Profit before Tax [` 2,00,000 – (50,000)], Add : Adjustment for Non-cash Items :, 70,000, Depreciation on Tangible Fixed Assets, 60,000, Interest on Debentures 12% of ` 5,00,000, 10,000, Goodwill written off (` 30,000 – 20,000), 3,90,000, Op er at ing Profit be fore Work ing Cap i tal Charges, Less : Increase in Current Assets :, Inventories (` 1,07,000 – 45,000), (62,000), Net Cash Flow from Op er at ing Ac tiv i ties (A) 3,28,000, (B)Cash Flow from Investing Activities :, (3,98,000), Purchase of Fixed Assets Tangible (Working Note 1), Net Cash Used in In vest ing Ac tiv i ties (B), (C)Cash Flow from Financing Activities :, Proceeds from Issue of Share Capital, Redemption of Debentures, Payment of Interest on Debentures, Increase in Bank Overdraft (` 1,50,000 – 50,000), Net Cash from Fi nanc ing Ac tiv i ties (C), , 470, , 1,00,000, (50,000), (60,000), 1,00,000, 90,000, , 3,28,000, , 3,98,000, , 90,000
Page 957 :
Cash Flow State ment, 20,000, , (D) Net Increase in Cash Equivalents (A + B + C), (E) Add : Cash and Cash Equivalents in the beginning, Current Investments, Cash and Cash Equivalents, (F) Cash and Cash Equivalents at the end of the year, Current Investments, Cash and Cash Equivalents, Work ing Notes :, Dr., , `, , 60,000, 60,000, , 1,20,000, , 50,000, 90,000, , 1,40,000, , 1. Fixed As sets (Tan gi ble) Ac count, , Particulars, , `, , Cr., Particulars, , To Balance b/d, , 7,05,000 By Depreciation A/c, , To Bank A/c (Purchase), , 3,98,000 By Balance c/d, , `, 70,000, 10,33,000, , 11,03,000, , 11,03,000, , Illustration 41 (Pro vi sion for Tax, Prov. for Dep. and Pay ment of In terim Div i dend), From the following Balance Sheets of Happy Ltd., prepare a Cash Flow Statement :, Balance Sheets, 31.03.2020 31.03.2019, , Particulars, , I. EQUITY AND LIABILITIES, , `, , 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus :, Statement of Profit & Loss, Securities Premium, 2. Current Liabilities :, Provision for Taxation, Trade Payables, Total, II. ASSETS, 1. Non-current Assets :, , Fixed Assets (Net), 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash Cash Equivalents, Total, , `, , 5,00,000, , 3,00,000, , 40,000, 40,000, , 30,000, 20,000, , 30,000, 30,000, 6,40,000, , 20,000, 20,000, 3,90,000, , 2,20,000, , 1,10,000, , 1,00,000, 2,20,000, 1,00,000, 6,40,000, , 60,000, 1,70,000, 50,000, 3,90,000, , Additional Information :, (i) In come-tax pro vi sion was made dur ing the year ` 24,000., (ii) Interim dividend was paid during the year ` 30,000., (iii) Provision for Depreciation on Fixed Assets : 31.03.2019 ` 20,000, 31.03.2020, ` 30,000., Solution, Cash Flow Statement (Indirect Method), (for the year ended 31.03.2020), Particulars, (A) Cash Flow from Operating Activities :, Net Profit before Tax and Extra-ordinary Items (Working Note 1), , `, , `, , 64,000, , 471
Page 958 :
SBPD Pub li ca tions Accountancy (XII), Adjustment for Non-cash and Non-operating Items :, 10,000, Depreciation on Fixed Assets (Working Note 2), 74,000, Op er at ing Profit be fore Work ing Cap i tal Changes, Add : Increase in Current Liabilities :, 10,000, 10,000, Trade Payables, Less : Increase in Current Assets :, (40,000), Inventories, (50,000), (90,000), Trade Receivables, (6,000), Cash from Operating Activities, (14,000), Less : Tax paid (Working Note 4), (20,000), Net Cash Flow from Op er at ing Ac tiv i ties, (B) Cash Flow from Investing Activities :, (1,20,000), Purchase of Fixed Assets (Machinery) (Working Note 3), Net Cash Used in In vest ing Ac tiv i ties, (1,20,000), (C)Cash Flow from Financing Activities :, 2,20,000, Proceeds from Issue of Shares at Premium (` 2,00,000 + 20,000), Interim Dividend paid (2020), (30,000), Net Cash Flow from Fi nanc ing Ac tiv i ties, 1,90,000, 50,000, Net Increase in Cash and Cash Equivalents (A + B + C), 50,000, Add : Cash & Cash Equivalents in the beginning of the year, 1,00,000, Cash and Cash Equivalents at the end of the year, Work ing Notes :, 1. Net Profit be fore Tax :, , `, , Net Profit as per Bal ance Sheet (` 40,000 – 30,000) (C.Y. – P.Y.), , 10,000, , Pro vi sion for Tax (2020), , 24,000, , In terim Div i dend paid, , 30,000, Profit be fore Tax, , 64,000, , 2. Provision for Depreciation Account, , Dr., Particulars, To Balance c/d, , Particulars, , `, 30,000 By Balance b/d, , By Profit & Loss Statement (Bal. fig.), 30,000, , Cr., `, 20,000, 10,000, 30,000, , 3. Fixed As sets Account, , Dr., Particulars, , `, , Cr., Particulars, , To Balance b/d ( ` 1,10,000 + 20,000), , 1,30,000 By Balance c/d (` 2,20,000 + 30,000), , To Bank A/c (Purchase), , 1,20,000, 2,50,000, , `, 2,50,000, 2,50,000, , 4. Pro vi sion for Tax a tion Ac count, , Dr., Particulars, , `, , Particulars, , Cr., `, , To Bank A/c (Bal. fig.), , 14,000 By Balance b/d, , 20,000, , To Balance c/d, , 30,000 By Profit & Loss Statement, , 24,000, , 44,000, , 44,000, , 472
Page 959 :
Cash Flow State ment, Illustration 42 (Cash Flow State ment of Sole Trad ers), Pre pare Cash Flow State ment from the Bal ance Sheets of Shalini for the year ended, 31st March, 2020 :, Balance Sheets, Liabilities, , 2018-19, , `, , 40,000, 44,000, 25,000, —, 40,000, 50,000, 1,25,000 1,53,000, , Creditors, Mrs. A’s Loan, Loan from Bank, Capital, , 2,30,000, , Assets, , 2019-20, , `, , 2018-19, `, , Cash, Debtors, Stock, Machinery, Land, Building, , 2,47,000, , 2019-20, `, , 10,000, 7,000, 30,000, 50,000, 35,000, 25,000, 80,000, 55,000, 40,000, 50,000, 35,000, 60,000, 2,30,000 2,47,000, , Dur ing the year a ma chine cost ing` 10,000 (ac cu mu lated de pre ci a tion` 3,000) was sold, for ` 5,000. De pre ci a tion pro vided dur ing the year ` 18,000., You are re quired to pre pare Cash Flow State ment., (J.A.C., 2011), Solution, Cash Flow Statement, (for the year ended 31st March, 2020), Particulars, , Amount, `, , A. Cash Flow from Op er at ing Ac tiv i ties :, Net Profit before Tax :, Cap i tal at the end of the year, Less : Cap i tal at the be gin ning of the year, Profit for the year, Adjustments for Non-Cash/Non-op er at ing Ex penses :, Add : Loss on Sale of Ma chin ery ` 10,000 – (5,000 + 3,000), De pre ci a tion, Op er at ing Profit be fore Changes in Work ing Cap i tal, Add : In crease in Cred i tors, De crease in Stock, Less : In crease in Debt ors, Cash Flow from Op er at ing Ac tiv i ties, B. Cash Flow from In vest ing Ac tiv i ties :, Sale of Ma chin ery, Less : Purchase of Land, Pur chase of Build ing, Net Cash Used in In vest ing Ac tiv i ties, C. Cash Flow from Fi nanc ing Ac tiv i ties :, Bank Loan raised, Re pay ment of Mrs. A’s Loan, Net Cash Used in Fi nanc ing Ac tiv i ties, Net De crease in Cash and Cash Equivalents (A + B + C), Add : Cash and Cash Equivalents at the be gin ning of the pe riod, Cash and Cash Equiv a lents at the end of the pe riod, , Amount, `, , 1,53,000, 1,25,000, 28,000, 2,000, 18,000, 48,000, 4,000, 10,000, 62,000, (20,000), 42,000, 5,000, (10,000), (25,000), (30,000), 10,000, (25,000), (15,000), (3,000), 10,000, 7,000, , 473
Page 960 :
SBPD Pub li ca tions Accountancy (XII), Illustration 43, State ments of Fi nan cial Po si tion of Mr. Shailesh are given be low :, Liabilities, , 1.4.2019, , 31.3.2020, , `, , Capital, Accounts Payable, , 7,39,000, 29,000, , 7,68,000, , Assets, , 1.4.2019, , `, , 31.3.2020, , `, , 6,15,000 Building, 25,000 Fixed Assets, Debtors, Stock, Cash, 6,40,000, , 1,00,000, 6,00,000, 20,000, 8,000, 40,000, 7,68,000, , `, , 80,000, 5,00,000, 17,000, 13,000, 30,000, 6,40,000, , Additional Information :, (i) There were no drawings., (ii) There was no purchase or sale of either building or fixed assets., Prepare a State ment of Cash Flow., Solution, Cash Flow Statement, (for the year ended 31st March, 2020), Particulars, (A) Cash Flow from Operating Activities :, Loss for the year (` 7,39,000 – 6,15,000), Adjustment for Non-cash/Non-operating Items :, Add : Depreciation on Building (` 1,00,000 – 80,000), Depreciation on Fixed Assets (` 6,00,000 – 5,00,000), Op er at ing Loss be fore Work ing Cap i tal Changes, Add : Decrease in Debtors (` 20,000 – 17,000), Less : Decrease in Accounts Payable (` 29,000 – 25,000), Increase in Stock (` 13,000 – 8,000), Net Cash used in Op er at ing Ac tiv i ties, (B) Cash Flow from In vest ing Ac tiv i ties, (C) Cash Flow from Fi nanc ing Ac tiv i ties, Net Decrease in Cash and Cash Equivalents (A + B + C), Add : Balance of Cash and Cash Equivalents in the beginning of the year, Balance of Cash and Cash Equivalents at the end of the year, , Amount, , Amount, , `, , `, , (1,24,000), 20,000, 1,00,000, (4,000), 3,000, (4,000), (5,000), , (6,000), (10,000), —, —, (10,000), 40,000, 30,000, , Illustration 44, From the fol low ing Bal ance Sheets of Bihar En ter prises, pre pare Cash Flow State ment, for the year end ing 31st March, 2020 :, Liabilities, , 2019, , Capital, Loan, Loan from Amit, Current Liabilities, , 474, , Assets, , 2020, `, , `, , 25,000, 8,000, 5,000, 8,000, , 30,600, 10,000, —, 8,800, , 46,000, , 49,400, , 2019, , 2020, `, , Cash, Stock, Debtors, Plant, Land, Building, , 2,000, 8,000, 6,000, 16,000, 7,000, 7,000, 46,000, , `, , 1,400, 5,000, 10,000, 11,000, 10,000, 12,000, 49,400
Page 961 :
Cash Flow State ment, Additional Information :, During the year a plant costing ` 2,000 (accumulated depreciation ` 600) was sold for, ` 1,000., Solution, Cash Flow Statement, (as on 31st March, 2020), Particulars, , Amount, , Amount, , `, , `, , (A) Cash Flow from Operating Activities :, Net Profit before Tax :, , 30,600, , Capital at the end of the year, , (25,000), , Less : Capital at the beginning of the year, , 5,600, , Profit before Tax, Adjustments for Non-cash/Non-operating Expenses :, , 400, , Add : Loss on Sale of Plant, , 3,600, , Depreciation, Op er at ing Profit be fore Work ing Cap i tal Changes, , 9,600, 800, , Add : Increase in Current Liabilities, , 3,000, , Decrease in Stock, , 13,400, (4,000), , Less : In crease in Debt ors, , 9,400, , Net Cash Flow from Op er at ing Ac tiv i ties, (B) Cash Flow from Investing Activities :, 1,000, , Sale of Plant, , (5,000), (3,000), , Purchase of Building, Purchase of Land, , (7,000), , Net Cash Used in In vest ing Ac tiv i ties, (C) Cash Flow from Financial Activities :, (5,000), , Amit's Loan paid, , 2,000, , Loan taken, Net Cash Used in Fi nan cial Ac tiv i ties, Net Decrease in Cash and Cash Equivalents, , (3,000), (600), , Add : Cash and Cash Equivalents in the beginning of the year, , 2,000, , Cash and Cash Equivalents at the end of the year, , 1,400, , Work ing Note :, Dr., Particulars, , Plant Ac count, Amount, , Cr., Particulars, , `, To Balance b/d, , 16,000 By, By, By, By, 16,000, , Amount, `, , Cash A/c (Plant sold), Statement of Profit & Loss (Loss), Depreciation A/c, Balance c/d, , 1,000, 400, 3,600, 11,000, 16,000, , 475
Page 963 :
Cash Flow State ment, USEFUL QUES TIONS, (A) Long Answer Type Questions, , (5/6 Marks Questions), , 1. What is Cash Flow Statement ? How is it prepared ?, 2. Describe the objects and importance (or uses) of Cash Flow Statement., 3. What is the purpose of Cash Flow Statement ? What information is disclosed in Cash Flow, Statement ?, 4. Distinguish between Operating, Investing and Financing Activities., 5. Describe the procedure to prepare Cash Flow Statement., 6. Explain the major Cash Inflows and Outflows from Operating Activities., , (B) Short Answer Type Questions, 1., 2., 3., 4., 5., 6., 7., 7A., 7B., 8., 9., 10., 11., 12., 13., 14., 15A., 15B., 16., , (3/4 Marks Questions), , Enumerate the steps involved in the preparation of a Cash Flow Statement. Discuss., Discuss the limitations of Cash Flow Statement., What are the objectives of preparing Cash Flow Statement., (N.C.E.R.T.), What is Cash Flow Statement ?, What is the difference between Cash from Operations and Net Profit ?, How the various activities are classified (as per AS-3 revised) while preparing Cash Flow, Statement ?, (N.C.E.R.T.), Explain the important of Cash Flow Statement., Explain the major Cash Inflow and Outflow from Financing Activites., (N.C.E.R.T.), Explain the major Cash Inflows and Outflows from Investing Activities., (N.C.E.R.T.), How Cash from Operating Activities is calculated ?, Explain the usess of Cash Flow Statement., (N.C.E.R.T.; U.S.E.B., 2010, 13), Why is Cash Flow Statement prepared ?, Give any three points of distinction between ‘Fund Flow Statement’ and ‘Cash Flow Statement’., What is meant by Cash Flow from Operating Activities ?, How is Cash Flow from Operating Activities calculated under direct method ?, How is Cash Flow from Operating Activities calculated under indirect method ?, Explain any three uses of Cash Flow Statement., What do you mean by Cash Flow State ment ? Ex plain., Classify the following activities under :, (a) Op er at ing Ac tiv i ties, (b) In vest ing Ac tiv i ties, (c) Fi nan cial Ac tiv i ties, (d) Cash Equiv a lents, (i), Cash Sales, (ii), Pur chase of Land, (iii), Pro ceeds from Sale of Ma chin ery, (iv), Cash Re ceipts from Debt ors/Cus tom ers, (v), Cash paid to Cred i tors/Sup pli ers, (vi), Wages and Sal a ries paid, (vii), Dividend re ceived on shares held as in vest ment, (viii) Bank Over draft, (ix), Pro ceeds from Is sue of Eq uity Shares, (x), Re fund of In come-tax re ceived, (xi), Cash Pur chases, (xii), Rent re ceived on Prop erty held as in vest ments, (xiii) Un der writ ing Com mis sion paid, (xiv) Pro ceeds from Sale of Pat ents, (xv), Pur chase of De ben tures, (xvi) In terim Div i dend paid on Eq uity Shares, (xvii) Cash Credit, (xviii) In come-tax paid, , 477
Page 964 :
SBPD Pub li ca tions Accountancy (XII), (xix) In ter est paid on Long-term Borrowings, (xx), Man u fac tur ing Over heads., [Ans. (a) Operating Activities : (i), (iv), (v), (x), (xi), (xviii), (xx); (b) Investing Activities : (ii),, (iii), (vi), (vii), (xii), (xiv), (xv); (c) Financing Activities : (ix), (xiii), (xvi), (xix); (d) Cash, Equivalents : (viii), (xvii)], 17. Which of the following changes will decrease the cash from operations :, (i) Increase in the Value of Stock, (ii) Decrease in the Amount of Temporary Investments,, (iii) Decrease in the Amount of Bills Payable, (iv) Increase in the Amount of Creditors,, (v) Decrease in the Amount of Wages Outstanding, (vi) Increase in the Amount of Prepaid Expenses, [Ans. (i), (iii), (v) and (vi)], 18. How are the various activities classified according to AS-3 (Revised) while preparing the Cash, Flow Statement ?, 19. Classify the following activities into operating activities, investing activities and financial, activities :, (i) Pur chase of ma chin ery,, (ii) Pro ceeds from is su ance of eq uity share cap i tal,, (iii) Cash sales,, (iv) Pro ceeds from long-term borrowings,, (v) Pro ceeds from sale of old ma chin ery,, (vi) Cash re ceipts from debt ors., [Ans. Operating Activities : (iii), (vi); Investing Activities : (i), (v); Financial Activities : (ii),(iv).], 20. What are the sources of Cash Flow Statement ?, (J.A.C., 2010), 21. Write any two differences between Cash Flow Statement and Income Statement., (C) Very Short An swer Type Ques tions, (1/2 Mark Ques tions with An swers), 1. What is Cash Flow Statement (CFS) ? Or Give the meaning of Cash Flow Statement., (B.S.E.B., 2011, 18; U.S.E.B., 2011, 18; Raj. Board, 2015), [Ans. Cash Flow Statement is a statement showing inflows and outflows of cash and cash, equiv a lents. It shows in flows and out flows of cash from op er at ing, in vest ing and fi nan cial, activities.], 2. Name the accounting standard which governs the preparation of Cash Flow Statement., [Ans. AS-3 (Re vised).], 3. Give the meaning of Cash Flows., (C.B.S.E., Delhi, 2011; M.P. Board, 2016), [Ans. ‘Cash flows’ are ‘in flows’ and ‘out flows’ of ‘cash and cash equiv a lents’. In other words, cash, flow im plies move ment of cash in and out of non-cash items.], 4. What is meant by Cash Inflow ?, [Ans. Cash inflow means receipt of cash from non-cash items. For example, receipts from, op er at ing ac tiv i ties, re ceipts from sale of fixed as sets etc.], 5. What is meant by Cash Outflow ?, [Ans. Cash out flow means pay ment of cash in re spect of non-cash items.], 6. State any two objectives of preparing Cash Flow Statement., [Ans. (i) To high light cash gen er ated from var i ous ac tiv i ties, (ii) To high light cash po si t ion.], 7. What is the objective of preparing Cash Flow Statement ? Or State why a Cash Flow, Statement is prepared ?, (J.A.C., 2011; C.B.S.E., 2012), [Ans. The ob jec tive of preparing Cash Flow State ment is to pro vide use ful in for ma tion about, cash in flows and out flows of an en ter prise dur ing a par tic u lar pe riod.], 8. What is meant by Cash Equivalents ?, (C.B.S.E., (C) O.D., 2011, A.I., 2012), Or, What are Cash Equiv a lents ?, (C.B.S.E. O.D., 2011), [Ans. Cash equivalents are the highly liquid short-term investments which are rapidly, con verted into known amount of cash with out any risk of changes in value. For ex am ple,, Gov ern ment se cu ri ties, Trea sury bills etc.], , 478
Page 965 :
Cash Flow State ment, 9. How are various activities classified as per AS-3 (Revised) while preparing Cash Flow, Statement ?, [Ans. With a view to pre par ing Cash Flow State ment, var i ous ac tiv i ties are clas si fied into three, cat e go ries as per AS-3 (Re vised) :, (1) Cash Flow from Op er at ing Ac tiv i ties,, (2) Cash Flow from In vest ing Ac tiv i ties,, (3) Cash Flow from Fi nanc ing Ac tiv i ties], 10. What is meant by Operating Activities ?, [Ans. Op er at ing ac tiv i ties are the prin ci pal rev e nue pro duc ing ac tiv i ties of the en ter p rise. They, de ter mine the net profit or loss.], 11. Give any two examples of cash inflows from operating activities., [Ans. (i) Cash sales; (ii) Col lec tion from debt ors.], 12. Give any two examples of cash outflows from operating activities., [Ans. (i) Cash Pur chases; (ii) Pay ment of Sal a ries.], 13. What is meant by Investing Activities ?, [Ans. Investing activities are the transactions involving purchase and sale of long-term, pro duc tive assets.], 14. Write any two items of cash inflows from investing activities., (Raj. Board, 2013), [Ans. (i) Sale of In vest ments; (ii) Sale of Fur ni ture.], 15. List any two activities which result into outflow of cash., (C.B.S.E., O.D., 2011), [Ans. (i) Pur chase of Plant and Ma chin ery; (ii) Pur chase of Fur ni ture.], 16. What is meant by Financing Activities ?, [Ans. Fi nanc ing ac tiv i ties are those ac tiv i ties which re sult in changes in size and com po si t ion of, funds (both owner’s cap i tal and borrowings) of the com pany.], 17. Give two examples of cash inflows from financing activities., [Ans. (i) Cash Re ceipts from Is sue of Shares; (ii) Cash Re ceipts from is su ing De ben tures.], 18. Give two examples of cash outflows from financing activities. (C.B.S.E., O.D., 2011), [Ans. (i) Re pay ment or Re demp tion of De ben tures, (ii) Pay ment of In ter est and Div i dends.], 19. Classify the following into operating, investing and financing activities :, (i) Goods sold for cash, (ii) Ma chin ery pur chased, (iii) In ter est re ceived., [Ans. (i) Op er at ing Ac tiv ities, (ii) In vest ing Ac tiv ities, (iii) Fi nanc ing Ac tiv ities.], 20. Classify the following into operating, investing and financing activities :, (i) Cash re ceived from debt ors; (ii) Is sue of shares for cash; (iii) Sale of ma chin ery., [Ans. (i) Op er at ing Ac tiv ities, (ii) Fi nanc ing Ac tiv ities, (iii) In vest ment Ac tiv ities.], 21. Write any two characteristics of Cash Flow Statement., (Raj. Board, 2016), [Ans. (1) To slow the changes in cash of the enterprise during two periods., (2) In Cash flow statement, activities are classified into there parts, viz., (i) Operating activities,, (ii) Investing Activities and (iii) Financing activities., (3) Preparation of Cash Flow Statements mandatory for listed companies., 22. Classify the following items into (i) Operating, and (ii) Investing/Financing activities :, (i) Re fund of in come-tax, (ii) Pay ment of div i dend to share hold ers., [Ans. (i) Op er at ing Ac tiv ities, (ii) Fi nanc ing Ac tiv ities.], 23. Why is ignoring non-cash items a limitation of the Cash Flow Statement ?, [Ans. It ig nores non-cash trans ac tions, e.g., is sue of shares against pur chase of ma chin ery or, re demp tion of de ben tures. These trans ac tions are sig nif i cant in na ture but do not flow, cash. So these trans ac tions do not find place in the cash flow statement.], 24. Why is the Cash Flow Statement not a suitable judge of profitability ?, [Ans. It ig nores non-cash trans ac tions. So ac tual prof it abil ity of the firm is not judged by cash, flow state ment.], , 479
Page 966 :
SBPD Pub li ca tions Accountancy (XII), 25. When does a flow of cash arise ?, [Ans. When ever there is move ment of cash in and out of non-cash items, flow of cash arises.], 26. How do you treat depreciation in calculating cash flow from operating activities ?, [Ans. Depreciation is added back to net profit while cal cu lat ing cash flow from op er at ing ac tiv i t ies.], 27. What is non-cash item ?, [Ans. When a trans ac tion does not in volve ei ther in flow or out flow of cash, the item is called, non-cash item. For ex am ple, de pre ci a tion. It does not re duce cash.], 28. Why do we add back preliminary expenses to net profit while calculating cash flow, from operating activities ?, [Ans. When pre lim i nary ex penses are writ ten off, they are deb ited to Profit and Loss Ac count. As, such they do not in volve cash pay ment. So, they are added back to net profit for cal cu lat ing, the op er at ing profit.], 29. State whether conversion of debentures into equity shares by financing company will, result in inflow, outflow or no flow of cash?, [Ans. No flow of cash, be cause it is a non-cash trans ac tion.], 30. Dividend paid by a finance company is classified under which kind of activity while, preparing cash flow statement., [Ans. Op er at ing Ac tiv ity.], 31. State whether the payment of cash to creditors will result in inflow, outflow or no flow, of cash., (C.B.S.E., A.I., 2011), [Ans. Out flow of cash.], 32. Dividend paid by a manufacturing company is classified under which kind of activity, while preparing cash flow statement ?, [Ans. Fi nanc ing Ac tiv ity.], 33. List any two items of operating activities that are typical of and pertaining to film, production unit., [Ans. (i) Fic ti tious as sets (e.g., good will) writ ten off; (ii) Am or ti sa tion of in tan gi ble as sets.], 34. List any two items of operating activities that are typical of and pertaining to, financial enterprise unit., [Ans. (i) Div i dend paid; (ii) In ter est on in vest ments.], 35. List any two items of operating activities, that is typical of and pertaining to print, media., [Ans. (i) Profit on sale of fixed as sets, (ii) Sale of news pa pers and magzines.], 36. State whether depreciation charged by a company will result in inflow, outflow or no, flow of cash., [Ans. There is no flow of cash be cause de pre ci a tion is treated as non-op er at ing ex penses.], 37. Interest paid by an investment company will come under which activity while, preparing cash flow statement., [Ans. Under op er at ing ac tiv ity.], 38. State whether cash deposited in Bank will result in inflow, outflow or no flow of cash., [Ans. No flow of cash be cause cash in cludes Bank also.], (C.B.S.E., Delhi, 2011), 39. State whether cash withdrawn from the Bank will result in inflow, outflow or no flow, of cash., [Ans. No flow of cash.], 40. Interest received by a finance company or Bank is classified under which kind of, activity while prepared Cash Flow Statement., [Ans. Operating activity because interest is the revenue income of a finance com pany from, pro duc ing activities.], 41. Under which type of activity will you classify ‘Issue of Equity Shares at Premium’, while preparing Cash Flow Statement ?, (C.B.S.E., 2010), [Ans. Under Financing Activities.], , 480
Page 967 :
Cash Flow State ment, 42. Purchase of patents would result in inflow, outflow or no flow of cash ? Give your, answer with reason., (C.B.S.E., 2010), [Ans. Outflow of cash. Reason–Cash is paid to acquire patents.], 43. Explain any two uses of Cash Flow Statement., (U.S.E.B., 2010), [Ans. (i) The cash flow statement gives information regarding sources and application of cash, and cash equivalents., (ii) The cash flow statement can be used to test the credibility of management decisions. ], 44. ‘Payment of Dividend' will come under what type of activity while preparing Cash, Flow Statement ?, (C.B.S.E., O.D., 2011), [Ans. Financing Activities.], 45. What is meant by Cash Flow from Investing Activities ?, [Ans. By cash flow from investing activities we mean flow of cash generated from or used in, investing activities, i.e., long-term assets like machinery, plant, buildings etc.], 46. What is meant by Cash Flow from Financing Activities ?, [Ans. By cash flow from financing activities we mean net cash generated from or used in, financing activities. For example, receipt of cash from issue of shares and debentures,, payment of interest and dividend etc.], 47. While preparing Cash Flow Statement, what type of activity is Payment of Cash to, acquire shares of another Company by a Trading Company ?, (C.B.S.E., 2012), [Ans. Investing Activities.], 48. Under which type of activity will you classify ‘Commission and Royalty Received’, while preparing Cash Flow Statement ?, (C.B.S.E., A.I., 2013, Set 1), [Ans. Operating Activities.], 49. Under which type of activity will you classify ‘Proceeds from Sale of Patents’ while, preparing Cash Flow Statement ?, (C.B.S.E., A.I., 2013, Set 2), [Ans. Investing Activities. ], 50. Under which type of activity will you classify ‘Interest paid on Long-term Borrowings,, while preparing Cash Flow Statement ?, (C.B.S.E., A.I., 2013, Set 3), [Ans. Financing Activities.], 51. Write the names of the methods of presentation of Cash Flow from Operating, Activities., [Ans. (i) Direct Method; (ii) Indirect Method], 52. Give two examples of Cash Flow from Operating Activities., [Ans. For Ans. See Q. 11 and Q. 12.], 53. Write any one limitation of Cash Flow Statement., [Ans. It is not suitable for judging the liquidity.], 54. Under which Accounting Standard, Cash Flow Statement is prepared ?, [Ans. AS-3 Revised.], , (D) Objective Type Questions, I. Se lect the cor rect alternative :, 1. Which of the following is not a Cash Outflow ?, (a) In crease in Cred i tors, (b) In crease in Stock, (c) In crease in Pre paid Ex penses, (d) None of these, 2. Cash Flow Statement is based upon :, (a) Ac crual Ba sis of Ac count, (b) Cash Ba sis of Ac count ing, (c) (a) and (b) both, (d) None of these, 3. Which of the following is not a Cash Inflow ?, (a) De crease in Debt ors, (b) Is sue of De ben tures, (c) De crease in Cred i tors, (d) None of these, 4. Cash Flow Statement is prepared from :, (a) Ad di tional In for ma tion, (b) State ment of Profit and Loss, (c) Bal ance Sheet, (d) All of these, , 481
Page 968 :
SBPD Pub li ca tions Accountancy (XII), 5. Which one of the following is not a non-cash item ?, (a) Cash Sales, (b) Good will Writ ten off, (c) De pre ci a tion, (d) Pro vi sion for Bad Debts, 6. Cash Flow Statement is related to :, (a) AS-3, (b) AS-6, (c) AS-9, (d) AS-12, 7. Which of the following transactions will result into flow of cash ?, (a) De pos ited ` 40,000 into Bank, (b) With drew cash from Bank ` 54,000, (c) Sold mar ket able se cu ri ties of ` 25,000 at par, (d) Sold ma chin ery of book value of ` 50,000 at a gain of ` 10,000, [C.B.S.E., 2015 (A.I.), Set III], 8. Which of the following transactions will result into ‘Flow of Cash’ ?, (a) De pos ited ` 10,000 into Bank, (b) With drew cash from Bank ` 14,500, (c) Sold ma chin ery of book value of ` 74,000 at a loss of ` 900, (d) Con verted ` 2,00,000, 9% de ben tures into eq uity shares, (C.B.S.E., 2015, Delhi, Set I), [Ans. (c) Sale of ma chin ery of book value of ` 74,000 at a loss of ` 9,000.], [Ans. 1. (a), 2. (b), 3. (c), 4. (d), 5. (a). 6. (a), 7. (d), 8. (c).], II. State whether the following statements are ‘True’ or ‘False’ :, 1. Increase in current liabilities is a source of cash., 2. Cash Flow Statement is based upon accrual basis of accounting., 3. Increase in the amount of debtors results in decrease in cash., 4. Interest paid on debentures is shown under Cash Flows from Operating Activities., 5. Increase in the amount of stock results in decrease in cash., 6. Net flow of cash in any period cannot be negative., [Ans. 1. True, 2. False, 3. True, 4. True, 5. True, 6. False.], , PRACTICAL PROB LEMS, ❏ Very Short An swer Type Numerical Ques tions, , (2 marks), 1. Cal cu late Cash Flow from the fol low ing in for ma tion of Build ing Ac count :, Open ing Bal ance` 2,50,000, Clos ing Bal ance ` 1,40,000 and Profit on Sale of Build ing` 30,000., [Ans. Bank A/c (Sale of Build ing) ` 1,40,000], 2. From the fol low ing in for ma tion find out the amount of pay ment of tax by pre par ing pro vi sion for, tax ac count :, Open ing Bal ance of Pro vi sion for tax ` 60,000 and Clos ing Bal ance ` 20,000. Tax pro vided dur ing, the year ` 80,000., [Ans. Tax paid ` 1,20,000], 3. From the fol low ing in for ma tion, Cal cu late the amount of cur rent year’s of de pre ci a tion :, 31.3.2018, 31.3.2019, Ac cu mu lated De pre ci a tion, ` 5,20,000, ` 8,00,000, The Ma chin ery Cost ing ` 6,00,000 Ac cu mu lated De pre ci a tion thereon ` 3,50,000 was sold for, ` 2,50,000., [Ans. Cur rent year’s De pre ci a tion ` 6,30,000], ❏ Long Answer Type Numerical Questions, ❏ Classification of Trasnactions Activities, 1. Classify the following transactions according to ‘Operating Activities’, ‘Investing Activities’ and, ‘Financing Activities’ :, (i) Sale of goods cost ing ` 20,000 for ` 25,000., (ii) 500, 12% De ben tures of ` 100 each con verted into eq uity shares of equal amount., (iii) 10,000 eq uity shares of ` 10 each is sued to sup plier of ma chin ery., (iv) Profit on sale of fixed as sets ` 15,000., (v) Dividend re ceived on shares ` 8,000., (vi) Cash pro ceeds from is sue of eq uity shares ` 1,00,000., [Ans. (i) Operating Activities, (ii) No, (iii) No, (iv) Investing Activities, (v) Investing Activities,, (vi) Financing Activities.], , 482
Page 969 :
Cash Flow State ment, ❏ Direct Method, ❏ Cash Flow from Op er at ing Ac tiv i ties without Missing Information (By Direct Method), 2. Calculate Cash Flow from Operating Activities of Ashoka Ltd. from the following information by, the Direct Method :, Particulars, Cash Sales, Cash Received from Debtors, Cash Purchases, Cash paid to Creditors, Salaries paid, Commission paid, , `, , 6,00,000, 24,000, 3,00,000, 16,000, 28,000, 20,000, , Particulars, Rent paid, Office Expenses paid, Insurance Claim for Loss of Stock, Income-tax paid, Tax Refund Received, Royalties received, , `, , 10,000, 4,000, 50,000, 50,000, 12,000, 30,000, , [Ans. Net Cash Gen er ated (In flow) from Op er at ing Ac tiv i ties ` 2,88,000], 3. Calculate Cash Flow from Operating Activities by Direct Method from the following information, for the year ended 31st March, 2020 :, Particulars, Cash Sales, Receipt from Debtors, Commission Received, Payment to Suppliers, Cash Purchases, Outstanding Rent, , `, Particulars, 75,000 Cash Payments for :, 2,00,000, Salaries, 40,000, Rent, 50,000 Proceeds from Flood Relief Settlement, 10,000 Income-tax paid, 5,000, , `, , 20,000, 12,000, 10,000, 30,000, , [Ans. Net Cash Flow from Op er at ing Ac tiv i ties ` 2,03,000], , ❏ Cash Flow from Op er at ing Ac tiv i ties with Miss ing In for ma tion (Direct Method), , 4. Cal cu late Cash Flow from Op er at ing Ac tiv i ties from the fol low ing in for ma tion by the Direct, Method :, Statement of Profit & Loss, (for the year ended 31st March, 2020), Particulars, `, `, 7,50,000, Revenue from Operations (Sales), Less : Expenses :, 5,00,000, Cost of Materials Consumed, 20,000, Depreciation, 10,000, Preliminary Expenses Written off, 85,000 6,15,000, Other Expenses, 1,35,000, Net Profit before Tax, 30,000, Less : Income-tax, 1,05,000, Net Profit af ter Tax, Ad di tional In for ma tion :, 31.3.2019, `, , Debt ors, Cred i tors, Bills Re ceiv ables, Bills Payables, Out stand ing Ex penses, Pre paid Ex penses, Stock, [Ans. Net Cash Flow from Op er at ing Activities ` 1,48,500], , 25,000, 20,000, 5,000, 2,000, 2,000, 1,000, 40,000, , 31.3.2020, `, , 20,000, 25,000, 6,000, 3,000, 1,500, 2,000, 35,000, , 483
Page 970 :
SBPD Pub li ca tions Accountancy (XII), 5. From the following information, calculate Cash Flow from Operating Activities by using Direct, Method :, Income Statement, (for the year ended 31st March, 2020), Particulars, , `, , 5,00,000, , I. Revenue from Operations (Sales), 3,00,000, 70,000, , II. Cost of Goods Sold, Employees Benefit Expenses (Salaries), , 20,000, 10,000, , Depreciation, Other Expenses (Insurance Premium), Total Expenses, Net Profit (I – II), Ad di tional In for ma tion :, , `, , 1.4.2019, `, , Debt ors, 50,000, Bills Re ceiv able, 20,000, Stock, 36,000, Pre paid In sur ance Pre mium, 3,000, Creditors, 20,000, Out stand ing Sal a ries, 10,000, [Ans. Cash Flow from Op er at ing Ac tiv i ties ` 91,000], ❏ Indirect Method, 6. Calculate Cash Flow from Operating Activities from the following balances :, 31.3.2019, `, , 4,00,000, 1,00,000, 31.3.2020, `, , 60,000, 30,000, 42,000, 4,000, 16,000, 12,000, , 31.3.2020, `, , Debt ors, 50,000, 40,000, Bills Re ceiv able, 10,000, 12,500, Cred i tors, 25,000, 20,000, Out stand ing Ex penses, 800, 1,000, Bills Pay able, 40,000, 25,000, Ac crued In come, 6,000, 7,000, De pre ci a tion, 40,000, 50,000, Bal ance in Profit & Loss Ac count, 50,000, 1,80,000, [Ans. ` 1,26,700], 7. The following is the position of current assets and current liabilities of Vijay Ltd. :, 2018, 2019, `, , `, , Cred i tors, 20,000, 15,000, Debt ors, 30,000, 20,000, Bills Re ceiv ables, 18,000, 29,000, Pre paid In sur ance, 2,000, 5,000, The company incurred a loss of ` 6,000 during the year. Calculate Cash from Operating, Activities., [Ans. Cash used ` 15,000], 8. Compute cash flow from operating activities from the following details :, 31-3-2020, 31-3-2019, `, , Cred i tors, Debt ors, Bills Re ceiv able, , 484, , 85,000, 1,40,000, 15,000, , `, , 70,000, 2,00,000, 10,000
Page 971 :
Cash Flow State ment, Short-term Loan, 20,000, —, Pro vi sion for Bad Debts, 7,000, 10,000, Bank Over draft, 50,000, 40,000, The com pany in curred a loss of ` 37,000 dur ing the year., [Ans. Net Cash Flow from Op er at ing Ac tiv i ties], [Hint. Bank Over draft will not be in cluded in com put ing cash flow from op er at ing ac tiv i ties], 9. The following is the position of current assets and current liabilities of Z Ltd. :, 2019, 2018, `, , `, , Pro vi sion for Bad Debts, 1,000, —, Short-term Loans, 10,000, 19,000, Cred i tors, 15,000, 10,000, Bills Re ceiv ables, 20,000, 40,000, The com pany in curred a loss of ` 45,000 dur ing the year. Cal cu late Cash Flow from Op er at ing, Activities., [Ans. Cash Loss ` 62,000], 10. Compute Cash from Operating Activities from the following information :, 2020, 2019, `, , Bal ance in State ment of P/L, 1,10,000, Debt ors, 50,000, Out stand ing Rent, 24,000, Good will, 80,000, Pre paid In sur ance, 8,000, Cred i tors/Ac counts Pay able, 26,000, [Ans. Cash Loss from Op er at ing Ac tiv i ties ` 32,000], 11. Cal cu late ‘Cash Flow from Op er at ing Ac tiv i ties’ from the fol low ing in for ma tion :, , 31st December, , Particulars, , 2018, , Debtors, Bills Receivable, Creditors, Bills Payable, Outstanding Expenses, Prepaid Expenses, Accrued Income, Income received in Advance, Operating profit be fore work ing cap i tal changes was ` 1,25,000., [Ans. Net Cash Flow from Op er at ing Ac tiv i ties ` 1,38,800.], 12. Calculate Cash Flow from Operating Activities :, 31.3.2019, Bal ance of Profit & Loss A/c, General Re serve, Out stand ing Ex penses, Good will, Trade Re ceiv ables, An item of plant cost ing ` 20,000 hav ing book value of ` 14,000, 2019-20 and de pre ci a tion writ ten off ` 5,000., [Ans. Net Cash Flow from Op er at ing Ac tiv i ties ` 24,000], , `, , 1,20,000, 62,000, 42,000, 76,000, 4,000, 38,000, , `, , 2019, , `, , `, , 75,000, 8,000, , 60,000, 12,000, , 45,000, 10,000, 2,000, 2,500, 1,000, , 50,000, 8,000, 3,000, 2,200, 1,500, , 1,000, , —, , 31.3.2020, `, , 30,000, 35,000, 10,000, 15,000, 5,000, 3,000, 20,000, 10,000, 40,000, 35,000, was sold for ` 18,000 dur ing, , 485
Page 972 :
SBPD Pub li ca tions Accountancy (XII), ❏ Calculation of Cash Flow from Operating Activities when Adjustment Items : Current, Assets and Liabilities are given, 13. Calculate Cash Flow from Operating Activities from the following :, (i) Prof its made dur ing the year ` 2,50,000 af ter con sid er ing the fol low ing items :, (a) De pre ci a tion on Fixed As sets, (b) Am or ti za tion of Good will, (c) Trans fer to Gen eral Re serve, (d) Profit on Sale of Land, (ii) The fol low ing is the po si tion of cur rent as sets and cur rent li a bil i ties :, 2018, , `, , 10,000, 5,000, 7,000, 3,000, 2017, , `, , `, , Trade Payables, 10,000, 15,000, Trade Re ceiv ables, 23,000, 22,000, Pre paid Ex penses, 4,000, 6,000, [Ans. Cash In flow ` 2,65,000], ❏ Calculation of Cash Flow from Operating Activities from Statement of Profit and Loss, 14. From the following Statement of Profit and Loss, calculate Cash Flow from Operating Activities :, Statement of Profit and Loss, (for the year ended 31st March, 2020), Particulars, Amount, `, , I. Revenue from Operations, II. Other Incomes :, Profit from Sale of Plant, Commission, Refund of Income-tax, III.Total Income, IV. Less : Expenses :, Salaries, Rent, Depreciation, Goodwill Written off, Loss on Sale of Land, Provision for Debts, Provision for Tax, Dividend Paid, V. Net Profit, , 95,000, `, , 17,000, 13,000, 3,000, , 38,000, 20,000, 4,000, 15,000, 3,000, 2,000, 4,000, 7,000, , 33,000, 1,28,000, , 93,000, 35,000, , [Ans. Net Cash Flow from Operating Activities ` 50,000.], , ❏ Cal cu la tion of Cash Flow from Op er at ing Ac tiv i ties on the ba sis of Bal ance Sheets, , 15. From the following informations, prepare Cash Flow Statement as on 31st March, 2020 :, Particulars, 2019, 2020, `, `, I. EQ UITY AND LI A BIL I TIES, Share holders’ Funds :, 60,000, 80,000, Share Capital, 80,000, 1,10,000, Re serves and Sur plus (Profit & Loss Bal ance), Cur rent Liabilities :, 40,000, 30,000, Trade Payables, 40,000, 45,000, Other Cur rent Liabilities, 2,20,000, 2,65,000, Total, , 486
Page 973 :
Cash Flow State ment, II. AS SETS, Non-cur rent As sets :, Fixed As sets, In vest ments, Cur rent As sets :, (a) In ven tories, (b) Trade Receivables, (c) Cash and Cash Equiv a lents, Total, , 1,00,000, 40,000, , 1,10,000, 60,000, , 30,000, 30,000, 20,000, 2,20,000, , 45,000, 40,000, 10,000, 2,65,000, , [Ans. Cash Flow from Operating Activities : Nil], 16A. From the following information relating to Hindustan Chemicals Ltd., calculate the Cash Flow, from Operating Activities :, `, Operating Profit be fore Work ing Cap i tal Changes, 57,500, Debt ors (De crease), 5,000, Stock (In crease), 2,000, Bills Payables (De crease), 4,500, Cred i tors (In crease), 3,200, Cash at Bank (Increase), 20,000, [Ans. Cash Flow from Op er at ing Ac tiv i ties ` 59,200], Note : Profit and Loss Bal ance is not given. Cal cu late Net Cash Flow from Op er at ing Ac tiv i ties by In di rect, Method, as pre scribed in AS-3 (Re vised)., , 16B. From the fol low ing in for ma tion, Cal cu late Cash Flow State ment from Op er at ing Ac tiv i ties :, `, , Net Profit of Cur rent Year, 1,00,000, Trans fer to Gen eral Re serve, 10,000, De crease in Debt ors, 25,000, De crease in Trade Payables, 20,000, Dis count on Debentures Writ ten off, 5,000, In crease in Stock, 18,000, Loss on Sale of Ma chine, 12,000, Profit on Sale of In vest ment, 4,000, [Ans. Net Cash in flows from Op er at ing Ac tiv i ties ` 1,10,000], (U.S.E.B., 2019), 16C. From the following informations ascertain Cash Flow from Operating Activities :, `, Net profit be fore tax, 1,00,000, Depreciation, 20,000, Trans fer to gen eral re serve, 30,000, Good will writ ten off, 7,000, Gain on sale of machinery, 3,000, In crease in Debt ors, 6,000, In crease in Cred i tors, 10,000, In crease in pre paid ex penses, 200, De crease in bills re ceiv able, 3,000, De crease in bills pay able, 4,000, De crease in out stand ing ex penses, 2,000, [Ans. Cash Flow from Op er at ing Ac tiv i ties ` 1,54,800], (U.S.E.B., 2017), ❏ Cash Flow from Investing Activities, 17. From the following particulars, calculate Cash Flow from Investing Activities :, `, Fixed As sets at the be gin ning of the year, 2,00,000, Fixed As sets at the end of the year, 3,00,000, [Ans. Net Cash Used in In vest ing Ac tiv i ties ` 1,00,000], 18. From the following information, calculate Cash Flow from Investing Activities :, 31.3.2019, 31.3.2020, In vest ments (Long-term), , `, , 1,00,000, , `, , 60,000, , 487
Page 974 :
SBPD Pub li ca tions Accountancy (XII), Ma chin ery (at Cost), 2,00,000, 2,60,000, [Ans. Net Cash Used in In vest ing Ac tiv i ties (` 20,000)], 19. From the following information, calculate the amount of Cash Flow from Investing Activities :, 31.3.2019, 31.3.2020, `, , `, , Plant and Ma chin ery, 8,50,000, 10,00,000, Non-cur rent In vest ments, 40,000, 1,00,000, Land (At Cost), 2,00,000, 1,00,000, Ad di tional In for ma tion :, (i) De pre ci a tion charged on Plant and Ma chin ery was ` 50,000., (ii) Plant and Ma chin ery with a book value of ` 60,000 was sold for ` 40,000., (iii) Land was sold at a gain of ` 60,000., [Ans. Net Cash Used in In vest ing Ac tiv i ties (` 1,20,000)], Hints. (i) Sale of Land ` 1,60,000, (ii) Pur chase of Plant & Machinery ` 2,60,000., 20. From the following information, calculate the amount of Cash Flow from Investing Activities :, Land pur chased dur ing the year, Non-cur rent In vest ment pur chased, Fixed Tan gi ble As sets (Ma chin ery) pur chased, Fixed Tan gi ble As sets sold (Build ing), Sale of Non-cur rent In vest ments, Sale of Tan gi ble Fixed As sets (Ma chin ery), In ter est re ceived on De ben tures held as In vest ments, Dividend re ceived on Shares as In vest ments, [Ans. Net Cash Used in In vest ment Ac tiv i ties (` 1,10,000)], 21. From the following information, calculate Cash Flow from Investing Activities :, 2018-19, , `, , 5,00,000, 2,70,000, 4,50,000, 6,00,000, 1,60,000, 2,10,000, 1,10,000, 30,000, 2019-20, , `, , `, , Pat ents, 90,000, 1,15,000, Land, 1,00,000, 90,000, Plant & Ma chin ery, 1,80,000, 1,70,000, Fur ni ture, 1,00,000, 2,25,000, 10% In vest ment, 2,00,000, 1,80,000, [Ans. Cash Used in In vest ing Ac tiv i ties (` 90,000)], 22. From the following information of Ashoka Ltd., prepare Cash Flow from Investing Activities :, Particulars, , Purchased, `, , Machinery, Investments, , Sold, `, , 8,00,000, 8,60,000, , 2,00,000, 5,00,000, , Goodwill, 4,40,000, Patents, —, (i) Interest received on de ben tures held as in vest ments ` 10,000., (ii) Dividend re ceived on shares held as in vest ments ` 30,000., [Ans. Net Cash Used in In vest ing Ac tiv i ties ( ` 11,60,000)], 23. From the following particulars, calculate Cash Flow from Investing Activities :, 2019-20, , —, 2,00,000, , `, , 2018-19, `, , Fixed As sets at Cost, 1,80,000, 1,82,000, Ac cu mu lated De pre ci a tion on Fixed As sets, 1,00,000, 80,000, Dur ing the year fixed as sets cost ing ` 50,000 was sold for ` 25,000 and ac cu mu lated de pre ci a tion, till date of sale of these as sets amounted to ` 10,000., [Ans. Net Cash Used in In vest ing Ac tiv i ties (` 23,000)], , 488
Page 975 :
Cash Flow State ment, ❏ Cash Flow from Financing Activities, , 24. From the following particulars of Sahara Ltd., calculate Cash Flow from Financing Activities for, the year ended 31st March, 2020 :, 31.3.2020, 31.3.2019, `, , (i) Eq uity Share Cap i tal, 2,50,000, (ii) Re demp tion of De ben tures, 10,000, (iii) Div i dend Pay able on Eq uity Shares, —, [Ans. Net Cash Flow from Fi nanc ing Ac tiv i ties ` 20,000], 25. From the fol low ing in for ma tion, calculate Cash Flow from Financing Activities :, Particulars, , 31.3.2019, , `, , 2,00,000, —, 20,000, , 31.3.2020, , `, , 4,00,000, 1,50,000, 40,000, , Eq uity Share Capital, 10% Debentures, Se cu ri ties Pre mium Re serve, , `, , 5,00,000, 1,00,000, 50,000, , Interest paid on debentures ` 10,000., [Ans. Net Cash Flow from Fi nanc ing Ac tiv i ties ` 50,000], 26A. From the following information of ABC Ltd., calculate the Net Cash Flow from Financing, Activities :, 2017, , Particulars, , `, , Equity Share Capital, 12% Debentures, 10% Debentures, , 5,00,000, 1,00,000, —, , 2018, `, , 7,50,000, —, 1,00,000, , Additional Information :, (i) Interest paid on De ben tures ` 10,000., (ii) Dividend paid ` 25,000., (iii) Dur ing the year 2018, ABC Ltd. is sued bo nus shares in the ra tio of 2 : 1 by cap i talisingreserve., [Ans. Net Cash Flow from Financing Activities ` 2,15,000], 26B. From the fol low ing items of fi nan cial ac tiv i ties, find out cash flow :, 31.3.2018, 31.3.2019, `, , `, , Eq uity Share Cap i tal, 5,00,000, 6,00,000, 12% Pref er ence Share Cap i tal, 2,00,000, —, 10% De ben tures, —, 50,000, Other In for ma tion :, (i) Eq uity Shares were is sued at a pre mium of 20%., (ii) Redeemed 12% Pref er ence Shares at a pre mium of 10%., (iii) Is sued 10% De ben tures at a dis count of 1%., (iv) In terim Div i dend paid on Eq uity Shares ` 90,000., [Ans. Net Cash used in Fi nanc ing Ac tiv i ties ` 1,40,500], 27. From the following financing activities, calculate Cash Flow from Financing Activities :, Particulars, , Issued as Redemption, on, as on, 31.3.2020 31.3.2020, `, , Equity Share Capital, 15% Preference Share Capital, 10% Debentures, , `, , 10,00,000, , —, , —, 4,00,000, , 10,00,000, —, , 489
Page 976 :
SBPD Pub li ca tions Accountancy (XII), Additional Information :, (i) Eq uity Shares were is sued at a pre mium of 10%., (ii) 15% Pref er ence Shares were re deemed at a pre mium of 5%., (iii) Dividend paid on old pref er ence shares ` 1,50,000., (iv) Interest paid on De ben tures ` 1,00,000., (v) Un der writ ing Com mis sion on is sue of eq uity shares ` 20,000., [Ans. Net Cash Flow from Financing Activities ` 1,80,000], ❏ Prep a ra tion of Cash Flow State ment without Adjustments, 28. From the fol low ing in for ma tion, pre pare a Cash Flow State ment :, `, Open ing Cash Bal ance, 10,000, Clos ing Cash Bal ance, 12,000, De crease in Debt ors, 5,000, In crease in Cred i tors, 7,000, Sale of Fixed As sets, 20,000, Re demp tion of De ben tures, 50,000, Net Profit for the year, 20,000, [Ans. (A) Cash Flow from Op er at ing Ac tiv i ties ` 32,000; (B) Cash Flow from In vest ing Ac tiv i ties, ` 20,000; (C) Cash Used in Fi nanc ing Ac tiv i ties ( ` 50,000); (D) Net In crease in Cash ` 2,000], 29. From the following Balance Sheets of Mr. Patel on 1st April, 2019 and 31st March, 2020, prepare, Cash Flow Statement :, Liabilities, Assets, 1.4.2019 31.3.2020, 1.4.2019 31.3.2020, `, , Cur rent Li a bil i ties, Long-term Loan, Cap i tal, , 72,000, 60,000, 2,96,000, , 4,28,000, , `, , `, , 82,000 Cash, 90,000 Debt ors, 2,98,000 Stock, Land, Build ing, Ma chin ery, 4,70,000, , 8,000, 70,000, 50,000, 40,000, 1,00,000, 1,60,000, 4,28,000, , `, , 7,200, 76,800, 44,000, 60,000, 1,10,000, 1,72,000, 4,70,000, , [Ans. I. Net Cash Flow from Operating Ac tiv i ties ` 11,200; II. Net Cash Used in Investing, Ac tiv i ties (` 42,000), III. Cash Flow from Fi nanc ing Ac tiv i ties ` 30,000, IV. Net De crease in, Cash and Cash Equiv a lents (` 800)], 30. Following are the Balance Sheets of Rahul & Co. for two years, prepare Cash Flow Statement :, Balance Sheets, 2017, , Particulars, I. EQ UITY AND LI A BIL I TIES, Share Cap i tal, State ment of Profit & Loss, Trade Payables, Total, II. AS SETS, Land, Inventories, Trade Receivables, Cash and Cash Equivalents, Total, , 2018, , `, , `, , 2,00,000, 10,000, 70,000, , 2,50,000, 23,000, 45,000, , 2,80,000, , 3,18,000, , 50,000, , 66,000, , 80,000, 1,20,000, 30,000, 2,80,000, , 90,000, 1,15,000, 47,000, 3,18,000, , [Ans. (A) Cash used in Op er at ing Ac tiv i ties ( ` 17,000); (B) Net Cash Used in In vest ing Ac tiv i ties, (` 16,000); (C) Net Cash Flow from Fi nanc ing Ac tiv i ties ` 50,000; (D) Net In crease in Cash and, Cash Equiv a lents ` 17,000.], , 490
Page 977 :
Cash Flow State ment, 31. From the following Comparative Balance Sheets as on 31st March, prepare Cash Flow Statement :, Particulars, 2018-19 2019-20, `, `, I. EQ UITY & LI A BIL I TIES, 1. Shareholders’ Funds :, 1,40,000 1,48,000, Share Cap i tal, 14,080 20,120, Re serves and Sur plus (Statement of Profit and Loss), 2. Non-current Liabilities :, 30,000 24,000, Long-term Borrowings, 3. Current Liabilities :, 20,720 23,680, Trade Payables, 1,400, 1,600, Other Li a bil i ties (Pro vi sion for Bad Debts), 2,06,200 2,17,400, II. AS SETS, 1. Non-cur rent As sets :, Tan gi ble Fixed As sets (Land), In tan gi ble Fixed As sets (Good will), 2. Cur rent As sets :, (a) Inventories, (b) Trade Re ceiv ables, (c) Cash, , 40,000, 20,000, , 60,000, 15,000, , 97,400 85,400, 30,800 41,400, 18,000 15,600, 2,06,200 2,17,400, , [Ans. (A) Net Cash Flow from Op er at ing Ac tiv i ties ` 15,600; (B) Net Cash Used in In vest ing, Ac tiv i ties ( ` 20,000); (C) Net Cash Flow from Fi nanc ing Ac tiv i ties` 2,000, (D) Net De crease, in Cash (` 2,400)], 32. From the following information, prepare Cash Flow Statement :, Particulars, I. EQ UITY & LI A BIL I TIES, 1. Shareholders’ Funds :, Share Cap i tal, Re serves and Sur plus, 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, Trade Payables, II. AS SETS, 1. Non-cur rent As sets :, (a) Fixed As sets, Land & Building, (b) Investments, 2. Cur rent As sets :, (a) Current Investments (Marketable), (b) Inventories, (c) Trade Receivables, (d) Cash at Bank, , 31.3.19, `, , 31.3.20, `, , 1,80,000 2,10,000, 24,000 1,32,000, 1,50,000 1,50,000, 27,000 50,000, Total 3,81,000 5,67,000, , 2,52,000 2,94,000, 18,000 48,000, 60,000 54,000, 24,000 1,07,000, 17,500 40,000, 9,500 24,000, 3,81,000, 5,67,000, Total, , 491
Page 978 :
SBPD Pub li ca tions Accountancy (XII), Note to Ac counts :, 2019, `, , Particulars, 1. Reserves and Surplus :, Surplus (Balance in Statement of Profit and Loss), , 2020, `, , 24,000, , 1,32,000, , [Ans. (A) Cash Flow from Operating Activities ` 50,500; (B) Cash Flow from Investing Activities, ` 72,000; (C) Cash Flow from Financing Activities ` 30,000; (D) Net increase in Cash &, Cash Equivalents ` 8,500], 33. Pre pare a Cash Flow State ment on the ba sis of the in for ma tion given in the Bal ance Sheets of, Simco Ltd. as 31.3.2020 and 31.3.2019 :, Particulars, , Note No., , I. EQ UITY AND LI A BIL I TIES, 1. Share hold ers’ Funds :, (a) Share Cap i tal, (b) Re serves and Sur plus, 2. Non-cur rent Li a bil i ties :, Long-term Borrowings, 3. Current Liabilities :, Trade Payables, , `, , 1, , Total, II. AS SETS, 1. Non-cur rent As sets, (a) Fixed As sets :, (i) Tangible Assets, (b) Non-current Investments, 2. Cur rent As sets :, (a) Current In vestments (Marketable), (b) Inventories, (c) Trade Receivables, (d) Cash and Cash Equivalents, , Current Previous, Year, Year, 31.3.2020 31.3.2019, , Total, , `, , 2,00,000, 90,000, , 1,50,000, 75,000, , 87,500, , 87,500, , 10,000, 3,87,500, , 76,000, 3,88,500, , 1,87,500, 1,05,500, , 1,40,000, 1,02,500, , 12,500, 4,000, 9,500, 68,500, 3,87,500, , 33,500, 5,500, 23,000, 84,000, 3,88,500, , Note to Ac counts :, 2020, `, , Particulars, 1. Reserves and Surplus :, Surplus (Balance in Statement of Profit and Loss), , 90,000, , 2019, `, 75,000, , [Ans. (A) Net Cash Flow from Operating Activities (` 36,000); (B) Net Cash Used in Investing, Activities (` 50,500); (C) Net Cash Flow from Financing Activities ` 50,000; Net Decrease, in Cash and Cash Equivalents (` 36,500).], (C.B.S.E., A.I., 2014), ❏ Preparation of Cash Flow State ment from Balance Sheet and Ad di tional In for ma tion, 34A. From the following comparative balance sheet prepare cash flow statement as on 31st Dec., 2019 :, Particulars, I. EQ UITY AND LI A BIL I TIES, Share Cap i tal, Statement of Profit & Loss—Surplus, Trade Payables, , 492, , 2018, `, , Total, , 3,00,000, 10,000, 70,000, 3,80,000, , 2019, `, , 3,50,000, 23,000, 45,000, 4,18,000
Page 979 :
Cash Flow State ment, II. AS SETS :, Machinery, Stock, Trade Receivables, Cash, , Total, , 50,000, 1,80,000, 1,20,000, 30,000, 3,80,000, , 66,000, 1,90,000, 1,15,000, 47,000, 4,18,000, , De pre ci a tion charged on ma chin ery ` 5,000., [Ans. (A) Net Cash used in Operating Ac tiv i ties (` 12,000); (B) Net Cash used in Investing, Ac tiv i ties (` 21,000); (C) Cash generated from Financing Activities ` 50,000; Net Increase, in Cash and Cash Equivalents ` 17,000.], Hint. Purchase of Machinery ` 21,000., 34B. The Balance Sheets of a Ltd. Company at 31.3.2017 and 31.3.2018 were as follows :, Par tic u lars, 31.3.2019, 31.3.2020, I. EQ UITY & LI A BIL I TIES, 1. Share hold ers’ Funds :, (a) Eq uity Share Cap i tal, (b) Re serves and Sur plus :, Gen eral Re serve, Profit & Loss State ment, 2. Non-cur rent Li a bil i ties :, 11% De ben tures, 3. Cur rent Li a bil i ties :, Trade Payables, II. AS SETS, 1. Non-cur rent As sets :, Fixed As sets, 2. Cur rent As sets :, In ven tories, Trade Re ceiv ables, Cash, Other Cur rent As sets (Pre lim i nary Ex penses), , `, , `, , 45,000, , 65,000, , 5,000, 10,000, , 7,500, 15,000, , 10,000, , 20,000, , 8,700, 78,700, , 11,000, 1,18,500, , 46,700, , 83,000, , 11,000, 18,000, 2,000, 1,000, 78,700, , 13,000, 19,500, 2,500, 500, 1,18,500, , Ad di tional In for ma tion :, De pre ci a tion on Fixed As sets for the year 2019-20 was ` 11,700., Pre pare a Cash Flow State ment., [Ans. (A) Net Cash Generated from Operating Ac tiv i ties ` 19,600; (B) Net Cash Used in, Investing Ac tiv i ties (` 48,000); (C) Net Cash Flow from Fi nanc ing Ac tiv i ties ` 28,900,, (D) Net In crease in Cash and Cash Equiv a lents ` 500], Hint : Pur chase of fixed as sets dur ing the year ` 48,000. This can be found out by preparing, Fixed As sets Ac count., 35. From the following Balance Sheet of Gunadhar Ltd. Prepare Cash Flow Statement :, Liabilities, Equity Share Cap i tal, General Re serve, Statement of Profit & Loss, Creditors, , 31-12-18 31-12-19, `, , `, , 90,000, 15,000, , 95,000, 20,000, , 8,000, 10,000, 22,500, 25,500, 1,35,000 1,50,000, , 493
Page 980 :
SBPD Pub li ca tions Accountancy (XII), Assets, , 31-12-16 31-12-17, , Cash, Debtors, Stock, Machinery, Building, , `, , `, , 5,000, 25,000, 20,000, , 4,000, 26,000, 25,000, , 40,000, 45,000, 45,000, 50,600, 1,35,000 1,50,000, , Depreciation charged on machinery was ` 6,000 and on building ` 5,000., (J.A.C., 2016), [Ans. (A) Cash Flow from Operating Ac tiv i ties ` 15,000; (B) Net Cash Used in Investing, Ac tiv i ties ( ` 21,000); (C) Net Cash Flow from Fi nanc ing Ac tiv i ties` 5,000, (D) Net De crease, in Cash and Cash Equivalents (` 1,000)], 36. Following are the Balance Sheets of Mittal Ltd., as on 31st March, 2019 and 2020 :, Particulars, 2018-19, 2019-20, `, `, I. EQ UITY AND LIABILITIES, (1) Share holders’ Funds :, 10,00,000 14,00,000, (a) Share Capital, 4,00,000 5,00,000, (b) Re serves ans Surplus (Profit & Loss Balance), (2) Non-cur rent Li a bil i ties :, 2,00,000 6,00,000, Long-term Borrowings (9% Deposits), (3) Cur rent Li a bil i ties :, 60,000, 80,000, Short-term Provisions (Provision for Tax), To tal 16,60,000 25,80,000, II. AS SETS, (1) Non-cur rent As sets :, (a) Fixed Assets :, (i) Tan gi ble Assets (Machinery), (ii) In tan gi ble As sets (Goodwill), (2) Cur rent As sets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, , 9,00,000 16,00,000, 2,00,000 1,40,000, , To tal, , 2,00,000 2,50,000, 3,00,000 5,00,000, 60,000, 90,000, 16,60,000 25,80,000, , Pre pare a Cash Flow State ment af ter tak ing into ac count the fol low ing ad just ments :, (a) The com pany paid in ter est ` 45,000 on its De pos its., (b) De pre ci a tion pro vided on ma chin ery dur ing the year ` 2,00,000., [Ans. (A) Net Cash Generated from Operating Ac tiv i ties ` 1,75,000, (B) Net Cash Used in, Investing Activities (` 9,00,000), (C) Net Cash Generated from Financing Activities, ` 7,55,000, (D) Net Increase in Cash and Cash Equivalents ` 30,000.], 37. Following is the balance sheet of Solar Power Ltd. as at 31.3.2020 :, So lar Power Ltd., Bal ance Sheet, Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, , 494, , Note No. 31.3.2020 31.3.2019, `, , `, , 24,00,000 22,00,000
Page 981 :
Cash Flow State ment, (b) Reserves and Surplus, 2. Non-current Liabilities :, Long-term Borrowings, 3. Current Liabilities :, (a) Trade Payables, (b) Short-term Provisions, , 1, , 2, 3, , To tal, , 4,00,000, , 4,80,000, , 3,40,000, , 3,58,000 4,08,000, 1,00,000 1,54,000, 39,38,000 35,02,000, , To tal, II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets :, (i) Tangible, (ii) Intangible, 2. Current Assets :, (a) Current Investments, (b) Inventories, (c) Trade Receivables, (d) Cash and Cash Equivalents, , 6,00,000, , 21,40,000 17,00,000, 80,000 2,24,000, 4,80,000 3,00,000, 2,58,000 2,42,000, 3,40,000 2,86,000, 6,40,000 7,50,000, 39,38,000 35,02,000, , Notes to Accounts :, Particulars, 1. Reserves and Surplus :, Surplus (Balance in Statement of Profit and Loss), 2. Tangible Assets :, Machinery, Less : Accumulated Depreciation, 3. Intangible Assets :, Goodwill, , As on, 31.3.2020, `, , As on, 31.3.2019, `, , 6,00,000, , 4,00,000, , 25,40,000, (4,00,000), 21,40,000, , 20,00,000, (3,00,000), 17,00,000, , 80,000, , 2,24,000, , Ad di tional In for ma tion :, During the year a piece of machinery costing ` 48,000 on which accumulated depreciation was, ` 32,000 was sold for ` 12,000., Prepare Cash Flow Statement., (C.B.S.E., 2015, A.I., Set I), [Ans. (A) Cash Generated from Operating Activities ` 3,06,000; (B) Cash Used in Investing, Activities (` 5,76,000);. (C) Cash Flow from Financing Activities ` 3,40,000. Net Increase in, Cash and Cash Equivalents ` 70,000.], 38A. From the following Balance Sheets and additional information of Manish Ltd., prepare Cash, Flow Statement :, Manish Ltd. (Bal ance Sheet), Particulars, Note No., 2019, 2018, I. EQUITY AND LIABILITIES, `, `, 1. Shareholders’ Funds :, (a) Share Capital, 4,50,000 3,00,000, (b) Reserves and Surplus : Profit, 1,85,000, 50,000, 2. Current Liabilities :, (a) Short-term Borrowings, 1,00,000, 70,000, 1, (b) Trade Payables, 1,05,000, 85,000, 2, To tal, 8,40,000 5,05,000, , 495
Page 982 :
SBPD Pub li ca tions Accountancy (XII), II. ASSETS, 1. Non-current Assets :, (a) Fixed Assets : Tangible, 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, To tal, Notes to Accounts :, , 1. Short-term Borrowings :, Bank Overdraft, 2. Trade Payables :, Creditors, Bills Payable, , Particulars, , 5,80,000, , 2,70,000, , 90,000, 90,000, 80,000, 8,40,000, , 80,000, 1,20,000, 35,000, 5,05,000, , 2019, , 2018, `, , `, , 1,00,000, , 70,000, , 85,000, 20,000, 1,05,000, , 60,000, 25,000, 85,000, , Additional Information :, (i) Income Tax paid during the year ` 35,000. (ii) Dividend paid during the year @ 10%., Prepare Cash Flow Statement., [Ans. (A) Cash Flow from Operating Activities ` 2,05,000; (B) Cash Flow from Investing, Activities ` 3,10,000; (C) Cash Flow from Financing Activities ` 1,50,000; (D) Net Increase, in Cash & Cash Equivalents ` 45,000], 38B. From the following Balance Sheet of YC Ltd., prepare Cash Flow Statement as per AS-3, (Revised), as at 31st March, 2019 :, Bal ance Sheet at 31st March, 2019, Particulars, Note No. 31.3.2019 31.3.2018, I. EQUITY AND LIABILITIES, `, `, 1. Shareholders’ Funds :, (a) Share Capital : Equity Share Capital, 4,00,000 4,00,000, (b) Reserves and Surplus : Surplus in Statement, of Profit & Loss, 1,80,000 1,00,000, 2. Current Liabilities :, (a) Short-term Borrowings : Cash Credit, —, 20,000, (b) Trade Payables, 40,000, 30,000, (c) Other Current Liabilities :, Outstanding Expenses, 2,000, 10,000, Unclaimed Dividend, 8,000, —, To tal, 6,30,000 5,60,000, II. ASSETS, 1. Non-current Assets :, Fixed Assets, 5,00,000 4,30,000, 2. Current Assets :, (a) Inventories, 30,000, 50,000, (b) Trade Receivables, 40,000, 20,000, (c) Cash at Bank, 60,000, 60,000, To tal, 6,30,000 5,60,000, Additional Informations :, (i) Net Profit for the year after providing ` 40,000 for depreciation was ` 60,000., , 496
Page 983 :
Cash Flow State ment, (ii) During the year the company declared 10% interim dividend., [Ans. (A) Cash generated from Op. Activities ` 1,62,000, (B) Cash used in Investing Activities, (` 1,10,000), (C) Cash used in Financing Activities (` 52,000)], 39. Balance Sheets of Kewal Ltd. as on 31st March, 2020 and 31st March, 2019 were as follows :, Particulars, 31.3.2020 31.3.2019, `, `, I. EQ UITY AND LI A BIL I TIES, 1. Share holders’ Funds :, 10,00,000 7,00,000, Share Capital, Re serves ans Sur plus, 2,50,000 1,50,000, (Bal ance in State ment of Profit & Loss), 2. Cur rent Li a bil i ties :, 50,000, 40,000, Outstanding Expenses, To tal, 13,00,000 8,90,000, II. AS SETS, 1. Non-cur rent As sets :, Fixed As sets :, Plant and Machinery, 2. Cur rent As sets :, Inventories, Cash and Cash Equivalents, , To tal, , 8,00,000, , 5,00,000, , 1,00,000, 4,00,000, 13,00,000, , 75,000, 3,15,000, 8,90,000, , Ad di tional In for ma tion :, (a) ` 50,000 has been charged to Plant and Ma chin ery dur ing the year 2019-20., (b) A piece of Ma chin ery cost ing ` 12,000 (book value ` 5,000) was sold at 60% profit on book value., Pre pare Cash Flow State ment., [Ans. Net Profit be fore Tax ` 1,50,000, (A) Net Cash from Op er at ing Ac tiv i ties ` 1,32,000, (B) Net, Cash Used in In vest ing Ac tiv i ties ( ` 3,47,000), (C) Net Cash flow from Fi nanc ing Ac tiv i ties, ` 2,60,000, (D) Net Increase in Cash and Cash Equiv a lents ` 85,000], 40. From the following Balance Sheets of Rama Motors Ltd., prepare a Statement of Cash Flow :, Particulars, 31.3.2019 31.3.2020, `, `, I. EQ UITY AND LIABILITIES, Share holders’ Funds :, 4,00,000 5,00,000, Share Capital, Re serve and Sur plus :, 1,00,000 1,20,000, Gen eral Re serve, 61,000, 61,200, Profit & Loss Statement, Non-cur rent Li a bil i ties :, 1,40,000, —, Bank Loans, Cur rent Li a bil i ties :, 2,80,000 2,60,000, Creditors, 20,000, 10,400, Bills Payable, 60,000, 70,000, Pro vi sion for Taxation, To tal 10,61,000 10,21,600, II. AS SETS, Non-cur rent As sets :, Machinery, Busi ness Premises, Cur rent Assets :, Cash, , 3,00,000, 4,00,000, , 3,38,000, 3,80,000, , 1,000, , 27,200, , 497
Page 984 :
SBPD Pub li ca tions Accountancy (XII), Debt ors, Stock, , To tal, , 2,00,000 1,48,000, 1,60,000 1,28,400, 10,61,000 10,21,600, , Depreciation charged on machinery during the year ` 28,000. Provision for Taxation made, during the year ` 66,000. Dividend paid on shares ` 46,000., [Ans. (A) Net Cash Generated from Operating Ac tiv i ties ` 1,58,200; (B) Net Cash Used in, Investing Activities (` 46,000); (C) Net Cash Used in Fi nanc ing Ac tiv i ties (` 86,000);, (D) Net In crease in Cash and Cash Equivalents ` 26,200], Hint : Pre pare Ma chin ery Ac count and Pro vi sion for Tax a tion Ac count to find out pur chase of, ma chin ery and pay ment of tax re spec tively., , ❏ Cash Flow Statements of Sale Trader Partnership Firm, 41. Balance Sheets of A and B as on April 1, 2019 and March 31, 2020 were as follows :, Balance Sheets, Liabilities, Assets, 1.4.2019 31.3.2020, 1.4.2019 31.3.2020, `, , Cred i tors, Mrs. A’s Loan @ 10%, Loan from Bank @ 10%, Cap i tal, , `, , 40,000, 25,000, 40,000, 1,25,000, , 44,000, —, 50,000, 1,53,000, , 2,30,000, , 2,47,000, , `, , 10,000, 30,000, 35,000, 80,000, 40,000, 35,000, 2,30,000, , Cash, Debt ors, Stock, Ma chin ery, Land, Build ing, , `, , 7,000, 50,000, 25,000, 55,000, 50,000, 60,000, 2,47,000, , Dur ing the year a ma chine cost ing ` 10,000 (accumulated de pre ci a tion ` 3,000) was sold for, ` 5,000. The provision for depreciation against Machinery Account as on 1.4.2019 was ` 25,000, and on 31.3.2020 ` 40,000. Net profit for the year amounted to ` 45,000. Pre pare Cash Flow, Statement., (U.S.E.B., 2014), [Ans. (A) Net Cash Generated from Operating Ac tiv i ties ` 65,500; (B) Net Cash Used in, Investing Ac tiv i ties (` 30,000); (C) Net Cash Used in Fi nanc ing Ac tiv i ties (` 38,500);, (D) Net De crease in Cash and Cash Equiv a lents (` 3,000)], Hint : Depreciation on Machinery ` 18,000; Drawings : ` 17,000 (1,25,000 + 45,000 – 1,53,000)., 42. Following are the summary of each transactions extracted from the books of A Limited :, Liabilities, , Amount, , Assets, , `, , Balance as on 1.1.2019, Receipt from Customers, Issue of Shares, Sale of Fixed Assets, , 35,000, 27,83,000, 3,00,000, 1,28,000, , 32,46,000, , Amount, `, , Payment to Suppliers, Payment for Fixed Assets, Payment of Overheads, Salaries, Income-tax, Dividend Paid, Repayment of Bank Loan, Balance as on 31.12.2019, , 20,47,000, 2,30,000, 1,15,000, 69,000, 2,43,000, 80,000, 2,50,000, 2,12,000, 32,46,000, , Prepare the Cash Flow Statement of the company for the period ended 31st December, 2019., [Ans. (A) Net Cash from Operating Activities ` 3,09,000; (B) Net Cash Used in Investing, Activities (` 1,02,000), (C) Net Cash Used in Financing Activities (` 30,000); (D) Net, Increase in Cash and Cash Equivalents ` 1,77,000.], (U.S.E.B., 2015), 43. Following are the Balance Sheets of Krishtec Ltd. for the year ended 31st March, 2019 and 2020 :, Particulars, 2020, 2019, I. EQ UITY AND LI A BIL I TIES, `, `, 1. Share holders’ Funds :, 12,00,000 8,00,000, (a) Share Cap i tal, , 498
Page 985 :
Cash Flow State ment, (b) Re serves and Sur plus (Profit and Loss Bal ance), 2. Non-cur rent Li a bil i ties : Long term Borrowings, 3. Cur rent Li a bil i ties : Trade Payables, II. AS SETS :, 1. Non-cur rent As sets :, Fixed As sets :, (i) Tan gi ble As sets, 2. Cur rent As sets :, (a) Inventories, (b) Trade Re ceiv ables, (c) Cash and Cash Equivalents, , 3,50,000 4,00,000, 4,40,000 3,50,000, 60,000, 50,000, Total 20,50,000 16,00,000, , 12,00,000, , 9,00,000, , 2,00,000 1,00,000, 3,10,000 2,30,000, 3,40,000 3,70,000, Total 20,50,000 16,00,000, , Pre pare a Cash Flow State ment af ter tak ing into ac count the fol low ing ad just ments :, (a) The com pany paid in ter est ` 36,000 on its long-term borrowings., (b) De pre ci a tion charged on tan gi ble fixed as sets was ` 1,20,000., (C.B.S.E., A.I., 2013), [Ans. Net Cash Used in Op er at ing Ac tiv i ties (` 64,000); Net Cash Used in In vest ing Ac tiv i ties, (` 4,20,000); Net Cash (In flow) from Fi nanc ing Activities` 4,54,000; Net Cash De crease in, Cash and Cash Equiv a lents (` 30,000).], 44. Ekta Ltd. has presented the following Balance Sheets as on 31st December, 2018 and 2019 :, Liabilities, Assets, 2018, 2019, 2018, 2019, `, , Share Capitals, General Reserve, Sundry Creditors, , `, , `, , 3,00,000 3,00,000 Building Less Dep., 13,250, 6,000 Plant Less Dep., 4,250, 2,000 Stock, Debtors, Cash, 3,17,500 3,08,000, , `, , 2,50,000 2,40,000, 45,000, 42,500, 2,500, 500, 7,500, 5,000, 12,500, 20,000, 3,17,500 3,08,000, , Sales made by the company amounted to ` 10,92,500 during the year 2019. No dividend has been, paid by the company. the changes in Building and Plant Values are fully due to depreciation, charge for 2019. Prepare a Cash Flow Statement., (U.S.E.B., 2016), [Ans. (A) Net Cash from Operating Activities ` 7,500; (B) Cash Flow from Investing Activities, Nil, (C) Cash Flow from Financing Activities Nil; (D) Net Increase in Cash and Cash, Equivalents (A + B + C) ` 7,500.], ❏ Miscellaneous and Boards’ Questions, 45. From the following particulars, prepare Cash Flow Statement :, Liabilities, Capital, Bank loan, Mrs. Z’s loan, Creditors, , 31.03.2019, , 31.03.2020, , `, , `, , 1,48,000, 30,000, —, 36,000, , 1,49,000, 25,000, 20,000, 41,000, , 2,14,000, , 2,35,000, , Assets, Land, Building, Machinery, Stock, Debtors, Cash, , 31.03.2019, 20,000, 50,000, 80,000, 25,000, 35,000, 4,000, 2,14,000, , 31.03.2020, 30,000, 55,000, 86,000, 22,000, 38,400, 3,600, 2,35,000, , During the year Mr. Z (Proprietor) has drawn ` 26,000 for personal use. The provision for, depreciation against machinery on 01.04.2019 was ` 27,000 and on 31.03.2020 was ` 36,000., [Ans. (A) Cash Flow from Operating Activities ` 40,600; (B) Cash Flow from Investing Activities, (` 30,000); (C) Cash Flow from Financing Activities (` 11,000); (D) Net Decrease in Cash, and Cash Equivalents ` 400.], (J.A.C., 2017), , 499
Page 986 :
SBPD Pub li ca tions Accountancy (XII), 46. Calculate Cash Flow from Investing Activities from the following information :, Particulars, 31-03-2020 31-03-2019, `, , `, , 15,00,000, 5,00,000, Investments in Shares of Janex Ltd., 1,50,000, 5,00,000, 9% Long term Investments, 4,00,000, 3,00,000, Plant and Machinery, 4,20,000, 2,40,000, Goodwill, Additional Information :, (i) 9% dividend was received from Janex Ltd., (ii) A machine costing ` 30,000 (depreciation provided thereon ` 5,000) was sold for ` 40,000., Depreciation charged during the year was ` 5,000., (C.B.S.E. A.I., 2017), [Ans. Net Cash used in Investing Activities ` 8,75,000.], Hint. Purchase of Plant & Machinery ` 1,30,000; Profit on sale of Machine ` 15,000., 47. Calculate Cash Flow from financing activities on the basis of following details :, Particulars, 2018, 2019, `, , `, , 12,00,000 15,00,000, Equity Share Capital, 4,00,000 4,00,000, 10% Preference Share Capital, 2,00,000 1,00,000, 8% Debentures, 5,00,000 3,00,000, Loan from Bank, During the year 20% dividend was paid on opening balance of equity shares, 10% dividend was, paid on preference shares, 8% interest was paid on opening balance of debentures. ` 54,000, interest was paid on loan from bank., [Ans. Net Cash used in Financing Activities ` 3,50,000.], 48. From the following information, calculate cash flow from operating activities for the year ending, 31st March, 2020 :, Particulars, `, `, 2,00,000, Cash Sales, 10,00,000, Receipt from Debtors, 1,00,000, Commission received, 4,00,000, Payment to Suppliers, 40,000, Cash Purchases, 10,000, Outstanding Salary, Cash Payments :, 24,000, Salary, 16,000, Rent, 8,000, 48,000, Insurance, 26,000, Flood Relief Fund, 1,60,000, Taxable Income, 30%, Income Tax rate, [Ans. Cash Flow from Operating Activities ` 7,64,000.], 49. Calculate Cash Flow from Operating Activities using the following information :, Particulars, 31.3.2019 31.3.2020, Profit & Loss A/c, Debtors, Outstanding Rent, Prepaid Insurance, Creditors, Goodwill, [Ans. Net Cash used in Operating Activities ` 36,000.], , `, , 1,20,000, 62,000, 42,000, 4,000, 38,000, 76,000, , `, , 1,10,000, 50,000, 24,000, 8,000, 26,000, 80,000, , l, , 500
Page 987 :
Unit : Computers in Accounting, , 1, INTRODUCTION TO, COMPUTER AND ACCOUNTING, INFORMATION SYSTEM (AIS), , Learning Objectives, 1.1., 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 1.8, 1.9, 1.10, 1.11, ●, , Introduction to Computer, Meaning and Definitions of Computer, Capabilities or Features or Characteristics of a Computer, Components of Computer System, Elements of Computer System, Classification or Types of Computer, Network, Accounting Information System (AIS), Concept of Spreadsheet, Word Processor, Limitations of Computer System, Useful Questions, 1.1 Introduction to Computer, , Today we are living in an age where computerisation is on rise. The cost of, computerisation is also coming down consistently. This has led to wide spread usage of, computers even within small business and by individuals. In fact, now they are in use in, almost every aspect of present day society. Some of the main advantages of computers are :, (1) They are used to make reservation of seats in railways and air flights, to prepare, customer’s bills in hotels and hospitals, to maintain a record of customer’s transactions in, banks, to forecast the weather and so on. (2) In fact, computers have become indispensible, in almost every field of science, technology, research, communication, commerce and, industry. (3) The type-setting of the newspapers, books and the T.V. programmes are, composed with the help of computers. In addition to this, a computer performs a number of, functions, such as composing, designing, accounting, communication of information etc., Thus, a computer plays a pivotal role in boosting our Economy., , 1
Page 988 :
SBPD Publications Accountancy (XII), 1.2 Meaning and Definitions of Computer, A computer is an electronic device (machine) which stores and processes information, to give meaningful results. It takes information from an input device and after processing,, the information gives the result. The result is known as an output or action. The basic, difference between the computer and the calculator is that the computer can perform long, sequences of computations without human interventions. It has the ability of storing and, executing a given set of instructions for solving a particular problem., According to International Standard Organisation (I.S.O.), ‘’A Computer is a data, processor that can perform substantial computation, including numerous arithmetic and, logic operations, without intervention by human operator during the run.’’, According to U. S. Institute, ‘’A computer is a device capable of solving problems by, accepting data, performing described operations on the data and supplying the results of, these operations.’’, Introduction to Computer and Accounting Information System (AIS), In Oxford dictionary, Computer is defined as ‘’An automatic electronics apparatus for, making calculations or controlling operations that are expressible in numerical or logical, terms.’’, 1.3 Capabilities or Features or Characteristics of a Computer, The following are the main features of a computer :, 1. Automation : A computer is an automatic machine. Once the programme (a series, of instructions) and the data are fed into computer memory, it executes these instructions, automatically, i.e., without any human intervention., 2. Memory (or Storage) : Memory unit of a computer is capable of storage (large, volume of information). Such information can be stored on it on permanent basis on, magnetic discs, floppy discs, punched cards, micro films etc. Stroed information can be, recalled at any time., 3. High Speed : An important feature of a computer is the high speed. Computers, are very fast in performing operations. A present day computer can perform a million, additions per second. The speed of a computer is rapidly increasing with technological, advancement., 4. Accuracy : Computer operates with degree of accuracy. Unlike human beings,, computers work continuously with same can level of efficiency without any sign of, tiredness. But it must be remembered that if data and programme fed into the computer, are wrong, it will either give no results or wrong results. Therefore, it is said that a special, feature of a computer is ‘’Garbage in, Garbage out (GIGO)’’., 5. Scientific Approval : A computer operates scientifically and never gets emotional, while solving problems. It always acts in a neutral manner and is never affected by the, feelings and opinions of someone., 6. Versatility : A computer is capable of doing a wide variety of jobs. It can shift from, one job to another according to instruction fed into it. A computer can be used for, accounting work, scientific work, industrial work, research work, reservation work,, invoicing, sales analysis and even for playing chess., 7. Diligence : Computer can perform continuously with same level of efficiency and, precision. Unlike human beings, there are no signs of tiredness fatigue etc. In fact,, computer never says, ‘’I am too tired to do any more work.’’, 8. Usage of Special Language : A computer does not understand the ordinary, language. A number of special languages have been developed in order to feed the, information and data in a computer. The names of some of the special languages are :, BASIC, COBOL, PASCOL, FORTRAN., , 2
Page 989 :
Introduction to Computer........... Information System (AIS), 9. Use of Binary System : Computers do not use the decimal system but use a, two-way system known as Binary System. Under this system, the information stored in, the computer are in two digits only. These two digits are 0 and 1., For example, if we want to change decimal 45 into Binary System, it will be changes, as under :, Quotient, Remainder, with a remainder, 1, 45 ÷ 2 = 22, with a remainder, 0, 22 ÷ 2 = 11, with a remainder, 1, 11 ÷ 2 = 5, with a remainder, 1, 5÷ 2 = 2, with a remainder, 0, 2÷ 2 = 1, Therefore, for 45 we shall write 10110 under Binary System., 1.4 Components of Computer System, Or, Basic Computer Structure of Computer System, Computer is an electronic device. It is made up of electronic components. These, components are known as ‘Hardware’. The following are the main components of a computer :, (1) Input Device—Key Board, Mouse, Light pen, Scaners. (2) Central Processing Unit or, C.P.U. (3) Monitor Output Device., (1) Input Device—Key Board : Input device is a device through which data and, programmes are fed into the computer. A commonly used input device is a key board which, resembles with a typewriter., The data which we want to feed, into a computer may be typed on, the key board (in binary, language). The other input, devices are mouse, magnetic, tape, magnetic disc, floppy disc,, punched cards, scanner etc., Intructions, programme and, input data are fed into computer, for processing with the help of, key-board, mouse and scanner., (2) Central Processing, Unit (C.P.U.) : This unit is the, main and most important part of, a computer. It consists of, complex electronic circuits. It, processes the data given by an, input device as per programme., Fig. 1, A programme or a software is a, set of instructions to a computer to perform certain operations in a sequence to get the, desired results. It is capable of performing arithmetical and logical oprerations. It can add,, subtract, multiply or divide the different numbers and other arithmetical operations. It, keeps full control on the operations of all the other units of a computer such as keyboard,, monitor, magnetic recorder, printers etc. Processor is said be the brain or decision-making, part of the computer which performs all the operations in accordance with the programme, fed into the computer., , 3
Page 990 :
SBPD Publications Accountancy (XII), The Central Processing Unit or C.P.U. consists of the following :, (i) Memory Unit,, (ii) Arithmetic Logical Unit,, (iii) Control Unit., (i) Memory Unit (MU) : It stores data and programmes fed by the input device. The, memory unit can be considered as divided into four work areas without any fixed physical, boundaries :, (a) Input Storage Area : This is the area where data fed in is held until ready to be, processed., (b) Working Storage Area : This is the area where the data are processed and the, intermediate results are held., (c) Output Storage Areas : In this area the final results of the processing are held, until they can be released., (d) Programme Storage Area : In this area the processing instructions, i.e., the, programme is stored., The memory of a computer can be basically classified into two parts :, (a) Random Access Memory, (RAM) : This part of memory is capable, of storing information temporarily and, the stored information is erased when, power supply is cut off or fails. It is also, known, as, Volatile, Memory., Example—Semi-conductor memories., (b) Read Only Memory (ROM) :, This part of memory stores information, per-manently. It is not erased when the, power supply is cut off or fails. It is also, known as non-volalite memory., It needs to be mentioned that both, RAM and ROM are parts of the internal, Fig. 2 : Components of Computer, memory of a computer. This can be, supplemented with external memory. Information and data can be stored permanently on, magnetic tapes, floppies, etc. They can be recalled any time by putting these takes, floppies, etc. into the computer., (ii) Arithmetic Logical Unit (ALU) :, The arithmetic logical unit performs all, arithmetical and logical operations. It is, capable of performing addition, subtraction,, multiplication, division. The data from, primary storage is transferred to ALU where, processing takes place, as per the, programme, instructions., After, the, calculations are over, the results are, transferred back to the memory unit., Fig. 3 : Block Diagram of Computer, (iii) Control Unit (CU) : Control unit, is the most important part of the processing unit. It is the brain or decision-making part of, the computer. It acts as a central nervous system for all the components of the computer, (as shown below). At the beginning of processing, the first programme instruction is, selected and fed into the control unit from the progrogramme area. There it is interpreted, and from these signals are sent to other components for necessary action. Other, , 4
Page 991 :
Introduction to Computer........... Information System (AIS), programme instructions are then selected and executed in a sequence until the processing, is complete. In small computers, CPU is called Micro Processor. In the memory of a, computer, there are lakhs of columns which are known as ‘Bytes‘ or ‘Locations‘., (3) Monitor Output Device : The output can be produced in two ways, either on, display unit or on a paper. The output unit consists of physical devices to display the results, obtained by the computer and present them to the user. Most important devices are directed, by the control unit. Some of the common output devices are : ‘Monitor’ and ‘Printer’. A, computer displays the results, reports, or answers on screen. This is known as ‘monitor’ or, ‘output device’. Keyboard and monitor taken together are called terminal., CENTRAL PROCESSING UNITS (C.P.U.), MEMORY UNIT, STORES DATA, INSTRUCTIONS AND RESULTS, , INPUT DEVICE, DATA AND, INSTRUCTIONS, , CONTROL UNIT (C.U.), INTERPRETS INSTRUCTIONS AND, ISSUES COMMANDS TO OTHER UNITS, , OUTPUT DEVICE, DATA AND, INSTRUCTIONS, , ARITHMETIC AND LOGIC UNIT (ALU), PERFORMS ALL ARITHMETICAL AND LOGICAL, OPERATIONS, Fig. 4, , Thus, a computer is an electronic device. It is capable of solving problems by, accepting data and instructions through input device, performing operations on the data, in the central processing unit as per instructions fed into the computer and supplying the, results through output device., 1.5 Elements of Computer System, There are six elements of a Computer System :, (1) Hardware : All the components of a computer are called ‘hardware’. In other, words, the physical equipments such as machine itself alongwith Input and Output, devices (i.e., Keyboard, Monitor, C.P.U., Magnetic Recorder etc.) are called hardware., (2) Software : A set of instructions or ‘programmes’ fed into the computer is called, ‘software’. A computer machine (hardware) can be used for various purposes only a change, of programme (that is software) is needed. For example, a computer by feeding a particular, software can be used to prepare pay-roll, whereas by feeding a second software, it can be, used for accounting. By feeding a third software, it can be used for inventory control and, so on., A very large number of software packages recorded on the floppy discs are available, in the market., It controls and support the computer system and its data processing activities. It may, be classified into three main categories (i) Programming Language, (ii) Application, Software, (iii) System Software., Sources of Software : There are three sources of softwares :, (i) By self preparing software,, , 5
Page 992 :
SBPD Publications Accountancy (XII), (ii) By entrusting the task of preparing software to a programmer,, (iii) By purchasing and software from the market., Types of Software : There are six types of software which are as follows :, (i) Operating Software : It is an interface between hardware and the user. It, facilitates operation of hardware by its user., (ii) Utility Software : Utility programmes to provide procedure commonly required, by virtually or applications., (iii) Application Software : These are specialised software such as payroll, accounting, inventory accounting, financial accounting etc., (iv) System Software : System software is a control software. It controls the operation, of the computer. It makes sure that components of system are functioning properly., (v) Language Processors : This software checks for language syntax and finally, translates the source programme into machine language., (vi) Connectivity Software : This software creates and control connection between, a computer and a server. This helps the computer to communicate and share resources of, server., Distinction between Hardware and Software, S.No., Hardware, 1., It is a physical component used in the, construction of computer., 2., Programming is not possible in hardware., 3., Some hardware can be used for different, jobs., , Software, It is a set of programmes that runs the, computer., Programming is possible in software., Some software cannot be used for, different jobs., , (3) People Associated with Computer, People are key elements of computer system. People are basically those individuals, who use hardware and software to develop, maintain and use the information system, residing in the computer memory. The main categories of people involve in the computer, system are :, (a) System Analysts : They design data processing system., (b) Operator : They operate the computers., (c) Programmers : They write programmes to implement the data processing, system design., (4) Procedures, Procedures are a series of operations in a certain order or manner to achieve same, desired result., Types of Procedures :, (i) Software-oriented Procedure : It provides a set of instructions required to use, a software in computer system., (ii) Hardware-oriented Procedure : It provides information about the various, components and their method of operation., (iii) Internal Procedure : It answers smooth data processing., (5) Data, The details of information are called data. It is collection of facts and figures which, has no meaning when collected. Data is the plural of datum though data is commonly used, as both in singular and plural forms. The details may be in numbers text, etc. For example,, bio-data of various applicants and teachers, marks obtained by various students in various, subjects, the details of passengers etc. These are gathered and entered into a computer, , 6
Page 993 :
Introduction to Computer........... Information System (AIS), system. In fact, data are input. They are processed to generate desired output. They can be, used for decision-making., (6) Connectivity, The element of connectivity refers to the manner which a computer system is, connected to other electronic devices such as telephone lines, satellite link, micro-wave, transmission etc., q Flow-Chart, The flow-chart is a pictorial graphic presentation of the steps needed to solve a, particular problem. A flow-chart clearly shows the flow of data, documents to be used,, computer language to be used, steps to be repeated etc. A flow-chart has its own symbols, and these symbols are used to indicate the various steps and input and output operations., A flow-chart acts as a guide to the programmer while preparing a programme. It also, helps the programmer in reducing the possibilities of errors in programming., q Algorithm, In order to develop a program (or programme) a series of separate steps in a logical, sequence is to be prepared. Such a sequence is called ‘algorithm’. Thus, algorithm means, the step by step instructions that are needed to solve a particular problem. If the algorithm, is put in the form of a diagram, it is called ‘flow-chart’., 1.6 Classification or Types of Computer, Computers can be classified into three basic categories :, (1) Digital Computers, (2) Analog Computers, (3) Hybrid Computers., (1) Digital Computers : Current use of the word ‘Computer’ almost always refers to, electronic digital computer which uses solid-state electronic circuits. As the name, suggests, digital computers work with digits and hence it is a type of counting device. A, digital computer uses the properties of electronic circuits which represents exactly two, states—’on’ or ‘off’. All digital computers use a combination sequence at binary digits i.e.,, ‘0’ and ‘1’ to represent independent pieces of information. Digital computers are commonly, used in business and commercial applications. Digital computers are also known as, General Purpose Computers., (2) Analog Computers : It is a type of measuring device and works on physical, quantities like low or high voltage, low or high pressure etc. Such computers solve one, specific problem. This type of computers can process continuously varying quantities, rather than on-off or increasingly stepped quantities. The moving pointer type automobile, speedometer is an example of a simple mechanical analog computer. Analog computers are, mostly used in scientific and engineering research., (3) Hybrid Computers : It is a combination of both Analog and Digital Computers., This ‘dual purpose’ system combines the measuring capabilities of the analog computer, and the logical and control capabilities of the digital computers. Flight simulator is an, example of Hybrid Computer. Hybrid computers are mainly used in the scientific and, industrial control system., Other Classification : Computers are also classified on the basis of their speed and, storage capacity. On this basis computers are of the following types :, (i) Mini Computers, (ii) Micro Computers, (iii) Super Computers, (iv) Mainframe, Computers., 1.7 Network, A network is a group of computers, printers and other devices that are connected with, each other for the purpose of communication. Networking can be made through the media, of copper wire, fiber optics or radio waves. Networks can be small or large, permanently, connected through wires or cables or tem- porarily connected through phone lines or, , 7
Page 994 :
SBPD Publications Accountancy (XII), wireless transmissions. The largest network is the Internet—the worldwide group of, networks. A network is a means of transmitting and/or receiving information—exchanging, information—from one or more sources., , Fig. 5 : A Simple Computer Network, A newtork is shown in Fig. 5, Types of Computer Network, On the basis of size and functions computer networks can be categorised into three, types, LAN (Local Area Network) and WAN (Wide area Network) and MAN (Metropolitan, Area Network). A LAN is the basic building block of any computer network. It can be a, simple network consisting of two computers connected by a cable. Or it can be a complex, network consisting of hundreds of connected computers and peripherals throughout an, organisation. The distinguishing feature of LAN is that it is restricted to a limited, geographic area. A wide area network (WAN) has no geographical limit. It can connect, computers and other devices on opposite sides of the world. A WAN is made up a number of, interconnected LANs. The Internet is the largest WAN. A MAN is a bigger version of a LAN., 1.8 Accounting Information System (AIS), Meaning of Accounting Information System : Accounting has been defined as, the process of identifying, recording, measuring and communicating economic information, to permit infamed judgements and decisions by user of the informations. Accounting, Information System (AIS) is the first application which information technology (IT), infrastructure is created in a business enterprise., Accounting Information System is a transaction based information system as it deals, with the economic events taking place in the course of day-to-day operation of the enterprises., In the wake of liberalisation and globalisation the need for generation of accounting, information system has increased considerably. In the past accounting information system, were designed primarily for reporting to statutory bodies, such as tax authorities,, regulatory authorities and investors. Very little information were generated to meet the, information needs of managerial decision-making. But now the focus of accounting, information has changed. Now it focuses more on generation of information for use in, managerial decision-making process., With the development of computer software, the speed at which important information, has become available to company readers is increasing. Computer software allows, companies to track accounting records electronically. Accounting Information System is a, system within the software that performs the enterprise’s accounting applications by, processing high volume of data. Accounting data processing consists of four major tasks :, , 8
Page 995 :
Introduction to Computer........... Information System (AIS), (a) Data Collection, (b) Data Manipulation, (c) Data Storage, and (d) Document, Preparation., Thus, AIS collects the data, analyses the data and makes information available to the, users. It provides the database to serve as a foundation for other Computer Based, Information Systems (CBIS) and sub-systems., In fact, the development of computer software accounting systems allow work to be, done more quickly with fewer people, with little resources but considerably more, accurately. It should be noted that AIS use mainly the historical data but also include data, in the form of budgets and forecasts., q 1. Objective of Accounting Information System, (i) To provide reliable accounting information to different users., (ii) To meet statutory reporting needs of an enterprise., (iii) To protect the enterprise from the possible risks of misuse of accounting data., q 2. Difference between Data and Information, Data means facts which may be numeric, text, picture, graph, vocal etc. It may be, represented by symbols., Information is processed data. Data is meaningless whereas processed data, i.e.,, information is meaningful for the user. Processing of data makes it information. Data is, ‘input’ whereas information is output., q 3. Model of AIS, The model of AIS is given below. From the chart given below it is obvious that the, data collected from the physical records work as ‘input’ or ‘resource’ entered into the, database, where it is transformed by using software into information. Then the, information is passed on to the management or the users of accounting information. The, information so generated is taken as output., , Management, , Data Processing Software, , Database, , Input, Physical, Resources, Data, , q, , Transform, Information, , Output, Physical, Resources, .............................., , Fig. 6, 4. Components of Accounting Information System (AIS), The accounting system consists of four basic sub-systems, such as :, (1) Input, (2) Process, (3) Output, (4) Control., 1. Input : • Transaction Data, , 9
Page 996 :
SBPD Publications Accountancy (XII), • Status information regarding different entities, such as customers, vendors,, employees, etc., 2. Process : Basic ways of processing accounting data are :, • Collection of Data, • Classification of Data, • Comparison of Data, • Aggregation and Summation, • Calculation, Diagrammatically the four sub-systems of AIS can be shown as follows :, Input, Transactions, and Other, Data, , Process, —Classification, —Comparison, —Aggregate, —Calculation, , Output, —Financial Statements, —Management Reports, —Documents, , Control, Internal and External Controls, 3. Output : (i) Financial Statements :, • Income Statement, • Balance Sheet, • Statement of Changes in Financial Position., (ii) Management Reports., (iii) Other output documents like customer invoice, material purchase order, pay, cheques etc., In short, output sub-system is responsible for producing the processed data in user, understandable format., 4. Control : The control over the accounting information is exercised by both the, external and internal factors., External Control Factors :, To follow generally accepted accounting principles,, To follow accounting standards,, To follow the laws and rules as laid down by the government and statutory bodies, etc., Internal Control Factors (Established by Management) :, To ensure quality of information,, To ensure security of information,, To analyse the variances between the actual performance and the standard performance., To take corrective action for variance and defficiencies etc., q 5. Purposes of Accounting Information System (AIS), Accounting Information System serve six important purposes which are as follows :, 1. Inventory Control, 2. Sales Order Processing, 3. Accounts Receivable, 4. Accounts, Payable, 5. Payroll, 6. General Ledger., 1.9 Concept of Spreadsheet, Spreadsheet is a simple worksheet consisting of rows and columns in which any data, can be entered. For example the report card of the student of the ledger that we create for, maintaining bank accounts can be termed as a spreadsheet., , 10
Page 997 :
Introduction to Computer........... Information System (AIS), , q Electronic Spreadsheet, Report cards of students are manual spreadsheet. An electronic spreadsheet,, although is just like a paper spreadsheet and consist of rows and columns. The only, difference is that instead of being on paper, it is on the computer screen., MS-Excel, MS-Excel is a most popular windows based Spreadsheet application, Package that can used to automate task such as calculation and analysis of data, and then present the data in a graphical manner., Spreadsheet Programs and Applications, It is commonly used in the following area :, (i) Production Planning, (ii) Personal Management, (iii) Marketing, (iv) Payroll,, (v) Accounting, (vi) Forecasting, (vii) Charting, (viii) Financial Solution., MS-Excel’s Components, MS-Excel has three component :, (i) The spreadsheet component : It displays and analyses text and number in, rows and columns., (ii) The database component : It manages lists of information., (iii) The chart component : It producess charts which help to present data in a, graphical manner., 1.10 Word Processor, Word Processor is a software. It is very helpful for businessmen and authors. A word, processor enables the user to draft the letters, reports and other text material on a video, screen. We can make necessary changes very conveniently as many times as desired. Further,, the paragraphs may be shifted upward or downward, their length and breadth can be, controlled. Thus, instead of typing the full matters again, any word, line, paragraph, previously typed can be changed, erased or shifted to new location. New words or lines can, also be inserted whenever needed. The other advantages of word processor are :, (i) It helps in checking the spelling of words., (ii) The text of letters can be stored in the word processor and replies can be sent only, by a change of adress., (iii) Contracts can be stored and used whenever a fresh contract is signed. Example—, MS–Word., 1.11 Limitations of Computer System, A computer system suffers from the following limitations :, (1) Lack of Common-sense : A computer system lacks in common-sense. It work, according to stored programme(s)., (2) Lack of Intelligence Quotient (I.Q.) : Computers are devices with zero I.Q., They cannot think themselves. Computers need to be programmed before hand to tackle, the situation., (3) Lack of Decision-making : Computers are helpful in taking the decisions but, they cannot take decisions on their own because they do not possess all the essentials of, decision-making. Decision-making essentials involves information, knowledge,, intelligency, wisdom and ability to judge., (4) Lack of Feelings : Computers have no feelings and no instincts because they are, mere machines. Although men have succeeded in building a memory for the computer, but, no computer possesses the equivalence of human heart and soul., , 11
Page 998 :
SBPD Publications Accountancy (XII), USEFUL QUESTIONS, (A) Long Answer Type Questions, 1. What is a Computer ? What are its important features ?, [J.A.C., 2012(A)], 2. What are the main components of computer and its parts ?, 3. Explain the following :, (a) Spread Sheet,, (b) Word Processor,, (c) Flow Chart., 4. On the basis of working, in how many categories computers can be classified ?, 5. What are the types of computers on the basis of their speed and storage capacity ? Explain it., 6. Identify the main features of Accounting Information System (AIS). How do these features, influence the process of development of Accounting Information System ?, 7. What is AIS ? Explain its elements., [J.A.C., 2013], 8. What do you mean by Accounting Information System ?, (J.A.C., 2009, 10, 13), 9. What is Hardware ? Explain the difference between Hardware and Software. (J.A.C., 2011), 10. Give the concept of Electronic Spread Sheet., (J.A.C., 2011, 14, 15, 16), 11. Whom do you consider more important, Hardware of Software ?, (J.A.C., 2012), 12. Give the role of computer in modern economy., (J.A.C., 2012, 13, 14, 16), 13. ‘‘The advantage of Internet is not possible without Computer.’’ Do you agree with this, statement ?, (J.A.C., 2012), 14. ‘‘The role of CPU is like mind of a man’’. Do you agree with this statement ? (J.A.C., 2012), 15. What is Hardware ?, (J.A.C., 2013), 16. Distinguish between the following :, (J.A.C., 2013), (a) Hardware and Software, (b) LAN and WAN, 17. Explain the concept of Data model with the help of an example., (J.A.C., 2017), 18. Explain the application of Electronic spreadsheet in general accounting. (J.A.C., 2017, 19), 19. How would you differentiate between Hardware and Software ?, (J.A.C., 2018), , (B) Short/Very Short Answer Type Questions, 1., 2., 3., 4., 5., 6., 7., 8., 9., 10., 11., 12., 13., 14., 15., 16., 17., 18., 19., , What is a Computer ? Give its definition., Give five characteristics of a Computer., What is a Flow Chart ?, What is Binary System ?, Explain the difference between RAM and ROM., Explain the difference between Micro and Mini Computers., What are the differences between Human and Computer ?, What are the main components of computer ?, What are the roles of computer in Accounting ?, Explain the following in the context of a computer :, (i) Key Board, and (ii) Memory Unit, Explain the following :, (i) Hardware, and (ii) Software, Explain in brief input device., Explain in brief output device., Explain the components of Accounting Information System (AIS)., What is Accounting Information System ?, What are the purposes of Accounting Information System ?, Distinguish between ‘Data’ and ‘Information’., What is meant by Computer ?, What are the differences between Hardware and Software ?, , 12
Page 999 :
Introduction to Computer........... Information System (AIS), 20., 21., 22., 23., , What, Write, What, What, , is Computer ?, the importance of Computer. Write the importance of ATM., are Hardware and Software ?, are the limitations of Computers ?, , (C) Objective Type Questions, I. State whether the following statements are ‘True’ or ‘False’ :, (1) Punch Card is an input device., (2) CPU stands for Central Processing Unit., (3) CPU stands for Control Processing Unit., (4) Control Unit controls the activities of all the other components of the Computer., (5) Control Unit controls the flow of electricity inside the Computer., (6) If the algorithm is put in the form of a diagram, it is called ‘Flow Chart’., (7) Software is the set of programmes executed by the Computer., (8) All the components of a Computer are known as ‘Hardware’., II. Choose the correct answer :, (1) Computer is a :, (a) Launching Machine, (b) Calculator, (c) Controlling Device, (d) None of the above, (2) Which of the following is not input device :, (a) Keyboard, (b) Magnetic Tape, (c) Monitor, (d) Floppy Disc, (3) Hard Copy Printer is :, (a) Output Device, (b) Input Device, (c) Powerful Computer, (d) Accumulated Device, (4) Which of the following is said to be the brain of a Computer :, (a) A.L.U., (b) C.P.U., (c) Monitor, (d) R.O.M., (5) Which of the following is a hardware device of a Computer :, (a) Printer, (b) Word Processor, (c) Data Base, (d) All of them, (6) Punched Card is :, (a) Used to send mail electronically (b) An Input Device, (c) An Output Device, (d) None of the above, (7) Which of the following languages are used for business operations :, (a) BASIC, (b) COBOL, (c) Fortran, (d) None of the above, (8) Which of the following two digits are used in Binary system :, (a) 1, 2, (b) 0, 1, (c) 1, 3, (d) 2, 1, (9) Which of the following computers basically does adding work :, (a) Digital Computer, (b) Analog Computer, (c) Hybrid Computer, (d) None of the above, (10) CPU stands for :, (a) Central Processing Unit, (b) Control Processing Unit, (c) Control Primary Unit, (d) None of the above., , Key to Answers, I., II., , (1) True, (2) True, (3) False, (4) True, (5) False, (6) True, (7) True, (8) True., (1) (d), (2) (c), (3) (a), (4) (b), (5) (a), (6) (b), (7) (b), (8) (b), (9) (a), (10) (a)., , l, , 13
Page 1000 :
2, OVERVIEW OF COMPUTERISED, ACCOUNTING SYSTEM (CAS), , Learning Objectives, 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10, 2.11, 2.12, 2.13, 2.14, 2.15, 2.16, ●, , Concept of Computerised Accounting System, Steps for Establishment of Computerised Accounting System, Applications of Computer in Accounting, Types of Accounting Software, Role of Computer in Accounting, Features of Computerised Accounting System, Different Components of Computerised Accounting System, Automation of Accounting Process, Designing of Accounting Reports, Management Accounting System (MAS) and Accounting Information, System (AIS), Relationship between AIS, MIS and HRIS, Relationship between AIS and MIS, Relationship between AIS and Manufacturing System, Comparison between Manual and Computerised Accounting, Functions of Accounting Programmes, Advantages and Disadvantages of Computerised Accounting, Useful Questions, , 2.1 Concept of Computerised Accounting System, A computerised accounting system is an accounting information system that process, the financial transactions and events as Generally Accepted Accounting Principles, (GAAP) to produce reports as per user requirements. In a computerised accounting, system, the framework of storage and processing of data is called operating environment, that consists hardware as well software in which accounting system works. Both hardware, and software are independent., Modern computerised accounting systems are based on the concept of date-base., Every computerised accounting system has two basic requirements :, (i) Accounting Framework : It consists of principles, coding and grouping, structure of accounting., (ii) Operating Procedure : It is well defined operating procedure blended suitably, with the operating environment of the organisation., , 14
Page 1001 :
Overview of Computerised Accounting System (CAS), The use of computers in any database-oriented application has four basic requirements, as mentioned below :, (i) Front and Interface, (ii) Back-end Database, (iii) Data Processing, (iv) Reporting, System., 2.2 Steps for Establishment of Computerised Accounting System, An ideal accounting system does not come interface automatically. It is to be very, much carefully planned, designed, arranged, managed and modified. In developing an, ideal accounting system the following steps are necessary :, (i) Analysis : At first it should be ascertained that information is necessary for, internal and external users., (ii) Design : For formulating a new accounting system designing of forms and, documents., (iii) Implementation : For implementation of a new or modified accounting, information system necessary documentary evidences of information, process of methods, and installation of necessary equipment etc. are to be activated., (iv) Follow-up : After implementation of accounting system and making it workable,, its weakness and breakdown are to be monitored very closely and its effectiveness and, design are to be compared with organizational objectives., 2.3 Applications of a Computer in Accounting, The most common applications of a computer in accounting covers the following :, (i) Recording of all business transactions., (ii) Preparation of various ledger accounts, such as cash, bank, sales, purchased,, debtors, creditors and various nominal and real accounts., (iii) Maintaining of the store records up-to-date., (iv) Preparation of payroll accounting—for wages and salary paid or payable., (v) Preparation of :, (a) Vouchers—Cash Voucher, Non-cash Voucher, Transfer Vouchers., (b) Cash Memos and Credit Invoices., (c) Preparation of Cash Book and Other Subsidiary Books., (d) Ledger Accounts, (e) Trial Balance, (f) Preparation of Final Accounts—Trading Account, Profit & Loss Account and, Balance Sheet., (g) Preparation of Cost Reports and Cost Sheet etc., Thus, with a computer, one can request and receive as in house balance sheet, an, income statement, or other accounting reports at a moment’s notice. So a computer, practically perform accounting operations efficiently and effectively and can be rightly, called ‘Accounting Machine’., 2.4 Types of Accounting Software, There are following Accounting Software available in the market :, 1. General Ledger Accounts, 2. Accounts Payable, 3. Accounts Receivable, 4. Stock Control., 2.5 Role of Computer in Accounting, Computers play a very important role in the modern business world. To survive and, grow in the present day fast changing business environment, it is very necessary that, business operations are performed efficiently and at a very fast speed. Here computer,, through hardware and software, helps the business to achieve this object., In the field of accounting, computers have special significance. In the present age, it, is possible to get the whole of accounting work done on computers. Use of ‘Spread Sheets’,, , 15
Page 1002 :
SBPD Publications Accountancy (XII), ‘Data-Base’ and ‘Word Processor’ help business houses in efficient functioning of the, business. Computers are very useful for certain specific accounting operations such as, preparation of general ledger, debtors ledger, creditors ledger, stock ledger, sales ledger,, salary ledger etc. A business entity can choose one or any of the above programme, according to its requirements., (1) General Ledger : Ledger accounts are updated in a fraction of a second when the, details of a transaction are fed into the computer. Once a transaction is recorded through, computer, it is automatically posted to various accounts., (2) Debtors Ledger/Accounts Receivable : Information about current states of, accounts of debtors is readily available from this ledger (software). This software is helpful, in making reminders to the debtors in case of delay in payment., (3) Creditors Ledger/Accounts Payable : It provides accurate and upto-date, information regarding accounts of creditors. This software enables the business to meet its, obligations., (4) Stock Ledger : It provides ready information about stock-in-hand. It also, provides details of receipts and issue of all the items of store., (5) Salary Ledger : It prepare salary statement/wages statement of thousands of, employees very accurately and in no time by use of pay roll accounting software (programme)., Computer also helps in the following work :, (i) Sales Accounting, (ii) Purchase Accounting, (iii) Inventory Control, (iv) Production, Planning and Control, (v) System Analysis, (vi) Input-Output Analysis, (vii) Management, Information System, (viii) Tax Deduction at Source (TDS) etc., Computers have changed the face of accounting dapartment. The job of accounting, department has been made very simple now. The manual and monotonous job of maintaining, subsidiary books, ledger books, preparation of Trial Balance and Income Statement and, Balance Sheet has been simplified. These accounting operations can be performed by, computers quickly, accurately and efficiently. Therefore, in most of the business organisations, today, like banks and insurance companies, accounting work is being done by computers., To conclude, the role of computer in accounting is increasing day-by-day and use of, computers by accounting departments is becoming popular with passage of time., 2.6 Features of Computerised Accounting System, For Computerised Accounting System, we have to use some Accounting Software like, ‘Tally’. This system is based upon the concept of database. It does not depend upon the concept, of creating and maintaining journals, ledger etc. which are very essential with manual, accounting systems. A typical computer accounting system will offer the following features :, (i), Online input and storage of accounting data., (ii) On screen input and print out of sale and purchase invoices., (iii) It makes the automatic updation of general ledger., (iv) It records the banking transactions., (v) It records the suppliers invoices., (vi) It facilitates a system of codification of accounts and house actions., (vii) It makes the automatic updations of stock records., (viii) It makes and records the payments made to suppliers., (ix) It facilitates grouping of various accounts., (x) It generates reports quickly., Computerised Accounting System is very accurate and saves the money and time of, the organisation. It provides the clear and up-to-date picture of transactions to the, management., , 16
Page 1003 :
Overview of Computerised Accounting System (CAS), 2.7 Different Components of Computerised Accounting System, Recording of Transactions, in respective Vouchers, GST, Aging Analysis ........., Component, Analysis, , Sales, , GST, Purchases ......... Invoices and Notes, Analysis of Stock, and Parties, , Ledgers, Procurement, Valuation, ......... Inventory, Movement, Analysis, , Payroll ......., , Pay Slips, Provisions, Statutory, Liabilities, , Final, Accounts, , Trial Balance, Profit and Loss, Accounts, Balance Sheet,, , Fig. 1 : Components of Accounting Software System, , 2.8 Automation of Accounting Process, The use of computers in accounting means automation of accounting process. The, process of accounting process begins with the process of designing database for accounting., The designs of the accounting record can be need based by an enterprise in a manual, accounting process or tailor-made software. However, in a ready-made accounting, software, this facility will not be available unless the ready-made software is customised to, the need of the enterprise., The process of designing a database for accounting is explained through a flow-chart, as follows :, Designing Database for Accounting : The process of designing Database for, Accounting begins with a reality i.e., expressed using elements of a conceptual data, morder. The process of designing a database for accounting is best described through a, flow chart (Fig. 2)., , 17
Page 1004 :
SBPD Publications Accountancy (XII), Conceptualisation of an Accounting Reality, , Development of an Equity Relationship (ER) Model, and Enhanced Entity Relationship (EER) Model, , Designing Relational Database for the ER and EER, , Process of Normalisation, , Refinement of Database, , Need, for, Refine, , Yes, , No, Final Design of Database Ready, Fig. 2 : Designing Database for Accounting, , 2.9 Designing of Accounting Reports, Data when processed becomes information. The related information, when, summarised to meet a particular need, is called a report. The content and design of the, report varies according to the level to which it is submitted and the type of decisions to be, based upon., A report must be accurate, effective and efficient to serve the purpose of the users of, such report. So report must possess the following characteristics :, (i) Relevance, (ii) Timeliness, (iii) Accuracy, (iv) Completeness, (v) Summarisation., 2.10 Management Accounting System (MAS) and, Accounting Information System (AIS), In the past, managers sought information from miscellaneous haphazard sources and, processed information on a personal basis. But now they have an information system, which provides through details to base the decisions upon., , 18
Page 1005 :
Overview of Computerised Accounting System (CAS), A Management Information System (MIS) is an information system that, provides accurate, timely and organised information necessary to take decisions and, manage organisation effectively. MIS is viewed and used at many levels and strategic., Accounting Information System (AIS) identifies, collects, processes and, communicates economic information of an organisation to a wide variety of users. Every, accounting system is essentially a part of the Accounting Information System. Which in, turn, is a part of the broader system viz., the Organisation Management Information, System., The following diagram shows the relationship of the AIS with the other functional, MIS :, , Manufacturing, Information, System, Human, Information, System, , Accounting, Information, System, Management, Information, System, , Financial, Information, System, , Marketing, Information, System, , Fig. 3 : Diagram showing Relationship of the Accounting Information, System with Other Functional Management Information System, , The Accounting Information System (AIS) receives and provides information to the, various sub-systems of the institutional/integrated Management Information System (MIS)., Accounting Information System (AIS) is a collections of resources (people and, equipment), designed to transform financial and other data into information. This, information is communicated to a wide variety of decision-makers., Initially MIS was considered to be a financial accounting systems but now it is widely, recognised as a broader concept and accounting system is a sub-component., 2.11 Relationship between Accounting Information System,, Manufacturing Information System and Human Resources, Information System, Manufacturing Department, Accounts Departments and Human Resource, Department (HRD) are three important functional departments of an organisation which, are mutually related. So Accounting Information System, Manufacturing Information, System and Human Resource Information System are mutually related., HRD : It sends a list of number of workers, their category, their level of skill etc. to, the manufacturing department and to the accounts department., , 19
Page 1006 :
SBPD Publications Accountancy (XII), Manufacturing Department : On receiving such list from HRD, manufacturing, department sends the details of production achieved by each worker and other deductions, to be made from their wages on various accounts, to both accounts department as well as, HR department., Accounts Department : The accounts department on receiving such reports make, its own calculations of various payments and dues of the workers and make the final, payments. Accounts department sends the report to both HR department and, Manufacturing department. HR department then monitors the performance of workers., The following diagram deficts the relationship between AIS, MIS and HRIS :, Report on Poor Performance/, Deduction to be made, , Report on Worker’s, Category, Wages, Payable, , Report on, Performance, of Workers, , Report on Payment of, Wages etc., , Accounts, Department, , R e po rt o n, Ne t Wag e s, paid, , Manufacturing, Department, , Human Resource, Department, Report of Wages, Payable to the Workers, , Fig. 4 : Diagram showing Relationship between AIS, MIS and HRIS, , 2.12 Relationship between Accounting Information System (AIS), and Marketing Information System (MIS), Business process in the marketing and sales department involves the following, activities :, (i) Inquiry Process, (ii) Creating Contacts, (iii) Ordertaking, (iv) Despatching Goods,, (v) Billing to Customers., Accounting sub-system transaction cycle include the following activities :, (i) Processing of Sales Order, (ii) Authorising the Credit Limits, (iii) Custody of, Goods, (iv) Inventory/Stock Position, (v) Shipping Information, (vi) Accounts Receivables, etc., It also keeps a track of the customers accounts., 2.13 Relationship between AIS and Manufacturing System, Business process in the production department involves the following activities :, (i) Preparation of Plans and Schedules. (ii) Issue of Material Requisition Forms and, Job Cards. (iii) Issue of Stock/Inventory. (iv) Issue of Orders for Procurement of Raw, Materials. (v) Handling of Vendors Invoices. (vi) Payment to Vendors., Accounting sub-system transaction cycle, therefore, includes the following activities :, (i) Processing of Purchases Orders, (ii) Advance to Suppliers, (iii) Stock Status, updation Reports, (iv) Report of Accounts Payable., , 20
Page 1007 :
Overview of Computerised Accounting System (CAS), 2.14 Comparison between Manual and Computerised Accounting, As we know accounting is a process of identifying, recording, classifying and, summarising financial transactions to produce financial statements. The accounting, process may be carried out manually or by the use of computer. Hence, let us have a, comparison between manual and computerised accounting :, 1. Identifying Financial Transactions : This process is common under both the, processes because under both process financial transactions are indentified by applying, the principles of accounting., 2. Recording : The process of recording transactions in the books of original entry,, posting them into ledger accounts and performing arithmetical functions, i.e., adding,, subtracting and totalling etc. are carried out manually under the manual process. In, computerised process, transactions are recorded in the books of accounts and the, remaining functions are performed without any further process. The data constant of, transactions is stored in the accounting database in the computerised accounting system., 3. Classifying : In the manual process, transactions are first recorded in the Journal, and then are posted to the ledger accounts. So data is duplicated. In the computerised process,, data is not duplicated. The stored data is processed by the software and produced as classified., 4. Summarising : Under the manual process, the transactions under each ledger, accounts are summarised, that is, because of each account is obtained to prepare a Trial, Balance. It means preparation of ledger accounts is essential to prepare a Trial Balance. In, the computerised accounting process, it is not necessary to generate ledger accounts to get, a Trial Balance., 5. Financial Statements : In the manual process, preparation of Trial Balance is, essential to prepare the financial statements. In the computerised process, the financial, statements are generated from the system itself. Therefore, the need to have a Trial, Balance does not arise., 6. Closing of Books : In the manual process, closing entries are made by, transferring nominal accounts to Trading Account or Profit and Loss Account, as the case, may be, to make the accounting process complete. Balance in other accounts is transferred, as opening balances in the books of the next accounting period. In the computerised, process, the process of closing the books of accounts is performed through the software and, the opening balances are stored in the database., 2.15 Functions of Accounting Programmes, The type of accounting program used by a business will depend on the size and, requirements of that business. So the available packages range from ‘Tally’ program to the, tailor-made system used by the larger business., A typical computer accounting program will provide a number of facilities :, (i), Print out of Sales Invoices,, (ii) Updating of Customers Accounts in the Sales Ledger,, (iii) Recording of Supplier’s Invoices,, (iv) Automatic Updating of Supplier Accounts in the Purchases Ledger,, (v) Recording to Bank Receipts,, (vi) Making of Payments to Suppliers and for Expenses,, (vii) Automatic Updating of General Ledger,, (viii) Automatic Adjustment of Stock Records,, (ix) Instant Reports for Management., , 21
Page 1008 :
SBPD Publications Accountancy (XII), 2.16 Advantages and Disadvantages of Computerised Accounting, , q Advantages (or Need) of Computerised Accounting, (1) High Speed : The routine accounting functions are done by computers at a much, faster pace than what is possible under manual accounting., (2) Reduces Labour : Computer reduces clerical labour., (3) Accuracy : The accuracy of computerised accounting record is more because the, scope for error in mechanical system, is negligible., (4) Quick Preparation of Statements and Reports : It helps in the preparation of, reports quickly and frequently. Computers can produce Profit and Loss Account as frequently as, required. In a mannual system, it can often take weeks to produce the Profit & Loss Account., (5) Warning Signal : Computerised system can help flash the warning signal, if built, properly in the software. It can check which debts are ageing or increasing beyond proportion., Similarly, it can signal which expense heads are rising alarmingly before it is too late., (6) Efficiency : Computers help in generating the desired kind of reports which help, management to discharge their functions effectively., (7) Helps in Decision : Computerised accounting system helps management in, taking timely decisions., (8) Storage/Retrieval : A computer can store large volumes of data in its memory, unit. Accounting data is stored in hard-disks, CD-ROMs, floppies. Besides, some data can, be utilised again and again., (9) Reliabilities : Records maintained by a computer are considered more reliable., (10) Upto-date Information : Computerised accounting system provides upto-date, information., (11) Real Time User Interface : Most of the automated accounting systems are, inter-linked through a net work computer. This facilitates the availability of information, to various users at the same time on a real time basis (that is spontaneously)., (12) Legibility : The data displayed on computer monitor is legible., q Limitations or Disadvantages of Computerised Accounting, (1) Costly Affair : Computerisation is a costly affairs. Hence, the small firms cannot, afford it., (2) Securities : Security is a big concern in computerised accounting. A single, accidental press of ‘delete’ button can erase entire data., (3) Inabilities to Check Manticipated Errors : Computer programmes on their, own cannot check unreasonable errors if the checks are not put into it., (4) Information Overload : Too much of information is disinformation. The, computerised system, if not properly checked, leads to an information overload. This, hampers the decision process of management., (5) System Failure : The danger of the system crashing due to hardware failures, and subsequent loss of work is a serious limitation of computerised accounting system., Software damage and failure may occur due to attacks of viruses., (6) Cost of Training : The handling of computers requires trained personnel. As a, result, huge costs are incurred on training., (7) Staff Opposition : Trade Unions and staff oppose computerisation in the, business enterprise as it leads to unemployment., (8) Disruption : The accounting process suffer a significant loss of work time when, an organisation switches over to computerised accounting system., (9) Ill-effects on Health : The extensive use of computer systems may lead to, elopment of various health problems. Such as bad backs, eye train, muscular pains etc., USEFUL QUESTIONS, (A) Long Answer Type Questions, 1. Define a Computerised Accounting System. Distinguish between a Manual and Computerised, Accounting System., 2. Describe advantages and disadvantages of Computerised Accounting System. [J.A.C., 2012(A)], , 22
Page 1009 :
Overview of Computerised Accounting System (CAS), 3., 4., 5., 6., , Explain in brief various categories of accounting packages., (J.A.C., 2013), Describe the sources of accounting software., What is Computerised Accounting System ? Explain its requirements., (J.A.C., 2013), Explain briefly any five advantages of computerised Accounting system over the manual, system., (J.A.C., 2015), 7. Discuss the various advantages of computerised Accounting system., (J.A.C., 2014), 8. Discuss the steps for establishment of Computerised Accounting System., (J.A.C., 2011, 13, 15, 18), , (B) Short/Very Short Answer Type Questions, 1., 2., 3., 4., 5., 6., 7., 8., 9., 10., 11., 12., 13., 14., 15., 16., , Give in brief the concept of Computerised Accounting System., State the main features of Computerised Accounting System., Write down some applications of computer in accounting., Draw the different components of Computerised Accounting System in block diagram., What is meant by automation of accounting process ?, Explain the characteristics of designing to Accounting Reports., Differentiate between Manual and Computerised Accounting Processes., Show the relationship between Management Accounting System (MIS) and Accounting, Information System (AIS)., Show the relationship between AIS and Marketing Information System., Write the name of different information systems., Explain the various accounting packages., Describe the advantages of Computerised Accounting System., Explain the role of computer in accounting., What is the importance of computer in the field of Accounting ?, Write any four differences between Manual Accounting and Computerised Accounting., Write short notes on the following :, (i) Ready-made Accounting Software,, (ii) Customised Accounting Software,, (iii) Tailor-made Accounting Software., , (C) Objective Type Questions, I. Choose the correct answer :, (1) Computerized Accounting is :, (A) Software (B) Data base, (C) Hardware, (D) None of these, (2) Computerised Accounting’s advantages are :, (A) Quickly (B) Accuracy, (C) Ralevance (D) All of these, (3) Computerised Accounting’s disadvantages are :, (A) High case (B) High speed, (C) Efficiency, (D) All of these, (4) What are the applications of computer in Accounting ?, (A) To record all business transactions, (B) To prepare various types of ledger, (C) To prepare financial statements, (D) All of these, (5) Computerised accounting is one of the.............................oriented applications :, (A) Superior, (B) Inferior, (C) Neither superior nor inferior (D) (A) and (B) both, (6) The Computerised accounting system is capable of handling.......................of transactions., (A) Large number, (B) Small number, (C) Limited number, (D) None of these, , Key to Answers, I. (1) (C)] (2) (D)] (3) (A)] (4) (D)] (5) (A)] (6) (A), , l, , 23
Page 1010 :
3, DATABASE MANAGEMENT, SYSTEM (DBMS), , Learning Objectives, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, , Meaning of Database, Basic Components of Database, Processing of Data, Database Management System (DBMS), Entity Relationship (ER) Model, Structured Query Language (SQL), ● Useful Questions, ● Practical Questions, , 3.1 Meaning of Database, Database is a general term for any collection of related information stored in a logical, way on a computer. A number of general purpose database programmes are available for, PCs, of which the best known is probably Microsoft’s Access. Using such software one can, define new databases, enter information and process the information in various ways. One, of the most important processing operations is to search for data that matches certain, criteria. In the transitional database model, the database is divided into a number of, tables. Each table consists of a number of record., The usual term for a database which does have such relational links is a flat file data, base., A database is, thus, a collection of data. It contains information about one particular, enterprise. It is so stored that is organised so that its contents, can easily be accessed,, managed and updated., For example, in a database of accounting information there may be a table of, supplier’s details, where each record relates to an individual supplier. If a number of tables, are connected logically, we have relational database., q Types of Databases, (1) Relational Database : The most important type of database is the relational, database. It is a tabular database in which data is defined so that it can be reorganised and, accessed in a number of different ways., 1, , 1, , Jain, V. K., ‘O’ Level : Elective—1, Module Ml. 1, Information Technology, BPB Publications, New Delhi, 2000,, p. 36., , 24
Page 1011 :
Database Management System (DBMS), (2) Distributed Database : A distributed database is one that can be dispersed or, replicated in a different points in a network., (3) Object-oriented Database : An object-oriented database is one that is, congruent with the data defined in object classes and sub-classes., Databases contain aggregations of data records or files, such as a sales transactions,, product catalogue, inventories and customer’s files. Typically a database manager, provides users the capabilities of controlling read/write access, specefying report, generation and analysing usage., Structured Query Language (SQL) is a standard language for making interactive, queires from and updating a database such as IBM’s DB2, Microsoft’s Access and database products from Oracle, Sybase and Computer Associates., 3.2 Basic Components of Database, The following are the basic components of Database :, (i) Bit or Binary Digits, (iv) Data Item,, (ii) Byte,, (v) Record,, (iii) Data,, (vi) Data File., 3.3 Processing of Data, Data Processing involves the technique of collecting, storing, relating, interpeting, and computing data items, so that meaningful and useful information for decision-making, may be obtained. In short, Data Processing refers to the activities associated with, generation of information. The relation between data and information can be presented in, the following diagram :, Data, , Processing of Data, , Information, , INPUT, PROCESS, OUTPUT, Data Processing Cycle : Data Processing cycle has the following steps :, (i) Data Capturing : Source Documents, i.e., Vouchers., (ii) Input of Data., (iii) Data Storage., (iv) Manipulation of Data., (v) Output of Data (Generation of Information)., Therefore, information refers to processed data placed in a meaningful context for the, user. Data processing involves the following activities :, (i) Collection of Data, (ii) Manipulation of Data, (iii) Managing Information., 3.4 Database Management System (DBMS), Database is an important programme or software. It records all the useful and, relevant information relating to a business at one centralised place. Data may relate to, number of files, salaries, appointments, retirements, sales, purchases, accounts receivable, and accounts payables, incomes and expenditures etc. These data are generally stored on a, floppy discs. The Database Management (or DBM) converts the data into useful, information. The data fed into the computer may be rearranged in a desired order and, different calculations can be performed according to the need of the business. So, if the, data of sales have been fed into the computer, we may very well know total sales of the, month, average sale, the amount of collection, percentage of profit on sales etc., Database Management is useful in debt collection, production planning and control,, inventory control, preparing pay rolls, invoicing, preparation of budgets etc. It also helps, in decision-making., , 25
Page 1012 :
SBPD Publications Accountancy (XII), , q Database and Database Management System, Databases help in organising related information in a logical manner for access and, retrieval. Data Base Management involves creating, storing, modifying, deleting and, adding data in files and using this data to generate reports. It is popularly ACCESS. The, software that allows to perform these functions is known as Data Base Management, System (DBMS)., q Models of Database Management System, DBMS programmes commonly use one of the following four database structures to, link files : (1) Hierarchical Databases, (2) Network Databases, (3) Relational Databases, and (4) Object-oriented Databases., (1) Hierarchical Databases : Hierarchichal databases were developed by IBM in, 1968. A hierarchical database links data using a hierarchical relationship. In a, hierarchical DBMS, a group of fields is called a segment rather a record. The data element, at the type of the hierarchy is known as the parent element. There may be several child, element beneath the parent element. Each of these children may, in turn, become a parent, to several lower level child elements. It should be noted that in a hierarchical structure, each segment can have only one parent. The structure that is created resembles a pyramid, or an organisational chart., The problem with a hierarchical database is that the data can be accessed only by, following a path down the structure access is not flexible. All the relationships among the, data elements must be determined when the database is designed., For example, Employees may be categorised by departments in which they work., Within the department, employees may be categorised by job function. Many companies, continue to use hierarchical databases even though other database structures are, superior. IBM supports a hirerarchical database on many of its mainframe computer., (2) Network Databases : The network database structure was developed by a, Conference on Data System Languages (CODASYL). As in a hierarchical database, a net, database organises data in a parent-child relationship. All the relationships among the, data items must be determined during the design phase. In a network structure, however,, a child can have more than one parent or no parent at all., (3) Relational Database : It is a collection of data items organised as a set of formally, described tables from which data can be accessed or reassembled in many different ways, without having to reorganise the database tables. A very important point to note here is that, an RDBMS that satisfies the 12 criteria given by Dr. Codd is called a true RDBMS., (4) Object-oriented Databases : Object-orient databases are the newest type of, data- base structure. On an object-oriented database, the result of a retrieval operation is, an object of some kind, such as document. Within the object are mini programmes. Mini, programmes enables the object to perform task, such as displaying a graphic. Objectoriented databases can incorporate sound, video, text and graphics into a single database, record., This type of database is well suited for multimedia applications. Object-oriented, databases can have their data linked to different programmes while using hierarchical, network, or relational database structure. So, Object-oriented databases are likely to gain, impopularity., q Advantages and Importance of Database Management System, 1. Database minimised date redundancy which makes updating easier and less errorprove., 2. Database saves processing effort and storage space., 3. A database poots the data for a series of applications. So data is readily available, from one central source., , 26
Page 1013 :
Database Management System (DBMS), , q, , 4. DBMS helps data management much more efficient and effective., 5. DBMS helps in having better access to more and better managed data., 6. DBMS helps in quickly answering the queries., 7. DBMS helps in preparing reports., 8. Fewer programs may be needed, since each can access an entire database., 9. DBMS helps in ensuring data security and integrity., Disadvantages/Limitations of DBMS, , 1. Insufficient database expertise., 2. DBMS software are costly., 3. DBMS hardwares are also costly., 4. Adoption of this approach requires a significant extract that has to be borne by the, organisation., 5. Data security and integrity problems arise with the DBMS as many users have, access right to the database., q Objectives of DBMS, DBMS has been evolved to overcome the problems and limitations of traditional, management, the following are the main objectives of DBMS :, (i) Complexity of an organisation information system is reduced through centralisation of data management., (ii) Data redundancy and inconsistancy are reduced by eliminating all isolated files in, which the data elements are repeated., (iii) Program data dependence is reduced by providing central control of data creation, and definition., (iv) Flexibility in Information System is greatly increased by permitting adhoc, queries of large pool of information., (v) Data once stored are accessed by multi-users. Thus, data collected for one purpose, can be used to serve various purposes as the needs arise., q Components of Data Base Management System (DBMS), Data Base Management System has different components, which have their own, functions. The following are the components of DBMS :, (i) File Manager,, (ii) Data Base Manager,, (iii) Query Processor,, (iv) Data Dictionary,, (v) Data Manipulation Language (DML) Precompiler,, (vi) Data Definition Language (DDL) Compiler., 3.5 Entity Relationship (ER) Model, It is a popular conceptual data model which is mostly used in database-oriented, applications., The model is best depicted with the help of ER symbols while preparing ER diagram,, the following symbols are used to present the different types of entities, attributes,, identifiers and relationship :, , 27
Page 1014 :
SBPD Publications Accountancy (XII), Symbols, , Meaning, Entity, Weak Entity, Relationship, , Identifying Relationship, Attribute, Key Attribute, Multi-value Attribute, Derived Attribute, , E1, , R, , E1, , R, , Total Participation of, E 2 in R, , E2, , Cardinality Ratio 1 : N, for E 1 : E 2 in R, , E2, Fig. 1, , q Components of ER Model, ER Model has four units :, ER Model, , Entity, , Attributes, , Identifier, , Relationship, , 1. Entity : Any thing in the real world with independent existence is called entity., Hence, an entity is a person, place, thing, event or concept about which information is, recorded. The object may have physical existence (e.g., person, car, etc.) or conceptual, existence (e.g., company, univesrity course, account, voucher). Students, employees are, entities in the context of accounting reality, there exists five entities : (i) Accounts, (ii), Vouchers, (iii) Employees, (iv) Accounts Type, (v) Support Documents. The accounting, data is captured through these entities., 2. Attributes : Attributes are some properties of interest (or characteristics) that, further describes the entity such as height, weight and date of birth in case of a person and, code and name in case of accounts., , 28
Page 1015 :
Database Management System (DBMS), Entities, Customer, Book, Student, , Attributes, Name, Address, Customer No. .............., ISBN, Author, Price ................., Name, Address, Roll No. ................., , An entity has value for each of its attributes, which is the data stored in the database., Attributes may be of several types as follows :, (i), Composite Vs. Simple Attributes,, (ii) Single-valued Vs. Multi-valued,, (iii) Store Vs. Derived Attributes,, (iv) Null Values (for absence of data),, (v) Complex Attributes,, (vi) Entity Types and Entity Sets,, (vii) Value Sets of Attributes., 3. Identifier (or Key Attributes of an Entity Type) : Almost every type has one of, its attributes, which contains unique values for identifying the entity instance. For, example, Roll. No. as attribute of entity type students has unique values through which a, student instance can be identified. Similarly, Code is a key attribute of entity type, accounts because its data values are required to be unique., 4. Relationship : It is a relational database. All entities have bonds (relations), between them. A relationship is a link between two entities. It tells something about which, , V, o, D uch, eb e, it r, , Ty, pe, , Credit, , Au, th, or, by ised, Pr, ep, by are, , d, , r, ar, N, , V, N ouc, um he, be r, r, , C, od, e, , Name, , Debit, , n, io, at, , Account, , Account, , Fig. 2, relationship exists between our entities. For example, vouchers and accounts are related, in two ways : Vouchers contain debit account(s) and vouchers contain credit account(s)., Employees, , Work, , Projects, , In ER model, these references are represented as explicit relationships rather than, attributes. Collection of relationship is called ‘Relationship Sheet’., , q Types of Relationship, There are three types of relationships :, (i) One-to-one Relationship,, (iii) Many-to-many Relationship., , (ii) One-to-many Relationship and, , 29
Page 1016 :
SBPD Publications Accountancy (XII), (i), , 1, , Husband, , 1, , Marriage, , Wife, , One-to-one Relationship (1 : 1), (ii), , State, , 1, , M, , has, , Cities, , One-to-many Relationship (1 : M), (iii), , 1, , Employees, , Work, , M, , Projects, , Many-to-many Relationship (M : M), Weak Entity Types : Entity types, which do not identifier or key attributes of their, own are called weak entity types. Such entity types are identified by being related to, specific entities from another type in combination with some of their attribute values., Accordingly, the relationship type that relates a weak entity type to its owner is called, identifying relationship of the week entity., Relationship based on Degree : The degree of a relationship type is the number of, participating entity types. A relationship type of degree one is called Unary relationship., A relationship type of degree two is called Binary relationship and relationship types, of degree three is called Ternary relationship. Example,, Voucher, , Debit/Credit, , Accounts, , Binary Relationship, , Voucher, , Debit/Credit, , Accounts, , Cash Book, Ternary Relationship, , 3.6 Structured Query Language (SQL), SQL is a standard interactive and programming language for getting information, from and updating database. Although SQL is both an ANSI and ISO standard, many, database products supports SQL with proprietory extensions to the standard language., Queries take the form of a command language. This lets you select, insert, update, find out, the location of data and so forth., q Categories of SQL Commands, SQL commands can be roughly divided into three major categories with regard to, their functionality. Firstly, there are those used to create and maintain the database, structure. The second category includes those commands that manipulate the data in such, structures. Thirdly, there are those that control the use of the database. To have all this, functionality in a single language is a clear advantage over many other systems, straightway and must certainly contribute largely to the rumour of it being easy to use., It is worth naming these three fundamental types of commands for future reference., Those that create and maintain the database are grouped into the class DDL or Data, Definition Language statements and those used to manipulate data in the tables, of which, there are four, are the DML or Data Manipulation Language commands. To control usage, , 30
Page 1017 :
Database Management System (DBMS), of the data the DCL commands (Data Control Language) are used and it is these three in, conjunction plus one or two additions that define SQL. There are therefore no, environmental statement, as one finds so irritating in COBOL : for example, no statement, to control program flow (if/then/else, perform, go to) and of course, no equivalent, commands to open and close files, and read individual records. At this level then, it is easy, to see where SQL gets its end-user-tool and easy-to-use tags., 1. Data Definition Language or DDL, Mainly DDL has following commands :, (i) CREATE Command—This command is used to create a database structure e.g., Table, View, Synomyms etc., SYNTAX :, CREATE TABLE TABLE_NAME, Employee_, Code, , Employee_Name, , Employee_Deptt, , Employee_ Salary, , Employee_ Sec_No, , (ii) ALTER Command—This command is used to make alterations in a table. One, can add a new column using ADD command and modify column using MODIFY command., ADD : ALTER TABLE TABLE_NAME ADD COLUMN_NAME, MODIFY : ALTER TABLE TABLE_NAME MODIFY COLUMN_NAME, (iii) DROP Command—Using this command one can drop any table from database., DROP TABLE TABLE_NAME, 2. Data Manipulation Language or DML, In SQL, DML Has following main commands :, (i) SELECT Command—This command is used to select particular data from the, table, which has been queried., Basic Query—SELECT.......FROM........WHERE........, SELECT Statement makes a list of columns containing required data FROM, statement extracts the required tables and where statement applies conditions., SELECT command has following structure :, SELECT COLUMN_NAME, FROM TABLE_NAME, WHERE CONDITIONS, Employee_, Code, , Employee_Name, , Employee_Deptt, , Employee_, Salary, , 001, , RAJEEV SHARMA, , PURCHASE, , 15,000, , 002, , VINOD KUMAR, , PUBLIC DEALING, , 14,000, , 003, , RITESH TANDON, , SALES, , 17,000, , 004, , AMIT LAL, , PERSONNEL, , 18,000, , Employee_, Sec_No, , (a) If we want to select the name of employee having salary = ` 14,000, then SELECT, command will be used as follows :, SELECT EMPLOYEE NAME, FROM EMPLOYEE, WHERE EMPLOYEE SALARY = ` 14,000, , 31
Page 1019 :
Database Management System (DBMS), Some other important commands for retrieve accounting information are following :, (i) OPEN Command—If opens the file., (ii) CLOSE Command—If closes the file., (iii) DISPLAY Command—This command displays the data structure on screen., This command displays following informations :, —Name of File, —Number of Records in File, —Length of Record (In Bytes), —Space for Storage (In Bytes), (iv) JOIN Command—Sometimes it is required to join two databases to get one new, file. This command is used for this purpose., (v) PRINT Command—This command is used to print particular file on printer., (vi) CANCEL Command—This command is used to cancel the transfer of data., Basic Queries Examples, Let us have the tables EMPLOYEE and BRANCH to understand the use of SELECT, for the retrieval of various Accounting informations :, EMPLOYEE, Emp_, Code, , Branch, Salary, _ Code, , Emp_Name, , Emp_, Joining_, Date, , Designation, , 0004, , SAHIL THAKUR, , 2912, , 12,000 Manager, , 03.01.03, , 0006, , KUKKU KAPUR, , 5419, , 14,000 Manager, , 03.04.66, , 0012, , ASHU TYAGI, , 2000, , 42,000 Chief Manager, , 05.10.90, , 0014, , JAY BANSAL, , 2912, , 10,000 Manager, , 27.11.84, , 0017, , DEEPAK KUMAR, , 2000, , 14,000 Analyst, , 31.12.80, , 0019, , RANJIT DEOL, , 2040, , 8,000, , 16.04.84, , 0026, , TANNU GOEL, , 2000, , 52,000 Director, , 21.06.98, , 0038, , RAJEEV GUPTA, , 2040, , 47,000 Deputy Director, , 22.08.88, , 0050, , VEERU PRATAP, , 5419, , 13,000 Accounts Officer, , 25.10.74, , 0058, , RAJEEV BATRA, , 2775, , 17,000 Manager, , 24.01.72, , Clerk, , BRANCH, Branch_Code, , Branch_Manager_Name, , City, , 5419, , RAMESH YADAV, , DELHI, , 2000, , D.P. SINGH, , CHENNAI, , 2912, , SANJAY BANSAL, , KOLKATA, , 2040, , NANAK SINGH, , MUMBAI, , 2775, , RAJ KAMAL, , HYDERABAD, , Query (i) : Write a query to select all the columns from the table BRANCH :, Answer : SELECT * FROM BRANCH, The result of the above query would be :, Branch_Code, 5419, , Branch_Manager_Name, RAMESH YADAV, , City, DELHI, , 33
Page 1021 :
Database Management System (DBMS), Query (v) : Write a query to select all information where the Branch code is 5419, from the table Branch :, Answer : SELECT * FROM BRANCH, WHERE Branch_Code = ‘5419’, Branch_Code, 5419, , Branch_Manager_Name, , City, , RAMESH YADAV, , DELHI, , q Use of Arithmetical Operators, Four types of arithmetical operators are used which perform a particular function :, Function, Operator used, Addition, +, Subtraction, –, Multiplication, *, Division, /, Using the above operators we shall observe the following queries :, Query (vi) : Write a query to select the names, salaries and designation of the, employees of the branch with code 2000 after giving an increment of ` 4,000 in their, salaries., Answer : SELECT Employee_Name, Salary + 4000, Designation, FROM EMPLOYEE, WHERE Branch_Code = 2000, Employee_Name, , Salary + 2000, , Designation, , ASHU TYAGI, , 46,000, , Chief Manager, , DEEPAK KUMAR, , 18,000, , Analyst, , TANNU GOEL, , 56,000, , Director, , Query (vii) : Write the name of the employee and his salary from the table, EMPLOYEE whose code = 0014 :, Answer : SELECT Employee_Name, Salary, FROM EMPLOYEE, WHERE Employee_Code = ‘0014’, Employee_Name, , Salary, , JAY BANSAL, , 10,000, , USEFUL QUESTIONS, (A) Long Answer Type Questions, 1., 2., 3., 4., 5., 6., 7., 8., , What do you mean by Data Base Management System (DBMS) ? Explain its main advantages., What is Data Base System? Explain ‘file’ and ‘table’ components of database., .What do you understand by database ? How does it differ from DBMS ?, (J.A.C., 2014), Describe in brief designing and creating simple tables, forms, queries and reports in context of, accounting system., What do you understand by table ? Explain the table designing process., What do you mean by Database Management System ? What are the elements of computer, system ?, Describe the use of Entity Relationship Model and describe its components., Explain briefly the basic components of Database., , 35
Page 1022 :
SBPD Publications Accountancy (XII), 9., 10., 11., 12., 13., 14., , What do you mean by Data base ? What are its Components ?, (J.A.C., 2013), Explain any four functions of Database management system., (J.A.C., 2015), Explain with one example DML or DCL., (J.A.C., 2008, 17), Develop and depict ER Model for accounting reality., (J.A.C., 2008, 17), What do you mean by DBMS ? Name two DBMS software packages. (J.A.C., 2009, 15, 18), What is ER Model ? Draw an ER diagram to create a balance sheet., (J.A.C., 2009, 10, 14, 16), 15. What do you mean by DBMS ? Explain different kinds of it., (J.A.C., 2010, 13), 16. What is database management system ?, (J.A.C., 2014, 16), 17. Explain ER Model., (J.A.C., 2018), , (B) Short Answer Type Questions, 1. What is meant by Structured Query Language ?, 2. What do you understand by database? How does it differ from DBMS (Data Base Management, System) ?, 3. Explain the basic concepts of Entity Relationship (E. R.) model. Illustrate as to how an, ER model is diagrammed ?, 4. What is meant by programming ?, 5. Mention the steps involved in the development of computer programme., 6. Explain the flow chart., 7. Define database and explain its types., 8. What is Database ? What are its types ?, 9. What are the objectives of DBMS ?, 10. What are the disadvantages or limitations of Database Management System ?, 11. What are the features of Relational Model ?, 12. State, what do you understand by accounting reports ?, 13. What do you understand by table ? Explain the table designing process., 14. What is Database Management System ? Explain the various components of Database, Management System., 15. What are the advantages of DBMS ?, [J.A.C., 2012(A)], 16. Write a short notes on :, (a) COMMIT Command, (b) ALTER Command, (c) UPDATE Command, (d) ROLLBACK Command., 17. What is DBMS ? State its objectives., 18. What are the functions at DBMS ?, 19. Explain the concept of Data Model with the help of one example., (J.A.C., 2019), , (C) Very Short Answer Type Questions, 1., 2., 3., 4., 5., , Give the meaning of database., What are the components of database ?, What is Database Management System ?, What are the steps of data process cycle ?, Explain any two of the following :, (i) Creation of Table,, (ii) Creation of Forms., 6. What is meant by query?, 7. What do you mean by SQL ?, , (iii) Creation of Queries., , (D) Objective Type Questions, I. State, whether the following statements are ‘True’ or ‘False’ :, (1) The Relational Model was propounded by E. F. Codd of IBM in 1972., , 36
Page 1023 :
Database Management System (DBMS), (2) In a computerised accounting system reports are generated as and when desired., (3) Data Transformation is called Information., II. Select the correct answer :, (1) How many bits constitute one byte ?, (a) 10, (b) 12, (c) 6, (d) 8., (2) When did E. F. Codd of IBM propound the concept of Relational Mode ?, (a) 1950, (b) 1972, (c) 1960, (d) 1901., (3) How many bytes are there in one Kilo Byte ?, (a) 1000 Bytes, (b) 500 Bytes, (c) 1024 Bytes, , (d) 2000 Bytes., , Key to Answers, I. 1. True, 2. True, 3. True., II. 1. (d), 2. (b), 3. (c)., , PRACTICAL QUESTIONS, From the following table Employee retrieve an answer to the undermentioned queries :, EMPLOYEE, Emp_name, , Emp_No, , Salary, , Commission, , Deduction, , Salary_Date, , 1001, , SOMNA, , 3000, , 200, , 250, , 30-June-96, , 1002, , SHIPRA, , 2500, , 120, , 200, , 30-June-96, , 1003, , RAHUL, , 3000, , 500, , 290, , 30-June-96, , 1004, , AMIT, , 2500, , 200, , 300, , 30-June-96, , 1005, , RAJ, , 2800, , 100, , 250, , 30-June-96, , 1006, , KIRTI, , 3000, , 200, , 290, , 31-July-96, , 1007, , DICKSON, , 2500, , 150, , 250, , 31-July-96, , Queries, 1., 2., 3., 4., 5., 6., 7., , Write, Write, Write, Write, Write, Write, Write, , a, a, a, a, a, a, a, , query, query, query, query, query, query, query, , to, to, to, to, to, to, to, , select the Emp_No, Emp_Name, Commission, whose commission is 200., select the Emp_No, Emp_Name, Salary whose Salary is 3000., select the Emp_No, Emp_Name, Salary whose Deduction is 250., select all the information whose Emp_No is 1001., select all the information about all Employees., delete the record where Emp_No is 1005., update the Emp_Name = ‘Nihar’ where Emp_Name = ‘Amit’., ANSWERS, 1. SELECT Emp_No, Emp-Name, Commission FROM Employee WHERE Commission = 200;, Emp_No, , Emp_Name, , Commission, , 1001, , SOMNA, , 200, , 1004, , AMIT, , 200, , 1006, , KIRTI, , 200, , 37
Page 1024 :
SBPD Publications Accountancy (XII), 2. SELECT Emp_No, Emp_Name, Salary FROM Employee WHERE Salary = 3000;, Emp_No, , Emp_Name, , Salary, , 1001, , SOMNA, , 3000, , 1003, , RAHUL, , 3000, , 1006, , KIRTI, , 3000, , 3. SELECT Emp_No, Emp_Name, Salary FROM Employee WHERE Deduction = 250;, Emp_No, , Emp_Name, , Salary, , 1001, , SOMNA, , 3000, , 1005, , RAJ, , 2800, , 1007, , DICKSON, , 2500, , 4. SELECT * FROM Employee WHERE Emp_No = ‘1001’;, Salary_Date, , Emp_No, , Emp_Name, , Basic_Salary, , Commission, , Deduction, , 1001, , SOMNA, , 3000, , 200, , 250, , Salary, , Commission, , Deduction, , Salary_Date, , 30-June-96, , 5. SELECT * FROM Employee;, Emp_No, , Emp_name, , 1001, , SOMNA, , 3000, , 200, , 250, , 30-June-96, , 1002, , SHIPRA, , 2500, , 120, , 200, , 30-June-96, , 1003, , RAHUL, , 3000, , 500, , 290, , 30-June-96, , 1004, , AMIT, , 2500, , 200, , 300, , 30-June-96, , 1005, , RAJ, , 2800, , 100, , 250, , 30-June-96, , 1006, , KIRTI, , 3000, , 200, , 290, , 31-July-96, , 1007, , DICKSON, , 2500, , 150, , 250, , 31-July-96, , 6. DELETE FROM Employee WHERE Emp_No = ‘1005’;, Emp_No, , 38, , Emp_Name, , Salary, , Commission, , Deduction, , Salary_Date, , 1001, , Somna, , 3000, , 200, , 250, , 30-June-96, , 1002, , Shipra, , 2500, , 120, , 200, , 30-June-96, , 1003, , Rahul, , 3000, , 500, , 290, , 30-June-96, , 1004, , Amit, , 2500, , 200, , 300, , 30-June-96, , 1006, , Kirti, , 3000, , 200, , 290, , 31-July-96, , 1007, , Dickson, , 2500, , 150, , 250, , 31-July-96
Page 1025 :
Database Management System (DBMS), 7. UPDATE TABLE Employee SET Emp_Name = ‘NIHAR’ WHERE Emp_Name = ‘AMIT’;, Emp_No, , Emp_Name, , Salary, , Commission, , Deduction, , Salary_Date, , 1001, , Somna, , 3000, , 200, , 250, , 30-June-96, , 1002, , Shipra, , 2500, , 120, , 200, , 30-June-96, , 1003, , Rahul, , 3000, , 500, , 290, , 30-June-96, , 1004, , Nihar, , 2500, , 200, , 300, , 30-June-96, , 1005, , Raj, , 2800, , 100, , 250, , 30-June-96, , 1006, , Kirti, , 3000, , 200, , 290, , 31-July-96, , 1007, , Dickson, , 2500, , 150, , 250, , 31-July-96, , l, , 39
Page 1026 :
4, ELECTRONIC SPREADSHEET, , Learning Objectives, 4.1, 4.3, 4.5, 4.7, 4.9, ●, , Introduction of Spreadsheet, Parts of MS-Excel Spreadsheet, Working with Chart, Working with a Pivot Table, Hyperlinks, Practical Questions, , 4.2, 4.4, 4.6, 4.8, ●, , Electronic Spreadsheet, Worksheets within Workbook, Functions, Data Validation in Data Bases, Useful Questions, , 4.1 Introduction of Spreadsheet, Spreadsheet is a simple worksheet consisting of rows and columns in which any data, can be entered. For example the report card of the student or the ledger that we create for, maintaining bank accounts can be termed as a spreadsheet., 4.2 Electronic Spreadsheet, Report cards of students are manual spreadsheet. An electronic spreadsheet,, although is just like a paper spreadsheet and consist of rows and columns. The only, difference is that instead of being on paper, it is on the computer screen., MS–Excel, MS–Excel is a most popular windows based Spreadsheet application, Package that can be used to automate task such as calculation and analysis of, data and then present the data in a graphical manner. MS–Excel has ‘been, developed to facilitate easy and quick entering of figures into an accounts register. It is one, of the most versatile and popular spreadsheet for the PCs and serves as an electronic pad, for accountants. It can easily perform simple as well as complex mathematical operations,, like addition, substraction, multiplication and division. This means that by using EXCEL,, you can design a complete application that does just what you need due to its following, features :, (i) Multiple undo up to the 16 actions., (ii) Easier entry range dialog boxes that accept range references., (iii) You can work with multiple files, simultaneously, and SAVE ALL command, that helps in saving all existing file., , 40
Page 1027 :
Electronic Spreadsheet, (iv) Full screen command is to view more worksheet., (v) Functions of MS–Excel make easy calculation or recalculation., (vi) Chart option is very useful feature in analysis of data., Spreadsheet Programs and Applications, It is commonly used in the following area :, (i) Production Planning, (ii) Personal Management, (iii) Marketing, (iv) Pay roll, (v) Accounting, (vi) Forecasting, (vii) Charting, (viii) Financial Solution, MS–Excel’s Components, MS–Excel has three component :, (i), The spreadsheet component : It displays and analyses text and numbers in, rows and columns., (ii) The database component : It manages lists of information., (iii) The chart component : It produces charts which help to present data in a, graphical manner., Excel Feature, MS–Excel has the following features :, (i), Worksheet and Graphics : It includes extremely powerful calculation, features. This helps to a large extent for data analysis., (ii) Data Lists and Data Bases : These functions are another important feature of, Excel. Several effective functions are available for working with data listed in a, tabular form., (iii) Data exchange with other application : Excel uses the advantage of the, window environment. This especially applies to D.D.E. (dynamic data, exchange) and object linking and embedding (OLE) within Excel and between, Excel and other windows applications., (iv) Standardized users interface : Excel is a part of the MS–office application, package of Microsoft., (v) Calculation & Analysis part of this software is very much useful in application, that one can easily complete the task either on universal fixed data or, fluctuating data., (vi) Advance Query features : As we know that the basic element of any, worksheet is known as cell and the cell contains all the information either in, form of row/column of sheets, where query features enables us to search the, fastest record searching based on the criteria entered., Opening Microsoft Excel, For working in Microsoft Excel, first we have to open it. To do so, follow the steps :, 1. Move the mouse pointer over the Start Button present on the Taskbar and press, left button., 2. A push up menu gets displayed, move the mouse pointer over the programs, option. The programs option gets highlighted and a second menu appears., 3. Inside the second menu, move the mouse pointer over the Miscrosoft word option, 4. Click the left mouse button on it immediately, MS–Excel windows open up., 4.3 Parts of MS-Excel Spreadsheet, When MS-Excel is loaded, the MS–Excel window will appear on the screen. Excel, window appearance with its parts is given ahead :, , 41
Page 1028 :
SBPD Publications Accountancy (XII), , Fig. 1, Title Bar : Displays the application name, file name and various window controls, like minimise button, maximise button and close button., Menu Bar : Different options for selection., Standard Toolbar : Displayed by default, allows to give common commands like, saving the file, opening a file, printing etc., Formatting Toolbar : Allows the user to give commands related to formatting cells, and cell contents like Bold, Underline, Font style, Font Size, Color etc., Name Box : Displays the address of the current cell., Formula Bar : Displays the cell content., Current Cell : Current cell will be the active cell., Row Headers : There are 65536 rows (lines) numbered as 1,2,3...65536. First row, number is 1 and the last row number is 65536. To go to cell in last row, press End and, Down arrow key, to return to cell in first row, press End and Up arrow key., Column Headers : There are 256 columns numbered as A, B, C.....Z, AA, AB...AZ,, BA, BB.. IV. First column name is A and last column name is IV. To go to the cell in last, column header press End and Right arrow key, to return to the cell in first column, press, End and left arrow key., Scroll Bars : Used to scroll through different parts of current sheet., Split Boxes : Used to split the window into 2 or 4 parts or to remove the split., Tab Split Box : Used to adjust the space occupied by the sheet tabs and horizontal, scroll bar., Sheet Tabs : Displays the sheet names. Each worksheet is named as Sheet 1, Sheet 2, and Sheet 3., Status Bar : Displays on the left side various modes like Ready or Edit mode. The, status of num lock, caps lock and scroll lock keys on the keyboard on the right side., 4.4 Worksheets within Workbook, Excel documents (files) are known as workbooks. Each Workbook contains 3, worksheets by default. Adding or deleting the sheets can change the number of sheets., Each sheet is named uniquely like Sheet 1, Sheet 2 etc. which is displayed in the sheet tab., A workbook can also contain chart sheets, which are named as Chart 1, Chart 2 etc., by, default., , 42
Page 1029 :
Electronic Spreadsheet, When Excel is loaded, it automatically opens a new workbook, named Book 1 (With, extension .XLS). This name is displayed on the Title bar., The main part of the Excel screen is the worksheet area–a grid of rows and columns., The worksheet contains 65536 rows and 256 columns., Grid, So we can clearly define grid as the framework of rows and columns in the worksheet, area. An electronic worksheet is a grid of 65536 rows and 256 columns., Cell, The intersection of a column and a row is called a cell. Each cell has a name or a cell, address. The cell address consists of the column latter and a row number. For instance, the, first cell is in first column and first row. First column name is A and first row number is 1., Therefore, the cell name address is A1. First cell is also called as Home Cell. Similarly, the, last cell address is IV65536 (column IV and row 65536). Total cells in a worksheet are 256*, 65536 (total number of columns x rows). At any time one cell can be active and the address, of the active cell is displayed in the name box. A thick black border indicates the active cell., Any cell can be made active by clicking on that cell. Using key combinations also it is, possible to move quickly to the desired cell., Range of Cells, Many spreadsheets operations involve a range of cells instead of a single cell. A range, of cells may involve many cells. Entering every individual cell for an operation to be, performed on them may be cumbersome and time taking. To take care of this problem, all, the spreadsheets packages allow the use of following types of cell ranges :, 1. Row range, 2. Column range, 3. Block range, Cell Content, Different types of data can be entered into a cell, 1. Lable is any string of alphanumeric text., 2. Numeric value is a number on which the spread sheet can perform calculations, 3. Formula may be include numbers, mathematical operators (such as +, –, *, / etc.), 4. Mathematical functions supported by spreadsheets (such as SUM, AVG, MAX,, MIN etc.) and cell addresses., 5. Date and Time contents types is normally used in a spreadsheet to display the, actual date and time., Cell References, A formula represents certain cell relationship, which generates a result. When typing, the cell address in the formula, three types of cell references can be used. A cell reference, specifies, when the formula is copied to other cells, its column or row number is to change, or not., Relative reference, Absolute reference, Mixed Reference, , = B3*C3, = $B$3*$C$3, = B3*$C3, , Relative Reference : If a formula with relative reference is copied, the cell, references used in the formula will automatically change in the copied cell. For example,, when the formula = B3*C3 in cell D3 is copied to D4, the formula will be = B4* C4 in the, cell D4. Similarly, if the formula in D3 is copied to E3, the formula will be = C3*D3., Absolute Reference : If the formula with a absolute reference is copied, the cell, references used in the formula remain unchanged (no change in column or row number)., To achieve this, use $ symbol before the column letter and the row number. For example,, when the formula = $B$3*$C$3 in cell D3 is copied to D4, the formula will be = $B$3*$C$3, , 43
Page 1030 :
SBPD Publications Accountancy (XII), itself because both column letter and row numbers are made constant. That means, the, result in the cells D3 and D4 will be the same., Mixed Reference : If a formula with mixed reference is copied, the cell references, used in the formula will change either the column letter or row number but not both of, them. To achieve this, use $ symbol before the column letter or the row number., For example, when the formula = B$3*C$3 in cell D3 is copied to D4, it will be =, B$3*C$3. But if the formula is copied to cell E3, it will be = C$3*D$3 because, the row, numbers are made constant and not the column letters., 4.5 Working with Chart, Chart Concept, The charts can be created based on some data model, if a data model is to be entered, in the same, you can generate the chart. In Excel we have the option that we can create the, charts with the help of wizard or by following the steps given in Excel. The following facts, are much important for any chart representing system., q Worksheet and Chart, A chart is linked to the worksheet data and it’s created and updated automatically, when you change the worksheet data., q Components of a Chart, Axis Values : Microsoft Excel creates the axis values from the worksheet data. Note, that the axis values in the example above range from 0 to 140000, which encompasses the, range of values on the worksheet. Unless you specify differently, Excel uses the format of, the upper-left cell in the value range as the number format for the axis., q Category Names, Excel uses column or row heading in the worksheet data for category axis names. In, the example above, the worksheet row heading 1st Quarter, 2nd Quarter, and so on appear, as category axis names. You can change whether Excel uses column or row heading for, category axis names or create different names., , Fig. 2 : Chart Type, , q Chart Data Series Names, Excel also uses column or row headings in the worksheet data for series names., Series names appear in the chart legend. In the example above, the row heading projected, and Actual appear as series names. You can change whether Excel uses column or row, heading for series names or create different names., Data Markers : Data markers with the same pattern represent one data series., Each data marker represents one number from the worksheet. In the example above, the, right most data marker represents the Actual 4th Quarter value of 120000., q Type of Charts, The MS-Excel is provides 14 types of chart, which has been divided into several, sub-categories called sub-segments. Each type of charts is fully compatible to present any, business data. The main kind of charts available in Excel., , 44
Page 1031 :
Electronic Spreadsheet, # Column, # Bar, # Line, #Pie, # XY, (Scatter), #Area, #Doughnut, # Radar, Surface, # Bubble (Hi-Low close), # Stoke, Cylinder, # Cone, # Pyramid, q Some Important Detail about these Charts, Column : A column a chart shows data changes over a period, of time or illustrates comparisons among items. Categories are, organized horizontally, values vertically, to emphasize variation, over time. Stacked column charts shoe the relationship of individual, items to the whole. The 3-D perspective column chart compares data, points along two axes. In this 3-D chart, you can compare four, quarters of sales performance in Europe with the performance of, two other divisions., Bar : A bar chart illustrates comparisons among individual, items. Categories are organized vertically, values horizontally, to, focus on comparing values and to place less emphasis on time., Stacked bar charts show the relationship of individual items to the, whole., Doughnut : Like a pie chart, a doughnut chart shows the, relationship of parts to a whole, but it can contain more than one, data series. Each ring of the doughnut chart represents a data, series. The high-low-close chart is often used to illustrate stock, prices. This chart can also be used for scientific data, for example,, to indicate temperature changes. You must organize your data in, the correct order to create this and other stock charts., Stock : A stock chart measures volume has two value axes :, one for the columns that measure volume, and the other for stock, prices. You can include volume in a high-low-close or, open-high-close-chart., XY (Scatter) : A xy (scatter) chart either shows the, relationships among the numeric values in several data series or, plots two groups of numbers as one series of xy coordinates., This chart shows uneven intervals-or clusters-of data and is, commonly used for scientific data. When you arrange your, data, place x values in one row or column, and then enter, corresponding values in the adjacent rows or columns. The, cone, cylinder, and pyramid data makers can lend a dramatic, effect to 3-D column and car charts., Surface : A Surface chart is useful when you want to, find optimum combinations between two sets data. As in Fig. 3 Types of Charts, topographic map colors and pattern indicate areas that are in, the same range of values. This card shows the various combinations of temperature and, time that result in the same measure of tensile strength., Creation of Chart, To create a chart sheet that uses the default chart type, select the data we want to, plot. But If we want to insert another chart type, we have go through with wizards., 1. To Activate chart wizards Click Insert Menu > Chart..., 2. This wizard instruct to us to select chart type., 3. The next wizard helps us to define the source of chart area, i.e. data sheet of excel, chart., 4. The last & final 4th step of the wizard is instruct us to define the area of chart., , 45
Page 1032 :
SBPD Publications Accountancy (XII), 4.6 Functions, Functions are prewritten formulas that perform calculations by using specific value, or values called arguments in a particular order called syntax. Function performs an, operation and return a value or values in the cell in which they are entered. All functions, begin with a ‘=’ sign & remains rules of entering formulae are same. Basically functions, are six types :, (i) Mathematically, (ii), Statistically, (iii) Financial, (iv), Date & time, (v) Logical, (vi), Text, (vii)Database, (viii) Lookup & References, q Some Important Functions, With these functions we can perform simple and complex calculations., q Mathematical Functions, (i) Abs( ), :, It will return absolute value of a number., Syntax : abs (number), e.g. abs (12) equals to 12, abs (–12) equal to 12, (ii) Sum( ), :, It will be used to add all numbers in a range of cells., Syntax : sum(num1, num2,............), (a) Sum (1,2) equal to 3., (b) Unlike previous example, if cell ‘B11’ contains 5 & cell, ‘C14’ contains 15 then Sum (b11, c14) equal to 20., (c) If cells b11 : d11 contains 5, 15, and 17 then sum, (b11:d11) equal to 37., (iii) SUMIF( ), :, It adds all numbers in a range of cells, based on a given, criteria. The syntax of SUMIF function is as follows :, SUMIF (range, crateria, [Sum-range]), Where it has following Agruments :, ‘range’, is the range of cells on which we want to apply, criteria., ‘criteria’ is used to determine which cells to be added., ‘sum-range’ is optional. It is the cells to be added. If this, parameter is omitted, SUMIF function uses ‘range’ as, ‘sum-range e.g.’, Suppose that in a column that contains numbers, we want, to sum only the values that are larger than 5. We can use, the following formula., =SUMIF (B2:B25,">5"), In this example, the criteria is applied the same values, that are being summed. If we want, we can apply the, criteria to one, range and sum the corresponding values in, a different range. For example, the formula, =SUMIF(B2:B5, “John”, C2:C5) sums only the values in, the range C2:C5, where the corresponding cells in the, range B2:B5 equal “John”., (iii) Product( ), :, Multiplies all the numbers given as arguments and, returns the product., Syntax : PRODUCT (number 1, number 2,.....), e.g. If cells A2:C2 contain 4, 8, and 25. PRODUCT (A2:C2), equals to 800, , 46
Page 1033 :
Electronic Spreadsheet, Date and Time Functions, (i) DATE( ), :, Returns the serial number of a particular date., Syntax : DATE (year, month, day), e.g. DATE() returns the serial number of the date., (ii) Now( ), :, Return the serial number of the current date and time., Syntax : NOW ( ), e.g. if you are using the 1900 date system and your, computers built-in clock is set to 12:30:00 P.M.,, 1-Jan-1987, then:1) Now ( ) equals to 31778.52083, Statistical Functions, Statistical functions perform statistical analysis on the range of data., (i) Average( ), :, Returns the average (arithmetic mean) of the argument., Syntax : average (number 1, number 2,.......), (ii) Counts ( ), :, Counts the number of cells that contain numbers and, number within the list of arguments., Syntax : counts (val1, Val2,........), (iii) Max ( ), :, Return the largest value in a set of values., Syntax : max(num1, num2,.....), (iv) Min ( ), :, Return the smallest number in a set of value., Syntax : min(num1, num2,......), Logical Functions, These functions help to see whether a condition is true or false or check for multiple, condition., (i) IF ( ), :, Return One value “true value” if a condition specify true or, “false value” if condition specify false., Syntex : If (condition, “true value”, “false value”), (ii) AND ( ), :, Returns True if all arguments are True, returns “False”, if one or more arguments is false., Syntax : And (condition 1, condition 2, ......), (iii) NOT ( ), :, Reverse the value of its arguments. Using the “Not”, function, we have to sure that a value is not equal to one, particular value., Syntax : not (logical), (iv) OR ( ), :, Returns TRUE if any argument is TRUE; returns FALSE, if all arguments are FALSE., Syntax : OR (logical 1, logical 2, ....), (v) TRUE ( ), :, Returns the logical value TRUE., Syntax : TRUE ( ), (vi) FALSE ( ), :, Returns the logical value FALSE, Syntax : FALSE ( ), Text Functions, These functions helps us to manipulating text string in formulas :, (i) CONCATENATE ( ) : Joins several text string., Syntax : concatenate (text1, text2,....), (ii) EXACT ( ), :, Compares two text string and return TRUE if they are, exactly the same, FALSE otherwise. EXACT is, case-sensitive but ignores formatting differences. Use, EXACT to test being entered into a document., Syntax : exact (text 1, text 2), , 47
Page 1034 :
SBPD Publications Accountancy (XII), (iii) LEFT ( ), , Return the first (or left most) character or characters in a, text string., Syntax : Left (text, num_chars), (iv) LEN ( ), :, Return the number of characters in a text string., Syntax : Len (text), q Commonly used Financial Functions in generating Accounting, Information, These functions are performing common business calculation, such as determining, the payment for a loan the future value or net present value of an investment, and the, values of bonds or coupons., q Common Arguments for the Financial Function, Future value (FV) :, The value of the investment or loan after all payments, have been made., No. period (NPER) :, The total number of payments or periods of an investment., Payment (PMT), :, The amount paid periodically to an investment or loan., Present value (PV) :, The value of an investment or loan at the beginning of the, investment period. For example, the present value of a, loan is principle amount that is borrowed., Rate (Rate), :, The interest rate or discount rate for a loan or investment., Type (type), :, The interval at which payment are made during the, payment period, such as at the beginning of a month or the, end of the month., (i) FV( ), :, Returns the future value of an investment based on, periodic, constant payment and a constant interest rate., Syntax : FV (rate, nper, pmt, pv, type), e.g. FV(0.5%, 10, -200, -500, 1) equal $2581.40, (ii) Nper( ), :, Returns the number of period for an investment based on, periodic, constant payment and a constant interest rate., Syntax : NPER (rate, pmt, pv, fv, type), e.g. NPER (12%/12, -100, -1000, 10000, 1) equal 60, (iii) PMT( ), :, Calculates the payment for a loan based on constant, payments and a constant interest rate., Syntax : PMT(rate, nper, pv, fv, type), e.g. The following formula returns the monthly payment on, a $10,000 loan at an annual rate of 8% that you must pay, off in 10 months : PMT(8%/12, 10, 10000) equal - $1,037.03, (iv) PV( ) :, Returns the present value of an investment. The present, values is the total amount that a series of future payments, is worth now. For example, when you borrow money, the, loan amount is the present value to the lender., Syntax : PV(rate, nper, pmt, fv, type), e.g. Suppose you’re thinking of buying an insurance, annuity that pays $500 at the end of every month for the, next 20 years. The cost of the annuity is $60,000, and the, money paid out will earn 8%. You want to determine, whether this would be a good investment. Using the PV, function, you find that the percent value of the annuity is :, PV(0.08/12, 12*20, 500, 0) equal- $59,777.15, The result is negative because it represents money that, you would pay, an outgoing cash flow. The present value of, the annuity ($59,777.15) is less than what you are asked to, pay ($60,00). Therefore, you determine this would not be a, good investment., , 48, , :
Page 1035 :
Electronic Spreadsheet, (v) RATE( ), , :, , Returns the interest rate per period of an annuity. Rate is, calculated by iteration and can have zero or more solution., If the successvie results of RATE do not converge to within, 0.0000001 after 20 iterations, RATE returns the #NUM!, Error value., Syntax : RATE(nper, pmt, pv, fv, type, guess), e.g. To calculate the rate of a four-year $8,000 loan with, payments of $200 : RATE (48, -200, 8000) equal 0.77%., This is the monthly rate, because the period is monthly., The annual rate is 0.77%*12, which equals 9.24 percent., Additional Financial Functions in Excel :, DB( ), :, Returns the depreciation of assets for a specified period, using the fixed declining balance method., Syntax : DB (Cost, Salvage, Life, Period, Month), DDB( ), :, Returns the depreciation of an assets for a specified period, using the double declining balance method or some other, method you specify., Steps for using above Financial Functions :, INSERT → FUNCTION → Financial (From category) →, Now choose the function DB() /DDB(), 4.7 Working with a Pivot Table, A Pivot Table is interactive, which means that data can be structured, arranged,, summarized and evaluated using changing points of view. The Pivot table wizard is like a, Report generator that provides different evaluations of existing data., q When to use a Pivot Table Report, We can use a Pivot table report whenever we want to compare related totals,, especially when a long list of figure to he summarize and compare several facts about each, figure. There are some other purposes for using the P.T. Report when we want EXCEL to, do the sorting, sub totaling and totaling for us. Because a P.T. report is interactive., q Pivot Table Report Element, Fields from under lane source data that are assigned a row, Row Fields, :, orientation in a Pivot Table Report. A Pivot Table Report, that has more than one row field has one inner row field, the one closest to the data area. Any other row fields are, referred to as outer row fields. Inner and outer row fields, have different attributes. Items in the outer most fields are, displayed only once, but items in the rest of the fields, repeated as needed., A field that’s assigned a column orientation in a Pivot, Column Fields :, Table Report. In the preceding example, Quarters is a, column field with items, Qtr2 and Qtr3. A Pivot Table, report can have multiple key info. Column field just it can, have row fields. Most indented format Pivot Pivot Table, reports do not column fields., Creating a Pivot Table, The Pivot Table can begin its works only if the necessary data already exist. Let us, have a look at the step-by-step procedure for creating Pivot Table :, Step 1 : Activate the Pivot Table Wizard, Step 2 : Define Range of Data, Step 3 : Layout the Pivot Table, These buttons can be drag into one of the four areas :, The fields that are supposed to determine the order of the sheets must be dragged to, the “Page” field., , 49
Page 1036 :
SBPD Publications Accountancy (XII), The fields that are supposed to determine the order of the columns must be dragged, to the “column” field., The fields that decide the order of rows belong to the “Rows” fields., At Least one of the fields must be dragged into the “Data” for the program to, recognize which values the output table should include., Step 4 : Position of the Pivot Table, 4.8 Data Validation in Data Bases, Data validation is a process of verifying that the data is acceptable by applying, certain rules., q Validating Numbers, Dates, Time and Text, Applying data validation is conceptually similar to cell formatting i.e. the command, acts upon the selected cell(s). Suppose validation is to be given :, Select the cell(s) for which the validation is to apply., Select Data > Validation. The tabbed dialog box is displayed., This dialog box is virtually identical for Decimal, Date and Time validation. The, tabbed dialog box displays three tabs namely Settings, Input Message, and Error Alert., , Fig. 4 : Data Validation dialog., , q Settings Tab, l Allow : This option allows you to select the data validation option from the list, to, , l, l, l, l, l, , l, l, , apply restrictions to the data entered in the selected cell(s). The options are Whole, numbers, Text length, Decimal, Custom etc. and Any Value., Data : Allows you to select the operator, depending on the type of data selected in, the Allow option., Minimum : Enter the minimum value that can be entered in the cell(s)., Maximum : Enter the maximum value that can be entered in the cell(s)., Clear All : Deletes all selections and information from all the three tabs of the, data validation dialog box. To undo the effects of Clear All click on Cancel., Click on the Check Box Apply these changes to all other cells with the same settings :, It applies all restrictions, input messages, error messages, displayed in the dialog, box to all other cells present on the worksheet that have the same data validation, as that of the selected cell(s)., Ignore Blank : Stops an error message from appearing when a restricted cell or a, dependent call for references or formulas is blank., Input Message Tab, , 50
Page 1037 :
Electronic Spreadsheet, l Title : Type an optional title for the Input Message to be displayed when a user, , selects the restricted cell. The title will appear in bold text., l Input Message : Type the text of the message to be displayed. The message can be, , upto 255 characters., l Select the Show Input Message when Cell is Selected Check Box : To, , display a message that prompts for entry into the selected cell., l Error Alert Tab, l Style : Click on error style in the list. The style error alert chosen determines what, , choices the error message presents when an invalid entry is made in a restricted, cell., l Title : Type an optional title for the error message. The title will appear in bold., l Error Message : Type the error message that should appear when an incorrect, entry has been made. You can enter upto 255 characters for the error message., l Select the Show Error Alert after invalid Data is Entered Check Box : To, display an error alert message when incorrect data is entered into a cell or to, prevent the entry of incorrect data entirely. For example, if in cells A1 to A5, whole, numbers have to be entered between numbers 10 to 50, number validations can be, used., ❂ Select cell A1 to A5, then select Data > Validation., ❂ From Settings Tab, select Whole Number from the Allow list., ❂ Select Between from the Data list, enter 10 as the minimum and 50 as the, Maximum., ❂ Enter the required messages in the Input Message and Error Alert Tabs, ❂ Click on OK., Now, if the user tries to enter the data in cell A1 to A5, other than numbers 10 to 50, it, will not be allowed and an error message will be displayed., q Validating Text, The text to be entered in the cell is validated by the length of the text that can be, entered in the cell. To validate text entry in the cell(s), in the Data Validation dialog box,, Select the Text length option in the Allow list and restrict the length of the text depending, upon what is selected in the data option., Suppose the entry in cell A1, should not exceed 20 characters., l Select the cell, A1, l Data > Validation, the Data validation dialog box will be displayed., l From the Allow list, select Text Length., l In Data, select less than or equal to., l In maximum option type 20., l Type the Input and Error Alert message and click on OK., l The user will not be allowed to enter data in cell A1, which is more than 20, characters. If the user tries to do so, an error message will be displayed., q Validating with Lists, List validating is used to validate a cell based on the contents of a list. For e.g. the, user has to enter products in cells A2 to A5 by selecting from the given list., l Enter the values Honda, Kawasaki, Scooty, and Kinetic in cells A9 to A12., l Select cell A2 and select Data > Validation., l Select List from Allow list., l With the cursor in the source setting, select the range A9 to A12., l Check the In-cell Dropdown, and click on OK., l Copy the validation of cell A1 to the cells A2 to A5., l Now, select cell A1, the dropdown list will appear. Choose a product, and the value, will be placed in A2., l Repeat step 7 for the cells A3 to A5., , 51
Page 1038 :
SBPD Publications Accountancy (XII), 4.9 What are Hyperlinks ?, A Hyperlink is a reference to a document, a location or an action that the user can, directly follow by selecting the link., Hyperlinks are used extensively on the Internet and are generally Words highlighted, in Underlined Blue., The Hyperlinks in Excel are being used in number of areas, e.g., l Opening Files (of any type), l Opening Web pages (Internet or Intranet), l Jumping/Navigating to locations within an existing document, l Creating New Documents (Excel files only), l Sending Emails., Microsoft has given us the ability to place Hyperlinks., (i) Directly on an Excel worksheet., (ii) Connected to a number of worksheet objects, including shapes, charts and, wordart, (iii) Included as a worksheet formulas., (iv) Programmatically using VBA., These 4 methods above will be discussed here., q Inserting Hyperlinks, As described above there are 4 methods for inserting hyperlinks in an Excel, workbook., (i) Directly on an Excel worksheet, There are 3 ways to insert a hyperlink directly into a cell, either :, (a) Right click on the cell and select Hyperlink; or, , 52
Page 1039 :
Electronic Spreadsheet, (b) Use the Insert, Hyperlinks Tab; or, , (c) Use a Keyboard Shortcut-Ctrl K, (ii) Connected to a number of worksheet objects, including shapes, charts and, wordard, We can also add a Hyperlink to many objects within Excel including Pictures,, Shapes, Text Boxes, Word Art and Charts., Right clicking a lot of these objects brings up the Objects Shortcuts Menu, select, Hyperlink....,, , A Rounded, Rectangle Shape, , 53
Page 1040 :
SBPD Publications Accountancy (XII), or, Select the object, Use the Insert, Hyperlinks Tab; or, Select the Object and Use the Keyboard Shortcut-Ctrl K, Hint : Right Clicking on Charts Doesn’t Show the Add Hyperlink option, so Select the, Chart and Ctrl K, (iii) Adding Hyperlinks using Worksheet Formulas., Hyperlinks can be added using worksheet formulas—, = Hyperlink (Link Location, Name), Link Location : This is the path and file name to the document to be opened., The Link Location can refer to a place in a document - such as a specific cell or named, range in an Excel worksheet or workbook, or to a bookmark in a Microsoft Word document., The path can be to a file that is stored on a hard disk drive. The path can also be the path, on a server or a URL, HTTP or FTP and location of an object, document, World Wide Web, page, or other destination on the Internet or an internet. The Link Location can be a text, string enclosed in quotation marks or a reference to a cell that contains the link as a text, string., Name : This is the text or value that is displayed in the cell. The Name is displayed in, blue and is underlined., Eg :, Jump to a cell on Another sheet, = HYPERLINK(Sheet3183,"Monthly Budget"), The above will add a Hyperlink, titled “Monthly Budget” and link to the sheet 3 ! B3, of the current workbook., Jump to a Web Page, =HYPERLINK(“http://chandoo.org/wp/”,"Goto Chandoo.org"), The above will add a Hyperlink, titled “Goto Chandoo.org” and link to, http://chandoo.org/wp/, Send an Email, =HYPERLINK(“mailto:chandoo.d@gmail.com”,"Email Chandoo"), The above will add a Hyperlink, titled “Email Chandoo” and send an email to, chandoo.d@gmail.com, (iv) Adding Hyperlinks Programmatically using VBA, Hyperlinks can be added to a worksheet or a worksheet object programmatically, using some simple code, Sheets(SheetName).Hyperlinks.Add Anchor:=Sheets(SheetName), Range(Range),, Address:="",SubAddress:="Address!Range“, TextToDisplay:=Name, Where :, SheeetName : The Name of the Sheet where the Hyperlink is to go, Range : The Range where the Hyperlink is to go, Address!Range : The address and Range linked to in the Hyperlink, Name : The Display Name of the Hyperlink, Types of Hyperlinks, There are 5 Types of Hyperlinks which Excel offers, each is described below :, l Existing File, l Existing Web Page, l Place in This Document, l Create a New Document, l Send an Email Link, , 54
Page 1041 :
Electronic Spreadsheet, , q Editing Hyperlinks, Once we have a hyperlink established we can edit the hyperlink by right click on the, hyperlink and select Edit Hyperlink, , The Edit Hyperlink dialog will very depending on the type of Hyperlink as discribed, above., , q Deleting Hyperlinks, Once you have a hyperlink established you can delete the hyperlink by right click on, the hyperlink and select Remove Hyperlink., , 55
Page 1042 :
SBPD Publications Accountancy (XII), , q Editing Hyperlinks, Once we have a hyperlink established we can edit the hyperlink by right click on the, hyperlink and select Edit Hyperlink, USEFUL QUESTIONS, (A) Long Answer Type Questions, 1., 2., 3., 4., 5., 6., 7., , What is spreadsheet ? Write the applications of spreadsheets ?, What is an electronic spreadsheet ? Write the features of electronic spreadsheets ?, Give the concept of Electronic Spread Sheet., (JAC, 2011, 13, 14), Explain the function of ‘SUMIF’ with an example in Excel., Explain the features of Excel Workbook., Describe the Auto Fill & Mixed Cell Reference., Describe the components of an Excel Workbook., , (B) Short Answer Type Questions, 1., 2., 3., 4., 5., 6., 7., 8., 9., 10., 11., 12., 13., 14., 15., 16., , Write a short note on the electronic spreadsheets., Mention features of electronic spreadsheets., State the areas of applications of spreadsheets ?, What is the role of the electronic spreadsheets in accounting ?, What is Grid ?, (CBSE (AI),, What is the use of worksheet in accounting ?, (USEB,, For what type of applications MS-Excel is appropriate ?, (USEB,, Explain the process of creating chart in Excel., (USEB,, Describe the process of entering a formula in Excel., (USEB,, List any two specific areas of accounting the spreadsheet lends support to., (CBSE (Delhi),, What is Data Validation ?, (CBSE (Al),, What is a hyperlink in Excel ? Describe with an example., Define Cell and Cell address., Write steps to resize a chart., What icon we use to draw charts in Excel., Name the area surrounding the chart., , 2009), 2010), 2010), 2010), 2010), 2010), 2011), , (C) Objective Questions, I. State whether the following statements are true or false :, (i) A cell entry can be edited either in the cell or on the formula bar., (ii) You can modify a cell entry either by overwriting the new entry over the existing one or by, partially editing it., (iii) If a cell that is being referred to in a formula is deleted, the formula will return an error, value., (iv) When you clear a cell, it is permanently removed from the worksheet and this, surrounding cells shift to fill the space., (v) If a row is deleted, the row number disappears from the worksheet border., (vi) Multiple worksheets can be deleted from a workbook at a time., (vii) You cannot open two different workbooks in two windows simultaneously., (viii)There can only be 16 worksheets in a workbook at a time., , Key to Answers, (i) True, (ii) True, (iii) False, (iv) False, (v) False, (vi) True, (vii) False, (viii) False., , 56
Page 1043 :
Electronic Spreadsheet, PRACTICAL QUESTIONS, 1. Write a formula for a spreadsheet to compute the depreciation and written down value of, assets. The following are the rates of depreciation :, (C.B.S.E.(AI), 2008), Plant and Machinery 20%, computers 35%, furnitures 25%, motor vehicles 20%, Round off, calculations to the nearest rupee., Assets, , Opening value, , Plant and Machinery, , 6,25,000, , Computers, , 7,24,000, , Furniture & Fitting, Motor Vehicles, , Depreciation, , Written Down Value, , 99,000, 3,89,000, ANSWER, , 2. A Factory owner purchases a new machine that costs ` 3,00,000 and has a useful life for 10, years with Salvage value of ` 30,000. Indicate the formula to be used in an Excel worksheet to, calculate Depreciation under the Diminishing Balance Method. Also using the formula,, calculate the Depreciation to be provided for a day, a month and year., (C.B.S.E. (AI), 2009), Hint : Use financial function DB (cost, salvage, life, period, month), 3. The TIMES MINES hires consultants on hourly basis. The names of all the consultants, alongwith the number of hours they have worked in the week are recorded in a worksheet as, shown below :, (a) Enter the given data and save the workbook as TIMES.XLS., (b) Calculate the total number of hours each consultant has worked in the week (TOT.HRS)., The total should be displayed in column H., , 57
Page 1044 :
SBPD Publications Accountancy (XII), ANSWER, , 4. The RAJDEEP PLAZA departmental store has organized a clearance sale. The details of the, items on sale and the percentage of discount offered are entered in a worksheet as shown, below :, Enter the given data in a worksheet and save the workbook as TRY.XLS., ANSWER, , 5. (a) Retrieve the file TRY.XLS using the Find Now button., (b) Calculate the Selling Price of each item and display in column D of the sheet., Hint : Use the following formula to calculate the selling price of an item :, Selling Price = Original Price - ((Discount/100) * Original Price), (c) Save and close the Workbook., 6. (i) Create a program of employee sheet., Emp ID, , Basic, , 0110, , 5000, , 58, , TA, , DA, , HRA, , PF, , LIC, , 7.5%, , 11.5%, , 15%, , 12%, , 3450, , Gross, , Net, Salary
Page 1045 :
Electronic Spreadsheet, 1001, 1004, 1005, 1021, 1020, 1151, 1154, 1004, 1000, , 7500, 12000, 15480, 10000, 4500, 4785, 12000, 8715, 7245, , (ii) Calculate the all Allowances and deduction according to the given percentage., (iii) Calculate the Gross Salary and Net Salary also., ANSWER, , 7. Write spreadsheet formula to find out monthly and annual rate of interest on the basis of, following informations :, Loan Amount, ` 4,000, Term of Loan, 4 years, Amount of Monthly Instalments, ` 200, Number of Instalments, 48, (U.S.E.B., 2010), 8. Calculate the formula of Excel for the following :, Dearness Allowance, 44% on basic pay upto ` 10,000, Minimum ` 2,000. 35% on above ` 10,000, minimum ` 4,400, House Rent Allowance, `, Upto basic pay of ` 8,000, 2,000, ` 8,001 – ` 15,000 basic pay, 6,000, Above `15,000 basic pay, 9,000, City Compensatory Allowance, 10% of pay subject to a minimum of ` 1,000., (C.B.S.E. (Delhi), 2010), 9. Write a formula for a spreadsheet to compute the Depreciation and Written Down Value of, Assets. The following are the rates of Depreciation :, , 59
Page 1046 :
SBPD Publications Accountancy (XII), Plant and Machinery, Computers, Furniture & Fittings, Motor Vehicles, Round off calculations to the nearest rupee :, Assets, , Opening value, , Plant and Machinery, , 12,50,000, , Computers, , 14,48,000, , Furniture & Fittings, , 1,98,000, , Motor Vehicles, , 7,78,000, , @, @, @, @, Depreciation, , 20%, 20%, 25%, 20%, , Written Down Value, , (B.S.E.B., 2010), , l, , 60
Page 1047 :
PROJECT WORK, WHAT IS A PROJECT WORK ?, Meaning : According to the Oxford Dictionary, a project means a plan, a scheme or long-term, task undertaken by a student to be submitted for assessment1. Professor W. H. Kilpatric, introduced the technique of imparting education through project study. According to him, A project, is a whole-hearted purposeful activity proceeding in a social environment., A project work involves a detailed study or research with special purpose or aim in which, theoretical knowledge is applied to the practical problems to arrive at the desired result or neat, conclusion. Hence, project work may be said to be a detailed and purposeful study carried out, by applying theoretical knowledge of a given problem and at the same time arriving at the most, appropriate decision. Thus, it is a problematic situation carried to its complete logical solution, in its natural and real life setting., To serve meaningful purpose, a project should be properly planned and completed with, absolute devotion and enthusiasm., The projects in Accountancy, as per the syllabus and guidelines of C.B.S.E., have to be, (i) From Real Life Situation preferably from corporate world and, (ii) Related to the Analysis of Financial Statements., OBJECTIVES OF PROJECT WORK, In the field of financial accounting, the objective of project work is to provide the students, an opportunity to exercise their theoretical knowledge of principles, concepts, conventions and, procedures of accounting in solving accounting and financial problems and minimise the, mistakes in accounting work., In short, the following are the objectives of project work :, (i) To provide practical knowledge,, (ii) To develop independent thinking,, (iii) To develop the ability to apply concepts, convensions, tools and techniques of accounting., (iv) To minimise the mistakes in accounting work., (v) To develop and improve the analytical skills of the students which will help them in, taking decisions., ELEMENTS OF A GOOD PROJECT, The following are the elements of a good project :, (1) Real Life Situation : The project should be from day-to-day real life situations to, which the students are faced., (2) Clear Objective : Any project undertaken should have a clear (attainable) objective or, objectives., (3) Co-ordinated Activities : In order to attain the objective, all the activities relating to, the project should be well co-ordinated and treated as a single unit., (4) Simplicity : Keeping in view the academic level and the standard of the students, the, project so undertaken should be simple., (5) Involvement : There should be involvement of a student in the selection of the project, problem. They should be involved in the collection and assimilation of the data. The teacher, should guide and mentor in this process., (6) Neat Conclusion : The poject work should lead to a neat conclusion., (7) Sense of Achievement : The project should lead be such that the student should feel, a sense of accomplishment, satisfaction and achievement on its completion., 1 The Concise Oxford Dictionary of Current English (1990), p. 954., , 1
Page 1048 :
SBPD Publications Accountancy (XII), PROJECT WORK IN FINANCIAL ACCOUNTING, Like any other science, there is enough scope of project work in the field of accounting (or, financial accounting). There are number of accounting problems which can be selected for project, work. The project work may relate to ‘inter-firm’ comparison or ‘intra-firm’ comparison. Some of the, project work in accounting which may be assigned to the students could be as follows :, —Preparation of Trial Balance, Balance Sheet and Income Statement., —Analysis of Financial Position/Analysis of Financial Statements., —Performance Appraisal/Financial Appraisal of a Particular Unit., —Preparation of Cash Flow Statement., —Computation of Liquidity Ratio., —Computation of Profitability Ratios., —Computation of Activity Ratios., —Computation of Solvency Ratios., —Preparation of Comparative Statements., —Preparation of Common-size Statements., —Accounting Treatment on the Retirement of a Partner., —Settlement of Deceased Partner’s Capital Account etc., etc., STEPS/PROCEDURE OF CONDUCTING PROJECT WORK, Step 1 : Identification of the Project Work, The first stage of project work is to identify the project problem. Any accounting problem, can be selected for project work. (The teacher should help inspire students in selecting a good, project or assign project work with their consent.), Step 2 : Developing the Project Procedure, The next step of conducting project work involves developing the project procedure. At this, stage the following points deserve our special attention :, (a) Selection of Organisation., (b) Determining the Objectives of the Project Work., (c) Collection of Data., (d) Classification and Tabulation of Data., (e) Analysis of Data., (f) Interpretation of Data., Step 3 : Preparation of Project File, Generally a student is asked to submit two specific projects and one comprehensive project, assigned to or selected by him., Hence, it should be noted that a project work must have :, l Proper Title, l Name, l Class, l Roll Number, l Name of the Institution, l Name of the Board Council to which the school/college is affiliated, i.e., name of the, Examination Board., CONTENTS OF THE PROJECT WORK, The project work should be neatly prepared. It may be divided into following parts :, (I) Name of the Project/Introduction of the Project Topic., (II) Objectives., (III) Sources of Data or Source Material., (IV) Processing the data or Analysis of Financial Data., (V) Interpretation of Findings/Observations., (VI) Conclusion., Project Report contains suggestions for improvement in the weak areas. It should also, include words of appreciation and encouragement for those areas where performance is good or, very good or excellent., , 2
Page 1049 :
Project Work, Notes :, (1), (2), (3), (4), , The length of the project work may be determined by the student with the consultation of his/her teacher., Teachers are requested to guide and help the students at different stages of project work., The style of presenting project work must be simple and lucid., Various techniques and tools of financial analysis, diagrams, charts and colour combinations may be used, as per requirements., (5) Viva-voce should be conducted on submission of project work and completion of written test relating to, the project work., , ABSTRACT OF A PROJECT WORK, FINANCIAL STATEMENTS OF HERO MOTOCORP LIMITED, The student should follow the following process to carry out project work on ‘Analysis of, Financial Statements of Hero Motocorp Auto Ltd.’ :, (I) Introduction of the Project Topic, This should be the introductory part of the project work. In this section, the student should, deal with :, (i) Why he has selected this topic, i.e., utility and significance of the project., (ii) Development of Auto Industry., (iii) Profile of Hero Motocorp Ltd., (II) Project Methodology, In this section the student should explain in brief :, (i) Objective/Objectives of the Project Work., (ii) Sources of Data/Data Collection Techniques., (III) Working of Hero Motocorp Ltd., In this section the student should present :, (i) Organisational Structure of Hero Motocorp Ltd., (ii) Production., (iii) Sales., (iv) Marketing, Pricing Policies etc., (IV) Presentation of Financial Statements, In this part the following should be presented :, (i) Income Statement/Profit & Loss Account., (ii) Balance Sheet., (iii) Funds Flow Statement., (iv) Cash Flow Statement., (V) Analysis of Financial Statements, For analysis of financial statements different techniques and tools may be adopted. The, following ratios may be calculated :, (i) Profitability Ratios., (ii) Liquidity Ratios., (iii) Solvency Ratios., (iv) Turnover Ratios etc., (VI) Conclusion, After analysis of various ratios, financial strengths and weaknesses should be identified and, some neat suggestions must be given so as to improve its financial position and market expansion., C.B.S.E. GUIDELINES FOR PROJECT WORK IN ACCOUNTANCY, CLASS XII, PROJECT WORK, Unit 1 : Project File, Unit 2 : Written Test, Unit 3 : Viva-Voce, , 20 Marks, 4 Marks : As per Requirement, 12 Marks : One hour, 4 Marks : As per Requirement, , 3
Page 1050 :
SBPD Publications Accountancy (XII), UNIT I : PROJECT FILE, Objectives, (i) To enable a student to complete the accounting process in real life situations., (ii) To develop the competence of analysing accounting information of business firms and, interpret the information on the basis of given guidelines to present the required information in, project file., In short, objective of this part of syllabus (i.e., Project Work) is to give the students a feel of, what an analysis of financial statements is and how it is done in real life situations., Classification of Projects, In its guidelines the Central Board of Education has classified the projects into two, categories :, (1) Specific Projects and (2) Comprehensive Projects., (1) Specific Projects : Under this category, small projects based on the information, drawn from actual reports of business units in the corporate sector are undertaken. The data, may be taken from :, (i) either Annual Reports of the Companies or, (ii) from the quarterly reports which are published in daily newspapers and weekly, magazines., Considering the academic level of the students, the data taken from the quarterly reports, is better, as it is very brief and precise. Specific projects may relate to ratio analysis and Cash, Flow Statement., (2) Comprehensive Projects : Comprehensive projects may begin with the initial stages, of financial accounting to the preparation and analysis of financial stements. Various tools and, techniques may be applied to judge the performance of the business enterprise. The data, presented should be from real life situations. In case of comprehensive project(s) a student is, required to derive meaningful information for taking decisions for purposes of investment,, expansion and financing, etc., Number of Project Work to be Completed by a Student, There is no upper limit to the number of projects to be completed by a student during the, year. However, there is a minimum limit. Every student is required to prepare at least two, Specific Projects and one Comprehensive Project., Project Note Book/Project File : As per the guidelines of the Central Board of, Secondary Education, project works will be prepared in the Project Note Book or Project File, maintained for this purpose., Allotment of Marks, The project work carries 20 marks., Sub-division of Marks, (i) The Project Note Book or Project File will carry 4 Marks., (ii) There will be a written test for one hour relating to the project work. This test will, carry 12 Marks having two questions of 6 marks each., (iii) Viva-voce examination will carry 4 Marks (viva-voce examination will form the part, of the Board Examination)., Thus, each student will be evaluated out of 20 marks., Scope of Project Work, All projects must relate only to the Analysis of Financial Statements and that too, to the, tools covered and ratios listed in the syllabus. However, the following ratios have been added, for enriching the students apart from the ratios mentioned in the syllabus :, 1. Capital Employed Turnover Ratio., 2. Fixed Assets Turnover Ratio., 3. Total Assets Turnover Ratio., 4. Net Profit Ratio., 5. Return on Capital Employed., 6. Return on Equity., 7. Return on Total Assets., 8. Earning per Share., , 4
Page 1051 :
Project Work, CONTENTS OF THE PROJECT FILE, First Page of the file should contain :, (i) Name of the Student,, (ii) Class,, (iii) Section,, (iv) Name of the School/College,, (v) Title of the Project (See Page No. 10)., Second Page of the file should contain Index of the Project Work (See Page No. 6). The, page should describe the following :, Serial No., Title of the Project, Type (Comprehensive/Specific), Page No., Source Material,, Teacher’s Remarks, Supervisor’s Signature., Format of the Project Work, 1. Name of the Project,, 2. Objective(s) of the Project/Required,, 3. Period of the Project,, 4. Source Material,, 5. Tools of Analysis,, 6. Processing the Data Information,, 7. Interpretation of the results alongwith observations., Project File should be neatly handwritten and presentable with page numbers marked., The results of the analysis in case of specific project(s) should be visually displayed through, Bar-diagrams, Pie-diagrams, etc., Each step of the solution needs to be highlighted. Conclusions or inferences drawn may be, highlighted in boxes., Awarding of Marks, The marks should be awarded based on :, l Context Coverage, l Presentation, l Completeness and quality of work., UNIT II : WRITTEN TEST, Objectives, 1. To give the students exposure to analysis of financial statements of business, firms/corporate world and enable them to Drive meaningful information therefrom., 2. To assess how effectively the students have done the project work., Guidelines for Teachers, The teachers will discuss with students all exercises given in the list appended and, analyse the information given. They will identify relevant data required and work out, solutions. The scope of cases will be limited to ratios and cash flows., Guidelines for Examiners, There will be two application oriented problems of 6 marks each from accounting ratios, and cash flow. The problems will be set in consultation with the teacher. It must be ensured, that multiple sets of papers are set., Awarding the Marks, Marks will be awarded on the steps taken, data identified and solution arrived at., UNIT III : VIVA-VOCE, Objectives, 1. To test whether the student has understood topics covered and is able to express., 2. To test whether the Project File presented by the student is a work done by himself/herself., Guidelines for Examiners, 1. Project File will form the basis of setting questions., 2. The external examiner will ask a few questions (preferable 2-3) to test the authenticity, of the work done in the file., , 5
Page 1052 :
SBPD Publications Accountancy (XII), PROJECT FILE, Name of the Student......................................................................................................, ........................................................................................................................................., , Class.................................Section..................................................................................., , Name of the Teacher......................................................................................................., , Name of the School/College............................................................................................, ........................................................................................................................................., ........................................................................................................................................, , Title of the Project.........................................................................................................., ........................................................................................................................................., ........................................................................................................................................., , (A) Comprehensive........................................................................................................, ........................................................................................................................................, ........................................................................................................................................, , (B) Specific....................................................................................................................., ........................................................................................................................................, ........................................................................................................................................, ........................................................................................................................................, , Signature, , 6
Page 1053 :
Project Work, SPECIAL TIPS FOR THE VIVA-VOCE/INTERVIEW, Before Viva-voce or Interview :, 1. You should be well dressed., 2. Your uniform must be neat and clean., 3. Knock at the door and take permission to enter the room. When permission is, granted, only then enter the room., At the Time of the Viva-voce or Interview :, 1. When you enter the room, first of all wish everyone., 2. Sit only when you are asked to sit., 3. Sit softly on the chair. Do not throw yourself., 4. Keep an eye contact with the interviewer instead of looking here and there., 5. Start answering only when the interviewer has completed his/her question., 6. Do not fumble, be fluent while answering., 7. Answers must be relevant and precise. Do not over-speak., 8. Avoid getting into any argument with the interviewer., 9. You must be confident while answering the question., 10. If you do not know the correct answer, just say sorry and politely request the, interviewer to give some other question. Don’t waste time in thinking of answer for, long time. Ask for alternative question after saying sorry and saying that ‘I do not, remember the answer at the moment’. To enhance their knowledge, students may, consult their respective school teacher only; they should not ask the answer from the, interviewer., At the End of the Interview :, 1. Politely leave the seat., 2. Wish him/her and leave the room., INDEX, Sl., No., , 1., , Name of the Project, ................, ................, ................, , Supervisor’s, Type : Comprehensive/, Page No. Source Remarks, Specific, Signature, Comprehensive, , —, , Self, , Economic, Times, , (a) Facts of the Problem, (b) Tools of Analysis, (c) Processing the data, (d) Conclusion, , 2., , ............., , 3., , Quarterly analysis of Specific, sales and profitability, , —, , Half-yearly analysis of Specific, sales and profitability, , —, , Segmentwise Compari- Specific, son of sales and, profit, , —, , 7
Page 1054 :
SBPD Publications Accountancy (XII), , ACKNOWLEDGEMENT, , I humbly express my sincere thanks to Mr./Mrs./Ms. ..............my, Accounts teacher for his/her valuable advice, help and comments at, every stage of the project work. My project has been a success only, because of his/her guidance. My hearty thanks are also due to my, teachers and friends who showed genuine interest in discussing with me, some of the problems related to the project., Name of the Student, Roll No. ...................., , CERTIFICATE, This is to certify that Mr./Ms.....................of Class XII, Section ..... of, Y.K. Sudershan Public School, Patna has completed his/her project under, my supervision. He/She has taken proper care and shown utmost sincerity, in completion of the project work., I certify that the projects completed are upto my expectations and as, per the guidelines issued by C.B.S.E., , ......................., (Signature), P.G.T. Accounts/H.O.D., Department of Commerce, , 8
Page 1055 :
Project Work, MODEL PROJECTS, (A) MODEL SPECIFIC PROJECTS, MODEL SPECIFIC PROJECT-1, (1) Name of the Project : Study of sales and profitability of Khaitan Electricals Limited, for the first 9 months of the financial year 2016-17., (2) Objectives : (i) To study the sales and profitability behaviour of the company in the, first 9 months of the current year in comparison to the corresponding period of the previous, year., (ii) To comment on growth in sales and improvement in profits., , KHAITAN ELECTRICALS LIMITED, (46 C J.L. Nehru Road, Kolkata - 700 071), Unaudited Financial Results for the Period Ended on 31st December, 2016, ` in Lacs, , Nine months ended, Sr., No., , Particulars, , 1. Net Sales/Income from Operations, , 31.12.2016 31.12.2015, (Reviewed) (Reviewed), 42008, , 31577, , 126, , 202, , (A) Increase/Decrease in Stocks trade, , (3200), , (436), , (B) Purchase of Finished Goods, , 27086, , 20195, , (C) Consumption of Raw Materials, , 7165, , 4317, , (D) Staff Cost, , 2343, , 1934, , (E) Other Expenditure, , 5712, , 4314, , 39106, , 30324, , 1340, , 1505, , 458, , 448, , 6. Profit/(Loss) before Tax and Extra-ordinary items (1 + 2 − 3 − 4 − 5), , 1230, , (498), , 7. Extra-ordinary Item – Profit/(Loss) on sale of development rights of land, , 247, , 1170, , 1477, , 672, , 9. Provision for Taxation — Current, , 116, , —, , — Deferred, , 483, , 104, , 10. Profit/(Loss) after Tax before prior period Adjustments (8 – 9), , 878, , 568, , 11. Prior Period Adjustments, , —, , 17, , 12. Net Profit/(Loss) (10 – 11), , 878, , 551, , 13. Paid-up Equity Share Capital, , 864, , 864, , 2. Other Income, 3. Expenditures :, , Total Expenditure (A + B + C + D + E), , 4. Interest, 5. Depreciation, , 8. Profit/(Loss) before Tax (6 + 7), , 9
Page 1056 :
SBPD Publications Accountancy (XII), 14. Reserves excluding Revaluation Reserves, , —, , —, , 10.16, , 11.62, , 2809685, , 2844590, , 32.51, , 32.91, , 15. Basic & Diluted Earning Per Share (`), 16. Aggregate of Non-Promoter Shareholding, —Number of Shares, —Percentage of Shareholding, , (3) Tools Used : (a) Percentages, (b) Ratio Analysis, (c) Comparative Statements, (d) Bar, Diagram., (4) Period : 2016-17 (first 9 months)., (5) Processing of Source Materials :, 1. Comparison of sales of first 9 months of current year with 9 months of, previous year, (` in Lacs), Particulars, , Net Sales, , Nine Months ended, , 31.12.2015, , 31.12.2016, , 31577, , 42008, , Absolute Change Percentage Change, 10431, , Absolute Change = ` (Crore) 42008 – 31577 = ` (Crore) 10431 (Increase), Absolute Change in Sales, Percentage Change =, × 100, Sale of Previous Year, 10431 × 100, =, = 33.03%, 31577, , Fig. 1, , 2. Comparative Study of Net Profit before Tax, Net Profit for 9 months ending 31.12.2016 1477 (lacs), Net Profit for 9 months ending 31.12.2015 672 (lacs), Absolute Change (Increase), 805 (lacs), , 10, , 33.03%
Page 1057 :
Project Work, Nine Months ended, , Particulars, , 31.12.2015, , 31.12.2016, , 672, , 1477, , Net Profit before Tax, , Absolute Change, , Percentage, Change, , 805, , 119.79%, , Working Note :, Absolute Change, × 100, Previous year, 805 × 100, =, = 119.79 or say 120%, 672, , Percentage Change =, , Fig. 2, , 3. Comparative Study of Net Profit after Tax, Net Profit after tax for 9 months ending 31.12.2016, Net Profit after tax for 9 months ending 31.12.2015, Absolute Change (Increase), , 878 (lacs), 568 (lacs), 310 (lacs), , Fig. 3, , 11
Page 1058 :
SBPD Publications Accountancy (XII), Nine Months ended, Particulars, , Net Profit after Tax, , 31.12.2015, , 31.12.2016, , 568, , 878, , Absolute Change, , Percentage, Change, , 310, , 54.58%, , Working Note :, Absolute Change, × 100, Previous Year, 310, =, × 100 = 54.58%, 568, , Percentage Change =, , Observation and Conclusion, The results for the first nine months of the financial year continue to be very, encouraging for Khaitan Electricals Ltd. The company continues to deliver strong revenue, growth and much improvement in profits. In fact, growth of net profit is excellent., In short, the following may be noted :, —Sales growth of 33% over last year., —Net Profit before tax improves by about 120%., —Net Profit after tax improves by about 55%., Thus, Khaitan Electricals Ltd. keeps on shining., Viva Questions, (A) General Questions :, Q. 1. What is your good name please ?, Q. 2. How much did you score in Pre board ?, Q. 3. What does your father do ?, Q. 4. What is your ambination ?, Or, What is your future plan ?, Q. 5. Why did you opt for Commerce stream ?, (B) Relating to Project Work :, Q. 1. Give the objective(s) of this project., Q. 2. To which business it is associated with ?, Q. 3. Where is its head office ?, Q. 4. Say a few words regarding its sales performance., Q. 5. Is there any improvement in its net profit after tax ?, Q. 6. What is your view regarding its future ?, MODEL SPECIFIC PROJECT-2, (Revenue and Net Profit), (1) Name of the Project : Study of Trend of Revenue and Profit before Tax of Steel Cast, Limited., (2) Objectives of the Project : To analyse and evaluate the changes in (a) Sales and, (b) Profit before tax on, (a) quarterly basis and, (b) half-yearly basis., , 12
Page 1059 :
Project Work, , STEEL CAST LIMITED, Regd. Office : Ruvapari Road, Bhavnagar, Gujarat - 364 005, Unaudited Financial Results for the Quarter ended 30th September, 2016, (` in Crores), Quarter Ended, , Half Year Ended, , Particulars, 30.09.16, Net Sales/Income from, Operations, Other Income, Total Expenditure :, (a) Increase/decrease in Stock, in trade, (b) Consumption of Raw Materials, (c) Staff Cost, (d) Power and Fuel, (e) Stores and Spares, (f) Job Changes, (g) Other expenditure, Interest #, Profit before Depreciation and Tax, Depreciation, Profit before Tax, Provision for Taxation :, – Current, – Deferred, Net Profit/(Loss), Paid-up Equity Capital, (Face Value ` 10), Reserves excluding Revaluation, Reserve, Basic and Diluted earning per share (`), Aggregate of Non-Promoter, Shareholding, – Number of Shares, – Percentage of Shareholding, , 30.09.15, , 30.09.16, , 30.09.15, , Year, Ended, 31.03.2016, (Audited), , 191.99, 32.30, , 158.42, 6.77, , 382.26, 37.25, , 311.42, 10.11, , 672.10, 31.70, , (10.71), 101.65, 10.54, 13.48, 12.14, 8.25, 31.97, 2.46, 54.51, 5.60, 48.91, , (8.29), 68.60, 9.36, 16.16, 11.54, 7.79, 32.31, 1.35, 26.37, 5.61, 20.76, , (6.46), 176.74, 19.53, 26.23, 22.83, 18.22, 60.20, 5.76, 96.46, 11.66, 84.80, , (12.15), 128.44, 17.83, 33.58, 21.92, 14.16, 59.83, (3.23), 61.15, 10.98, 50.17, , (14.15), 258.55, 37.57, 61.21, 43.74, 34.46, 146.09, 5.03, 131.30, 22.79, 108.51, , 12.15, 0.06, 36.70, 16.19, , 6.45, (0.34), 14.65, 16.19, , 25.10, 0.17, 59.53, 16.19, , 15.70, (0.52), 34.99, 16.19, , 35.39, (0.56), 73.68, 16.19, , 22.67*, , 9.05*, , 36.77*, , 21.61*, , 45.50, , 5965929, 36.84%, , 5940361, 36.69%, , 6038779, 37.29%, , 459.99, , * Not annualised., # Interest is net of Derivative gains., 1. The above financial results as reviewed by Audit Committee were approved by the Board of Directors in their, Meeting held on 18th October, 2016., 2. Details of number of investors complaints for the quarter ended 30th September, 2016 : beginning-1,, received-50, disposed off-50 and pending-1., 3. Other Income for the current quarter includes ` 17.49 crores being profit realised on Investments in Mutual, Funds., 4. Previous quarter figures have been regrouped/rearranged wherever considered necessary., , By Order of the Board, For Steel Cast Limited, , 13
Page 1060 :
SBPD Publications Accountancy (XII), (3) Tools of Analysis : Accounting Ratios., (4) Period under Study : (i) 2nd quarter of the year ending 31st March, 2017 & half-year, ended on 30.09.2016., (ii) 2nd quarter of the current year and 2nd quarter of the base year ending on 30th Sept., Half-year of the current year and half-year of the base year ending on 30th Sept., (5) Processing the Data :, (i) Comparison of Net Sales of Q of Current Year with Net Sales of Q of Base, 2, , 2, , Year, Net Sales of Current Year : 2nd Quarter (Q2/C) ` 191.99 (crores), Net Sales of Base Year : Corresponding period i.e. Q2/B = ` 158.42 (crores), Absolute Change (or Difference) :, D = Q 2C – Q 2B, = ` 191.99 – 158.42 (crores), Increase = ` 33.57 (crores), 33.57 × 100, Percentage Change =, = 21.19%, 158.42, ∴, , Increase = 21.2%, , Fig. 4, , (ii) Comparison of Net Sales of Current Year with Net Sales of the Base Year :, Half-year ended on 30.9.2016 :, Net Sales of Current Year (half-year) : ` 382.26 (crores), Net Sales of Base Year (half-year) : ` 311.42 (crores), Change (or Difference), D = ` 382.26 – 311.42 (crores), Increase = ` 70.84 (crores), 70.84 × 100, Percentage Change =, = 22.747%, 311.42, Increase = 22.7%, , 14
Page 1061 :
Project Work, , Fig. 5, , (iii) Comparison of Net Profit (before Tax) of 2nd Quarter of the Current year, (2016-17) with Net Profit of 2nd Quarter Base Year (2015-16), Net Profit of 2nd quarter of current year (Q2/C), ` 48.91 crores, Net Profit of 2nd quarter of base year (Q2/B), ` 20.76 crores, Change (Q2/C – Q2/B) : Increase, ` 28.15 crores, , Fig. 6, , 28.15 × 100, Percentage Change =, 20.76, = 135.597%, Increase = 135.6%, , 15
Page 1062 :
SBPD Publications Accountancy (XII), (iv) Comparison of half-yearly Net Profit (before Tax) of Current year with, half-yearly Net Profit (before Tax) of the Base Year :, Net Profit of Current half-year (Yc) :, ` 84.80 (crores), Net Profit of Base half year (Yb) :, ` 50.17 crores, Change (Yc – Yb) :, ` 34.63 crores, ∴, , Increase = ` 34.63 crores, 34.63 × 100, Percentage Change =, 50.17, = 69.025%, , ∴, , Increase = 69%, , Fig. 7, , (6) Observations and Conclusions : After processing of the data, the following facts, emerge :, (i) In the second quarter of the current year (i.e., 2016-17) net sales of the company have, increased by 21.2% as compared to net sales of the corresponding quarter of the base year (i.e.,, 2015-16). So it can be concluded that though the company is progressing, it should make effort, to enhance the sale., (ii) Net sales of half-year ended on 30.9.2016 have increased by 22.7% (23%) in comparison, to half-yearly net sales of the year 2015-16. This shows that half-yearly net sales of the current, year show much better position than increase in the 2nd quarter., (iii) The company has registered an increase of 135.6% or say 136% in its net profit in the, second quarter as compared to the net profit of second quarter of the base year. This, tremendous increase is highly commendable. Increase in sales and efficient use of resources, and other income, hard work of the company are the main reasons for increase in net profit., (iv) The company was able to enhance its profit before tax by 69% in the current half-year, ended on 30.9.2016 in comparison to the net profit of corresponding period of the last year. This, trend is appreciable., , 16
Page 1063 :
Project Work, Viva Questions, (A) General Questions : Same as Model Projet., (B) Relating to Project Work :, Q. 1. What is the objective of this project ?, Q. 2. In which segment it operates ?, Q. 3. What does the company produce and sell ?, Q. 4. Where is the registered office of this company situated ?, Q. 5. Where is its administrative office situated ?, Q. 6. Which is better basis of performance Sales Revenue or Net Profit ?, Q. 7. In which period the performance is better :, (i) 2nd quarter of current year or half-year of current year., (ii) 2nd quarter of current year or 2nd quarter of the base year., MODEL SPECIFIC PROJECT-3, (Revenue, Net Profit and Net Profit Ratio), (1) Name of the Project : Analytical Study of the behaviour of Sales, Profit before Tax, and Net Profit of Remco India Limited., (2) Objectives of the Study :, (i) To study the behaviour of, (a) Sales, (b) Profit before Tax, (c) Net Profit., (ii) To compare the Sales, Profit and Net Profit of the 3rd quarter of current year (2016), with that of the 3rd quarter of the base year (2015)., (iii) To compare the Sales, Profit and Net Profit of 9 months of the current year with, corresponding period of the base year., , REMCO INDIA LIMITED, Unaudited Financial Results for the Quarter ended 30th September, 2016, , (` in lacs), Previous, Year, Ended, 30.09.2016 30.09.2015 30.09.2016 30.09.2015 31.12.2015, (Audited), Quarter Ended, , 1. Net Sales/Revenue from, Operations, , 9 Months Ended, , 7949, , 7925, , 18325, , 20704, , 30160, , 111, , 14, , 337, , 187, , 200, , (a) Increase/Decrease in Stock, in Trade, , (166), , 213, , (1741), , (518), , 758, , (b) Consumption of Materials, and Cost of Services, , 5334, , 5018, , 12559, , 13326, , 17760, , 795, , 697, , 2270, , 2194, , 2967, , 2. Other Income, 3. Total Expenditure, , (c) Staff Cost, (d) Other Expenditure, 4. Interest, , 921, , 664, , 2630, , 2129, , 3663, , 6884, , 6592, , 15718, , 17131, , 25148, , 49, , 56, , 179, , 177, , 238, , 17
Page 1064 :
SBPD Publications Accountancy (XII), 5. Depreciation, , 140, , 143, , 414, , 408, , 764, , 6. Profit before Tax, (1 + 2 − 3 − 4 − 5), , 987, , 1148, , 2351, , 3175, , 4210, , 7. Provision for Taxation : Current, , 312, , 356, , 680, , 738, , 979, , Provision for Taxation :, Deferred, 8. Net Profit (6 – 7), 9. Paid-up Equity Share Capital, (Face Value ` 10 each), , 10, , 55, , 94, , 415, , 542, , 665, , 737, , 1,577, , 2022, , 2689, , 1203, , 1203, , 1203, , 1203, , 1203, , 10. Reserves excluding Revaluation, Reserves, 11. Basic and diluted EPS, (Not Annualised), , 13798, 5.53, , 6.13, , 13.11, , 16.81, , 22.35, , Notes :, 1. The above results have been taken on record by the Board of Directors at their meeting held on 18.10.2016., 2. The results of the quarter ended 31.03.2015 included non-recurring income of ` 824 lacs., 3. Pursuant to Clause 41 of the Listing Agreement with the Stock Exchanges, the Statutory Auditors have, carried out a limited review of the Unaudited Financial Results for the quarter and period ended 30.09.2016., 4. Status of Investors complaints, Pending on, 01.07.2016, , Received, , Resolved, , Pending on, 30.09.2016, , 0, 0, Nil, Nil, 5. The figures of the previous year, corresponding quater and 9 months period of the previous year have been, regrouped to conform with the figures reported for the current year., , (3) Tools of Analysis : Accounting Ratios., (4) Period under Study :, (i) 3rd quarters of the year 2015 and 2016, ended on 30.09.2016., (ii) 3rd quater of the current year ended 30.09.2016. 9 months of the current year ended, 30.9.2016. 9 months of previous year ended 30.9.2015., (iii) Previous year ended on 31.12.2015., (5) Abbreviations Used :, Q3/c : 3rd quarter of Current Year, Q3/p : 3rd quarter of Previous Year, Yc, , : Current Year, , Yp, , : Previous year, , (6) Processing of Data :, (i) Comparison of Net Sales of Q3 Current year with Net Sales of Q3 of Previous, year :, Net Sales of Current year, third Quarter (Q3/C) = ` 7949 (Lacs), Net Sales of Previous year, third Quarter (Q3/P) = ` 7925 (Lacs), Absolute Change (D) = Q3/C – Q3/P = ` 7949 – 7925 (Lacs), Increase = ` 24 Lacs, , 18
Page 1065 :
Project Work, % Change =, , Increase in Net Sales × 100, Net Sales of Q 3P, , 24 × 100, = 0.3%, 7925, Increase = 0.3%, =, , ∴, , Fig. 8, , (ii) Comparison of Net Sales of 3rd Quarter of current year with quarterly, average of Net Sales of nine months ending 30th September, 2015 :, Nine months Net Sales of Previous Year, QAV/C =, 3, =, , 20704, 3, , = ` 6901 (lacs), Change = Q3/C – QAV/C, = ` 7949 − 6901, = ` 1048 lacs, 1048, Percentage Change =, × 100, 6901, = 15.17%, Increase = 15.2%, , 19
Page 1066 :
SBPD Publications Accountancy (XII), , Fig. 9, , (iii) Comparison of Profit (before Tax) of 3rd Quarter of Current year with Profit, of 3rd Quarter of Previous year :, Net Profit of 3rd Quarter of Current year,, (Q3/C) = ` 987 lacs, Net Profit of 3rd Quarter of Previous year,, (Q3/P) = ` 1148 lacs, Change = ` 987 – 1148 lacs, Decrease = – ` 161 lacs, , Fig. 10, , 20
Page 1067 :
Project Work, – 161, × 100, 1148, Decrease = − 14%, (iv) Comparison of Profit (before Tax) of 3 Quarters of Current year with Net, Profit of 3 Quarters of Previous year :, Net Profit (before tax) of 3 Quarters (i.e. 9 months) of Current year = ` 2351 lacs, Percentage Change =, , Fig. 11, , Net Profit (before tax) of 3 Quarters (i.e. 9 months) of Previous year = ` 3175 lacs, Change = ` 2351 – 3175 lacs, Decrease = – ` 824 lacs, Percentage Change =, , − 824, × 100, 3175, , Decrease = – 26%, (v) Comparison of Net Profit of 3rd Quarter of Current year (Q3/C) with Net, Profit of 3rd Quarter of Previous year (Q3/P) :, Net Profit of 3rd Quarter of Current Year (Q3/C) = ` 665 lacs, Net Profit of 3rd Quarter of Previous Year (Q3/P) = ` 737 lacs, Change = Q3/C – Q3/P, = ` 665 – 737 lacs, Decrease = – ` 72 lacs, Percentage Change =, , − 72, × 100, 737, , Decrease = – 9.77%, , 21
Page 1068 :
SBPD Publications Accountancy (XII), , Fig. 12, , (vi) Comparison of Net Profit of first nine months of Current year with first nine, months of Previous year :, Net Profit of 9 months of Current year = ` 1577 (lacs), Net Profit of 9 months of Previous year = ` 2022 lacs, Change (D) = ` 1577 – 2022 lacs, Decrease = – ` 445 lacs, – 445, Percentage Change =, × 100, 2022, Decrease = – 22%, , Fig. 13, , 22
Page 1069 :
Project Work, (7) Main Observations :, (1) Sales in 3rd quarter of current year have increaded by ` 24 lacs in comparison to the, same corresponding period of previous year. In percentage term it has shown a negligible, increase of 0.3%. Hence, the company should take necessary steps to enhance sales. However,, net sales of third quarter of current year have increase by over 15% in comparison to quarterly, average of previous year covering a period of 9 months., (2) So far profit (before tax) is concerned, it is seen that profit of 3rd quarter of current year, decreased by 14% in comparison to the profit earned in the same corresponding period of the, previous year., (3) On the basis of quarterly average profit, it is observed that profit in 9 months of current, year has declined by 26%. This is not a healthy sign., (4) Similarly, net profit of 3rd quarter of current year has declined by 9.8% in comparison, to previous year., (5) Sharp decrease in net profit is observed in 9 months of current year both in absolute, and percentage terms., Viva Questions, l Same as Questions of Last Project., l Additional Questions :, Q. 1. Explain the profitability of Remco India Ltd., Q. 2. Discuss in brief its future prospects., MODEL SPECIFIC PROJECT-4, (Segment Analysis), (1) Name of the Project : Study of segmentwise Revenue and Results (Profit & Loss) of, Remco India Limited., (2) Statement of Objectives : To analyse the changes in :, (a) Revenue, and, (b) Profit of the following segments of the company :, (i) Power, (ii) Marine., , REMCO INDIA LIMITED, Mumbai : 18 October, 2016, Segmentwise Revenue, Results and Capital Employed, , (` In Lacs), , Previous, Year, Ended, 30.09.2016 30.09.2015 30.09.2016 30.09.2015 31.12.2015, (Audited), Quarter Ended, , 1., , Segment Revenue (Net Sales/, Income from Operations) :, (a) Power, (b) Marine, Total, Less : Inter Segment Revenue, , 2., , Net Sales/Income, from Operations, Segment Results [Profit and, (Loss) before Tax and Interest] :, (a) Power, , 9 Months Ended, , 7499, , 7640, , 17376, , 19394, , 27085, , 450, , 285, , 949, , 1310, , 3075, , 7949, , 7925, , 18325, , 20704, , 30160, , —, , —, , —, , —, , —, , 7949, , 7925, , 18325, , 20704, , 30160, , 775, , 925, , 1841, , 2734, , 3270, , 23
Page 1070 :
SBPD Publications Accountancy (XII), (b) Marine, , 165, , 230, , 397, , 485, , 1,095, , Total, , 940, , 1155, , 2238, , 3219, , 4365, , 49, , 56, , 179, , 177, , 238, , (96), 987, , (49), 1148, , (292), 2351, , (133), 3175, , (83), 4210, , Less :, (a) Interest, (b) Other un-allocable, expenditure net off, unallocable income, Total Profit Before Tax, , 3., , Capital Employed (Segment Assets – Segment, Liabilities), (a) Power, (b) Marine, (c) Un-allocable Corporate Assets less Liabilities, Total Capital Employed in Company, , As on, As on, As on, 30.09.2016 30.09.2015 31.12.2015, 9300, 9180, 8917, 496, 362, 587, 9216, 7786, 8147, 19012, 17328, 17651, , FOR REMCO INDIA LIMITED, Sd/RAMESH AGARWAL, Managing Director, (3) Tools of Analysis :, (i) Comparative Statements and, (ii) Common-size Statements., (4) Period of Study : 9 months ending September 30, 2016., (5) Processing of Data :, (i) Common-size Statement of Sales : Segment-wise, Segment, , Sales, , (a) Power, (b) Marine, Total, , Percentage of Total, , 17376, , 94.82, , 949, , 5.18, , 18325, , 100, , Calculations :, 17376, × 100 = 94.82%, 18325, 349, (b) Marine :, × 100 = 5.18%, 18325, (a) Power :, , Fig. 14, , 24, , (` in Lacs), Degree (% × 360/100), 341, 19, 360
Page 1071 :
Project Work, (ii) Common-size Statement of Profit : Segmentwise, Segment, , Sales, , Percentage of Total, , (` in Lacs), Degree (% × 360/100), , (a) Power, , 1841, , 82.26, , 296, , (b) Marine, , 397, , 17.74, , 64, , Total, , 2238, , 100, , 360, , Calculations :, (a) Percentage of Power Segment in Profit :, 1841, × 100 = 82.26%, 2238, (b) Percentage Marine Segment in Profit :, 397, × 100 = 17.74%, 2238, , Fig. 15, , (6) Observations :, (i) Power segment accounts for 94.82% of total sales but it contributes only 82.26% of total, profit., (ii) Marine segment has made contribution of only 5.18% in total sales but it has, contributed 17.79% of total profit., (7) Conclusion : On the basis of processing of the data and observations listed above, it, may be concluded that :, (a) The company should take necessary steps to enhance profit of power segment., (b) The performance of marine segment seems to be more satisfactory in terms of profit, earned by this segment. However, the company must try its best to increase sales of this, segment., Viva Questions, Q. 1. What is meant by Segment Analysis ?, Q. 2. Name the various segments of Remco India Limited., Q. 3. Which segment is the best segment and why ?, Q. 4. Which tools you have applied to measure performance of each segment ?, Q. 5. What is the purpose (or objective) of Segment Analysis ?, , 25
Page 1072 :
SBPD Publications Accountancy (XII), MODEL SPECIFIC PROJECT-5, (Segment Analysis), (1) Name of Project : Segmentwise Analysis of Net Sales/Income from Operations,, Segment Results, Profit/(Loss) and Capital Employed of Vitec Limited., (2) Objectives of the Study : (i) To analyse the contribution of :, (a) Heavy Engineering Division,, (b) Steel Foundry, and, (c) Others in Revenue of Vitec Ltd., (ii) To analyse the contribution of different segments in profits of Vitec Ltd., (iii) To analyse position of capital employed in different segments of the company., , VITEC LTD., Regd. Office : P.O. Belgharia, Kolkata 700 056 (West Bengal), Segment-wise Revenue, Results and Capital Employed, (` in Lacs), Quarter Ended 30th, Sept., , Particulars, , 1., , Half Year Ended, 30th Sept., , Audited, for Year, Ended, 31st, March, , 2016, , 2015, , 2016, , 2015, , (a) Heavy Engg. Division, , 4076.15, , 2535.54, , 6730.00, , 3861.40, , 11925.95, , (b) Steel Foundry, , 2073.44, , 1159.26, , 3622.34, , 1842.87, , 4748.89, , 3.84, , 3.53, , 4.16, , 13.31, , 24.77, , Total, , 6153.43, , 3698.33, , 10356.50, , 5717.58, , 16699.61, , Less : Inter-department Revenue, , 1499.69, , 1025.63, , 2297.19, , 1331.48, , 3155.54, , 4653.74, , 2672.70, , 8059.31, , 4386.10, , 13544.07, , 392.68, , 122.52, , 511.84, , 217.66, , 997.39, , (b) Steel Foundry, , 65.17, , 40.63, , 126.78, , 98.55, , 325.69, , (c) Others, , (0.45), , 30.17, , 40.26, , 56.40, , 103.34, , 457.40, , 193.32, , 678.88, , 372.61 1426.42, , 100.40, , 157.80, , 222.33, , 318.53, , 12.06, , 13.29, , 24.11, , 344.94, , 22.23, , 432.44, , 2016, , Segment Revenue, (Net of Excise Duty), , (c) Others, , Net Sales/Income from, Operations, , 2., , Segment Results Profit/(Loss), before Interest & Tax, (a) Heavy Engg. Division, , Total, , Less/Add :, (i) Interest (Net), (ii) Extra-ordinary Items, Total Profit/(Loss) before Tax, , 26, 26, , 582.55, , 20.49 (1243.92), 33.59, , 2087.79
Page 1073 :
Project Work, 3., , Capital Employed, (a) Heavy Engg. Division, , 4339.83, , 1430.58, , 4339.83, , 1430.58, , 2705.28, , (b) Steel Foundry, , (166.11), , 494.78, , (166.11), , 494.78, , 181.10, , (c) Others excluding investments, , 2885.76, , 1523.07, , 2885.76, , 1523.07, , 2377.04, , (3) Tools of Analysis Used :, Common-size Statements, Percentages., (4) Period under Study :, 1st April, 2016 to 30th September, 2016., (5) Processing the Data :, (i) Sales Analysis/Income from Operations of Various Segments :, Common-size Statements of Sales : Segment-wise, (` in Lacs), Segment, Net Sales (Income, from Operations), Percentage of Total, , Heavy Engineering, Division, , Steel Foundry, , Others, , Total, , 6730.00, 64.98, , 3622.34, 34.98, , 4.16, 0.04, , 10356.50, 100*, , * Total does not tally due to rounding off the figures., , Calculations :, (i) Contribution towards Sales in Percentages :, 6730, (a) Heavy Engineering Division =, × 100 = 64.98%, 10356.50, 362234, ., (b), Steel Foundry =, × 100 = 34.98%, 10356.50, 4.16, (c), Others =, × 100 = 0.04%, 10356.50, (ii) Contribution towards Sales in degree :, 64.98 × 360, (a) Heavy Engineering Division =, = 233.93, 100, 34.98 × 360, (b), Steel Foundry =, = 125.93, 100, 0.04 × 360, (c), Others =, = 0.14, 100, , Fig. 16, , 27
Page 1074 :
SBPD Publications Accountancy (XII), (iii) Profit Analysis of Various Segments :, Common-size Statements of Net Profit : Segmentwise, (` in Lacs), Segments, Profit before Int. & Tax, Percentage of Total, , Heavy Engineering, Division, , Steel Foundry, , Others, , Total, , 511.84, , 126.78, , 40.26, , 678.88, , 75.39, , 18.68, , 5.93, , 100*, , * Total does not tally due to rounding off figures., Calculations :, (i) Contribution towards Net Profit in Percentages : Segmentwise :, Segment (a) :, , 511.84, × 100 = 75.39%, 678.88, , Segment (b) :, , 126.78, × 100 = 18.68%, 678.88, , Segment (c) :, , 40.26, × 100 = 5.93%, 678.88, , (ii) Contribution towards Profit in degree :, Segment (a) :, , 75.39 × 360, = 272, 100, , Segment (b) :, , 18.68 × 360, = 67, 100, , Segment (c) :, , 5.93 × 360, = 21, 100, , Fig. 17, , (iii) Analysis of Capital Employed of Various Segments, Segment, Capital Employed, Percentage of Total, , 28, , (` in Lacs), , Heavy Engineering, Division, , Steel Foundry, , Others, (excluding, Investments), , Total, , 4339.83, , (166.11), , 2885.76, , 7059.48, , 61.47, , (2.35), , 40.88, , 100
Page 1075 :
Project Work, , Fig. 18, , Calculations :, (i) Contribution towards Capital Employed in Percentages : Segmentwise :, 4339.83, (a) Heavy Engineering Division =, × 100 = 61.47%, 7059.48, (166.11), × 100 = (2.35%), 7059.48, 288576, ., (c), Others =, × 100 = 40.88%, 7059.48, (ii) Contribution towards Capital Employed in degree :, Segment (a) : 61.47 × 360/100 = 221, Segment (b) : (2.35 × 360/100) = (8), Segment (c) : 40.88 × 360/100 = 147, Net Profit, (iii), Net Profit Ratio =, × 100, (Net) Sales, (b), , Steel Foundry =, , Segment, (a) Heavy Engineering Division, (b) Steel Foundry, (c) Others, , Net Profit Ratio, 511.84, × 100 = 6.35%, 8059.31, 126.78, × 100 = 1.57%, 8059.31, 40.26, × 100 = 0.49%, 8059.31, , 29
Page 1076 :
SBPD Publications Accountancy (XII), (iv) Return on Investment (ROI) :, Return on Investment in Percentages =, Segment, , Net Profit, × 100, Capital Employed, Return on Investment, 511.84, × 100 = 11.79%, 4339.83, 126.78, × 100 = 76.32%, (166.11), 40.26, × 100 = 1.40%, 2885.76, , (a) Heavy Engineering Division, (b) Steel Foundry, (c) Others, , (6) Observations : From processing of data, it is observed that :, (i) While the sales of Heavy Engineering Division account for 64.98% of total sales during, half-year ended 30th September, 2010, the profits earned by this division is quite higher at, 75.39% of total profit., (ii) The sales of Steel Foundry during the same period stand at 34.98% but its contribution, in net profit is only 18.68%., (iii) Surprisingly, the percentage of sales of ‘Others’ is only 0.04% whereas their, contribution in profit is 5.93% which is quite satisfactory., (iv) Heavy Engineering Division has shown higher net profit ratio at 6.35%, whereas, Return on Investment is the best in Steel Foundry segment., (v) Return on Investment is quite low at 1.40% in ‘Others’ segment., (7) Conclusion : To conclude, the following points need to be noted :, (i) Heavy Engineering Division is the main segment of Texmaco Ltd. It accounts for about, two-third of net sales and three-fourth of profit. Hence, it is the best segment of the company., However, this segment should further try to enhance the sales., (ii) The profit contribution of Steel Foundry segment is not in comensurate with sales. It, may be either due to higher cost or inefficiency in management. Hence, this segment should, take steps to reduce cost and earn more profits., (iii) With capital employed of 61.48% of total capital employed, the profit of Heavy, Engineering Division is more than 75% of total profit of the company., RATIO ANALYSIS, MODEL SPECIFIC PROJECT-6, The following are the summarised Profit & Loss Account and Balance Sheet of Jai, Corporation Ltd. for the yer ended 31st March, 2011 :, Profit & Loss Account, (for the year ended 31.3.2011), Particulars, , Amount, , Particulars, , `, , To, To, To, To, , Opening Stock, Purchases, Carriage Inward, Gross Profit c/d, , To Operating Expenses, To Non-operating Expenses, To Net Profit, , 30, , 99,500 By Sales, 5,45,000 By Closing Stock, 15,500, 4,40,000, 11,00,000, 2,00,000 By Gross Profit b/d, 40,000 By Non-operating Income, 2,60,000, 5,00,000, , Amount, `, , 9,50,000, 1,50,000, , 11,00,000, 4,40,000, 60,000, 5,00,000
Page 1077 :
Project Work, Balance Sheet, (as at 31.3.2011), Liabilities, , Amount, , Assets, , Amount, , `, , `, , Capital (Equity Share of `10 each), Reserve, Profit & Loss A/c, Other Current Liabilities, Bills Payable, , 2,00,000, 2,00,000, 60,000, 40,000, 40,000, , Land and Building, Plant and Machinery, Stock, Debtors, Cash and Bank, , Creditors, , 50,000 Bills Receivable, 5,90,000, , 1,50,000, 1,80,000, 50,000, 45,000, 60,000, 1,05,000, 5,90,000, , Calculate : (a) Gross Profit Ratio, (b) Net Profit Ratio, (c) Operating Ratio, (d) Return on, Capital Employed, (e) Stock Turnover Ratio, (f) Debtors Turnover Ratio, (g) Creditors, Turnover Ratio, (h) Fixed Assets Turnover Ratio., Solution, (a), , (b), , (c), , (d), , (e), , (f), , Gross Profit, × 100, Sales, ` 4,40,000, =, × 100 = 46.31%, ` 9,50,000, Net Profit, Net Profit Ratio =, × 100, Sales, ` 2,60,000, =, × 100 = 27.36%, ` 9,50,000, Cost of Goods sold + Operating Expenses, Operating Ratio =, × 100, Sales, ` 5,10,000 + 2,00,000, =, × 100, ` 9,50,000, 7,10,000, =, × 100 = 74.74%, 9,50,000, Operating Profit = 100 – 74.74 = ` 25.26%, Net Profit, Return on Capital Employed =, × 100, Capital Employed, ` 2,60,000, =, × 100 = 56.52%, ` 4,60,000, Capital Employed = Share Capital + Reserves + Profit & Loss A/c, = ` 2,00,000 + 2,00,000 + 60,000 = `4,60,000, Cost of Goods Sold ` 5,10,000, Stock Turnover Ratio =, =, = 4.09 times, Average Stock, ` 1,24,750, Opening Stock + Closing Stock, Average Stock =, 2, ` 99,500 + 1,50,000, =, = ` 1,24,750, 2, Credit Sales, Debtors Turnover Ratio =, Average Receivables (Debtors + B/R), ` 9,50,000, 9,50,000, =, =, = 6.33 times, ` 45,000 + 1,05,000 1,50,000, Gross Profit Ratio =, , 31
Page 1078 :
SBPD Publications Accountancy (XII), (g), , Creditors Turnover Ratio =, =, , (h), , Fixed Assets Turnover Ratio =, =, , Credit Purchases, Average Payables (Creditors + B/P), ` 5,45,000, ` 50,000 + 40,000, , = 6.06 times, , Sales, Fixed Assets, ` 9,50,000, ` 3,30,000, , = 2.88 times, , MODEL SPECIFIC PROJECT-7, The following is the Condensed Balance Sheet of Kerala Steel Ltd. for 3 years ended on, 31st March, 2014, 31st March, 2015 and 31st March, 2016 :, (` in lakh), Particulars, , 31.3.2014 31.3.2015 31.3.2016, `, , `, , `, , I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital :, Equity Shares (` 100 each), , 20, , 20, , 20, , 10% Preference Shares (` 100 each), , 20, , 20, , 20, , 30, , 32.5, , 38.75, , 15, , 22.5, , 26.25, , (b) Reserves, Profit & Loss before Providing for Taxation and, Dividends, 2. Non-current Liabilities, Debentures (Secured), Unsecured Loans : Bank, 3. Current Liabilities, , 60, 15, 20, , 180, , 60, 40, 32, 227, , 60, 45, 30, 240, , 90, , 110, , 120, , 12, , 18, , 30, 3, , 35, 4, , 40, 5, , 180, , 50, 10, 227, , 240, , 300, 15%, , 360, 18%, , 400, 20%, , II. ASSETS, 1. Non-current Assets : Fixed Assets, 2. Current Assets :, Stock : Raw Materials, Finished Goods, Stores and Spares, Trade Receivables, Cash at Bank, Sales, Gross Profit, , 20, 25, 5, 50, 20, , The company earned the net profits before providing for income-tax 50%. Equity shareholders, to get dividends 50% more than preference shareholders. Work out the following ratios after, reworking the Balance Sheet:, (i) Acid-test Ratio, (ii) Stock Turnover Ratio, (iii) Earning per Share, (iv) Fixed Assets to, Shareholders’ Fund, (v) Return on Capital Employed., , 32
Page 1079 :
Project Work, Solution, In the Books of Kerala Steel Ltd., Statement of Profit & Loss, Particulars, , 31.3.2014, , 31.3.2015, , `, , Profit before Tax and Dividend, Less : Income-tax @ 50%, Profit after Tax, Less : Preference Dividends (10%), Earnings for Equity Shareholders, Less : Equity Dividends (15%), Balance of Profits, , `, , 31.3.2016, `, , 15,00,000, 22,50,000, (7,50,000) (11,25,000), 7,50,000, 11,25,000, 2,00,000, 2,00,000, 5,50,000, 9,25,000, 3,00,000, 3,00,000, 2,50,000, 6,25,000, , 26,25,000, (13,12,500), 13,12,500, 2,00,000, 11,12,500, 3,00,000, 8,12,500, , Balance Sheet, (as on.......), Particulars, , 31.3.2014, , Shareholders Funds, , 31.3.2015, , `, , Share Capital : Equity, Preference Shares, Reserves and Surplus, Shareholders Funds, Current Liabilities, Add : Provision for Tax, Total Current Liabilities, Current Assets, Working Capital (Current Assets – Current Liabilities), Add : Fixed Assets, Capital Employed, , 31.3.2016, , `, , `, , 20,00,000, 20,00,000, 32,50,000, 72,50,000, 20,00,000, 7,50,000, 27,50,000, 90,00,000, 62,50,000, 90,00,000, 1,52,50,000, , 20,00,000, 20,00,000, 38,75,000, 78,75,000, 32,00,000, 11,25,000, 43,25,000, 1,17,00,000, 73,75,000, 1,10,00,000, 1,83,75,000, , 31.3.2014, , 31.3.2015, , 20,00,000, 20,00,000, 46,87,500, 86,87,500, 30,00,000, 13,12,500, 43,12,500, 1,20,00,000, 76,87,500, 1,20,00,000, 1,96,87,500, , Working Notes :, Cost Goods Sold = Sales – Gross Profit, Particulars, , `, , 31.3.2016, , `, , `, , Sales, Less : Gross Profit, , 3,00,00,000, 45,00,000, , 3,60,00,000, 64,80,000, , 4,00,00,000, 80,00,000, , Cost of Goods Sold, , 2,55,00,000, , 2,95,20,000, , 3,20,00,000, , Liquid Assets = Current Assets – Stock, , Calculation of Ratios, Particulars, (i) Acid Test Ratio, Liquid Assets, =, Current Liabilities, (ii) Stock Turnover Ratio, Cost of Goods Sold, =, Average Stock, (iii) Earnings per Share, Earnings for Equity Shares, =, Number of Equity Shares, , 31.3.2014, ` 45,00,000, ` 27,50,000, = 1.64 : 1, ` 2,55,00,000, ` 4,50,00,000, = 5.67 times, ` 5,50,000, ` 20,000, = ` 27.5, , 31.3.2015, ` 60,00,000, ` 43,25,000, , = 1.39 : 1, ` 2,95,20,000, ` 51,00,000, , = 5.78 times, ` 9,25,000, ` 20,000, = ` 46.25, , 31.3.2016, ` 70,00,000, ` 43,12,500, = 1.62 : 1, ` 3,20,00,000, ` 53,50,000, = 5.98 times, ` 11,12,500, ` 20,000, = ` 55.63, , 33
Page 1080 :
SBPD Publications Accountancy (XII), (iv) Fixed Assets to Shareholders', Fixed Assets, Funds =, Shareholders' Funds, (v) Return on Capital Employed, Profit after Tax, =, Capital Employed, , ` 90,00,000, , ` 1,10,00,000, , ` 1,20,00,000, , ` 72,50,000, ` 78,75,000, ` 86.87,500, = 1.24 times, = 1.4 times, = 1.38 times, ` 7,50,000, ` 11,25,000, ` 13,12,500, × 100, × 100, × 100, ` 1,52,50,000, ` 1,83,75,000, ` 1,96,87,500, = 4.92%, = 6.12%, = 6.67%, , MODEL SPECIFIC PROJECT-8, Prepare Cash Flow Statement as per AS-3 from the following information indicating cash, flow from operating, investing and financing activities and report the performance:, Balance Sheet, Particulars, I. EQUITY AND LIABILITIES, 1. Shareholders’ Funds :, (a) Share Capital, (b) Reserves and Surplus (Profit & Loss), 2. Non-current Liabilities, Long-term Borrowing, 3. Current Liabilities :, Trade Payables, II. ASSETS, 1. Non-current Assets :, Fixed Assets, Tangible Assets (Plant), Intangible Assets (Goodwill), 2. Current Assets :, Inventory, Trade Receivables, Cash and Cash Equivalents, (Cash at Bank), , 2016, , 2015, , `, , `, , 3,50,000, 2,50,000, , 2,50,000, 1,50,000, , 2,00,000, , 3,00,000, , 4,50,000, 12,50,000, , 3,00,000, 10,00,000, , 3,50,000, 1,00,000, , 2,50,000, 1,50,000, , 3,00,000, 3,00,000, , 2,50,000, 2,00,000, , 2,00,000, , 12,50,000, , 1,50,000, 10,00,000, , Additional Information :, Depreciation charged on plant amounted to ` 50,000., Solution, Cash Flow Statement, (for the year ended 31st March, 2017), (As per AS-3), Particulars, (A) Cash Flow from Operating Activities :, Profit for the Year :, Net Profit as on March 31, 2017, Less : Net Profit as on March 31, 2016, Net Profit before Tax, Add : Non-operating Expenses :, Depreciation, Goodwill Written off, Less : Non-operating Income :, Profit before Working Capital Changes, , 34, , Amount, `, , 2,50,000, 1,50,000, 1,00,000, 50,000, 50,000, 2,00,000, —, 2,00,000, , Amount, `
Page 1081 :
Project Work, Add : Increase in Trade Payables, Less : Increase in Trade Receivables, Increase in Stock, Net Cash Flow from Operating Activities, (B) Cash Flow from Investing Activities :, Plant Purchased, Net Cash and Used in Investing Activities, (C) Cash Flow from Financing Activities :, Issue of Shares, Redemption of Long-term Loan, , 1,50,000, 3,50,000, (1,00,000), (50,000), 2,00,000, (1,50,000), (1,50,000), 1,00,000, (1,00,000), , Net Increase in Cash & Cash Equivalents (A + B + C), Cash and Bank at the beginning of the period, Cash and Bank at the end of the period, , —, 50,000, 1,50,000, , 2,00,000, , Report : It may be understood from the above statement that cash inflow generated from, operating activities amounts to ` 2,00,000. There is no inflow of cash from investing activities., It has been negative. In other words, there has been outflow of cash from investing activities., There is neither inflow nor outflow of cash from financing activities., MODEL SPECIFIC PROJECT-9, Re-arrange the following figures in the form of Comparative Statements depicting the, changes in the absolute figures and percentage and give your views in one sentence on the net, effect of the change :, 2015, , 2016, , `, , Net Sales, Cost of Goods Sold, Operating Expenses :, Office and Administrative, Repairs and Maintenance, Selling and Distribution, Non-operating Expenses, , `, , 8,00,000, 5,00,000, , 9,60,000, 5,80,000, , 1,10,000, 30,000, 90,000, 10,000, , 1,50,000, 40,000, 70,000, 5,000, , Comparative Income Statements, , Solution, Particulars, , 2015, `, , Net Sales, Less : Cost of Goods Sold, Gross Income, Less : Operating Expenses :, Office and Administrative, Repairs and Maintenance, Selling and Distribution, Operating Income, Less : Non-operating Expenses, Net Profit before Tax, , 2016, `, , Change in, Absolute Figures, , Changes in, Percentage, , `, , 8,00,000, (5,00,000), 3,00,000, , 9,60,000, (5,80,000), 3,80,000, , 1,60,000, (80,000), 80,000, , 20%, 10%, 27%, , (1,10,000), (30,000), (90,000), 70,000, (10,000), 60,000, , (1,50,000), (40,000), (70,000), 1,20,000, (5,000), 1,15,000, , 40,000, 10,000, – 20,000, 50,000, – 5,000, 55,000, , 36%, 33%, – 22%, 71%, – 50%, 92%, , Report : Operational efficiency and overall performance of the firm is excellent as there is, considerable increase in net sales, gross income and net income in terms of both absolute, figures and percentage., , 35
Page 1082 :
SBPD Publications Accountancy (XII), Notes :, (i) Gross income has been calculated by deducting cost of goods sold from net sales and shown as an, additional item., (ii) Operating income has been ascertained by deducting operating expenses from gross income and its, changes in terms of absolute figures and percentage shown., (iii) Net profit before tax has been calculated by deducting non-operating expenses from operating income., , It is advised that students should calculate gross income, net income before tax and after, tax etc. If necessary items for these calculation are given., MODEL SPECIFIC PROJECT-10, From the following details make out a Comparative Statement and report the changes in, the absolute figures and percentage change assuming the year 2015 as the base year. You are, also required to comment upon the performance :, Particulars, , 2015, `, , Sales, Cost of Goods Sold, Indirect Expenses, Provision for Tax, Net Profit, , 1,20,000, (70,000), 50,000, (20,000), 30,000, (6,000), 24,000, , 2016, `, , 1,50,000, (75,000), 75,000, (25,000), 50,000, (10,000), 40,000, , Comparative Income Statement, , Solution, , Absolute Figures, Particulars, Sales, Less : Cost of Goods Sold, Gross Income, Less : Indirect Expenses, Net Profit before Tax (NPBT), Less : Provision for Tax, Net Profit (after Tax), , 2015, , 2016, , 1,20,000, (70,000), 50,000, (20,000), 30,000, (6,000), 24,000, , 1,50,000, (75,000), 75,000, (25,000), 50,000, (10,000), 40,000, , Changes (Base Year 2015), Absolute, Percentage, Figures, 30,000, 25%, (5,000), 7%, 25,000, 50%, (5,000), 25%, 20,000, 67%, (4,000), 67%, 16,000, 67%, , Report : The performance has been excellent during the year 2016. Sales has increased by, 25% whereas cost of goods sold has increased by 7% resulting in considerable rise in gross profit, and net profit by 50% and 67%. Overall performance of the firm is excellent and future, prospects are bright., Note : Gross income less indirect expenses amount to net profit before tax. Net profit before tax less taxes is net, profit after tax., , SPECIFIC PROJECTS FOR PRACTICE, , (1 to 11), SPECIFIC PROJECT WORK NO. 1, From the following information of Samsung Digital Limited for the quarter/half-year, ending 30th September, 2016, prepare a Project Report highlighting the Changes in Net Sales, and Net Profit on :, (a) quarterly basis and (b) half-yearly basis., State whether the company has improved its performance or not., , 36
Page 1083 :
Project Work, , SAMSUNG DIGITAL LIMITED, Regd. Office : Mukhija Chamber, 5, Saraswati Marg,, Opp. Lane Raymonds, M.I. Road, Jaipur, Unaudited Financial Results (Provisional) for Quarter Ended 30.09.2016, (` in Lacs), , S., No., , 1., 2., 3., 4., , 5., 6., 7., 8., 9., 10., 11., , Particulars, , Net Sales, Other Income, Total Revenue (1 + 2), Total Expenditure :, (A) Increase/Decrease in, Stock-in-trade, (B) Consumption of Raw, Materials, (C) Staff Cost, (D) Other Expenditure, Processing Charge, Excise Duty, Finish & Grey, Purchase, Interest, Depreciation, Total Expenditure, Profit before Tax (3 − 4), Provision for Taxation, Provision for deferred tax, Net Profit (+) Loss (–), Paid-up Equity Share, Capital, Reserve & Surplus Excluding Revaluation Reserves, Basic and diluted EPS for, the period for the pervious, year (not to be annualised), , Corresponding Year to date, figures for, 3 months in, the Previous current period, as on, year as on, 30.9.2016, 30.9.2015, (UNAUDITED) (UNAUDITED) (UNAUDITED), 369.88, 411.44, 813.36, 11.09, 12.40, 21.13, 380.97, 423.84, 834.49, 3 months, ended as on, 30.9.2016, , Year to date, figures for the, Previous year, as on, 30.9.2015, (UNAUDITED), 732.65, 21.78, 754.43, , Previous, Accounting, year, 2015-16, (AUDITED), 1590.46, 17.46, 1,607.92, , 0.44, 223.14, , (–) 44.83, 190.21, , 14.06, 423.09, , (–) 25.39, 356.78, , (–) 75.29, 813.03, , 15.73, 37.79, 31.81, 9.06, 32.97, , 13.93, 52.63, 33.32, 21.49, 129.14, , 30.51, 98.67, 71.36, 30.32, 103.08, , 26.92, 93.57, 71.76, 42.07, 132.31, , 54.64, 215.24, 159.55, 80.84, 231.49, , 8.42, 12.42, 371.78, 9.19, —, —, 9.19, , 7.88, 11.97, 415.74, 8.10, —, —, 8.10, , 19.21, 24.77, 815.07, 19.42, —, —, 19.42, , 17.01, 24.04, 739.07, 15.36, —, —, 15.36, , 37.22, 48.61, 1,565.63, 42.59, 3.13, 14.64, 24.82, , 319.04, , 319.04, , 319.04, , 319.04, , 319.04, , —, , —, , —, , —, , 207.91, , 0.26, 0.25, 0.43, 0.48, 0.72, Notes :, 1. The above results were reviewed by the audit committee of the Board on 21st Oct., 2016 and approved by, the Board of Directors at its meeting held on 30th Oct., 2016., 2. Provision for deferred tax for the current quarter in accordance with the provision of Accounting Standard, AS-22 (Accounting for taxes on income) issued by the Institute of Chartered Accountants of India, shall be, accounted for at the year end., 3. The provision for tax liability will be provided at the year ended 31st March, 2017., , For and on behalf of the Board, (DINESH KANDBAR), Managing Director, Date : 30th Oct., 2016, , 37
Page 1084 :
SBPD Publications Accountancy (XII), SPECIFIC PROJECT WORK NO. 2, Prepare a detailed Project from the following financial results of Hinduja Rayon and, Industries Limited for the year ended March 31, 2016. The project should highlight the changes, in :, (a) Net Sales (Income from Operations),, (b) Net Profit before Tax., The changes should be reflected :, (i) On quarterly basis by comparing the 4th quarter of the current year with the 4th, quarter of the previous year and, (ii) On annual basis by comparing year ending March, 2016 with that of the year ending, March, 2015., , HINDUJA RAYON AND INDUSTRIES LIMITED, Registered Office : Junagarh-Veraval Road, Veraval-362 266 (Gujarat), Audited Financial Results for the Year Ended 31st March, 2016, (` in Crores), Nine, Months, Ended, 31st, Dec. 10, , Quarter Ended 31st, March, Financial Results, 2016, , 1282.80, 105.58, , 431.26, 34.64, , 1177.22, 10.98, 1188.20, , 396.62, 329.00, 399.91, , 3.82, 582.58, 87.51, 315.36, , (24.83), 229.92, 30.30, 100.17, , 198.93, 18.73, 7.45, , 64.35, 5.26, 1.72, , 187.65, 5.46, 61.22, , 60.80, —, 20.30, , 120.97, 19.95, 140.92, 32.18, 5.03, , 40.51, —, 40.51, 12.07, 0.87, , —, 103.71, , —, 27.57, , 38, , 2015, 367.92 Sales, 33.74 Less : Excise Duty, Net Sales/Revenue from, 334.18, Operation, 1.44 Other Income, 335.62 Total Revenue, Total Expenditure :, (0.87) Decrease/Increase in Stock-in-trade, 162.20 Consumption of Raw Material, etc., 28.90 Staff Cost, 87.88 Other Expenditure, Profit Before Depreciation,, 57.51, Royalty & Tax, 7.73 Interest and Finance Expenses, 8.92 Add : Interest Income, Profit before Depreciation,, 58.70, Royalty & Tax, 1.00 Royalty to Wholly-owned Subsidy, 17.63 Depreciation and Amortization, Profit before Tax and, 40.07, Exceptional Items, (18.66) Exceptional Items, 21.41 Profit after Exceptional Items, 1.53 Provision for Current Tax, 2.10 Provision for Deferred Tax, Tax provision no longer required, (0.01), written back, 17.79 Net Profit, , Year, Year, Ended, Ended, 31st, 31st, March, 16 March, 15, (Audited) (Audited), 1714.06, 140.22, , 1593.35, 150.93, , 1573.84, 14.27, 1588.11, , 1442.42, 10.00, 1452.42, , (21.01), 812.50, 117.81, 415.53, , (3.87), 686.81, 122.83, 398.28, , 263.28, 23.99, 9.71, , 248.37, 43.70, 21.98, , 248.96, 5.46, 81.52, , 226.65, 8.17, 71.74, , 161.48, 19.95, 181.43, 44.25, 5.90, , 147.74, (18.66), 128.08, 9.00, 25.22, , —, 131.28, , (11.48), 105.34
Page 1085 :
Project Work, 59.88, —, 17.32, , 59.88, —, 4.60, , Paid-up Equity Share Capital (Face, 59.88, value of ` 10 each), — Reserves, 2.97 Basic and Diluted Earning Per Share (`), Aggregate of Non-Promoter, Shareholding :, Number of Shares, Percentage of Shareholding, Dividend, , 59.88, 1207.80, 21.92, , 59.88, 1110.91, 17.59, , 42776227, 71.43%, 40%*, , 43752582, 73.07, 37.5%, , * Recommended., (B) SEGMENT ANALYSIS, SPECIFIC PROJECT WORK NO. 3, From the following information of Varandani Auto Limited and its subsidiaries, Joint, Ventures and Associates pertaining to Segment performance, prepare a project to highlight the, contribution of each segment towards revenue (sales) and profits with special reference to :, (i) 3rd Quarter of the current year and, (ii) 9 months ended 31.12.2016., , VARANDANI AUTO LIMITED, Segmentwise Revenue, Results and Capital Employed, (` in Million), Quarter, Quarter, Ended, Ended, 31.12.2016 31.12.2015, Segment Revenue :, Automotive, Insurance, Investment & Others, Total, , Less : Inter-segment Revenue, Net Sales/Income from, Operations, Segment Profit/(Loss) before, Tax and Interest :, Automotive, Insurance, Investment & Others, Total, Less : Interest, Total Profit before Tax, Capital Employed :, Automotive, Insurance, Investment & Others, Unallocable, Total, , Year, Nine, Nine, Ended, Months, Months, 31.03.2016, Ended, Ended, 31.12.2016 31.12.2015 (Audited), , 16071.8, 2917.4, 873.9, 19863.1, 39.2, , 13110.0, 887.3, 627.8, 14625.1, 42.0, , 42852.1, 7303.1, 2818.3, 52973.5, 245.4, , 36377.3, 2278.8, 2896.9, 41553.0, 265.0, , 49249.3, 3704.4, 3577.5, 56531.2, 263.8, , 19823.9, , 14583.1, , 52728.1, , 41288.0, , 56267.4, , 1863.5, 59.8, 856.4, 2779.7, 2.7, 2777.0, , 2054.8, 41.0, 580.3, 2676.1, 1.0, 2675.1, , 5217.6, 451.5, 2683.8, 8352.9, 5.0, 8347.9, , 5178.6, 252.0, 2301.1, 7731.7, 8.5, 7723.2, , 6777.4, 36.7, 2991.9, 9806.0, 9.4, 9796.6, , 7931.6, 3625.1, 46392.0, 329.1, 58277.8, , 9960.1, 2298.7, 38150.9, 273.4, 50683.1, , 7931.6, 3625.1, 46392.0, 329.1, 58277.8, , 9960.1, 2298.7, 38150.9, 273.4, 50683.1, , 9601.5, 2310.7, 40677.6, (2592.3), 49997.5, , 39
Page 1086 :
SBPD Publications Accountancy (XII), Note : Segment revenues for insurance business represents the premiums earned and other income. However,, for the purpose of consolidated finances the net result of the insurance business revenue accounts, together with shareholders' income in accordance with the reporting framework of IRDA amounting to a, net surplus of ` 464.1 million prior elimination of inter-segments revenue of ` 35.2 million for the 9 months, ended December 31, 2016 has been included in a manner consistent with the parent’s reporting format as, was done for the previous year., , SPECIFIC PROJECT WORK NO. 4, From the following information of Williamson Tea Assam Limited pertaining to segment, performance, prepare a project highlighting the contribution of each segment towards sales and, profits. Also state which segment of the company is the best on the basis of capital employed, and profitability., , WILLIAMSON TEA ASSAM LIMITED, Unaudited Financial Results for the Quarter ended 31st December, 2016, Quarterly Reporting of Segmentwise Revenue, Results and Capital Employed,, under Clause 41 of the Listing Agreement, (` in Lacs), Particulars, 1., , 2., , Segment Revenue :, (a) Tea : Domestic Sales, (b) Tea : Export Sales, Total, Less : Inter-segment Revenue, Net Sales/Income from, Operation, Segment Results :, (a) Tea : Domestic Sales, (b) Tea : Export Sales, , Less : (i) Interest, , 3., , (ii) Other Unallocable, Expenses net off, Unallocated Income, Total Profit before Tax, Capital Employed :, (a) Tea : Domestic Sales, (b) Tea : Export Sales, Total, , Quarter, Quarter, ended, ended, 31.12.2016 31.12.2015, , Nine, Nine, Year ended, months, months, 31.3.2016, ended, ended, (Audited), 31.12.2016 31.12.2015, , 2855, 3737, 6592, —, , 5042, 3089, 8131, —, , 7903, 7855, 15758, —, , 9319, 7613, 16932, —, , 10774, 8236, 19010, —, , 6592, , 8131, , 15758, , 16932, , 19010, , 325, 253, 578, 37, , 1798, 913, 2711, 81, , 2251, 1647, 3898, 93, , 2255, 1723, 3978, 216, , 711, 779, 1490, 232, , 122, 419, , 1949, 681, , 458, 3347, , 622, 3140, , 451, 807, , 325, 1732, 2057, , 1117, 1751, 2868, , 325, 1732, 2057, , 1117, 1751, 2868, , 20, 473, 493, , (C) RATIO ANALYSIS, SPECIFIC PROJECT WORK NO. 5, Supreme Paper Company’s total current assets, net working capital and inventory for, each of the past 4 years are as follows :, Item, , 2013, Amount, `, , Total Current Assets, Net Working Capital, Inventory, , 40, , 1,01,700, 47,700, 36,000, , 2014, Amount, `, , 1,31,400, 55,800, 41,400, , 2015, Amount, `, , 1,35,000, 59,400, 41,400, , 2016, Amount, `, , 1,62,000, 57,600, 43,200
Page 1087 :
Project Work, (a) Calculate the Current and Liquid (Quick) Ratios for each year. Compare the time series, of each measures of liquidity i.e., net working capital, the current ratio and liquid (quick) ratio., (b) Comment on the firm’s liquidity over 2015 to 2016 period., (N.C.E.R.T.), [Ans. (a) (i) CIR : 2013—1.88 : 1; 2014—1.74 : 1; 2015—1.79 : 1; 2016—1.55 : 1, (ii) Liquid Ratio : 2013—1.22 : 1; 2014—1.19 : 1; 2015—1.24 : 1; 2016—1.14 : 1, (b) (i) Current Ratio is declining. It is less than the norm 2 : 1., (ii) The Quick Ratio is more than the normally used standard which is 1 : 1 in all years., The firm’s liquid assets are sufficient to meet current liabilities], SPECIFIC PROJECT WORK NO. 6, Industrial Finance Ltd. has been approached by two customers for a short-term loan of, ` 1,75,000. The following summarised financial information is available from the latest, financial statements :, Consolidated, Golden Stores, Stores, , Particulars, , `, , Net Sales, Gross Profit Margin, Interest Expense, Income-tax, Profit after Tax, Inventories, Debtors, Cash, Current Liabilities, Long-term Liabilities, Shareholders’ Equity, , `, , 31,85,000, 13,37,700, 70,000, 2,62,500, 2,87,000, 3,15,000, 2,45,000, 21,000, 6,39,100, 3,60,000, 6,30,000, , 26,25,000, 10,23,750, 28,700, 1,75,000, 1,96,875, 2,28,200, 1,96,000, 63,000, 4,06,000, 4,55,000, 4,90,000, , Industrial Finance Ltd. intends to accept one of the two loan requests. On the basis of your, understanding of financial ratio analysis, decide the loan request which should be accepted by, Industries Finance Ltd., (N.C.E.R.T), [Ans. Calculate Current Ratio, Quick Ratio, Debt-equity Ratio and Interest Coverage, Ratio of each company and draw the conclusion on comparative analysis.], Conclusion : Loan should be granted to Golden Stores because the Liquidity Ratio are, higher for Golden Stores., SPECIFIC PROJECT WORK NO. 7, From the following figures relating to the working of two companies during the year 2016,, compare the overall profitability of the undertaking by computing Return on Investment Ratios, and comment on the same :, C Ltd., , Particulars, , D Ltd., , `, , Net Profit earned during the year before Interest and Taxes, Equity Share Capital, General Reserve, Preference Share Capital, 12% Debentures, , 50,000, 90,000, 20,000, 30,000, 60,000, , `, , 80,000, 1,20,000, 40,000, 60,000, 1,00,000, , SPECIFIC PROJECT WORK NO. 8, From the following information for the year 2015-16 make an assessment of the, comparative position of three companies engaged in the same line of business :, Particulars, Sales (Credit), , X Ltd., , Y Ltd., , `, , `, , 5,20,000, , 6,60,000, , Z Ltd., `, , 7,25,000, , 41
Page 1088 :
SBPD Publications Accountancy (XII), Cost of Goods sold, Inventory (31.3.2016), Office & Administration Expenses, Account Receivable for the year (360 days), , 4,50,000, 75,000, 50,000, 1,04,000, , 6,00,000, 1,20,000, 55,000, 2,20,000, , 6,50,000, 1,30,000, 80,000, 2,90,000, , SPECIFIC PROJECT WORK NO. 9, The Profit & Loss Account and Balance Sheets of Arnold Co. Ltd. for two years are given, below :, Profit & Loss Account of Arnold Co. Ltd., (for the years ending March 31, 2015 and 2016), (` in Lacs), 2015, , Particulars, `, , Net Sales, Less : Cost of Goods sold, Administrative Expenses, Selling Expenses, Profit before Interest and Tax, Less : Interest, Profit before Tax, Less : Provision for Tax, Profit after Tax, , 2016, `, , `, , 3,75,000, 1,08,500, 42,000, 47,500, , 1,98,000, 1,77,000, 35,000, 1,42,000, 76,000, 66,000, , 1,13,000, 65,500, 56,500, , Balance Sheet of Arnold Co. Ltd., (as at March 31, 2015 and 2016), Particulars, , `, , Total, Assets :, Fixed Assets (Net), Investments, Debtors, Inventories, Cash and Bank Balance, , 2,35,000, 1,85,000, 42,000, 1,43,000, 89,000, 54,000, , (` in Lacs), 2015, , Liabilities :, Capital, Reserves and Surplus, Long-term Loan, Creditors, Bills Payable, , `, , 4,20,000, , 2016, `, , 8,00,000, 3,50,000, 82,000, 54,000, 23,500, 13,09,500, , 8,00,000, 3,00,000, 98,000, 46,000, 26,000, 12,70,000, , 4,62,000, 2,42,500, 72,000, 2,18,000, 3,15,000, 13,09,500, , 5,04,000, 1,33,000, 64,000, 2,84,000, 2,85,000, 12,70,000, , Calculate the following ratios for both the years and comment on the solvency position and, analyse the efficiency of operations and management of the firm :, (i) Debt-equity Ratio, (ii) Proprietary Ratio, (iii) Inventory Turnover Ratio, (iv) Debtors, Turnover Ratio, (v) Working Capital Turnover Ratio., SPECIFIC PROJECT WORK NO. 10, Prepare a Cash Flow Statement on the basis of the information given in the Balance Sheet, of Simco Ltd. as at 31.3.2016 and 31.3.2015 :, Particulars, I. EQUITY AND LIABILITIES :, 1. Shareholders’ Funds :, (a) Share Capital, , 42, , Note No., , 31.3.2016, `, , 2,00,000, , 31.3.2015, `, , 1,50,000
Page 1089 :
Project Work, (b) Reserve and Surplus, 2. Non-current Liabilities :, Long-term Borrowings, 1. Current Liabilities :, Trade Payables, , 90,000, , 75,000, , 87,500, , 87,500, , 10,000, Total, , II. ASSETS :, 1. Non-current Assets :, (a) Fixed Assets :, (i) Tangible Assets, (b) Non-current Investments, 2. Current Assets :, (a) Current Investments (Marketable), (b) Inventories, (c) Trade Receivables, (d) Cash and Cash Equivalents, Total, , 76,000, , 3,87,500, , 3,88,500, , 1,87,500, 1,05,500, , 1,40,000, 1,02,500, , 12,500, 4,000, 9,500, 68,500, 3,87,500, , 33,500, 5,500, 23,000, 84,000, 3,88,500, , Notes to Accounts :, Note 1, 2016, , Particulars, , 2015, , `, , Reserve and Surplus, Surplus (Balance in Statement of Profit & Loss), , 90,000, , `, 75,000, , [Ans. (A) Cash Used in Operating Activities ` 36,000;, (B) Cash Used in Investing Activities ` 50,500;, (C) Net Flows from Financing Activities ` 50,000;, (D) Net Decrease in Cash and Cash Equivalents ` 36,500.], (D) PREPARATION OF CASH FLOW STATEMENT, SPECIFIC PROJECT WORK NO. 11, Prepare Cash Flow Statement on the basis of the information given in the Balance Sheets, of Mittal Ltd. as at 31.03.2016 and 2015., Particulars, , Note No., , I. EQUITY AND LIABILITIES :, 1. Shareholder’s Funds :, (a) Share Capital, (b) Reserves and Surplus, 2. Non-current Liabilities :, (a) Long-term Borrowings 9% Deposit, 3. Current Liabilities :, (a) Short-term Provisions, , `, , 1, Total, , II. ASSETS :, 1. Non-current Assets :, (a) Fixed Assets :, (i) Tangible Assets, (ii) Intangible Assets, (b) Non-current Investments, , 31.3.2016, , 2, 3, , 31.3.2015, `, , 14,00,000, 5,00,000, , 10,00,000, 4,00,000, , 6,00,000, , 2,00,000, , 80,000, , 60,000, , 25,80,000, , 16,60,000, , 16,00,000, 1,40,000, , 9,00,000, 2,00,000, , 43
Page 1090 :
SBPD Publications Accountancy (XII), 2. Current Assets :, (a) Inventories, (b) Trade Receivables, (c) Cash and Cash Equivalents, , 2,50,000, 5,00,000, 90,000, 25,80,000, , 2,00,000, 3,00,000, 60,000, 16,60,000, , 31st March,, 2016, , 31st March,, 2015, , Total, Notes to Accounts :, , 1. Short-term Provisions :, Provision for Taxes, 2. Tangible Fixed Assets :, Machinery, 3. Intangible Assets :, Goodwill, , `, , `, , 80,000, , 60,000, , 16,00,000, , 9,00,000, , 1,40,000, , 2,00,000, , Additional Information :, (i) Depreciation provided on Fixed Tangible Assets (Machinery) ` 2,00,000., (ii) Interest paid on deposits (Long-term borrowing) ` 45,000., (iii) The Net profit earned during the year before tax ` 1,00,000., Ans. (a) Net Cash from Operating Activities ` 1,75,000;, (b) Net Cash used in Investing Activities ` 9,00,000;, (c) Net Cash flow from Financing Activities ` 7,55,000;, (d) Net increase in Cash and Cash Equivalents (a + b + c) ` 30,000., , MODEL COMPREHENSIVE PROJECTS, COMPREHENSIVE PROJECT NO. 1, Mr. Sunil Prakash of Jaipur won ` 30,00,000 after the payment of tax from a money game, show : DKD (Dus Ka Dum)- in June 2013. Out of the net amount received after tax, he donated, ` 13,00,000 to a charitable institution being run for the welfare of old people and orphans as per, the wish of his mother. In addition, he spent ` 2,50,000 on his daughter’s marriage. The, remaining amount of ` 12,50,000 was invested in his own newly started business of, manufacturing superior quality ‘Electronic toys’ on 1st Jan., 2014., Mr. Sunil Prakash deposited ` 10 lakh in PNB in the firm’s name and remaining amount, has retained as cash in hand., He hired a premises for which he paid a rent of ` 15,000 per month. The factory and shop, occupied the ground floor and he used the upper story for residential purpose. Wages, running, expenses of van and petty expenses are to be paid in cash while all other payments and, expenses are to be made through bank., One-fourth of all expenditure on rent, electricity and insurance was attributed to, residential portion and the balance for business purpose. He also purchased a delivery van on, 1.1.2014 for ` 2,50,000. The estimated useful life of the van is 10 years with an anticipated, residual value of ` 30,000. The monthly running expenses of the van is ` 1,000. The delivery van, was used to the extent of 2/5 for delivering goods to customers and 3/5 for collection raw, materials from suppliers., Mr. Sunil Prakash uses his private telephone for business calls but has paid the total bill, from business bank account. He estimates that the business calls account for 4/5th of the total, charge. The total charge amounted to ` 22,250., He spent ` 25,450 on furnishing his office. An imported Japanese Toy making machine, was purchased costing ` 2,00,000 with estimated useful life of 10 years and an anticipated, residual value of ` 25,000., Installation charges amounted to ` 15,000 on the above machinery were wrongly included, in wages., , 44
Page 1091 :
Project Work, Following figures are extracted from his books at the end of the first year 2014 :, Total sales during the year amounted to 2,000 toys sold @ ` 450 each. One-fourth of the, total sales are on credit and balance for cash. Out of the total cash sales 3/5th of the receipts, were realised by cheques., Following are the expenses incurred during the year 2014 :, `, Wages (inclusive of installation charges of toy machine), 18,000, Raw Material Purchased for Cash for Toys, 2,36,000, General Expenses, 23,250, Advertisement, 20,750, Electricity Charges, 30,000, Insurance, 20,000, Amount paid to Suppliers, 2,30,000, Petty Expenses Incurred, 15,000, Salary to Salesman per month, 6,000, Discount Allowed to Customers, 23,500, Bad Debts, 12,500, Returns Inward out of Credit Sales, 11,000, Returns Outward out of Credit Purchases, 45,000, Rent, 1,80,000, Discount received from suppliers during the year amounted to ` 15,500., Interest received from PNB during the year ` 75,000. At the end of the year :, (a) Amount due from credit customers was ` 50,000 including ` 2,000 recovered from a, customer who already had returned the goods and this amount was to be adjusted, against subsequent purchases by customers., (b) Amount due for credit purchases was ` 1,30,000., (c) Closing stock valued at ` 2,35,800. This includes goods costing ` 1,100 that are, worthless because of some technical defect in them., (d) Cost of goods lying with customers on approval basis (sale price ` 10,000) is ` 7,500, which are wrongly included in credit sales., (e) Closing stock also includes stock of finished goods along with stock of raw, , materials., You are required to find out :, (A) Cash received during the year from debtors assuming that they pay only through, cheque :, l Credit purchase of raw materials., l Bank balance at the end of the year 2014., l Cash in hand at the end of the year 2014., l Drawings made during the year and also prepare a Trial Balance., (B) Prepare financial statement of Mr. Sunil Prakash for the year ending 2014., (C) Calculate the relevant ratios so to ascertain whether Mr. Sunil Prakash business has, been well managed and also whether it has been efficiently managed in terms of profitability, and solvency., (D) Comment upon the profitability and how efficiently the fixed assets, working capital, etc. have been utilised. Also comment upon the average collection period and average payment, period on the basis of the following norms :, (a) Gross Profit Ratio—40%, (b) Net Profit Ratio—20%, (c) Operating Profit Ratio—15%, (d) Operating Ratio—85%, (e) Return on Capital Employed—15%, (f) Current Ratio—2 : 1, (g) Quick Ratio—1 : 1, , 45
Page 1092 :
SBPD Publications Accountancy (XII), (h), (i), (j), (k), (l), (m), (n), (o), , Proprietory Ratio—80%, Fixed Asset Ratio—0.67 : 1, Fixed Assets Turnover Ratio—3 times, Working Capital Turnover Ratio—2 times, Debtors Turnover Ratio—6 times, Average Collection Period—2 months, Creditors Turnover Ratio—3 times, Average Payment Period—4 months, , Solution, (A), Date, , Cash Book, Particulars, , 2014, To Capital A/c, To Sales A/c, To Debtors A/c, To Interest A/c, (from PNB), , To Balance b/d, , Cash, , Bank, , `, , `, , 2,50,000 10,00,000, 2,70,000 4,05,000, 1,30,000, 75,000, , Date, 2014, , Particulars, , `, , By Rent A/c, By Delivery Van, A/c, By Telephone, Charges A/c, By Furnishing, Charges A/c, By Imported, Machines A/c, By Wages A/c, By Purchases A/c, By General Exp., A/c, By Advertisement A/c, By Electricity, Charges A/c, By Insurance A/c, By Creditors’ A/c, By Petty Exp. A/c, By Salaries A/c, By Running Exp., of Delivery, Van A/c, By Balance c/d, , 5,20,000 16,10,000, 4,75,000, , 2,97,000, , Working Notes :, (i), Total Sales 2,000 toys @ ` 450 = ` 9,00,000, Credit Sales = 1/4 of total sales, = 9,00,000 × 1/4 = ` 2,25,000, Cash Sales = Total Sales – Credit Sales, = ` 9,00,000 – 2,25,000 = ` 6,75,000, 2/5th of the cash sales is received in cash i.e., 2/5 × ` 6,75,000, = ` 2,70,000, Sales collected through cheque = ` 6,75,000 – 2,70,000 = ` 4,05,000, , 46, , Cash, , Bank, `, , 1,80,000, 2,50,000, 25,550, 25,450, 2,00,000, 18,000, 2,36,000, 23,250, 20,750, 30,000, 20,000, 2,30,000, 15,000, 72,000, , 12,000, 4,75,000 2,97,000, 5,20,000 16,10,000
Page 1093 :
Project Work, (ii), , Total Purchases = Cash Purchases + Credit Purchases, = ` 2,36,000 + 4,20,500, = ` 6,56,500, Debtors’ Account, , (iii), Particulars, , To Credit Sales A/c, (Including goods sold on approval, basis for ` 10,000), , Amount, `, , Particulars, , By Discount A/c, By Bad Debts A/c, 2,25,000 By Returns Inward A/c, (Including ` 2,000), By Bank A/c (Cash collected from, debtors) (Balancing figure), By Balance c/d (50,000 – 2,000), 2,25,000, , Amount, `, 23,500, 12,500, 11,000, 1,30,000, 48,000, 2,25,000, , Note : Returns include ` 2,000 which have also been deducted from ` 50,000., (iv), Creditors’ Account, Particulars, , Amount, , Particulars, , `, To Bank A/c, To Discount A/c, To Returns Outward A/c, To Balance c/d (given), , `, , 2,30,000 By Purchases A/c (Bal. fig.), 15,500, (Credit Purchases), 45,000, 1,30,000, 4,20,500, , Depreciation on ‘Delivery Van’ =, , 4,20,500, , 4,20,500, By Balance b/d, , (v), , Amount, , 1,30,000, , ` 2, 50, 000 − ` 30, 000 2, 20, 000, =, 10 years, 10, , = ` 22,000 per annum, (vi) Value of delivery van on 31.12.2014 after charging depreciation, = ` 2,50,000 – 22,000 = ` 2,28,000, (vii) Depreciation on Imported Toy Machine, Charges − ScrapValue, Estimate dLife, (2, 00, 000 + 15, 000 − 25, 000) 1, 90, 000, =, =, = ` 19,000, 10, 10, (viii) Value of Imported Machine after Depreciation, = ` 2,15,000 – 19,000 = ` 1,96,000, (ix) Value of closing stock after including the cost of goods sent on approval basis and excluding the, defective goods will be ` 2,42,000 (i.e.` 2,35,800 + 7,500 – 1,100)., Drawings made by Mr. Sunil Prakash is as follows :, `, (a) Rent, 1,80,000, Electricity, 30,000, Insurance, 20,000, 2,30,000, ⇒ 1/4 × ` 2,30,000 ⇒ ` 57,500, Rent, electricity and insurance used for business purpose, = ` 2,30,000 – 57,500 = ` 1,72,500, (b) Drawings in respect of telephone used for personal purpose = 1/5th of the total telephone charges `, 25,550 to be treated as drawings, = 1/5 × 25,550 = ` 5,110, Business charges of telephone = 25,550 × 4/5 = ` 20,440, = Total Cost including Instalment =, , 47
Page 1094 :
SBPD Publications Accountancy (XII), Delivery van running expenses and depreciation :, Running Expenses = ` 12,000, Depreciation = ` 22,000, ` 34,000, 3/5th of ` 34,000 will be charged to Trading Account as carriage inward and 2/5th of ` 34,000 will be, charged to P. & L. A/c as carriage outward., Carriage Inward = 3/5 × ` 34,000 = ` 20,400, Carriage Outward = 2/5 × ` 34,000 = ` 13,600, Total, 34,000, , (B), , Trial Balance, (as on 31.12.2014), , Dr., , Name of the Account, , L.F., , Cash in hand, Cash at Bank, Debtors, Creditors, Wages (excluding ` 15,000 Installation Charges), Delivery Van, Depreciation on Delivery Van, Interest from PNB, Running Expenses on Delivery Van, Advertisement Expenses, Petty Expenses, General Expenses, Rent, Electricity Charges, Insurance, , Cr., , Amount, , Amount, , `, , `, , 4,75,000, 2,97,000, 48,000, 1,30,000, 3,000, 2,28,000, 22,000, 75,000, 12,000, 20,750, 15,000, 23,250, 1,80,000, 30,000, 20,000, 25,550, 25,450, 1,96,000, 19,000, 72,000, 6,56,500, , Telephone Charges, Furnishing Charges, Toy Machine (inclusive of ` 15,000 Installation Charges), Depreciation on Toy Machine, Salaries A/c, Purchases (Cash + Credit), Sales A/c (Including Sales Return), Capital A/c, Discount Allowed A/c, Bad Debts A/c, Returns Inward (Including ` 2,000) A/c, Discount Received A/c, Returns Outward A/c, , 9,00,000, 12,50,000, 23,500, 12,500, 11,000, 15,500, 45,000, 24,15,500 24,15,500, , Trading Account, (for the year ending 31-12-2014), Particulars, , Amount, , Particulars, , Amount, , `, , To Purchases, , 48, , 6,56,500, , `, , By Sales, , 9,00,000
Page 1095 :
Project Work, Less : Purchases Returns 45,000, To Wages (` 18,000 – 15,000), To Expenses on Delivery Van, (Carriage Inward), To Gross Profit c/d (transferred to, P. & L. A/c), , 6,11,500, 3,000, 20,400, , Less : Sales Returns, Less : Sales on Approval, Basis, By Closing Stock, , 11,000, 8,89,000, 10,000, , 4,86,300, 11,21,200, , 8,79,000, 2,42,200, 11,21,200, , Profit & Loss Account, (for the year ended 31-12-2014), Particulars, , Amount, , Particulars, , `, , To Advertisement Expenses, To Petty Expenses, To General Expenses, To Rent, Electricity and Insurance, (3/4 of ` 2,30,000), To Depreciation on Delivery Van, and Running Expenses, To Telephone Expenses, To Discount Allowed, To Salaries, To Bad Debts, To Dep. on Toy Machine, To Net Profit transferred to Capital, A/c, , Amount, `, , 20,750 By Gross Profit b/d, 15,000 By Interest from PNB, 23,250 By Discount Received, , 4,86,300, 75,000, 15,500, , 1,72,500, 13,600, 20,440, 23,500, 72,000, 12,500, 19,000, 1,84,260, 5,76,800, , 5,76,800, , Balance Sheet, (as on 31st Dec., 2014), Liabilities, , Amount, `, , Assets, , `, , Capital, 12,50,000, Less : Drawings :, `, (a) Telephone, 5,110, (b) Rent, Electricity,, Insurance, Premium 57,500, 62,610, 11,87,390, Add : Net Profit, 1,84,260 13,71,650, Creditors, 1,30,000, 15,01,650, , Amount, `, , Cash in hand, Cash at Bank, Debtors (See Working Note given, below), Delivery Van (Working Note-vi), Furniture, Toy Machine (Working Note-viii), Closing Stock, (See Working Note-ix), , Working Note :, Details of Debtors :, Debtor as per Books, Less : Goods sent for approval wrongly Recorded as Sales, Less : Sales Returns, , 4,75,000, 2,97,000, 38,000, 2,28,000, 25,450, 1,96,000, 2,42,200, 15,01,650, , `, 50,000, (10,000), (2,000), 38,000, , 49
Page 1096 :
SBPD Publications Accountancy (XII), (C) Following ratios are calculated so as to ascertain the profitability of Mr. Sunil Prakash :, Gross Profit × 100 4,86,300 × 100, (a) Gross Profit Ratio =, =, = 55.32%, Net Sales, 8,79,000, Net Profit × 100 1,84, 260 × 100, (b), Net Profit Ratio =, =, = 20.96%, Net Sales, 8,79,000, (c) Returns on Capital Employed :, Net Profit × 100, 1,84, 260 × 100, =, =, Capital, 13,71,650, = 13.43%, Operating Profit × 100, (d) Operating Profit Ratio =, Net Sales, Operating Profit = Net Profit – Interest Received – Discount Received, = ` 1,84,260 – 75,000 – 15,500, = ` 93,760, 93,760 × 100, Operating Profit Ratio =, = 10.67%, 8,79,000, Cost of Goods Sold + Operating Expenses, (e), Operating Ratio =, × 100, Net Sales, Cost of Goods Sold = Net Sales – Gross Profit, = ` 8,79,000 – 4,86,300, = ` 3,92,700, Operating Expenses = ` 3,92,540, 3,92,700 + 3,92, 540, Operating Ratio =, × 100, 8,79,000, 7,85, 240, =, × 100 = 89.33%, 8,79,000, Operating Profit Ratio + Operating Ratio = 100%, 10.67% + 89.33% = 100%, Comment on the Profitability Ratio :, (a) Gross Profit Ratio : The gross profit ratio in higher than the norm fixed for the, firm. This may be due to : (i) High Selling Price, (ii) Low prices of raw materials, or (iii), Efficiency of the labour., (b) Net Profit Ratio : The actual Net Profit Ratio is hear to the norm set for the firm,, this shows Mr. Sunil Prakash has been able to achieve the desired level of profit., (c) Return on Capital Employed : The actual return on capital employed ratio is less, than the norm set for the firm. It shows the capital employed has not been used in the, desired manner by Mr. Sunil Prakash. He must take proper steps so as to use the, capital in an efficient and effective manner so as to increase the returns. So the first, year performance of Mr. Sunil Prakash business is not very satisfactory., (d) Operating Profit Ratio : The norm set for the operating Profit Ratio was 15% but, the actual ratio is only 10.67%, which is not acceptable. It might be due to increased, operating expenses, such as rent, salary, insurance charges etc. Therefore, Mr. Sunil, Prakash is advised to keep a check on these expenses., (e) Operating Ratio : There has been an increase of 4.33% in this ratio as compared to, the norm set for it. Again this increase in the ratio may be due to (i) Higher purchase, price of raw materials, (ii) Increased amount of rent, salary, electricity and insurance, etc. which need to be controlled., Following ratios are calculated to judge the short-term and long-term solvency position of, the business :, , 50
Page 1097 :
Project Work, Cuttent Assets, Current Liabilities, Current Assets = Cash + Bank + Debtors + Stock, = ` 4,75,000 + 2,97,000 + 38,000 + 2,42,200, = ` 10,52,200, Current Liabilities = Creditors = ` 1,30,000, 10, 52, 200, Current Ratio =, = 8.09 : 1, 1,30,000, Comment : The current ratio is much better than norms. The situation is very, comfortable for the creditors but it indicates that Mr. Sunil Prakash is not in a position to use, his funds effectively., This is clear from the fact that Mr. Sunil Prakash’s Bank Balance is ` 2,97,000 and Cash, Balance is ` 4,75,000 which are just idle funds. He must have inverted this money is good investment so as to increase his return and maintain a balance between liquidity and profitability., Quick Assets, (b), Quick Ratio =, Current Liabilities, 8,10,000, =, = 6.2 : 1, 1,30,000, The actual quick is much higher than the norm which shows that the firm is highly liquid., However this situation is very much satisfactory for the creditors., After computing current and quick ratio, it is revealed that Mr. Sunil Prakash’s shortterm financial position is good., Long-term Solvency Ratio :, Owner' s Funds, (a), Proprietory Ratio =, Total Assets, 13,71,650 × 100, =, = 91.34%, 15,01,650, If compared with the norm, the ratio is satisfactory. As a matter of fact, the ratio is, considered as ideal even when half of the total assets are financed through proprietory funds, but here it is more than that. It seems Mr. Sunil Prakash is adopting a very conservative policy,, as regards financing of fixed assets through outsiders funds. Such a policy would not given the, benefit of trading on enquiry to the owner., FixedAssets, (b), Fixed Assets Ratio =, Long- term Funds, ` 4, 49, 450, =, = 0.33 : 1, ` 1371650, Comment : The ideal ratio is 0.67 : 1. However the actual ratio is very low. It means a, major portion of long-term funds have been used for financing a part of working capital also., (D) Following Ratios are calculated to judge the performance of the Mr. Sunil Prakash’s, business in term of Fixed Assets to Net Sales, Working Capital to Net Sales, Debtors Turnover, Ratio, Average Collection Period, Creditors Turnover Ratio, Average Payment Period., Net Sales, (a), Fixed Assets Turnover Ratio =, Net Fixed Assets, Fixed Assets = Delivery Van + Furniture + Toy Machine, = ` 2,28,000 + 25,450 + 1,96,000, = ` 4,49,450, Net Sales = ` 8,79,000, ` 8,79,000, Fixed Assets Turnover Ratio =, = 1.96 times, ` 4, 49, 450, Comment : The ratio is not very satisfactory. It indicates that the firm has not been able, to utilise its Fixed Assets judiciously., (a), , Current Ratio =, , 51
Page 1098 :
SBPD Publications Accountancy (XII), Net Sales, Working Capital, ` 8,79,000, =, ` 10, 52, 200 – 1,30,000, 8,79,000, =, = 0.95 : 1, 9, 22, 200, This ratio is also not very satisfactory. This shows that working capital has not been, utilised effectively., Net Credit Sales, (c), Debtors Turnover Ratio =, Debtors, Net Credit Sales = Credit Sales–Returns Inward– Sales on, Approval basis, = ` 2,25,000 – 11,000 – 10,000, = ` 2,04,000, 2,04,000, Debtors Turnover Ratio =, = 5.37 times, 38,000, Comment : The ratio is slightly less than the norm set for it. It shows that the debts, collection will be delayed by sometime period., (d) Average Collection Period (in months), 12 months, =, = 2.23 months, 5.27, The actual collection period is near to the standard norm, therefore, it is a satisfactory, situation., Net Credit Purchases, (e), Creditors Turnover Ratio =, Creditors, Net Credit Purchases = Credit Purchases – Returns Outward, = ` 4,20,500 – 45,000, = ` 3,75,500, 3,75, 500, Creditors Turnover Ratio =, = 2.89 times, 1,30,000, This Ratio is also near to the standard norm, therefore it is a satisfactory situation., 12 months, (f), Average Payment Period (in months) =, = 4.15 months, 2.89, The actual time of payment to creditors is close to the standard norm., COMPREHENSIVE PROJECT NO. 2, (1) Name of the Project : The study of financial soundness and overall profitability, position of Grover Soap Factory., (2) Objectives of the Project :, (i) Preparation of Trial Balance, Profit & Loss Account and Balance Sheet of Grover, Soap Factory., (ii) Preparation of Financial Statements., (iii) To know the financial soundness of the firm., (iv) To judge the overall profitability position., (3) Source Material : Information furnished by the Grover Soap Factory, Katihar., (4) Period Covered : 1st April, 2015 to 31st March, 2016., (5) Information furnished by the Firm :, Balance on 1.4.2015 :, Capital ` 2,00,000, Cash in hand ` 10,000, Cash at Bank ` 50,000, Creditors ` 60,000, Bank, Loan ` 60,000, General Reserve ` 30,000, Plant and Machinery ` 1,00,000, Debtors ` 1,30,000,, Furniture ` 60,000., (b), , 52, , Working Capital Turnover Ratio =
Page 1099 :
Project Work, Expenses incurred and Revenue realised during the year 2015-16 :, `, (i) Raw material purchased (including credit purchases of ` 3,00,000), 5,00,000, (ii) Sales (including credit sales of ` 6,00,000), 10,00,000, (iii) Cash paid to the suppliers, 2,00,000, (iv) Advertising Expenses, 25,000, (v) Wages and Salaries paid, 1,65,000, (vi) Office Expenses, 15,000, (vii) Cash received from Customers, 4,50,000, (viii) Electric Charges, 16,000, (ix) Packing and Distribution Expenses, 20,000, (x) Petty Expenses, 5,000, (xi) Telephone Expenses, 6,000, (xii) Bank Loan paid, 30,000, Balance as on 31st March, 2016 :, (i) Unsold Stock ` 40,000; (ii) Plant ` 1,00,000; (iii) Furniture ` 60,000., Other Information :, (a) Depreciation was to be charged @ 10% per annum on plant and machinery and 5% on, furniture., (b) Wages and salaries were outstanding amounting to ` 15,000 and Telephone expenses, ` 600., (c) Free samples were distributed worth ` 10,000., (6) Tools of Analysis : Ratios, (7) Processing the Information :, Step (1) : Preparation of Journal, Step (2) : Preparation of Ledger, Step (3) : Preparation of Trial Balance, Step (4) : Preparation of Trading and Profit & Loss Account, Step (5) : Preparation of Balance Sheet, Step (6) : Calculation of Ratios indicating Financial and Profitability Position, Solution, (1) Journal Entries, Dr., Cr., Date, , Particulars, , L.F., , Amount, `, , 1., , Purchases A/c, To Bank A/c, , Dr., , Amount, `, , 2,00,000, 2,00,000, , (Being cash purchases of raw material during the year, ` 5,00,000 – 3,00,000 = ` 2,00,000), , 2., , Purchases A/c, To Creditors’ A/c, , Dr., , 3,00,000, 3,00,000, , (Being credit purchase made during the year), , 3., , Bank A/c, To Sales A/c, , Dr., , 4,00,000, 4,00,000, , (Being cash sales made during the year ` 10,00,000 – 6,00,000), , 4., , Debtors’ A/c, To Sales A/c, , Dr., , 6,00,000, 6,00,000, , (Being credit sales made during the year), , 5., , Creditors’ (Suppliers) A/c, To Bank A/c, , Dr., , 2,00,000, 2,00,000, , (Being the payment made to creditors), , 6., , Advertising Expenses A/c, To Bank A/c, , Dr., , 25,000, 25,000, , (Being advertisement expenses paid), , 53
Page 1100 :
SBPD Publications Accountancy (XII), 7., , Wages and Salaries A/c, To Bank A/c, , Dr., , 1,65,000, 1,65,000, , (Being wages and salaries paid), , 8., , Office Expenses A/c, To Bank A/c, , Dr., , 15,000, 15,000, , (Being office expenses paid), , 9., , Bank A/c, To Debtors’ A/c, , Dr., , 4,50,000, 4,50,000, , (Being cash received from debtors), , 10., , Electric Charges A/c, To Bank A/c, , Dr., , 16,000, 16,000, , (Being electric charges paid), , 11., , Packing and Distribution Expenses A/c, To Bank A/c, , Dr., , 20,000, 20,000, , (Being packing and distribution expenses paid), , 12., , Petty Expenses A/c, To Cash A/c, , Dr., , 5,000, 5,000, , (Being petty expenses paid), , 13., , Telephone Expenses A/c, To Bank A/c, , Dr., , 6,000, 6,000, , (Being telephone expenses paid), , 14., , Bank Loan A/c, To Bank A/c, , Dr., , 30,000, 30,000, , (Being Bank loan paid), , (2) Ledgers, Capital Account, , Dr., Date, Particulars, 2016, Mar. 31 To Balance c/d, , J.F., , Amount, `, , 2,00,000, 2,00,000, , Cr., , Date, Particulars, 2015, April 1 By Balance b/d, , J.F., , `, , 2,00,000, 2,00,000, , 2016, April 1 By Balance b/d, Date, Particulars, 2015, April 1 To Balance b/d, , J.F., , Amount, `, , 10,000, , Date, 2016, , Cr., Particulars, , 2016, April 1 To Balance b/d, , Particulars, , 2015, April 1 To Balance b/d, To Sales A/c, To Debtors’ A/c, , 54, , Amount, 5,000, 5,000, 10,000, , 5,000, , Bank Account, , Dr., , J.F., , `, , By Petty Expenses, Mar. 31 By Balance c/d, , 10,000, , Date, , 2,00,000, , Cash Account, , Dr., , Amount, , J., Amount, F., `, , 50,000, 4,00,000, 4,50,000, , Date, , Cr., Particulars, , 2016, , J., Amount, F., `, , By Purchases A/c, By Creditors’ A/c, By Advertising, Expenses A/c, , 2,00,000, 2,00,000, 25,000
Page 1101 :
Project Work, By Wages & Salaries A/c, By Office Expenses A/c, By Electric Charges A/c, By Packing & Distribution Expenses A/c, By Telephone Expenses, A/c, By Bank Loan, Mar. 31 By Balance c/d, 9,00,000, 2016, April 1 To Balance b/d, J.F., , Amount, `, , To Bank A/c, Mar.31 To Balance c/d, , 2,00,000, 1,60,000, 3,60,000, , Date, , Cr., Particulars, , J.F., , Particulars, , J.F., , 2015, April 1 To Balanc e b/d, To Sales A/c, , 2015, April 1 By Balance b/d, —, By Purchases A/c, 2016, , 60,000, 3,00,000, 3,60,000, , April 1 By Balance b/d, , 1,60,000, , `, , Amount, , Date, , Cr., Particulars, , J.F., , `, , 1,30,000, 6,00,000, , 2016, April 1 To Balance b/d, , Amount, `, , By Bank A/c, , 4,50,000, , 2016, Mar. 31 By Balance c/d, , 2,80,000, 7,30,000, , 7,30,000, 2,80,000, , Bank Loan Account, , Dr., Particulars, , J.F., , 2016, , Amount, , Date, , Cr., Particulars, , J.F., , `, 2015, 30,000 April 1 By Balance b/d, 30,000, 60,000, 2016, , To Bank A/c, Mar. 31 To Balance c/d, , Amount, `, , 60,000, 60,000, , April 1 By Balance b/d, , 30,000, , Plant and Machinery Account, , Dr., Date, , Amount, , Debtors’ Account, , Dr., , Date, , 6,000, 30,000, 2,23,000, 9,00,000, , Creditors’ Account, Particulars, , 2016, , Date, , 20,000, , 2,23,000, , Dr., Date, , 1,65,000, 15,000, 16,000, , Particulars, , 2015, April 1 To Balance b/d, , J.F., , Amount, , Particulars, , `, 2016, 1,00,000 Mar. 31 By Balance c/d, , 1,00,000, 2016, April 1 To Balance b/d, , Date, , Cr., J.F., , Amount, `, , 1,00,000, 1,00,000, , 1,00,000, , 55
Page 1102 :
SBPD Publications Accountancy (XII), Furniture Account, , Dr., Date, Particulars, 2015, April 1 To Balance b/d, , J.F., , Cr., , Amount, , Date, Particulars, 2016, 60,000 Mar. 31 By Balance c/d, , J.F., , `, , `, , 60,000, 60,000, , 60,000, 2016, April 1 To Balance b/d, , 60,000, , Purchases Account, , Dr., Date, , Particulars, , Amount, , J.F., , 2015, April 1 To Bank A/c, To Creditors’ A/c, , Cr., , Amount, , Date, Particulars, `, 2016, 2,00,000 Mar. 31 By Trading A/c, 3,00,000, —Transfer, 5,00,000, , J.F., , Amount, `, , 5,00,000, 5,00,000, , Sales Account, Date, , Particulars, , J.F., , 2016, Mar.31 To Trading A/c, —Transfer, , Amount, , Date, , Particulars, , J.F., , `, , Amount, `, , By Bank A/c, By Debtors’ A/c, , 10,00,000, 10,00,000, , 4,00,000, 6,00,000, 10,00,000, , Advertising Expenses Account, Date, , Particulars, , J.F., , Amount, , Date, , Particulars, , J.F., , To Bank A/c, , Amount, , 2016, 25,000 Mar.31 By P & L A/c (Transfer), , 25,000, , 25,000, , 25,000, , `, , `, , Wages & Salaries Account, Date, , Particulars, , J.F., , Amount, , Date, , Particulars, , J.F., , `, 2016, 1,65,000 Mar.31 By Trading A/c, —Transfer, 1,65,000, , To Bank A/c, , Amount, `, , 1,65,000, 1,65,000, , Office Expenses Account, Date, , Particulars, , J.F., , Amount, , Date, , Particulars, , J.F., , `, 2016, 15,000 Mar.31 By P & L A/c (Transfer), , To Bank A/c, , Amount, `, , 15,000, 15,000, , 15,000, Electric Charges Account, Date, , Particulars, , J.F., , Amount, , To Bank A/c, , 56, , Date, , Particulars, , J.F., , Amount, , 2016, 16,000 Mar.31 By P & L A/c (Transfer), , 16,000, , 16,000, , 16,000, , `, , `
Page 1103 :
Project Work, Packing and Distribution Expenses Account, Date, , Particulars, , J.F., , Amount, , Date, Particulars, J.F., 2016, 20,000 Mar. 31 By P & L A/c (Transfer), `, , To Bank A/c, , 20,000, , Amount, `, , 20,000, 20,000, , Petty Expenses Account, Date, , Particulars, , J.F., , Amount, , Date, Particulars, 2016, 5,000 Mar. 31 By P & L A/c, 5,000, , J.F., , Amount, , `, , To Cash A/c, , `, , 5,000, 5,000, , Telephone Expenses Account, Date, , Particulars, , J.F., , Amount, , Date, Particulars, 2016, 6,000 Mar. 31 By P & L A/c, 6,000, , J.F., , `, , To Bank A/c, , Amount, `, , 6,000, 6,000, , General Reserve Account, Date, Particulars, 2016, Mar. 31 To Balance c/d, , J.F., , Amount, , Date, , Particulars, , `, , 30,000, 30,000, , J.F., , Amount, `, , By Balance b/d, 2016, April 1 By Balance b/d, , 30,000, 30,000, 30,000, , (3) Trial Balance, Particulars, , Amount, , Particulars, , `, , Cash A/c, Bank A/c, Debtors’ A/c, Plant & Machinery A/c, Furniture A/c, Purchases A/c, Advertising Expenses A/c, Wages & Salaries A/c, Office Expenses A/c, Electric Charges A/c, Packing and Distribution Expenses A/c, Petty Expenses A/c, Telephone Expenses A/c, , 5,000, 2,23,000, 2,80,000, 1,00,000, 60,000, 5,00,000, 25,000, 1,65,000, 15,000, 16,000, 20,000, 5,000, 6,000, 14,20,000, , Amount, `, , Capital A/c, Creditors’ A/c, Bank Loan A/c, Sales A/c, General Reserve, , 2,00,000, 1,60,000, 30,000, 10,00,000, 30,000, , 14,20,000, , Adjustments required :, (a) Unsold stock (31.3.2016) ` 40,000., (b) Depreciation to be charged @ 10% p.a. on Plant and Machinery and 5% on Furniture., (c) Outstanding Expenses : Wages & Salaries amounting to ` 15,000 and Telephone, expenses ` 600., (d) Free samples were distributed worth ` 10,000., , 57
Page 1104 :
SBPD Publications Accountancy (XII), (4) Adjustment Entries, Journal, , Dr., , Date, Particulars, 2016, March 31 Stock A/c, Free Samples (Advertising) A/c, To Trading A/c, , L.F. Amount, `, , Dr., Dr., , Cr., Amount, `, , 10,000, 40,000, 50,000, , (Being amount of unsold stock and distribution of free samples, recorded), , March 31 Depreciation A/c, To Plant & Machinery A/c, To Furniture A/c, , Dr., , 13,000, 10,000, 3,000, , (Being depreciation charged @ 10% on Plant & Machinery and, 5% on Furniture), , March 31 Wages & Salaries A/c, To Wages & Salaries Outstanding A/c, , Dr., , 15,000, 15,000, , (Being wages and salaries outstanding), , Telephone Expenses A/c, To Telephone Expenses Outstanding A/c, , Dr., , 600, 600, , (Being telephone expenses outstanding), , (5) Final Accounts, Trading and Profit & Loss Account, (for the year ended 31st March, 2016), , Dr., Particulars, , Amount, , Particulars, , `, , To Purchases, To Wages & Salaries, Add : Outstanding, To Gross Profit c/d, , Cr., Amount, `, , 5,00,000 By Sales, 10,00,000, 1,65,000, By Stock distributed as Free Samples, 10,000, 15,000 1,80,000 By Closing Stock, 40,000, 3,70,000, 10,50,000, 10,50,000, `, , To Office Expenses, To Electric Charges, To Telephone Expenses, 6,000, Add : Outstanding, 600, To Petty Expenses, To Advertising Expenses, 25,000, Add : Free distribution, of Samples, 10,000, To Packing & Distribution Expenses, To Depreciation :, Plant & Machinery, Furniture, To Net Profit, , 15,000 By Gross Profit b/d, 16,000, , 3,70,000, , 6,600, 5,000, , 35,000, 20,000, 10,000, 3,000, 2,59,400, 3,70,000, , 3,70,000, , Balance Sheet of Grover Soap Factory, (as on 31st March, 2016), Liabilities, , Amount, `, , Capital, , 58, , 2,00,000, , Assets, , `, , Amount, `, , Cash in hand, , 5,000
Page 1105 :
Project Work, Add : Net Profit, General Reserve, Bank Loan, Creditors, Outstanding Expenses :, Wages & Salaries, Telephone Expenses, , (1), , 2,59,400, , 4,59,400, 30,000, 30,000, 1,60,000, , Cash at Bank, Debtors, Stock, Plant & Machienry, Less : Depreciation, 15,000 Furniture, 600, Less : Depreciation, 6,95,000, , `, , 1,00,000, 10,000, 60,000, 3,000, , 2,23,000, 2,80,000, 40,000, 90,000, 57,000, 6,95,000, , (6) Calculation of Ratios, Current Assets, Current Ratio =, Current Liabilities, =, , ` 5,000 + 2,23,000 + 2,80,000 + 40,000, , ` 1,60,000 + 15,600, 5,48,000, =, = 3.12, 1,75,600, Quick Assets, (2) Liquidity Ratio or Quick Ratio =, Current Liabilities, , =, , ` 5,000 + 2,23,000 + 2,80,000, ` 1,60,000 + 15,600, , =, , 5,08,000, = 2.89, 1,75,600, , Debt, Long-term Loan, or, Equity, Owners Equity, ` 30,000, 30,000, =, =, = 0.06, ` 2,00,000 + 2,59,400 + 30,000, 4,89,400, Net Sales, 10,00,000, (4) Fixed Assets Turnover Ratio =, =, = 6.80 times, Fixed Assets, 1,47,000, Net Profit, 2,59,400, (5), Return on Investment =, × 100 =, × 100 = 49.9%, Capital Employed, 5,19,400, Gross Profit, 3,70,000, (6), Gross Profit Ratio =, × 100 =, × 100 = 37%, (Net) Sales, 10,00,000, Net Profit, (7), Net Profit Ratio =, × 100, (Net) Sales, 2,59,400, =, × 100 = 25.94%, 10,00,000, Operating Profit, (8), Operating Ratio =, × 100, Net Sales, Operating Profit = Net Profit + (Non- operating Expenses), – (Non-operating Incomes), or Gross Profit – Operating Expenses, 2,59,400, =, × 100 = 25.94%, 10,00,000, Observations, From the above ratios the following facts are observed :, (i) The Current Ratio is 3.12 : 1 which is much higher than the ideal current ratio of 2 : 1. It, shows that the business is in a very good position to meet its short-term commitments., (ii) The Liquidity Ratio or Quick Ratio of the firm is 2.89. It is also very satisfactory, because the ideal quick ratio is 1 : 1., (3), , Debt-equity Ratio =, , 59
Page 1106 :
SBPD Publications Accountancy (XII), (iii) The Deb-equity Ratio of the firm is 0.06. The debt-equity ratio of 2 : 1 is generally, acceptable as ideal ratio. Hence, it appears that the claims of the creditors are less than those of, the owner(s)., (iv) The Fixed Assets Turnover Ratio is almost 6.80. This shows that fixed assets have been, used very efficiently., (v) The Gross Profit Ratio is 37%. It indicates that the business has good production, efficiency., (vi) The Net Profit Ratio is 25.94% or say 26%. Hence, the overall profitability is also good., (vii) The Operating Profit Ratio is also good as it stands at 25.94% or 26% like that of Net, Profit Ratio., Conclusion, On the basis of above analysis it may be concluded that it is financially sound. It has, earned a good return on its investment., Further, its profitability position is also satisfactory. However, there is further scope for, improvement in terms of profitability and efficiency., VIVA-VOCE, Q. 1. What is the name of your project ?, Ans. Sir, study of financial strength and profitability of Grover Soap Co., Q. 2. Is it a specific project or a comprehensive one ?, Ans. Sir, this is comprehensive one., Q. 3. What is a Comprehensive Project ?, Ans. Sir, a comprehensive project is one which starts from its initial stage and ends, with preparation, presentation and analysis of financial statements., Q. 4. What is a Specific Project ?, Ans. Sir, a specific profit is covered under small project. It is based on the information, provided by actual reports provided by business units of corporate world., Q. 5. What is the main business of Grover Soap Factory ?, Ans. Sir, Main business of Grover Soap Factory is manufacturing of soap and, detergent powder., Q. 6. Who are the consumers of its product ?, Ans. Sir, local people., Q. 7. Which ratios did you use for evaluating profitability position ?, Ans. Sir, Gross Profit Ratio, Net Profit Ratio and Operative Ratio., Q. 8. Name the ratios which are used to judge the liquidity position of a firm., Ans. Sir, current ratio and quick ratio., Q. 9. How would you record the amount spent on free samples ?, Ans. Amount spent on free samples is an operating expense and will be included in, advertising., Q. 10. How can the short-term financial position of a firm be judged ?, Ans. Short-term financial position of a firm can be judged from current ratio and, quick ratio., Q. 11. What is your comment on profitability and financial position of the firm ?, Ans. Profitability of the firm is good and financial position is sound., COMPREHENSIVE PROJECT NO. 3, (1) Name of the Project : Study of financial position of M/s Sanjay Plastic Products., (2) Objectives of the Project :, (i) To know operational efficiency of the firm., (ii) To know Cash Flows from Operating Activities, Investing Activities and Financing, Activities., (3) Period of Study : 1st April, 2015 to 31st March, 2016., , 60
Page 1107 :
Project Work, (4) Source of Material : Project Statement of M/s Sanjay Plastic Products and, information furnished by the firm., Mr. Sanjay Munda had 2,000 equity shares of SRF Ltd. of ` 10 each. Due to sudden boom, in April 2015 the market price of such equity shares rose to ` 110 each. Hence, he sold all the, shares and with the proceeds he decided to set up a business of manufacturing plastic chairs, under the name of M/s Sanjay Plastic Products. He deposited the amount in Central Bank of, India., He purchased two moulding machines of ` 40,000 each. The installation charges being, ` 5,000. He also purchased dies and mould for ` 20,000 and a second hand Maruti Van for, ` 40,000. Payments were made through cheques., He is entitled for charging depreciation on moulding machines, dies and moulds and motor, van @ 25% and 10% on furniture on Written Own Value Method., He had an old scooter worth ` 10,000 which he decided to use in his business. Depreciation, is to be charged @ 20% on the same., The following figures are extracted from the books of the firm at the end of 31st March, 2015 :, (i) Cash withdrawn from Bank for day to day expenses ` 60,000 : 2.4.2015., (ii) Sales during the year :, Cash Sales : 5,000 Chairs @ ` 120, Credit Sales : 3,000 Chairs @ ` 160, Trade Discount on such sales @ 10%., (iii) Expenses Incurred :, `, (a) Raw Material purchased : on Credit, 2,60,000, for Cash (by Bank), 3,00,000, (b) Salaries paid (by Bank), 24,000, (c) Sales Promotion Expenses (by Bank), 10,000, (d) Factory Rent & Insurance (by Bank), 50,000, (e) Electricity Expenses (in Cash), 16,000, (f) Consultancy Charges (by Bank), 10,000, (g) Telephone Expenses (Cash paid), 2,400, (h) Van Maintenance Expenses paid in Cash, 12,000, (i) Scooter Maintenance Expenses paid in Cash, (1/5th of the expenses are for personal use), 2,500, (j) Sundry Creditors were paid by Cheque, 42,000, (k) Wages paid (by Bank ` 80,000), 1,00,000, (l) Office Expenses paid (including 2,000 for purchase of furniture), 5,000, (iv) Other Information :, (a) Closing stock was valued at the cost of ` 20,000 (market value ` 30,000)., (b) Salaries outstanding for the month of March ` 2,000., (c) Prepaid factory insurance to the extent of ` 500., (d) Provision to be made for bad and doubtful debts for ` 2,000., (e) Bank charges as per pass book provided by bankers ` 200., (f) Cash received from Debtors ` 2,05,000., Required :, (i) Post the items into respective ledger accounts and prepare Trial Balance., (ii) Prepare Trading Account, Profit & Loss Account and a Balance Sheet., (iii) Judge the performance or operational efficiency of the firm considering the, following acceptable Standard Ratios :, Current Ratio, 2:1, Liquid Ratio, 1:1, Gross Profit Ratio, 25%, Net Profit Ratio, 20%, Return on Investment, 20%, Stock Turnover Ratio, 10 times, Debtors Turnover Ratio, 4 times, (iv) Calculate Cash Flow from Operating Activities, Financing Activities and Investing, Activities., , 61
Page 1108 :
SBPD Publications Accountancy (XII), (i) Ledger Accounts, Capital Account, , Solution, Dr., Date, Particulars, 2016, Mar. 31 To Scooter, Maintenance A/c, Mar. 31 To Depreciation, (on Scooter 1/5), To Balance c/d, , J.F., , Date, Particulars, `, 2015, April 1 By Bank A/c, 500, By Scooter A/c, , J.F., , `, , 2,30,000, , Cash Account, J.F., , Amount, 2,20,000, 10,000, , 400, 2,29,100, 2,30,000, , Dr., Date, Particulars, 2015, April 2 To Bank A/c, , Cr., , Amount, , Cr., , Amount, , Date, Particulars, J.F., `, 2016, 60,000 Mar. 31 By Electric Exp. A/c, By Telephone, Expenses A/c, By Van Maintenance, Expenses A/c, By Scooter Maintenance A/c, By Wages A/c, By Office Expenses A/c, By Furniture A/c, Mar. 31 By Balance c/d, 60,000, , Amount, `, , 16,000, 2,400, 12,000, 2,500, 20,000, 3,000, 2,000, 2,100, 60,000, , Bank Account, Date, Particulars, 2015, April 1 To Capital, 2016, Mar. 31 To Sales, To Sundry Debtors, , J.F., , Amount, `, , 2,20,000, 6,00,000, 2,05,000, , Date, 2015, , Particulars, , By Sundry Creditors, A/c, By Wages A/c, By Bank Charges A/c, By Balance c/d, , 62, , Amount, `, , By Moulding, Machines A/c, By Moulding, Machines A/c, By Dies & Moulds A/c, By Motor Van A/c, By Cash A/c, 2016, Mar. 31 By Purchases A/c, By Salaries A/c, By Sales Promotion, Expenses A/c, By Factory Rent &, Insurance A/c, By Consultancy, Charges A/c, , 10,25,000, , J.F., , 80,000, 5,000, 20,000, 40,000, 60,000, 3,00,000, 24,000, 10,000, 50,000, 10,000, 42,000, 80,000, 200, 3,03,800, 10,25,000
Page 1109 :
Project Work, Dr., , Moulding Machines Account, , Date, Particulars, 2015, April 1 To Bank A/c, To Bank A/c, , J.F., , Amount, , Date, Particulars, 2016, 80,000 Mar. 31 By Depreciation A/c, 5,000, By Balance c/d, 85,000, , Cr., J.F., , Amount, , `, , `, , 21,250, 63,750, 85,000, , Dies and Moulds Account, Date, Particulars, 2015, April 1 To Dies & Moulds A/c, , J.F., , Amount, , Date, Particulars, 2016, 20,000 Mar. 31 By Depreciation A/c, By Balance c/d, 20,000, , J.F., , Amount, , `, , `, , 5,000, 15,000, 20,000, , Maruti Van Account, Date, Particulars, 2015, April 1 To Bank A/c, , J.F., , Amount, , Date, Particulars, 2016, 40,000 Mar. 31 By Depreciation A/c, By Balance c/d, 40,000, , J.F., , Amount, , `, , `, , 10,000, 30,000, 40,000, , Scooter Account, Date, Particulars, 2015, April 1 To Capital A/c, , J.F., , Amount, , Date, Particulars, 2016, 10,000 Mar. 31 By Depreciation A/c, By Balance c/d, 10,000, , J.F., , Amount, , `, , `, , 2,000, 8,000, 10,000, , Sales Account, Date, Particulars, 2016, Mar. 31 To Trading A/c, , J.F., , Amount, , Date, , Particulars, , J.F., , `, , 10,32,000, , Amount, `, , By Bank A/c, By Sundry Debtors A/c, , 6,00,000, 4,32,000, 10,32,000, , 10,32,000, , Purchases Account, Date, , Particulars, , J.F., , Amount, , Date, Particulars, 2016, 3,00,000 Mar. 31 By Trading A/c, , J.F., , `, , To Bank A/c, To Sundry Creditors, A/c, , Amount, `, , 5,60,000, , 2,60,000, 5,60,000, , 5,60,000, , Salaries Account, Date, Particulars, 2016, Mar. 31 To Bank A/c, To Outstanding, Salaries A/c, , J.F., , Amount, , Date, Particulars, 2016, 24,000 Mar. 31 By P & L A/c, `, , 2,000, 26,000, , J.F., , Amount, `, , 26,000, , 26,000, , 63
Page 1110 :
SBPD Publications Accountancy (XII), Sales Promotion Expenses Account, Date, Particulars, 2016, Mar. 31 To Bank A/c, , J.F., , Amount, , Date, Particulars, 2016, 10,000 Mar. 31 By P & L A/c, 10,000, , J.F., , `, , Amount, `, , 10,000, 10,000, , Factory Rent & Insurance Account, Date, Particulars, 2016, Mar. 31 To Bank A/c, , J.F., , Amount, , Date, Particulars, 2016, 50,000 Mar. 31 By Prepaid Factory, Insurance A/c, By Trading A/c, 50,000, , J.F., , Amount, , `, , `, , 500, 49,500, 50,000, , Electric Expenses Account, Date, Particulars, 2016, Mar. 31 To Cash A/c, , J.F., , Amount, , Date, Particulars, `, 2016, 16,000 Mar. 31 By Trading A/c, 16,000, , J.F., , Amount, `, , 16,000, 16,000, , Sundry Debtors Account, Date, Particulars, 2016, Mar. 31 To Sales A/c, , J.F., , Date, Particulars, 2016, Mar. 31 To Bank A/c, To Balance c/d, , J.F., , Amount, , Date, Particulars, 2016, 4,32,000 Mar. 31 By Bank A/c, By Balance c/d, 4,32,000, , J.F., , `, , Amount, `, , 2,05,000, 2,27,000, 4,32,000, , Sundry Creditors Account, Amount, , Date, Particulars, `, 2016, 42,000 Mar. 31 By Purchases A/c, 2,18,000, 2,60,000, , J.F., , Amount, `, , 2,60,000, 2,60,000, , Consultancy Charges Account, Date, Particulars, 2016, Mar. 31 To Bank A/c, , J.F., , Amount, , Date, Particulars, 2016, 10,000 Mar. 31 By P. & L. A/c, 10,000, , J.F., , `, , Amount, `, , 10,000, 10,000, , Telephone Expenses Account, Date, Particulars, 2016, Mar. 31 To Cash A/c, , J.F., , Amount, , Date, Particulars, 2016, 2,400 Mar. 31 By P. & L. A/c, 2,400, , J.F., , `, , Amount, `, , 2,400, 2,400, , Van Maintenance Expenses Account, Date, Particulars, 2016, Mar. 31 To Cash A/c, , 64, , J.F., , Amount, , Date, Particulars, 2016, 12,000 Mar. 31 By P. & L. A/c, 12,000, `, , J.F., , Amount, `, , 12,000, 12,000
Page 1111 :
Project Work, Scooter Maintenance Expenses Account, Date, Particulars, 2016, Mar. 31 To Cash A/c, , J.F., , Amount, , Date, Particulars, 2016, 2,500 Mar. 31 By Capital A/c, By P. & L. A/c, 2,500, , J.F., , Amount, , `, , `, , 500, 2,000, 2,500, , Wages Account, Date, Particulars, 2016, Mar. 31 To Bank A/c, To Cash A/c, , J.F., , Amount, , Date, Particulars, 2016, 80,000 Mar. 31 By Trading A/c, 20,000, 1,00,000, , J.F., , `, , Amount, `, , 1,00,000, 1,00,000, , Office Expenses Account, Date, Particulars, 2016, Mar. 31 To Cash A/c, , J.F., , Date, Particulars, 2016, Mar. 31 To Cash A/c, , J.F., , Amount, , Date, Particulars, 2016, 3,000 Mar. 31 By P. & L. A/c, 3,000, , J.F., , Amount, , `, , `, , 3,000, 3,000, , Furniture Account, Amount, , Date, Particulars, 2016, 2,000 Mar. 31 By Depreciation A/c, By Balance c/d, 2,000, , J.F., , Amount, , `, , `, , 200, 1,800, 2,000, , Depreciation Account, Date, , Particulars, , J.F., , 2016, Mar. 31 To Moulding Machines, To Dies & Moulds, To Motor Van, To Scooter, To Furniture, , Amount, , Date, , Particulars, , J.F., , `, 2016, 21,250 Mar. 31 By Capital A/c, 5,000 Mar. 31 By P & L A/c, 10,000, 2,000, 200, 38,450, , Amount, `, , 400, 38,050, , 38,450, , Stock Account, Date, , Particulars, , J.F., , 2016, Mar. 31 To Trading, , Amount, , Date, , Particulars, , J.F., , `, 2016, 20,000 Mar. 31 By Balance c/d, 20,000, , Amount, `, , 20,000, 20,000, , Outstanding Salaries Account, Date, , Particulars, , 2016, Mar. 31 To Balance c/d, , J.F., , Amount, , Date, , Particulars, , 2016, 2,000 Mar. 31 By Salaries A/c, 2,000, , J.F., , Amount, , `, , `, , 2,000, 2,000, , 65
Page 1112 :
SBPD Publications Accountancy (XII), Prepaid Factory Insurance Account, Date, Particulars, 2016, Mar. 31 To Factory Rent &, Insurance A/c, , J.F., , Amount, `, , Date, Particulars, 2016, Mar. 31 By Balance c/d, , J.F., , Amount, `, , 500, , 500, 500, , 500, , Provision for Bad & Doubtful Debts Account, Date, Particulars, J.F., 2016, Mar. 31 To Sundry Debtors A/c, , Amount, , Date, Particulars, 2016, 2,000 Mar. 31 By P & L A/c, 2,000, , J.F., , Amount, , `, , `, , 2,000, 2,000, , Bank Charges Account, Date, Particulars, 2016, Mar. 31 To Bank A/c, , J.F., , Amount, , Date, Particulars, 2016, 200 Mar. 31 By P. & L. A/c, 200, , Dr., , Trial Balance, Particulars, , Amount, , Amount, `, , To Purchases, , 66, , 5,60,000 By Sales, , `, , 200, 200, , Amount, `, , 2,100 Capital A/c, 3,03,800 Sales A/c, 63,750 Sundry Creditors A/c, 15,000, 30,000, 8,000, 5,60,000, 24,000, 10,000, 50,000, 16,000, 2,27,000, 10,000, 2,400, 12,000, 2,000, 1,00,000, 3,000, 1,800, 38,050, 200, 14,79,100, , (ii) Final Accounts, Trading and Profit & Loss Account, (for the year ended 31st March, 2016), Particulars, , Amount, , Cr., Particulars, , `, , Cash A/c, Bank A/c, Moulding Machines A/c, Dies and Moulds A/c, Maruti Van A/c, Scooter A/c, Purchases A/c, Salaries A/c, Sales Promotion Expenses A/c, Factory Rent & Insurance A/c, Electric Expenses A/c, Sundry Debtors A/c, Consultancy Charges A/c, Telephone Expenses A/c, Van Maintenance Exp. A/c, Scooter Maintenance Exps. A/c, Wages A/c, Office Expenses A/c, Furniture A/c, Depreciation A/c, Bank Charges, , Dr., , J.F., , `, , Particulars, , 2,29,100, 10,32,000, 2,18,000, , 14,79,100, , Cr., Amount, `, , 10,32,000
Page 1113 :
Project Work, To Wages, To Factory Rent &, `, Insurance, 50,000, Less : Prepaid Insurance, 500, To Electric Expenses, To Gross Profit c/d, To Salaries, 24,000, Add : Salaries, Outstanding, 2,000, To Sales Promotion Exps., To Consultancy Charges, To Telephone Expenses, To Van Maintenance Exp., To Scooter Maintenance, `, Exps., 2,500, Less : 1/5th for Personal, Use, 500, To Office Expenses, To Depreciation :, Moulding Machines, Dies & Moulds, Motor Van, Scooter, Furniture, To Bank Charges, To Provision for Bad and, Doubtful Debts, To Net Profit, , 1,00,000 By Closing Stock, , 49,500, 16,000, 3,26,500, 10,52,000, , 20,000, , 10,52,000, By Gross Profit b/d, , 3,26,500, , 26,000, 10,000, 10,000, 2,400, 12,000, , 2,000, 3,000, 21,250, 5,000, 10,000, 1,600, 200, 200, 2,000, 2,20,850, 3,26,500, , 3,26,500, , Balance Sheet, (as on 31st March, 2016), Liabilities, , Amount, `, , Capital, Add : Net Profit, Current Liabilities :, Creditors, Salaries Outstanding, , 2,29,100, 2,20,850, , Assets, , `, , Fixed Assets :, 4,49,950 Moulding Machines, Dies and Moulds, 2,18,000 Maruti Van, 2,000 Scooter, Furniture, Current Assets :, Cash in hand, Cash at Bank, `, Sundry Debtors, 2,27,000, Less : Provision, 2,000, Closing Stock, Prepaid Factory Insurance, 6,69,950, , Amount, `, , 63,750, 15,000, 30,000, 8,000, 1,800, 2,100, 3,03,800, 2,25,000, 20,000, 500, 6,69,950, , 67
Page 1114 :
SBPD Publications Accountancy (XII), , (a), (b), (c), , (d), , (e), , (f), , (g), , (iii) Ratio Analysis, Current Assets, 5,51,400, Current Ratio =, =, = 2.5 : 1, Current Liabilities 2,20,000, Liquid Assets, 5,31,400, Liquid Ratio =, =, = 2.4 : 1, Current Liabilities 2,20,000, Gross Profit, Gross Profit Ratio =, × 100, Net Sales, 3,26,500, =, × 100 = 31.64%, 10,32,000, Net Profit, Net Profit Ratio =, × 100, Net Sales, 2,20,850, =, × 100 = 21.4%, 10,32,000, Profit before Interest & Tax, Return on Investment =, × 100, Capital Employed, 2,20,850, =, = 49.08% or 49.1%, 4,49,950, Cost of Goods Sold, Stock Turnover Ratio =, Average Stock, Cost of Goods Sold = Opening Stock + Purchases + Direct Exps., – Closing Stock or Net Sales – Gross Profit, = ` 5,60,000 + 1,00,000 + 49,500 + 16,000 – 20,000, = ` 7,05,500, 7,05,500, STR =, = 35.275 or 35 times, 20,000, Net Credit Sales, Debtors Turnover Ratio =, Average Amount Receivable, 4,32,000, =, = 1.92 times, 2,25,000, Comparative Chart, , Particulars, (a) Current Ratio, (b) Liquid Ratio, (c) Gross Profit Ratio, (d) Net Profit Ratio, (e) Return on Investment, (f) Stock Turnover Ratio, (g) Debtors Turnover Ratio, , Standard Ratio, 2:1, 1:1, 25%, 20%, 20%, 10 Times, 4 Times, , Actual Ratio, 2.5 : 1, 2.4 : 1, 31.64%, 21.4%, 49.1%, 35 Times, 1.92 Times, , Remarks, Satisfactory, Very Satisfactory, Satisfactory, Satisfactory, Very Satisfactory, Very Satisfactory, Not Satisfactory, , (iv) Cash Flow Statement, Particulars, , Amount, `, , (A) Cash Flow from Operating Activities :, Net Profit before Tax, Add : Depreciation, Operating Profit before Working Capital Changes, Less : Increase in Debtors, Less : Prepaid Factory Insurance, Add : Outstanding Salaries, , 68, , 2,20,850, 38,050, 2,58,900, (2,25,000), (500), 2,000, , Amount, `
Page 1115 :
Project Work, Add : Increase in Creditors, Net Cash Flow from Operating Activities, (B) Cash Flow from Investing Activities :, Purchase of Fixed Assets, Net Cash Outflow from Investing Activities, (C) Cash Flow from Financing Activities :, Capital, Net Cash Inflow from three Activities (A + B + C), , 2,18,000, 2,53,400, (1,56,600)1, (1,56,600), 2,29,100, , 2,29,100, 3,25,900, , Working Note :, , `, , 1 Moulding Machines, Dies & Moulds, Maruti Van, Scooter (10,000 – 400), Furniture, , 85,000, 20,000, 40,000, 9,600, 2,000, 1,56,600, , Conclusion, Keeping in mind the very first year of the business M/s Sanjay Plastic Products have done, quite well. The profitability of the firm is quite high. It has earned a very good return on, investment. As is evident from the comparative chart, its actual ratios are greater than the, Standard Ratios excepting in the case of Debtors Turnover Ratio. The firm should pay attention, improve the Debtors Turnover Ratio., Viva Questions, Q. 1. What did M/s Sanjay Plastic Products produce and sell ?, Q. 2. What is the liquidity position of the firm?, Q. 3. What is the use of Profitability Ratios ?, Q. 4. State in a few lines about the profitability position of M/s Sanjay Plastic Products., Q. 5. In which sector the firm needs improvement ?, Q. 6. What ratio will help you to know the financial position of Sanjay Plastic Products ?, Q. 7. How do you identify the financing activities ?, Q. 8. How do you identify the investing activities ?, Q. 9. What was the main reason of the success of M/s Sanjay Plastic Products ?, , COMPREHENSIVE PROJECTS FOR PRACTICE (1 to 4), PROJECT NO. 1, After doing BCA, Aman thought of doing business and starting a Computer Cafe. The cafe, could provide the following services :, (i) Computer classes for various age groups on prescribed fee., (ii) Computer using facilities on payment per hourly basis., (iii) Internet access facility., (iv) Computer games corner for children etc., Aman aprised of this idea to his father who agreed to his project and gave him ` 3,00,000 to, start the work. Then he approached Bank of Bardoa to grant him a loan of ` 2,00,000. The, manager of the Bank agreed to his request and sanctioned the loan of ` 1,50,000 on the, guarantee of his father. The Bank loan was to be paid back in 5 annual instalments along with, interest @ 10% p.a., He started his business under the name of 'Aman Computer Cafe' on 1st April, 2015. He, opened a bank account with ` 2,80,000., He deposited ` 30,000 for internet connection from BSNL. He purchased 10 computers, costing ` 30,000 each and spent ` 12,000 for furnishing the cafe. All payments excepting petty, expenses were made by cheques. All the receipts were in cash and deposited in the bank on the, same day., At the end of the year, the following information was extracted from his books :, `, (i) Fees received, 2,20,000, , 69
Page 1116 :
SBPD Publications Accountancy (XII), (ii) Purchase of Computer Stationery, 80,000, (iii) Sale of Computer Stationery, 1,10,000, (iv) Electricity, 20,000, (v) Salaries (Eleven months), 44,000, (vi) Entertainment Expenses, 12,000, (vii) Repairs and Maintenance Expenses, 10,000, (viii) Petty Expenses, 10,000, (ix) Income from Interest on Bank deposits, 8,000, (x) Telephone Charges, 7,200, (xi) Insurance, 3,000, (xii) Printing and Distribution of Pamphlets, 2,000, (xiii) Receipts from Internet facility, 40,000, It was decided to charge depreciation on computers @ 20% and furniture @ 10%. The stock, of computer stationery in hand amounted to ` 15,000. He paid the bank loan regularly and, withdrew ` 2,000 by cheque each month for his personal expenses., You are required to :, (i) Journalise the above transactions., (ii) Post them into ledger accounts., (iii) Prepare Trial Balance and Final Accounts., (iv) Calculate Profitability Ratios., (v) Comment on the efficiency of the business if in the similar type of business concerns., Gross Profit Ratio and Net Profit Ratio are 50% and 25% respectively. Further, he, has approached the bank for further loan of ` 1,00,000 to expand the business, should, the bank accept his request., PROJECT NO. 2, Project Statement, C Raghvan after obtaining engineering degree in Automobile thought of starting 'Raghvan, Auto Agency' at Jamshedpur with a view to buy and sell motor-cars and scooters. For this he, prepared a project and estimated a capital requirement of ` 60 lakhs. He got a loan of ` 40 lakhs, from a nationalised bank at 12% on the security of his house. It was to be paid back in 5, instalments along with interest. He got a loan of ` 10,00,000 from his friend, Raj Shekhar. The, remaining amount was contributed by his mother as capital. All these amounts were deposited in, firm’s Current Account. Bank loan was sanctioned on 1st April, 2015 and inauguration of the, agency was made on the same day for which a small party was also arranged., He hired a showroom at a monthly rent of ` 5,000. It was decided that cash would be, deposited into the Bank and expenses would be paid by cheque., At the end of the financial year the following figures were extracted from the books of the, firm :, `, , (i), (ii), (iii), , Purchase of Furniture and Fittings, Purchase of Office Equipments, Purchase of Cars and Scooters :, Cash Purchases, Credit Purchases, (iv) Electricity, (v) Salaries, (vi) Advertising, (vii) Printing and Stationery, (viii) Petty Expenses, (ix) General Expenses (including ` 5,000 inauguration expenses), (x) Wages, , 70, , 3,00,000, 2,50,000, 35,00,000, 5,60,000, 30,000, 1,50,000, 25,000, 5,000, 35,000, 12,000, 25,000
Page 1117 :
Project Work, (xi) Telephone Expenses, 11,000, (xii) Cash withdrawn from Bank for Petty Expenses, 50,000, (xiii) Sales, Cash Sales only, 50,00,000, (xiv) Sales-tax-piad, 15,000, The following expenses for the months of March, 2011 were got to be paid :, (a) Salaries, 12,500, (b) Telephone, 1,200, (c), Advertising Expenses, 2,000, Additional Information :, (i), Depreciation is to be charged on furniture and office equipments @ 10%., (ii) Unsold stock (of cars and scooters) ` 5,20,000, (iii) Payment of friends loan amounting to ` 2,00,000 was made on 31.3.2016., Raghvan wants to have first hand information about his financial position and, profitability., You are required to :, (i), Journalise the above transactions., (ii) Prepare Ledger Accounts and Trial Balance., (iii) Prepare Trading Account, Profit & Loss Account and Balance Sheet., PROJECT NO. 3, Mr. Satish Agarwal commenced business of selling bicycles under the banner of Agrawal, Cycles on April 1, 2015 with a capital of ` 20 lakhs. He entered into agreement with Hero Cycles, Ltd. to sell the bicycles, purchased from them on two months credit basis. It also entered into an, agreement with Ralson (India) Limited for supply of two-wheeler and three-wheeler types on, one month credit basis., Mr. Satish purchased the following assets and payments were made through Bank :, `, , Land and Building, 10,00,000, Furniture and Fittings, 80,000, Office Equipments, 75,000, The bicycles were to be sold on cash and credit basis. The cash proceeds were to be, deposited in the Bank on the same day. All expenses except petty expenses were to be paid, through Bank only. The petty cashier was given ` 2,000 on 1st April, 2015 under 'Imprest, System'. The petty cashier would be reimbursed the actual expenses of the month on the first, day of the next month before depositing the sale proceeds of the day., The following particulars were obtained from his books :, `, Purchases of Cycles, 7,50,000, Purchases of Tubes and Tyres, 2,00,000, Purchases of Spare Parts, 1,50,000, Sales : Cycles (on Credit ` 2,60,000), 10,00,000, Tubes, 1,00,000, Tyres, 1,35,000, Spare Parts, 2,00,000, Expenses paid through Cheque :, Opening Ceremony Expenses, 2,500, Electricity Expenses, 6,600, Telephone Expenses, 4,000, Advertising Expenses, 4,500, Petty Expenses, 11,000, Printing and Stationery, 1,000, Advance Tax paid, 10,000, Salaries, 55,000, Insurance, 2,000, Outstanding Expenses :, Salaries, 5,000, , 71
Page 1118 :
SBPD Publications Accountancy (XII), Telephone Expenses, 600, Electric Expenses, 400, Prepaid Expenses :, Insurance, 500, Other Information :, The firm paid for purchases as per terms agreed upon. The last bill for the month of, March, 2016 amounting to ` 75,000 remains to be paid. The cash with petty cahsier on 31st, March, 2016 was ` 500. The closing stock as on 31.3.2016 was as under : Cycles ` 1,00,500,, Tubes and Tyres ` 20,000, Spare Parts ` 29,500. It was decided to write off building @ 10%,, furniture and fittings @ 5% and office equipments @ 20%. Tax liability is estimated at ` 15,000., Required :, (1) Prepare Bank Account and Trial Balance., (2) Prepare Income Statement and Balance Sheet., (3) Find out the short-term financial position of ‘Agrawal Cycles’., (4) Calculate Profitability and Cost Efficiency Ratios., Give your comment on the ratios calculated above., PROJECT NO. 4, Mr. Anand Prakash sold his 5,000 equity shares of Reliance Industries of ` 10 each @ ` 140, each. Out of such proceeds, he gifted ` 2,00,000 to his wife and with the remaining amount he, started a business of readymade garments under the name of 'Sir & Madam'. He hired a, showroom at a monthly rent of ` 3,000 per month. He got it furnished at a cost of ` 25,000. He, spent ` 2,000 on advertisement in the local Cinema Hall and T.V. Cable. He also purchased a, computer set at ` 40,000., He opened a Bank Account with ` 4,50,000 and started his business on 1st October, 2010., All the receipts were in cash to be deposited in the Bank on the same day. All the major payments, were to be made by cheques. Miscellaneous and postage and telegrams were to be paid in cash., At the end of the financial year 2015-16 the following information was available from his, books :, `, (i), Total Purchases (including Credit Purchases of ` 1,00,000), 4,00,000, (ii) Cash paid to Suppliers of Garments, 60,000, (iii) Cash Discount received, 10,000, (iv) Total Sales (including Credit Sales of ` 1,80,000), 5,00,000, (v) Rent paid for 5 months, 15,000, (vi) Insurance Premium paid for one year, 6,000, (vii) Bank Loan (1.1.2016) @ 12%, 1,00,000, (viii) Salaries paid for 5 months, 20,000, (ix) Miscellaneous Expenses, 15,000, (x) Postage and Telephones, 3,000, (xi) Cash received from Customers, 30,000, (xii) Discount Allowed, 3,000, Additional Information :, (a) He had a stock of unsold garments valued at ` 50,000., (b) Depreciation on furniture and fittings and computer is to be charged @ 10% p.a., (c) Interest on loan was paid on 31st March, 2016., Required :, (i) Judge the performance of the firm ‘Sir & Madam’., (ii) Calculate necessary ratios to find out profitability position., (iii) Evaluate short-term financial position., (iv) Identify financing and investing activities., , l, , 72
Page 1119 :
CHAPTERWISE VALUE/MULTIDISCIPLINARY BASED, QUESTIONS WITH ANSWERS, , PART A : ACCOUNTING FOR NOT-FOR-PROFIT, ORGANISATIONS, PARTNERSHIP FIRMS, , 1, , ACCOUNTING FOR PARTNERSHIP FIRMS—, FUNDAMENTALS, , Q. 1. Priyanshu and Asparsh are partners in a firm. Their Capitals are ` 1,00,000 and, ` 10,000 respectively. Asparsh has also provided ` 40,000 as loan to the firm. There is no, partnership agreement. Asparsh claims interest of ` 2,400 whereas Priyanshu does not, want to give interest. State giving reasons who is correct in this case., Ans. Asparsh is correct., Reason : In the absence of parternship deed, a partner who has provided to the, firm is entitled to claim an interest on his loan @ 6% p.a. (So Interest on loan =, 6, 40,000 ×, = ` 2,400), 100, Q. 2. Anuj, Bharati and Chandni are partners in a firm having no partnership, agreement. Anuj, Bharati and Chandni contributed ` 1,00,000, ` 20,00,000 and ` 50,000, respectively. Anuj and Bharat desire that the profit should be divided in the ratio of capital, contribution. Chandni dres not agree to it. Is Chandni correct ? Give reason., Ans. Chandni is correct., Reason : In the absence of partnership deed, the profits are to be shared equally., Q. 3. Khan and Johar are partners without a partnership deed. Khan is an active, partner and claims a salary of ` 15,000 per month. State with reasons whether the claim is, valid or not ?, Ans. Claim is not valid., Reason : In the absence of partnership deed, no partner is entitled to get any salary., , 1
Page 1120 :
SBPD Publications Accountancy (XII), Q. 4. A and B are partners in a firm. There is no partnership deed among them. ‘B’, advanced a loan of ` 5,000 and claim 10% interest on the loan advanced. Comment with, reason., Ans. B’s claim is not valid., Reason : In the absence of partnership deed, a partner is entitled to claim an interest, on his loan @ 6% p.a. only. So he will be allowed interest @ 6% p.a., Q. 5. Can a partnership exempted from sharing the losses in a firm ? If yes, under, what circumstances ?, Ans. Yes. (i) If partners have agreed that one or more of them shall not be liable for, losses. (ii) In case of minor partner., Q. 6. A, B and C decided that interest on capital will be provided to each partner @ 5%, p.a. But after one year ‘C’ wants that no interest on capital be provided to any partner. State, how ‘C’ can do this ?, Ans. If ‘C’ wants that no interest on capital is to be provided to any partner then this, can be done by entering into a new agreement by all the partners. ‘C’ can do this only if it is, consented in partnership deed otherwise he cannot do this., Q. 7. Munna, Mahmood and Marandi are partners in a firm. Munna has contributed `, 1,00,000 more towards capital. All the partners look after the business for which they are, paid salaries. Munna suggests that interest @ 5% p.a. on ` 1,00,000 should be paid to him., Mahmood agree to it but Marandi opposes it on the grounds that Partnership Deed does, not provide for it. What value has been ignored in this case ?, Ans. Value of being just and equitable has been ignored., Q. 8. Sanjeev, Rajeev and Reena are partners. All the partners devote full time to, the firm and get equal salaries for it. However, Rajeev has contributed more capital than, Sanjeev and Reena by ` 50,000. Sanjeev and Reena decide to allow interest to Rajeev @, 5% p.a. on the amount in excess of their capital contribution. Identify the value fulfilled, by them., Ans. The partners has fulfilled the value of equality and being just., Q. 9. A, B and C are partners in a firm. They decided to select 2 children from B.P.L., (below poverty line) families and decided to sponsor their education. Accordingly, they, selected one girl and one boy. Identify any two values which the firm wants to, communicate to the society., Ans. (i) Sensitivity towards children of low income group people., (ii) Fulfilment of social responsibility towards weaker section of the society., Q. 10. Ruchi and Supriya are partners. They decided to donate ` 1,00,000 or 5% of, their profit (whichever is more) to Abhilasha, an N.G.O. which is engaged in cleanliness of, area and waste management. Identify any two values which the partners want to fulfill., Ans. : (i) Sensitivity of partners towards cleanliness of area and hygenic conditions of, nearby area., (ii) Fulfilment of social responsibility towards society., Q. 11. Ali, Anshu and John are partners. They decided to donate ` 1,00,000 to ‘Old, Age Home’ of their area every year. State any two values that the partners want to, communicate to the society., Ans. (i) This exhibits their sensitivity towards old age people who have been, neglected by their children., , 2
Page 1121 :
Chapterwise Value ........ Questions with Answers, (ii) This also indicates their social responsibility towards the old aged people who, needs care and help at the end of their life., Q. 12. After completing M.B.B.S., Satyam suggested to his classmate Shivam to form, a partnership to run a hospital in the locality inhabited by low income group. After a long, thought, he agreed to the proposal. Then they approached Sundaram, a rich friend, to join, the firm as a partner. All of them formed a partnership on the following terms :, (i) Satyam, Shivam and Sundaram will contribute ` 5,00,000, ` 10,00,000 and, ` 25,00,000 respectively., (ii) Interest on capital @ 5% p.a. will be allowed., (iii) The profit of the firm for the year ended 31st March, 2014 was ` 8,00,000., (a) Prepare Profit and Loss Appropriation Account for the year ending 31st March,, 2014., (b) Identify any two values which motivated them to form the partnership., Ans., (a) Profit and Loss Appropriation Account, `, , Particulars, To Interest on Capital :, Satyam, Shivam, Sundaram, , `, 25,000, 50,000, 1,25,000, , To Balance c/d, , `, , Particulars, By Profit and Loss A/c (Net Profit), , 8,00,000, , 2,00,000, 6,00,000, 8,00,000, , To Profit transferred to Capital A/cs :, Satyam, 2,00,000, Shivam, 2,00,000, Sundaram, 2,00,000, , 8,00,000, By Balance b/d, , 6,00,000, , 6,00,000, 6,00,000, , 6,00,000, , (b) Value involved :, (i) Sensitivity towards people belonging to the low income groups of the society., (ii) Working as a team for a good cause., Q. 13. X, Y and Z entered into a partnership on 1st April, 2013 to share profits and, losses in the ratio of 5 : 3 : 2. X guaranteed that Z’s share of profit after charging interest on, capital @ 5% p.a. would not be less than ` 25,000 in any year., Capital of X, Y and Z were ` 3,20,000; ` 2,00,000 and ` 1,60,000 respectively. The, profits for the year ended 31st March, 2014 amounted to ` 1,34,000 before providing for, interest on capital., (a) Show the Profit and Loss Appropriation A/c., (b) Which value is adhered by X by guaranteeing minimum profit of ` 25,000 to Z., Ans., (a) Profit and Loss Appropriation Account, Particulars, , Amount, , Particulars, , Amount, , `, , To Interest on Capital :, X, Y, , `, , `, , By Profit and Loss A/c (Net Profit), , 1,34,000, , 16,000, 10,000, , 3
Page 1122 :
SBPD Publications Accountancy (XII), Z, To Balance c/d, , 8,000, , 34,000, 1,00,000, 1,34,000, , To Profit transferred to Capital A/cs :, X (` 50,000 – 5,000), 45,000, Y, 30,000, Z (` 20,000 + 5,000), 25,000, , 1,34,000, By Balance b/d, , 1,00,000, , 1,00,000, 1,00,000, , 1,00,000, , (b) Value adhered : Value of responsibility is adhered by X by guaranteeing, minimum profit of ` 25,000 to Z in case of deficiency of profit., Q. 14. Rajeev, Sanjeev and Jatin were partners in a firm manufacturing blankets., They were sharing profits in the ratio of 5 : 3 : 2. Their capitals on 1st April, 2012 were `, 1,00,000, ` 2,00,000 and ` 4,00,000 respectively. After the flood in Uttarakhand, all, partners decided to help the flood victims personally., For this Rajeev withdrew ` 10,000 from the firm on 1st October, 2012. Sanjeev, instead of withdrawing cash from the firm took blankets amounting to ` 14,000 from the, firm and distributed those to the flood victims. On the other hand, Jatin, withdraw `, 1,50,000 from his capital on 31st December, 2012 and set-up a centre to provide medical, facilities in the flood affected area., The Partnership Deed provides for charging interest on drawings @ 6% p.a. After the, final accounts were prepared it was discovered that interest on drawings had not been, charged. Give the necessary adjusting Journal entry and show the Working Notes clearly., Also state any two values which the partners wanted to communicate to the society., (C.B.S.E., A.I., 2014), Ans. Interest on Rajeev's Drawing, `, 6, 6, (From 1st Oct., 2012 to 31st March, 2013), = ` 10,000 ×, = 300, ×, 100 12, Interest on Sanjeev's Drawing, 6, 6, (From 1st Oct., 2012 to 31st March, 2013), = ` 14,000 ×, = 420, ×, 100 12, Interest on Jatin's Drawing, 6, 3, (For 3 months), = ` 1,50,000 ×, = 2,250, ×, 100 12, Total Interest to be charged from Partners 2,970, This amount of ` 2,970 is an item of income for the firm but this has not been recorded, on the credit side of Profit & Loss A/c. As such the profit of the year will now be increased, by this amount. Hence, profit of ` 2,970 will be shared by the partners in their, profit-sharing ratio 5 : 3 : 2., Table Showing Adjustment, Particulars, , Rajeev, `, , Sanjeev, `, , Jatin, , Total, , `, , `, , (A) Interest on Drawings, , (Dr.), , 300, , 420, , 2,250, , 2,970, , (B) Division of ` 2,970 in 5 : 3 : 2, , (Cr.), , 1,485, , 891, , 594, , 2,970, , (Cr.) 1,185, , (Cr.) 471, , (Dr.) 1,656, , —, , Difference (A – B), , 4
Page 1123 :
Chapterwise Value ........ Questions with Answers, Dr., , Adjusting Journal Entry, Particulars, , L.F., , Jatin’s Capital A/c, To Rajeev’s Capital A/c, To Sanjeev’s Capital A/c, , Dr., , `, , Cr., `, , 1,656, 1,185, 471, , (Being adjustment in respect of interest on drawing omitted in, previous years accounts), , Values : (i) Fulfilment of social responsibility towards flood victims of the society., (ii) Moral, financial and medical support to the flood victims., Q. 15. D, E, F and G are partnes. Their capitals on 1st April, 2013 were D : ` 60,000; E, : ` 1,00,000; F : ` 1,60,000 and G : ` 2,00,000. After the accounts for the year ended 31st, March, 2014 have been prepared, it is discovered that interest @ 5% p.a. as provided in the, partnership deed has not been credited to partners’ capital accounts before distributing, profits. So, it is decided to make adjusting entry at the beginning of the year., (a) Give the necessary Journal Entry along with working notes., (b) Which value is adhered while deciding to make adjustment in the beginning of the, next year., Ans. (a) Calculation of Interest on Capital :, 5, 5, D = ` 60,000 ×, = ` 3,000;, E = ` 1,00,000 ×, = ` 5,000, 100, 100, 5, 5, F = ` 1,60,000 ×, = ` 8,000;, G = ` 2,00,000 ×, = ` 10,000, 100, 100, Total Interest payable = ` 3,000 + 5,000 + 8,000 + 10,000 = ` 26,000, Interest has not been credited to the partners. No it has to be credited. So, there will, be loss to the firm of ` 26,000.Since the Partnership Deed is silent about profit-sharing, ratio, it will be equally debited to Partners’ Capital Account., Statement Showing Adjustment, Particulars, (A) Interest on Capital, (B) For Sharing Loss, Balance to be adjusted (A – B), , Cr., Dr., , D, , E, , F, , G, , `, , `, , `, , `, , 3,000, 5,000, 8,000, 10,000, 6,500, 6,500, 6,500, 6,500, (Dr.) 3,500 (Dr.) 1,500 (Cr.) 1,500 (Cr.) 3,500, , Dr., , Journal Entry, Particulars, D’s Capital A/c, E’s Capital A/c, To F’s Capital A/c, To G’s Capital A/c, , L.F., ...Dr., ...Dr., , `, , Total, 26,000, 26,000, —, , Cr., `, , 3,500, 1,500, 1,500, 3,500, , (Being the adjustment of interest on capital omitted in previous, year), , (b) Value of prudence is adhered while deciding to make adjustment entry in the, beginning of the next year itself., Since partnership deed provides for interest on capital @ 5% p.a., it should have been, credited to Partners’ Capital Accounts before distributing profit. By making adjustment, entry in the beginning of next year implies adherence to value of prudence., , 5
Page 1124 :
SBPD Publications Accountancy (XII), , 2, , GOODWILL : MEANING, NATURE, FACTORS, AFFECTING AND METHODS OF VALUATION, , Q. 1. Why is ‘Goodwill’ considered an ‘Intangible Asset’ but not Fictitious Asset ?, Ans. Goodwill cannot be see and touched. It is invisible but it can be sold and, purchased for cash like other assets. Hence, it is treated as intangible asset. All assets can, be separately sold but goodwill cannot be sold separately. An asset shown in balance sheet, that does not exist is called fictitious asset, that is why, goodwill is an intangible asset but, not fictitious asset., Q. 2. In how many ways goodwill may arise ?, Ans. Goodwill of a business many arise in two ways :, 1. It may be inherent to the business, that is generated internally., 2. It may be required while purchasing any concern. Purchased goodwill can be, defined as abeing the excess of fair value of the business consideration over the fair value, of the separable net assets required., Non-purchased goodwill is any goodwill other than purchased goodwill., Q. 3. List any four factors that contribute to goodwill or influence its value., Ans. (i) Nature of business, (ii) Location of business and service entres, (iii) Superior, management, (iv) Market dominance., Q. 4. Capital employed in X Ltd. is ` 1,70,000. Future maintainable profit is `, 3,00,000. Normal rate of return is 15%. Calculate the amount of goodwill., Future Maintainable Profit × 100, Ans., Goodwill, =, – Capital Employed, Normal Rate of Return, 3,00,000 × 100 , = , − 17,00,000, , , 15, = ` 20,00,000 – 17,00,000 = ` 3,00,000, Q. 5. The Capital employed by a partnership firm is ` 2,00,000 and its super profit is `, 10,000. Normal rate of return is 20% in similar firms working under similar conditions., Calculate the average profit of the firm., Capital Employed × Rate of Return, Ans. Normal Profit =, 100, 20, = 20,00,000 ×, = ` 40,000, 100, Super Profit, = Average Profit – Normal Profit, 10,000 = Average Profit – 40,000, Average Profit, = ` 10,000 + 40,000 = ` 50,000, ∴, , 3, , RECONSTITUTION OF PARTNERSHIP—, CHANGE IN PROFIT-SHARING RATIO AMONG, THE EXISTING PARTNERS, , Q. 1. State any two occasions on which reconstitution of partnership firm can take, place., Ans. (i) Change in profit sharing ratio of the existing partners. (ii) Admission of a, partner., , 6
Page 1125 :
Chapterwise Value ........ Questions with Answers, Q. 2. What is the effect of change in profit-sharing ratio ?, Ans. Change in profit sharing ratio involves increase in share of profit of one or more, partners and decrease in share of profit of one or more partners., Q. 3. Give the meaning of new profit-sharing ratio., Ans. The ratio in which all the partners share the future profits and losses is known, as the new profit-sharing ratio., Q. 4. Anuj, Raj and Shreekant are partners in a firm sharing profits and losses in the, ratio of 2 : 2 : 1 and from now and onwards, they decided to share future profits and losses, equally. What single adjustment journal entry shall be passed for following items :, (a) Goodwill is valued at ` 60,000., (b) General Reserve appears in the book at ` 1,20,000., (c) Revaluation of assets and liabilities results in a profit of ` 60,000., Ans. Step 1 : Calculation of gain or sacrifice due to change in profit-sharing, ratio :, Sacrificing Ratio = Old Ratio – New Ratio, 2 1 6−5, 1, Anuj = − =, =, (Sacrifice), 5 3, 15, 15, 2 1 6−5, 1, Raj = − =, =, (Sacrifice), 5 3, 15, 15, 1 1 3– 5 – 2, (Being negative, it is a gain), Shreekant = − =, =, 5 3, 15, 15, Step 2 : Calculation effect distributable amount :, Value of Goodwill, ` 60,000, General Reserve, ` 1,20,000, Profit on Revaluation, ` 60,000, Total Distributable Amount, ` 2,40,000, Step 3 : Calculation of proportionate amount of net distributable amount :, For Anuj 1/15 of ` 2,40,000, = ` 16,000, For Raj 1/15 of ` 2,40,000, = ` 16,000, For Shreekant 2/15 of ` 2,40,000 = ` 32,000, Adjusting Journal Entry, Dr., Cr., Step 4 :, Date, , Particulars, Shreekant’s Capital A/c, To Anuj’s Capital A/c, To Raj’s Capital A/c, , L.F., Dr., , `, , `, , 32,000, 16,000, 16,000, , (Being the adjustment made for net distributable amount), , Q. 5. What are the adjustments required when a change in the profit-sharing of, existing partners take place in the partnership firm ?, Ans. (1) Adjustments of goodwill., (2) Adjustment of profit/loss arising from the Revaluation of Assets and Liabilities., (3) Adjustment of Accumulated Profit and Loss and Reserves., (4) Adjustment of capitals (if agreed)., , 7
Page 1126 :
SBPD Publications Accountancy (XII), Q. 6. R, S and T are partners in a firm sharing profits in the ratio of 3 : 3 : 2. They, decided to share profits equally in future. Goodwill of the firm was valued at ` 60,000 but, they decided that no goodwill adjustment be made for gain in profit share of T., (i) Find sacrifice/gaining share of partners., (ii) Identify any two values involved in changing profit-sharing ratio., Ans., (i) Calculation of Profit Share Sacrificed/Gained, R, S, T, 3, 3, 2, (A) Old Share, 8, 8, 8, 1, 1, 1, (B) New Share, 3, 3, 3, 1, 1, 2, (C) Difference (A − B), +, +, −, 24, 24, 24, (Sacrifice), (Sacrifice), (Gain), (ii) (a) Promotion of equality among the partners., (b) Recognition of work and effort made by T as his profit share was previously less, in relation to R and S’s share., Q. 7. Anurag and Chirag are partners in a firm sharing profits in the ratio of 5 : 3 : 2., They decided to share future profits equally. They also decided to spend ` 50,000 for, plantation of saplings in parks and nearby schools. They also donated dustbins worth `, 20,000 to the local municipal corporation. Indicate any three values involved in their, decision., Ans. (i) Promotion of equality among the partners., (ii) Sensitivity towards environment., (iii) Fulfilment of social responsibility towards society., Q. 8. Ajay, Bimal and Chandan are partners sharing profits in the ratio of 3 : 2 : 1., Ajay suggested that future profit share of all the partners be equal. The goodwill of the, firm on that date was ` 1,20,000. Bimal and Chandan agreed to this proposal. They, further decided to donate ` 30,000 or 2% of net profit of the firm to N.G.O. of the area for, tree plantation and for upkeep of cleanliness of the area under Prime Minister Swachhta, Abhiyan., (i) Pass the necessary journal entry., (ii) Identify the values involved in the decision of the firm., Ans. (i), Ajay, Bimal Chandan, 3, 2, 1, (A) Old Share, 6, 6, 6, 1, 1, 1, (B) New Share, 3, 3, 3, —, —, —, 1, 1, (C) Difference (A – B), —, +, (- ), 6, 6, —, —, —, Sacrifice, 1, Ajay’s Share of Goodwill = ` 1,20,000 × = ` 20,000, 6, , 8, , —, , Gain
Page 1127 :
Chapterwise Value ........ Questions with Answers, Dr., , Journal Entry, Date, , Particulars, Chandan’s Capital A/c, To Ajay’s Capital A/c, , L.F., Dr., , `, , Cr., `, , 20,000, 20,000, , (Being adjustment made for goodwill due to change in profitsharing ratio), , (ii) Value involved in this decision are :, (a) Promotion of equality among partners., (b) Sensitivity towards environment., (c) Fulfilment of social responsibility towards society., (d) Awareness towards cleanliness of area., Q. 9. A, B and C were in partnership sharing profits and losses in the ratio of 5 : 3 : 2, to carry on a business of promoting Madhubani paintings. Madhubani paintings were, supplied not only to different parts of the country but exported to other parts of the world, as well. A operated from Delhi to supply the handicrafts i.e., Madhubani Paintings, procured by C from Madhubani. The Balance Sheet of the firm was as follows on 31st, March, 2014 :, Liabilities, Capital A/cs :, A, B, C, General Reserve, Sundry Creditors, Outstanding Expenses, , Assets, Plant and Machinery, Furniture, Stock, 2,25,000 Sundry Debtors, 20,000 Cash at Bank, 12,000, 2,000, `, , `, , 1,00,000, 75,000, 50,000, , 2,59,000, , `, , 1,10,000, 15,000, 75,000, 50,000, 9,000, , 2,59,000, , It was decided that with effect from 1st April, 2014 the profit- sharing ratio will be 2 :, 3 : 5. For this purpose, the following revaluations were made :, (i) Plant and Machinery be valued at ` 1,05,000., (ii) Furniture to be taken at 80% of its value., (iii) Stock to be appreciated by 20%., (iv) Outstanding expenses to be increased by ` 3,000., Partners agreed that altered values are not to be recorded in the books and they also, do not want to distribute the general reserve., (i) Identify any two values exhibited by the partnership business and (ii) Pass a single, journal entry to give effect to the above arrangement., Ans. (i) Value exhibited by the partnership are as follows :, l Promotion of small and cottage industry., l Creation of employment opportunities in less developed parts of the country., (ii) Calculation of Sacrifice or Gain, Old Ratio of A, B and C = 5 : 3 : 2, New Ratio of A, B and C = 2 : 3 : 5, 5, 2, 3, (Sacrifice), A=, –, =, 10 10 10, , 9
Page 1128 :
SBPD Publications Accountancy (XII), 3, 3, –, = Nil, 10 10, 2, 5, 3, (Gain), C=, –, = (–), 10 10, 10, , B=, , Total Amount of Adjustment to be made, Particulars, , `, , Profit due to increase in the value of stock, Less : Loss due to decrease in value of Machinery, Loss due to decrease in value of Furniture, Loss due to increase in Outstanding Expenses, , `, , 15,000, 5,000, 3,000, 3,000, , Profit on Realisation, Add : General Reserve, , 11,000, 4,000, 20,000, 24,000, , 3, = ` 7,200, 10, 3, C's Share of Gain = ` 24,000 ×, = ` 7,200, 10, , A's Share of Sacrifice = ` 24,000 ×, , Journal Entry, Date, , Particulars, C’s Capital A/c, To A’s Capital A/c, , Dr., , Cr., , `, , `, , L.F., Dr., , 7,200, 7,200, , (Being adjustment made on account of revaluation of assets and, liabilities and general reserve), , 4, , ADMISSION OF A PARTNER, , Q. 1. Why is it necessary to ascertain new profit-sharing ratio even for old partners,, when a new partner is admitted ?, Ans. When a new partner is admitted to the firm, he acquires his share from the old, partners. Their ratio or in any other specified ratio. Hence, some old partners may loose, and same may gain from the admission of a new partner. Thus, it is necessary to ascertain, the new profit-sharing ratio even for old partners when a need partner is admitted., Q. 2. If some goodwill already exists in the books and the new partner brings in his, share of goodwill in cash, how will you deal with existing amount of goodwill ?, Ans. In such a case, the existing goodwill is witten off by debiting the old partners in, their old profit-sharing ratio and crediting the goodwill account., Journal Entry :, Old Partners’ Capital Accounts, Dr., To Goodwill Account, (Being goodwill written off in old ratio), , Q. 3. On what occasions sacrificing ratio is used ?, Ans. In the following situations, sacrificing ratio can be used :, (i) When there is a change in the profit-sharing ratio of the old partners., , 10
Page 1129 :
Chapterwise Value ........ Questions with Answers, (ii) To find out the new profit-sharing ratio of the firm., (iii) To compensate old partners by goodwill which is brought in by the incoming, partner., Q. 4. Reeta and Geeta are partners in a firm sharing profits and losses is 3 : 1 ratio., They admitted Pallavi for 1/4 share of profits. Pallavi could not bring her share of premium, for goodwill in cash. The goodwill of the firm is valued at ` 80,000 on the Pallavi’s, admission. Pass necessary journal entry for goodwill on Pallavi’s admission., Journal Entry, Dr., Cr., Ans., `, , Pallavi’s Capital A/c, To Reeta’s Capital A/c, To Geeta’s Capital A/c, , Dr., , `, , 20,000, 15,000, 5,000, , (Being Pallavi’s share of goodwill adjusted through capital account.), , Q. 5. Amar and Akbar are partners in firm. They admit Anthony for 1/5th share., Anthony is to contribute capital proportionate to his share in the firm. The combined, capital of Amar and Anthony, after all adjustments is ` 60,000. Find the capital to be, contributed by Anthony., 5 1, Ans. Anthony’s share of capital = 60,000 × × = ` 15,000., 4 5, Q. 6. Anuj and Som are partners in a firm sharing profits in the ratio of 2 : 1. They, admited Tony, an unemployed M.B.A. degree-holder, as a partner for 1/3rd share of profit, to look after sales and marketing. They decided to share profits equally in future. Tony, brought in ` 30,000 towards his share of goodwill., (i) Pass necessary journal entries., (ii) Indicate value, if any, in admitting Tony as a partner., Ans. (i) Sacrificing Ratio = Old Share – New Share, 2 1 1, Anuj' s Sacrifice = – =, 3 3 3, 1 1, Som' s Sacrifice = – = 0 (Nil), 3 3, Journal Entries, Dr., Cr., Date, , Particulars, Cash A/c, , L.F., Dr., , `, , `, , 30,000, , To Premium (Goodwill) A/c, , 30,000, , (Being cash brought in by Tony for his share of goodwill), , Premium (Goodwill) A/c, , Dr., , To Anuj’s Capital A/c, , 30,000, 30,000, , (Being the amount of Goodwill credited to Anuj’s Capital Account in, sacrificing ratio), , (ii) Value : Promotion of entrepreneurship., Q. 7. Sumit and Jagjit are partners dealing in sports goods. They decided to admit, Sanya as a partner for 1/5th share in profit who is a cricketer and to Raj for 1/6th share in, profit who is a badminton player. Identify the values involved in this decisions., Ans. Following values are involved in this decision :, , 11
Page 1130 :
SBPD Publications Accountancy (XII), (i) Promotion of sports., (ii) Promotion of entrepreneurship., (iii) Promotion to business as Sanya and Raj relates to different sports., Q. 8. Raman and Susmita are partners sharing profits in the ratio of 9 : 2. They, decided to admit Pooja (their old friend who has obtained her M.B.A. degree from Indian, 1, 1, Institute of Management, Hyderabad) as a partner. Ram sacrificed rd and Susmita th of, 3, 6, their profit share respectively in favour of Pooja., (a) Calculate new profit-sharing ratio of partners., (b) Identify any two values which in your opinion motivated Raman and Susmita to, admit Pooja as their partner., Ans. (a) New Profit-sharing Ratio, Old Ratio of Raman and Susmita 9 : 2., 1, 9, 9, Raman sacrifices in favour of Pooja = of, =, 3 11 33, 1, 2, 1, Susmita sacrifices in favour of Pooja = of, =, 6 11 33, 9, 1, 10, Pooja' s Share =, +, =, 33 33 33, New Share = Old Share – Sacrifice, 27 – 9 18, 9, 9, Raman' s Shares =, –, =, =, 11 33, 33, 33, 6–1, 2, 1, 5, Susmita' s Share =, –, =, =, 11 33, 33, 33, ∴ New Profit-sharing ratio of Raman, Susmita and Pooja, 18 5 10, or 18 : 5 : 10, =, :, :, 33 33 33, (b) (i) Promotion of women entrepreneurship., (ii) Pooja is M.B.A. degree-holder from I.I.M. So she will give new dimensions to, their business., Q. 9. Shabir and David of Delhi were partners in a firm supplying school uniform., They share profits in the ratio of 4 : 3. Their capitals as on 1st April, 2013 were ` 1,00,000, and ` 50,000 respectively. On this date, Shabir suggested David to start supplying low cost, school uniforms also to the students who belonged to low income group and have been, admitted to the private schools of the city as per the provisions of Rights to Education Act,, 2009. David agreed and requested to admit his friend, Neha a visually handicapped, unemployed graduate of Kolkata into the firm, however, Neha will not contribute any, capital. Shabir agrees to it. They were in need of more capital. Shabir, therefore,, persuaded a rich friend of his, Rafiq, who hailed from Patna to be a partner., Rafiq contributed ` 7,00,000 in cash, Delivery van of ` 2,50,000 and furniture `, 50,000 as his capital. The new profit sharing ratio is 3 : 2 : 1 : 1., (a) Identify any four values which according to you motivated to them to form the, partnership firm., (b) (i) Calculate sacrificing ratio., (ii) Pass necessary journal entry., , 12
Page 1131 :
Chapterwise Value ........ Questions with Answers, Ans. (a) Values involved are as follows :, (1) Secularism., (2) Supporting the implementation of ‘Right to Education Act, 2009.’, (3) Sensitivity towards empowering women entrepreneurship., (4) Promotion to national integration by providing entrepreneurial opportunities to, people from different areas of the country., (b) (i) Calculation of Sacrificing Ratio, Sacrificing Ratio = Old Ratio – New Ratio, Old Ratio of Shabir and David = 4 : 3, New Ratio of Shabir, David, Neha and Rafiq = 3 : 2 : 1 : 1, 4 3 1, ∴ Shabir' s Sacrifice = – =, 7 7 7, 1 1, Therefore, Sacrificing ratio of Shabir and David = : = 1 : 1, 7 7, (ii) Journal Entry, Dr., Cr., Date, , Particulars, , L.F., , `, , Cash A/c, , Dr., , 7,00,000, , Delivery Van A/c, , Dr., , 2,50,000, , Furniture A/c, , Dr., , 50,000, , To Rafiq, , `, , 10,00,000, , (Being capital brought by Rafiq in the form of cash, delivery van, and furniture), , Q. 10. Singh and Gupta decided to start a partnership firm to manufacture low cost, jute bags as plastic bags were creating many environmental problems. They contributed, capitals of ` 1,00,000 and ` 50,000 on 1st April, 2012 for this. Singh expressed his, willingness to admit Shakti as a partner without capital, who is especially abled but a very, creative and intelligent friend of his. Gupta agreed to this. The terms of partnership were, as follows :, (i) Singh, Gupta and Shakti will share profits in the ratio of 2 : 2 : 1., (ii) Interest on capital will be provided @ 6% p.a., Due to shortage of capital, Singh Contributed ` 25,000 on 30th September, 2012 and, Gupta contributed ` 10,000 on 1st January, 2013 as additional capital. The profit of the, firm for the year ended 31st March, 2013 was ` 1,68,900., (a) Identify any two values which the firm want to communicate to the society., (b) Prepare Profit and Loss Appropriation Account for the year ending 31st March,, 2013., (C.B.S.E., A.I., 2014), Ans. (a) Values communicated to the society :, (i) Sensitivity towards environment., (ii) Promotion of entrepreneurship., (b) Profit and Loss Appropriation Account, Liabilities, To Interest on Capital :, 6 , , Singh 1,00,000 ×, , , 100 , , Assets, , `, `, , By Net Profit, , `, , 1,68,900, , 6,000, , 13
Page 1132 :
SBPD Publications Accountancy (XII), 6, 6, , × , 25,000 ×, , 100 12, 6, Gupta (50,000 × ), 12, 6, 3, , × , 10,000 ×, , 100 12, , 750, , 6,750, , 3,000, 150, , To Balance c/d, , 3,150, 1,59,000, 1,68,900, , To Profit transferred to Capital A/cs :, Singh, 63,600, Gupta, 63,600, Shakti, 31,800, , 1,68,900, By Balance b/d, , 1,59,000, 1,59,000, , 5, , 1,59,000, , 1,59,000, , RETIREMENT OF A PARTNER, , Q. 1. What are the different ways in which partner can retire from the firm ?, Ans. According to Section 32(1) of The Indian Partnership Act, 1932, a partner may, retire :, (i) with the consent of all the partners of the firm., (ii) In accordance with an express agreement by the partners., (iii) In case of partnership at will, by giving notice in writing by partner desiring to, do so., Q. 2. If the retiring partner is not paid fully immediately on retirement, how should, his capital account be shown in subsequent Balance Sheet ?, Ans. If the retiring partner is not paid fully immediately, the remaining balance of his, Capital Account will be transferred to his Loan Account. Loan Account will be shown on, the liabilities side of the Balance Sheet of the firm., Q. 3. State any three items of deduction that may have to be made from the amount, payable to a retiring partner., Ans. The following deductions are entered on the debit side of retiring partner’s capital, account :, (i) His share of loss on revaluation of assets and liabilities., (ii) His share in accumulated loss of the firm., (iii) His share of existing goodwill written off., Q. 4. X, Y and Z are partners sharing in the ratio of 2 : 2 : 1. Y retires and his share is, entirely taken of Z. Find the new profit sharing ratio of X and Z., Ans., New share, = Old Ratio + Gaining Ratio, 2, 2, X’s New Share, = +0=, 5, 5, 1 2 1+2 3, Z’s New Share, = + =, =, 5 5, 5, 5, 2 3, New ratio of X and Z will be : or 2 : 5., 5 5, , 14
Page 1133 :
Chapterwise Value ........ Questions with Answers, Q. 5. A, B and C are partners sharing profits and losses in the ratio of 1/2, 3/10 and 1/5, respectively. B retires from the firm and A and C decide to share future profits and losses, in the ratio of 3 : 2. Calculate the gaining ratio., Ans., A, Z, 3, 2, (A) Their new share, 5, 5, 1, 1, (B) Their old share, 2, 5, 3 1 6−5, 2 1, − =, −, 5 2, 10, 5 5, 1, 1, =, =, 10, 5, 1 1, (D) Gaining Ratio of A and C =, : =1:2, 10 5, Q. 6. A, B and C are partners sharing profit and loss in the ratio of 3 : 2 : 1. A wanted, to retire from the firm on health grounds. B and C suggested to A that he should retire and, his son, Amrit who has just completed his B.Com. (Hons.) should join the firm on the same, old terms. A agreed to the proposal. Indicate any two values involved in this decision., Ans. In this decision, the following values are involved :, (i) Sensitivity of B and C towards old age of their partner ‘A’., (ii) Promotion of entrepreneurship by admitting Amrit in place of A., Q. 7. Jasmeet, Gurpreet and Sonali are partners in a firm. Jasmeet decided to retire., He requested Gurpreet and Sonali that sum due to him be paid in lump sum as he has to, marry his daughter. As per partnership agreement, sum due to retiring partner was, payable in 3 equal annual instalments. But Gurpreet and Sonali agreed to his request., They took bank loan and paid the amount due to Jasmeet. Indicate any two values, involved in their decision., Ans. (i) Recognition of human values., (ii) They are just and equitable with this decision., Q. 8. Karan, Sanjeev and Usman are partners in a firm sharing profits and losses in, the ratio of 5 : 3 : 2. Usman met with serious accident and so he showed his inability to, continue as a partner in future. Karan and Sanjeev decided that entire profit resulting, from revaluation of assets and whole amount to the credit of General Reserve be given to, Usman besides the amount due to him in cash instead of transferring to his loan account, as per the partnership deed. Identify the value, if any, involved in their decision., Ans. (i) Sensitivity of Karan and Sanjeev towards serious accident., (ii) Payment of entire profit on revaluation and balance of General Reserve reflect, their moral and financial support to retiring partner., (iii) Payment of the entire amount in lump sum reflects that they are just and, equitable to Usman, though there is violation of the deed., Q. 9. Balbir, Sukhbir and Tanveer are partners sharing profits in the ratio of 4 : 3 : 3., Their Balance Sheet on 1st April, 2014 was as follows :, (C) Difference being gain (A – B), , Liabilities, Creditors, , `, , 24,000 Cash at Bank, , Assets, , `, , 25,000, , 15
Page 1134 :
SBPD Publications Accountancy (XII), General Reserve, Capital :, Balbir, Sukhbir, Tanveer, , `, 60,000, 30,000, 30,000, , 16,000 Debtors, Stock, Furniture, , 80,000, 45,000, 10,000, , 1,20,000, 1,60,000, , 1,60,000, , Balbir meet with serious road accident on this date. So he decided to retire from the, firm. It was agreed upon that :, (i) Furniture be depreciated by ` 1,000., (ii) Stock be valued at ` 60,000., (iii) A reserve for bad and doubtful debts be created @ 5% on the debtors., (iv) Goodwill of the firm be valued at ` 50,000., Sukhbir and Tanveer decided that whole profit on revaluation be given to Balbir., They also decided to pay the entire sum due to Balbir in cash by taking loan from the bank, rather than transferring to his loan account as per partnership deed., I. Identify the values which according to you motivated Sukhbir and Tanveer to take, decisions., II. Prepare Revaluation Account and Partners’ Capital Accounts., Ans. I. The values involved in the decision of Sukhbir and Tanveer are as follows :, (i) Recognition of personal relations over business relations., (ii) Sensitivity towards serious accident of Balbir., (iii) Moral and financial support to retiring partner., (iv) Making entire payment in cash reflects their just and equitable decision., Dr., , Cr., , II. Revaluation A/c, Particulars, , Particulars, , `, , To Furniture, To Reserve for Bad & Doubtful Debts, To Profit transferred to Balbir’s, Capital A/c, , `, , 1,000 By Stock A/c, 4,000, 10,000, , 15,000, , 15,000, , 15,000, , Partner’s Capital Accounts, Particulars, To Balbir’s, Captal A/c, (Goodwill), To Bank A/c, To Balance c/d, , Balbir, , Sukhbir, , Tanveer, , `, , `, , `, , —, , 10,000, , 96,400, —, , —, 24,800, , 96,400, , 16, , 34,800, , Particulars, , Balbir, `, , Sukhbir, `, , Tanveer, `, , By Balance b/d, 10,000 By General, Reserve, — By Revaluation, 24,800, A/c, By Sukhbir’s, Capital A/c, By Tanveer’s, Capital A/c, , 60,000, , 30,000, , 30,000, , 6,400, , 4,800, , 4,800, , 10,000, , —, , —, , 10,000, , —, , —, , 10,000, , —, , —, , 34,800, , 96,400, , 34,800, , 34,800
Page 1135 :
Chapterwise Value ........ Questions with Answers, , 6, , DEATH OF A PARTNER, , Q. 1. Why is an executor’s account prepared ?, Ans. As the deceased partner cannot receive his share of payment, so deceased, executor’s account is prepared., Q. 2. Why a retiring/deceased partner is entitled to a share of goodwill of the firm ?, Ans. The retiring/deceased partner is entitled to his share of goodwill at the time of, retirement/ death because the retiring/deceased partner was responsible for bringing the, firm to the level of enjoying reputation or goodwill and earning super or extra profit of, future profit., Q. 3. What is the difference between retirement and death of a partner ? (Any two, points.), Ans. (i) Retirement of a partner is usually planned and made effective from the date, of Balance Sheet but death of a partner may occur on any day without notice during the, year., (ii) The payment of retiring partner’s share will be received by himself but payment of, deceased partner’s share will be received by his heirs/executors., Q. 4. A, B and C are partners in a firm sharing profits in the ratio 3 : 2 : 1. B died on, 1st January, 2014. C, son of B, is of the opinion that he is the rightful owner of his father’s, share of profit, and as such, the profits of the firm be shared between A and C equally. A, does not agree. Settle the dispute between A and C according to the Indian Partnership, Act, 1932., Ans. C is not correct. The new profit sharing ratio between A and C will be 3 : 1, (i.e., 3 : 1, being outgoing partner’s share deleted)., Q. 5. X, Y and Z were partners in a firm. X died on 1st October, 2014. According to the, Partnership Deed, amount due to the deceased was payable in annual instalments, alongwith interest @ 6% p.a. Y and Z decided to pay all the money to the executors of X in, cash immediately by taking loan from the bank. Identify the value involved in this, decision., Ans. Values involved in this decision are :, (i) It reflects value of giving moral and financial support to the family by paying the, amount immediately., (ii) It reflects that personal relations of partner have over-ridden over business, relations., Q. 6. Prateek, Pramod and Pawan are partners in a firm sharing profits in the ratio of, 2 : 1 : 1. Pawan died on 1st July, 2014 due to heart attack. There is no other earning, member in the family of Pawan. However, he had a daughter Parneeti who had just, completed her post-graduation this year. Prateek and Pramod decided to take Parneeti as, a partner in place of her father. The partnership deed did not have a clause for admission, of legal heirs as a partner in such a situation., Indicate the value involved in this decision., Ans. : (i) It is an expression of gratitude and moral responsibility of Prateek and, Pramod towards family members of deceased partner., (ii) Empowering women entrepreneurship., (iii) Prateek and Pramod are extremely fair, compassionate and just in this situation., , 17
Page 1136 :
SBPD Publications Accountancy (XII), Q. 7. The Balance Sheet of Sindhu, Rahul and Kamlesh, who were sharing profits in, the ratio of 3 : 3 : 5 respectively, as on 31st March, 2014 was as follows :, Liabilities, , Amount, , Assets, , Amount, , `, , General Reserve, Bills Payable, Loan, Capitals :, Sindhu, Rahul, Kamlesh, , 1,20,000, 1,00,000, 80,000, , `, , 10,000 Cash, 20,000 Stock, 24,000 Investments, Land and Building, Sindhu’s Loan, , 32,000, 88,000, 94,000, 1,20,000, 20,000, , 3,00,000, 3,54,000, , 3,54,000, , Sindhu died on 31st July, 2014. The Partnership Deed provided for the following on, the death of a partner :, (a) Goodwill of the firm be valued at two years’ purchase of average profits for the last, three years which were ` 80,000., (b) Sindhu’s share of profit till the date of his death was to be calculated on the basis of, sales. Sales for the year ended 31st March, 2014 amounted to 8,00,000 and that from 1st, April to 31st July, 2014 ` 3,00,000. The profit for the year ended 31st March, 2014 was `, 2,00,000., (c) Interest on capital was to be provided @ 6% p.a., (d) According to Sindhu’s will, the executors should donate his share to Matri, Chaya—an orphanage for girls., Prepare Sindhu’s Capital Account to be rendered to his executor. Also identify the, value being highlighted in the question., (C.B.S.E., A.I., 2013), Ans., Working Notes :, 1. Calculation of Goodwill :, Goodwill = Average Profit × Number of Year’s Purchase = ` 80,000 × 2 = ` 1,60,000, 3, Sindhu’s share of Goodwill = ` 1,60,000 ×, = ` 48,000, 10, Sindhu’s share of Goodwill is contributed by Rahul and Kamlesh in their gaining ratio, i.e., 3 : 4., 3, ∴ Rahul’s Contribution = ` 48,000 × = ` 20,571, 7, 4, Kamlesh’s Contribution = ` 48,000 × = ` 27,429, 7, 2. Sindhu’s Share of Profit :, 2,00,000 × 100, Profit, Percentage of Profit =, × 100 =, = 25%, Sales, 8,00,000, Sindhu’s share of profit till the date of death = ` 3,00,000 ×, 3. Interest on Capital of Sindhu = ` 1,20,000 ×, , 25, 3, = ` 22,500, ×, 100 10, , 6, 4, = ` 2,400, ×, 100 12, , Sindhu’s Capital Account, `, , To Sindhu’s Loan A/c, , 18, , 20,000 By Balance b/d, , `, , 1,20,000
Page 1137 :
Chapterwise Value ........ Questions with Answers, To Sindhu’s Executor’s A/c, (Balancing figure), , 1,75,900, , 1,95,900, , 3, , By General Reserve 10,000 ×, , , 10 , , 3,000, , By Rahul’s Capital A/c (1), By Kamlesh’s Capital A/c (1), By Profit & Loss Suspense A/c (2), By Interest on Capital (3), , 20,571, 27,429, 22,500, 2,400, 1,95,900, , * Value being highlighted : Support and syampathy towards orphan girls., Q. 8. Gaurav, Saurav and Raghav were partners in a firm for many years. Gaurav, died and the partnership deed did not have a clause of admission of legal heir as a partner, in such a situation. On Gaurav’s death, assets were revalued and liabilities were, re-assessed and Gaurav’s account was credited. Also goodwill was valued and credited to, his account. Saurav and Raghav decided that Bimlesh, son of Gaurav, the deceased, partner, be made partner in the firm. They further decided that premium for goodwill shall, not be charged from Bimlesh. Indicate the value fulfilled by Saurav and Raghav., Ans. (i) By making Bimlesh, the son of the deceased partner, a partner in the firm,, Saurav and Raghav are extremely fair and just in their action., (ii) They are extending moral and financial support to the family by this act., (iii) They are also supportive by not taking premium for goodwill from Bimlesh., , 7, , DISSOLUTION OF PARTNERSHIP FIRM, , Q. 1. Chirag and Dhanraj are partners in a firm located at Patna dealing in Pan, Masala and Gutka. Government of Bihar banned the sale and purchase of both these, products in the state. So they decided to dissolve the firm. Identify the value which, motivated them to dissolve the firm., Ans. Both Chirag and Dhanraj are law abiding citizens. So it is just and equitable to, close the firm in the best interest of the society as their business has become unlawful now, in the state of Bihar., Q. 2. A, B and C are partners in a firm. A few days ago B had a quarrel with A and C, and so he sold his share in the firm to D without the consent of other partners. A and C, approached the honourable court for dissolution of the firm as D wanted to act as a partner, for 1/3rd share. Court ordered for the dissolution of the firm. Identify value involved in this, decision., Ans. Values involved in this decision are as follows :, (i) The court is just and equitable in ordering the dissolution of the firm. The reason, being, as per Partnership Act, 1932, no partner can transfer his interest/share in the firm, to other without the consent of other partners., (ii) B’s decision to sell his share without the consent of other partners is neither, correct legally nor morally. Better choice should have been to realise from the firm instead, of selling his share., Q. 3. Mention two internal liabilities whose payment does not require cash payment, at the time of dissolution of firm., Ans. (i) Provision for Doubtful Debts. (ii) Joint Life Policy., , 19
Page 1138 :
SBPD Publications Accountancy (XII), Q. 4. Why is the balance of cash or cash at bank is not transferred to the Realisation, Account on the disolution of partnership firm ?, Ans. The balance of cash or cash at bank is not transferred to Realisation Account at, the dissolution of partnership firm because it is not realised instead distribution of cash is, recorded., Q. 5. Pass the journal entries for the following at the time of dissolution of a firm :, (i) Sale of Assets = ` 1,00,000, (ii) A commission of 5% allowed to Mr. A, a partner, on sale of assets by him., Journal Entries, Dr., Cr., Ans., Date, (1), , Particulars, Cash A/c, To Realisation A/c, , L.F., Dr., , `, , `, , 1,00,000, 1,00,000, , (Being assets sold), , (2), , Realisation A/c, To Mr. A, , Dr., , 5,000, 5,000, , (Being commission paid to partner A), , Q. 6. Ram and Mohan are two partners sharing profits in the ratio of 2 : 1. Give, journal entry at the time of dissolution, if Raghav, a creditor, to whom ` 15,000 were due to, the paid, accepted office equipment at ` 10,000 and the balance was paid in cash., Journal Entry, Dr., Cr., Ans., Date, , Particulars, Realisation A/c, To Cash A/c, , L.F., Dr., , `, , `, , 5,000, 5,000, , (Being amount paid to Raghav, a creditor), , Q. 7. X and Y are two partners sharing profits in the ratio of 3 : 2. Give journal entry, at the time of dissolution, if Z, a creditor, of whom ` 30,000 were due to be paid, took over, Machinery at ` 36,000. Balance was paid by him in cash., Journal Entry, Dr., Cr., Ans., `, , Cash A/c, To Realisation A/c, , Dr., , `, , 6,000, 6,000, , (Being the amount paid by Z, a creditor), , Q. 8. Prashant and Rajesh were partners in a firm sharing profits in the ratio of 3 : 2., In spite of repeated reminders by the authorities, they kept dumping hazardous material, into a nearby river. The court ordered for the dissolution of their partnership firm on 31st, March, 2014. Prashant was deputed to realise the assets and to pay the liabilities. He was, paid ` 1,000 as commission for his services. The financial position of the firm on 31st, March, 2014 was as follows :, Balance Sheet as on 31st March, 2014, Liabilities, , Amount, , Assets, , Amount, , `, , Creditors, Mrs. Prashant’s Loan, Rajesh’s Loan, , 20, , 80,000 Building, 40,000 Investments, 24,000 Debtors, , `, , 1,20,000, 30,600, 34,000
Page 1139 :
Chapterwise Value ........ Questions with Answers, Investment Fluctuation Fund, Capitals :, Prashant, 42,000, Rajesh, 42,000, , 8,000 Less : Provision, for doubtful debts, Bills Receivable, 84,000 Cash, Profit and Loss A/c, Goodwill, 2,36,000, , 4,000, , 30,000, 37,400, 6,000, 8,000, 4,000, 2,36,000, , Following was agreed upon :, (i) Prashant agreed to pay off his wife’s loan., (ii) Debtors realised ` 24,000., (iii) Rajesh took away all investments at ` 27,000., (iv) Building realised ` 1,52,000., (v) Creditors were payable after 2 months. They were paid immediately at 10% discount., (vi) Bills Receivable were settled at a loss of ` 1,400., (vii) Realisation expenses amounted to ` 2,500., Prepare Realisation Account, Partners’ Capital Accounts and Cash Account to close, the books of the firm. Identify the value being conveyed in the question. (CBSE, 2013, A.I.), Ans., Realisation Account, , Dr., Particulars, , Amount, , Cr., Particulars, , Amount, , `, , To Building, To Investments, To Debtors, To Bills Receivable, To Goodwill, To Prashant’s Capital A/c (Wife’s Loan), To Cash A/c :, Creditors, 72,000, Realisation Expenses, 2,500, To Prashant’s Capital A/c, (Commission paid), To Profit transferred to :, Prashant’s Capital A/c, 17,700, Rajesh’s Capital A/c, 11,800, , `, , 1,20,000, 30,600, 34,000, 37,400, 4,000, 40,000, , By Provision for doubtful debts, By Creditors, By Mrs. Prashant’s Loan, By Investment Fluctuation Fund, By Cash A/c :, Debtors, 24,000, Building, 1,52,000, Bills Receivable, 36,000, 74,500 By Rajesh’s Capital A/c (Investments), 1,000, , Particulars, , Partners’ Capital Accounts, Prashant Rajesh, Particulars, `, , To Profit & Loss A/c, To Realisation A/c, (Investments), To Cash A/c, (Balancing figure), (To be paid), , 4,800, —, 95,900, , 1,00,700, , 2,12,000, 27,000, , 29,500, 3,71,000, , Dr., , 4,000, 80,000, 40,000, 8,000, , `, , 3,200 By Balance b/d, By Realisation A/c (Profit), 27,000 By Realisation A/c, 23,600, (Commission), By Realisation A/c, (Wife’s Loan), 53,800, , 3,71,000, , Prashant, `, , Cr., Rajesh, `, , 42,000, 17,700, , 42,000, 11,800, , 1,000, , —, , 40,000, , —, , 1,00,700, , 53,800, , 21
Page 1140 :
SBPD Publications Accountancy (XII), Cash Account, , Dr., Particulars, To Balance b/d, To Realisation A/c, , Particulars, 6,000 By Realisation A/c, 2,12,000 By Rajesh’s Loan, By Prashant’s Capital A/c, By Rajesh’s Capital A/c, `, , 2,18,000, , Cr., `, , 74,500, 24,000, 95,900, 23,600, 2,18,000, , Value being conveyed :, , The value being conveyed in this question is the social value of environmental, protection as dumping hazardous material into the river pollutes the environment, which, ultimately affects the society as a whole., , PART B : COMPANY ACCOUNTS AND FINANCIAL, STATEMENTS ANALYSIS, , 1, , ISSUE OF SHARES, , Q. 1. HCL Ltd. invited application for 1,00,000 equity shares of ` 10 each, payable as, follows :, On application ` 3, on allotment ` 4, on first and final call ` 3., Applications were received for 1,50,000 shares. It was decided to make pro-rata, allotment and utilise the excess application money on allotment., Indicate which value is adhered by making pro-rata allotment ?, Ans. Value of equality is adhered by making pro-rata allotment., Q. 2. Laxmi Narayan Ltd. issued 5,000 equity shares of ` 100 each as fully paid to, promoters for their services and issued 2,000 equity shares of ` 100 each as fully paid to, the underwriters for their underwriting services., Indicate, what value Laxmi Narayan Ltd. is adhering by issuing fully paid shares to, promoters and underwriters for their services ?, Ans. Laxmi Narayan Ltd. is adhering to the value of gratitude or thankfulness by, issuing fully paid shares to promoters and underwriters for their services., Q. 3. Black Diamond Ltd. made a public issue of 5,00,000 Equity shares of ` 10 each., The issued is over-subscribed by 100%. The company decided to reject applications for, 2,50,000. Equity shares, allot 1,25,000 equity shares to the applicants of 3,75,000 shares, and make full allotment to the remaining applicants., (i) Indicate the value, if any, ignored by the company in allotment of shares., (ii) Suggest a better way of allotting the shares., Ans. (i) The company has been unfair in allotting the shares. It has ignored the value, of equal distribution of wealth., (ii) It would have been more appropriate that the company made pro-rata allotment to, all the applicants., Q. 4. Agro Products Ltd. issued Equity shares which were over-subscribed. The, directors decide to utilise excess amount received against allotment and calls. The Articles, of Association of the company do not permit payment of interest on calls-in- advance. In, your opinion, what value has been ignored by the company ?, , 22
Page 1141 :
Chapterwise Value ........ Questions with Answers, Ans. The company has ignored the value of being just and fair. It has used the excess, application money without payment of interest to the shareholders., Q. 5. Happy Ltd. made a public issue of 5,00,000 Equity shares of ` 20 each. The issue, was over-subscribed. The shares were allotted as follows :, (a) Applicants upto 50 shares—25 shares to each applicant., (b) Applicants of 250-500 shares—50 shares to each applicant, (c) Applicants of 5,000 and more shares—250 shares to each applicant., What is your opinion regarding allotment of shares made by the company ?, Ans. The allotment has been equitable as the company has given due consideration to, each category of applicants—small as well as large investors., Q. 6. A Ltd. provided ` 5,00,000 for plantation of trees in and around its, manufacturing unit. Indicate the values involved in such decision., Ans. Environment protection., Q. 7. Kalyan Ltd. decided that ` 1,00,000 will be spent on the education of children of, company’s employees. Further, 10% jobs in the company will be reserved for the children of, company’s employees. Indicate the value involved in such decision., Ans. Fulfilment of corporate social responsibilities toward employees., Q. 8. Z Ltd. made a provision of 2% of its profits or ` 25 lac., whichever is higher for, the medical care, social security and recreation of its employees. State the values served by, this decision., Ans. (i) Fulfilment of corporate social responsibility towards employees., (ii) Respecting the human values and human rights., Q. 9. TISCO decided to spend ` 50 lac or 2% of its profits, whichever is higher, on the, development of parks in the city, lighting in the slum areas and road connectivity in the, residential areas of weaker section of the society. State any two values served by this, decision., Ans. (i) Fulfilment of corporate social responsibility (CSR)., (ii) Respecting the human values and human rights., Q. 10. Dunlop Ltd. set aside ` 5 lac for medical care and group insurance of its, employees, ` 1 lac for school dresses and books to the children of its employees getting, monthly salary less than ` 10,000 and ` 1 lac for scholarship to the disabled students of, nearby schools. State the values involved in this decision., Ans. (i) Fulfilment of corporate social responsibility towards employees., (ii) Sympathy towards physically handicapped students., (iii) Promotion of education., Q. 11. What are preliminary expenses ?, Ans. Expenses incurred on the formation of a company are termed as ‘preliminary, expenses’., Q. 12. What is the minimum time internal between two consecutive share calls, according to Table ‘A’ of the Companies Act, 1956., Ans. According to Table ‘A’ of the Companies Act, 1956, there must be minimum one, month internal between two consecutive share calls., Q. 13. Bharat Ltd. had invited application for 80,000 equity shares of ` 10 each at a, premium of ` 5 each. The total application money received at ` 2 per share as ` 1,92,000., Name the kind of subscription. List three alternatives for allotting these shares., , 23
Page 1142 :
SBPD Publications Accountancy (XII), Ans. Over-subscriptions., Alternatives available :, (i) To accept some applications in full and totally reject the others., (ii) To make a pro-rata distribution of shares available for allotment among the applicant, for shares., (iii) Application of some shares are rejected outright and pro-rata allotment of, remaining number of shares., Q. 14. Shalimar Ltd. made the first call of ` 3 per share on its 2,00,000 equity shares, on 1.4.2014. Disoaker, a shareholders, holding 1,000 shares paid the second and final call, amount of ` 2 per share along with the first call money., Pass the journal entries for recording the above., Journal Entries, Dr., Cr., Ans., Date, , Particulars, Equity Share First Call A/c, To Equity Share Capital A/c, , L.F., Dr., , `, , `, , 6,00,000, 6,00,000, , (Being amount due on first call), , Bank A/c, To Equity Share First Call A/c, To Calls-in-Advance A/c, , Dr., , 6,02,000, 6,00,000, 2,000, , (Being first call money received along with calls in advance on 1,000, shares @ ` 2 per share), , Q. 15. Rajesh Ltd. registered with an authorised capital of ` 10,00,000 divided into, 10,000 equity shares of ` 10 each. The company issued 80,000 shares for public, subscription. Applications were received for 50,000 shares and allotment was made to all, the applicants. All the calls were made and duly received except the final call of ` 2 per, share on 500 shares. Prepare the Balance Sheet of the company showing the share capital., Ans., Balance Sheet of Rajesh Ltd., (as on .................), I. Shareholders’ Funds :, (a) Share Capital, , Note No., , `, , 4,99,000, 4,99,000, , II. Assets :, Current Assets :, Cash at Bank, , 4,99,000, 4,99,000, , Q. 16. What is minimum subscription ?, Ans. Minimum subscription, according to the SEBI guidelines, is 90% of the issued, capital. It is the amount which is necessary for :, (a) purchasing fixed assets for company., (b) paying preliminary expenses, and, (c) meeting necessary working capital of the company., Q. 17. ABC Ltd. issued 10,000 shares of ` 50 each at a premium of ` 10, payable as under :, On Application ` 10 per share, On Allotment ` 30 per share (including premium of ` 5 per share), , 24
Page 1143 :
Chapterwise Value ........ Questions with Answers, On First and Final Call ` 20 per share (including premium of ` 5 per share), Applications were received for 24,000 shares. Applicants for 12,000 shares were, allotted only 2,000 shares and applicants for 4,000 were sent letters of regrets. Shares, were allotted in full to the remaining applicants. All the money due was duly received., (i) Indicate which value has been affected by rejecting the applications of the, applicants who had applied for 4,000 shares ?, (ii) Suggest better alternatives., (iii) Give Journal Entries to record the above transactions in the books of the, company., Ans. (i) Value of equality and just has been affected by rejecting the applications of, small investors from getting shares of the company., (ii) The better alternative could have been to allot the shares on pro-rata basis to all the, applicants., (iii), Journal Entries, Dr, Cr, Date, , Particulars, Bank A/c, To Share Application A/c, , L.F., Dr., , `, , `, , 2,40,000, 2,40,000, , (Being application money received on 24,000 shares @ ` 10 per share), , Share Application A/c, To Share Capital A/c, To Share Allotment A/c, To Calls-in-Advance A/c, To Bank A/c, , Dr., , 2,40,000, 1,00,000, 60,000, 40,000, 40,000, , (Being application money adjusted and balance refunded), , Share Allotment A/c, To Share Capital A/c, To Securities Premium A/c, , Dr., , 3,00,000, 2,50,000, 50,000, , (Being allotment money due alongwith premium), , Bank A/c, To Share Allotment A/c, , Dr., , 2,40,000, 2,40,000, , (Being allotment money received on 8,000 shares @ ` 30 per share), , Share First and Final Call A/c, To Share Capital A/c, To Securities Premium A/c, , Dr., , 2,00,000, 1,50,000, 50,000, , (Being first and final call money due), , Bank A/c, Calls-in-Advance A/c, To Share First and Final Call A/c, , Dr., Dr., , 1,60,000, 40,000, 2,00,000, , (Being first and final call money received), Working Notes :, 1. Total amount received on Application = 24,000 × ` 10 = ` 2,40,000, 2. Pro-rata Category = Applied for 12,000 shares : Allotted = 2,000 shares (i.e. 6 : 1), `, Money received on Applications 12,000 × ` 10 = 1,20,000, Less : Money required on Applications 2,000 × ` 10 = 20,000, Excess money received on application, 1,00,000, Money required on allotment of 2,000 shares = 2,000 × ` 30 = ` 60,000, so, entire amount due on allotment of 2,000 shares is already received., , 25
Page 1144 :
SBPD Publications Accountancy (XII), , 2, , FORFEITURE AND RE-ISSUE OF SHARES, , Q. 1. State two effects of forfeiture of shares., Ans. (i) The name of the shareholder is removed from the register of members. It, means he is no more shareholder of the company., (ii) The forfeited projected amount should be transferred to new opened share, forfeiture account., Q. 2. State with reason whether a company can issue its share at discount in its Initial, Public Offer (IPO)., Ans. A compay can issue those shares at discount which have already been issued,, i.e., shares should be a class already issued. So initial public offer cannot be issued at, discount., Q. 3. When does a company forfeits its shares ?, Ans. When a shareholder fails to pay allatment and/or call money due on shares, the, company has the authority to forfeit such shares., Q. 4. Cosmos Ltd. forfeited 2,000 equity shares of ` 10 each, ` 7 called up, issued at a, premium of 20% (payable at the time of allotment) for non-payment of the first call of ` 2, per share. Give journal entry., Journal Entry, Dr., Cr., Ans., Date, , Particular, Equity Share Capital A/c, To Equity Share First call A/c, To Share Forfeiture A/c, , L.F., Dr., , `, , `, , 14,000, 4,000, 10,000, , (Being 2,000 equity shares forfeited), , Q. 5. What is meant by Surrender of Shares ?, Ans. It is a voluntary return of shares by a shareholder for the purpose of, cancellation., Q. 6. A company offered 2,00,000 Equity shares of ` 10 each to public on payable as `, 3 on application, ` 4 on allotment and balance as and when required. Applications were, received for all the shares and shares were duly allotted., A shareholder holding 2,000 equity shares failed to pay the allotment money. His, shares were forfeited., (a) Which value is not adhered by company by forfeiting shares for non-payment of, allotment money and not returning the amount paid by shareholders on application., (b) Pass Journal Entries to record the above transactions., Ans. (a) Company is not adhering to the value of gratitude by forfeiting the shares and, not returning the amount already paid by the shareholders. It is unfair on the part of the, company to keep the already paid amount on forfeiture, because shareholders provide, capital to the company in need., Journal Entries, Dr, Cr, (b), Date, , Particulars, Bank A/c, To Equity Share Application A/c, , L.F., Dr., , (Being the application money received on 2,00,000 equity shares @ ` 3, per share), , 26, , `, , `, , 6,00,000, 6,00,000
Page 1145 :
Chapterwise Value ........ Questions with Answers, Equity Share Application A/c, To Equity Share Capital A/c, , Dr., , 6,00,000, 6,00,000, , (Being application money transferred to Share Capital A/c), , Equity Share Allotment A/c, To Equity Share Capital A/c, , Dr., , 8,00,000, 8,00,000, , (Being allotment money due on 2,00,000 shares @ ` 4 per share), , Bank A/c, To Equity Share Allotment A/c, , Dr., , 7,92,000, 7,92,000, , (Being allotment money received on 1,98,000 shares), , Equity Share Capital A/c, To Equity Share Allotment A/c, To Forfeited Shares A/c, , Dr., , 14,000, 8,000, 6,000, , (Being forfeiture of 2,000 shares for non-payment of allotment money), , 3, , ISSUE OF DEBENTURES, , Q. 1. The rate of return on capital employed of DFL Ltd. is 10% and the borrowing cost, is 12%. The company decided to raise funds by issuing shares. Indicate the value fulfilled, by the company in raising funds by issuing shares., Ans. (i) The company has fulfilled the value of democratic management., (ii) The shareholders will have voting rights and better return on capital, capital, appreciation benefits, etc., Q. 2. The rate of return on investment is 10% and borrowing cost is 15%. The company, still prefers to raise funds by borrowings and not by issuing shares. State any one value, that has been ignored by the company in raising funds., Ans. The company has ignored the value of democratic management as the, debentureholders do not have the voting right., Q. 3. A Ltd. always makes payment of interest on debentures on the due date. It has, never defaulted in the payment of interest. Indicate any two values fulfilled by the, company., Ans. (i) Compliance of law, (ii) Trustworthiness., Q. 4. What is meant by ‘Convertible debentures’?, Ans. The debentures which are convertible into equity shares or other securities, either at the option of debentureholder or at the option of the company after a specified, period are called convertible debentures., Q. 5. Why should an investor prefer to invest in the debenture of a company rather, than in its Shares?, Ans. An investor would prefer to invest in debentures rather than shares because, interest on debentures is payable irrespective of the company is making a profit or, incurring a loss whereas dividend on shares is paid only when a company makes a profit., Q. 6. Why should an investor prefer to invest partly in shares and partly in the, debentures of company?, Ans. An investor would prefer to invest partly in shares and partly in the debentures, because they provide liquidity, safety, capital appreciation from shares and assured return, from debentures to the investors., , 27
Page 1146 :
SBPD Publications Accountancy (XII), Q. 7. What is meant by issue of debentures as ‘Collateral Security’?, Ans. Collateral Security means secondary (additional) security in addition to the, principal security., Q. 8. AB Ltd. took over assets of ` 17,00,000 and liabilities of ` 3,00,000 of C Ltd. at an, agreed price of ` 14,40,000. The purchase consideration was discharged by using 12%, debentures of ` 100 each at a premium of 20%. Pass necessary journal entries., Journal Entries, Dr., Cr., Ans., Date, , Particulars, Assets A/c, Goodwill A/c, To Liabilities A/c, To C Ltd., , L.F., Dr., Dr., , `, , `, , 17,00,000, 40,000, 3,00,000, 14,40,000, , (Being assets and liabilities of C Ltd. taken over), , C Ltd., To 12% Debentures A/c, To Securities Premium A/c, , Dr., , 14,40,000, 12,00,000, 2,40,000, , (Being 12,000 debentures of ` 100 each issued to C Ltd. at a, primium of 20% in satisfaction of purchase price), , 4, , REDEMPTION OF DEBENTURES, , Q. 1. Sun-Plant Ltd. had issued 12% debentures at par and redeemable after 10 years., At the end of 5th year the company offered to its debentureholders to get their holding, converted into equity shares at par. Which value has been fulfilled by the company ?, Ans. (i) Fulfilment of democratic management., (ii) Promotion of risk capital as risk capital is capable of better returns in long-term., Q. 2. Mention any one difference between premium on issue of debentures and, premium on redemption of debentures., Ans. Premium on issue of debentures is a capital profit whereas premium on, redemption of debentures is a capital loss., Q. 3. State the exceptions (any three points) to the creation of Debenture Redemption, Reserve., Ans. According to the SEBI guidelines, following are the exceptions :, (i) All India Financial Institutions regulated by Reserve Bank of India., (ii) Other Financial Institutions regulated by RBI., (iii) Banking Companies., (iv) National Housing Bank., Q. 4. How would you treat the profit on sale of own debentures purchased by the, company in open market?, Ans. It is treated as revenue profit. So it should be transferred to Profit & Loss A/c of, the company., Q. 5. In which account gain on redemption of debentures is credited?, Ans. Capital Reserve., , 28
Page 1147 :
Chapterwise Value ........ Questions with Answers, Q. 6. Janta Ltd. has issued 40,000, 10% Debentures of ` 100 each of which half the, amount is due for redemption on March 31, 2020. The company has in its Debenture, Redemption Reserve Account a balance of ` 6,00,000. How much additional amount of DRR, is required before the redemption of debentures begins, if redemptions is to be made out of, profits. Record journal entries for redemption of debentures to meet 25% requirements., Ans. Further creation of DRR ` 4,00,000., Journal Entries, Dr., Cr., Date, , Particulars, 10% Debentures A/c, To Debentureholders A/c, , L.F., Dr., , `, , `, , 10,00,000, 10,00,000, , (Being transfer of 10% debentures to debentureholders account), , Debentureholders A/c, To Bank A/c, , Dr., , 10,00,000, 10,00,000, , (Being debentureholders paid), , Q. 7. Excel Ltd. (a) issued 1,000; 10% debentures of ` 100 each in Urban Open, Markets at a premium of 10%, redeemable at par., (b) Issued 1,000; 10% debentures of ` 100 each to Small-scale Industrial Units at par,, redeemable at a premium of 10%., I. By doing so, what value has been fulfilled by the company?, II. Pass Journal Entries for the above transactions in the books of Excel Ltd., Ans. I. Promotion of objective of equitable development of the nation, i.e., supporting, even growth amongst all parts of the country., Journal Entries in the Books of Excel Ltd., Dr, Cr, II. (a), Date, , Particulars, Bank A/c, , L.F., Dr., , `, , `, , 1,00,000, , To Debenture Application & Allotment A/c, , 1,00,000, , (Being application money received on 1,000 debentures @ ` 100 each), , Debenture Application & Allotment A/c, , Dr., , 1,10,000, , To 10% Debentures A/c, , 1,00,000, , To Securities Premium A/c, , 10,000, , (Being allotment of debentures, issued at premium of ` 10 per, debenture), , II. (b), , Journal Entries in the Books of Excel ltd., , Date, , Particulars, Bank A/c, , L.F., Dr., , Dr, , Cr, , `, , `, , 1,00,000, , To Debenture Application & Allotment A/c, , 1,00,000, , (Being application money received on 1,000 debentures @ ` 100 each), , Debenture Application & Allotment A/c, , Dr., , 1,00,000, , Loss on Issue of Debentures A/c, , Dr., , 10,000, , To 10% Debentures A/c, To Premium on Redemption of Debentures A/c, , 1,00,000, 10,000, , (Being debentures issued at par, redeemable at a premium of 10%), , 29
Page 1148 :
SBPD Publications Accountancy (XII), , 5, , FINANCIAL STATEMENTS OF A COMPANY :, BALANCE SHEET OF A COMPANY, , Q. 1. Which Section of the Companies Act, governs the preparation of Books of, accounts etc. to be kept by the company ?, Ans. Section 128., Q. 2. Which Section of the Companies Act requires the Balance Sheet to be prepared, in the prescribed form ?, Ans. Section 129., Q. 3. State the major headings on Equity & Liabilities side of the Balance Sheet, according to the Schedule III, Part I of the Companies Act, 2013., Ans. (1) Shareholders’ Funds; (2) Share Application money pending allotment; (3), Non-current Liabilities; (4) Current Liabilities., Q. 4. State the major headings on Assets side of Balance Sheet according to Schedule, III, Part I of Companies Act, 2013., Ans. (1) Non-Current Assets, (2) Current Assets., Q. 5. What is Segment Report ?, Ans. A report giving all relevant information about the different types of products and, services of a concern or its unit and also its operations in all different geographical area is, known as ‘Segment Report’., , 6, , ANALYSIS OF FINANCIAL STATEMENTS, , Q. 1. State any one objective of Financial Statement Analysis., Ans. To know the solvency and profitability of the firm., Q. 2. What are the importance of Financial Statement Analysis ?, Ans. Following are the importance of financial statement analysis :, (i) Assessing the profitability of the concern., (ii) Judging the efficiency of the concern., (iii) Judging the liquidity of the concern., Q. 3. ‘‘Analysis of Financial Statement ignores price level changes’’. Comment., Ans. Figures contained in financial statements do not show the effects of changes in, the price level. As a result misleading figures may be obtained by making a comparison of, figures of past year with current year figures., Q. 4. Why is the shareholders interested in analysing financial statements ?, Ans. Shareholders are interested in the logivity of the business enterprise and, therefore, they want to know the earning capacity of the enterprise and its prospects for, future growth and prosperity., Q. 5. Why are the financial institutions interested in analysing financial statements ?, Ans. The financial institutions are interested in analysis of the financial statements, to know the profit earning capacity of the business and its long-term solvency so that they, may grant loan to the business concern easily., , 30
Page 1149 :
Chapterwise Value ........ Questions with Answers, , 7, , TOOLS FOR FINANCIAL ANALYSIS :, COMPARATIVE STATEMENTS, , Q. 1. What is horizontal analysis?, Ans. When financial statements for a number of years are analysed, the analysis is, called horizontal analysis. Such analysis is mostly in the form of ‘Comparative Financial, Statements’., Q. 2. What is vertical analysis?, Ans. When financial statements for a single year are analysed, the analysis is called, vertical analysis. Statements containing such analysis are termed as ‘Common-size, Statements’., Q. 3. List any four tools for financial analysis., Ans. (i) Comparative Statements, (ii) Common-size Statements, (iii) Ratio Analysis,, (iv) Cash Flow Statement., Q. 4. Illustrate absolute data in terms of money value., Ans. Sales during 2012-13 ` 8 crore and in 2013-14 it is ` 10 crore. It shows that sales, increased in 2013-14 by ` 2 crore in comparison to sales of 2012-13. This increase of ` 2, crore is known as absolute date in terms of money value., Q. 5. Illustrate absolute data in terms of percentage., Ans. Sales in 2012-13 ` 8 crore, Sales in 2013-14 ` 10 crore, Absolute change in 2013-14 in relation to 2012-13 = ` 2 crore., 2 × 100, Hence, Change in percentage term =, = 25%., 8, This increase of 25% is known as absolute data in terms of percentage., , 9, , ACCOUNTING RATIOS, , Q. 1. Name the ratios which are useful to test the liquidity of a concern., Ans. (i) Current Ratio, (ii) Quick Ratio., Q. 2. Name the ratios which are useful to test profitability of a concern., Ans. (i) Gross Profit Ratio, (ii) Operating Ratio, (iii) Net Profit Ratio, (iv) Return on, Investment., Q. 3. List any two activity ratios., Ans. (i) Stock Turnover Ratio, (ii) Debtors Turnover Ratio., Q. 4. While calculating quick ratio, name two items that are execluded from Current, Assets., Ans. (i) Closing Stock, (ii) Prepaid Expenses., Q. 5. The Debt-Equity Ratio of a company is 0.6 : 1. Explain that conversion of, Debentures into Equity Shares would increase, decrease or not change it., Ans. The Debt-Equity Ratio will decrease., Long-term debts are decreased and total equity is increased by the same amount., , 31
Page 1150 :
SBPD Publications Accountancy (XII), , 10, , CASH FLOW STATEMENT, , Q. 1. State that declaration of Final Dividend would result in flow, out flow or no flow, of cash., Ans. No flow of cash., Reason : Dividend has been declared, it has not been paid as yet., Q. 2. Give an example of a single transaction which includes cash flows that are, classified under more than one activity., Ans. Instalment paid in respect of a fixed asset purchased on hire purchase system, includes both interest and loan, the interest element is classified under financing activities, and the loan element is classified under investing activities., Q. 3. Sunplant Finance Ltd. is a company engaged in the business of financing. In the, Cash Flow Statement, it has shown interest under Investing Activities. Do you think it, appropriate? Given reason for your answer., Ans. The business of the company is financing. Here financing is operating activity., Interest earned by a financing company is treated as operating activity. Hence, the, depiction of interest as an investment activity is not correct., It should be shown as an operating activity., Q. 4. Ritu Finance Ltd., a company engaged in providing loans and investing into, shares has received dividend on shares. In the cash flow statement where it should be, shown? Give reasons also., Ans. The company is engaged in the business of providing loans and also investing in, shares. Any income arising from these activities should be shown under operating activity., Q. 5. Bronza Ltd. is engaged in trading of cosmetic products. It had purchased a, lottery ticket and a cash prize of ` 1,00,000. In the cash flow statement where it should be, depicted and why ?, Ans. Winning from lottery will be shown under ‘Operating Activity as an, extra-ordinary item’., Reason : AS-3 (Revised) defines operating activity as an activity, which is the, principal revenue producing activity and other activity, that is not investing or financing, activity., l, , 32
Page 1151 :
LATEST MODEL PAPER, Jharkhand Academic Council, (JAC) Ranchi, Accountancy, Class-XII, [Full Marks :80, , Time : 3 Hours], , General Instructions :, (i) All questions are compulsory., (ii) Candidates are required to give their answers in their own words as far as practicable., (iii) Figures in the margin indicate full marks., (iv) This question paper contains two Parts A and B., (v) Both Parts A and B are compulsory for all candidates., (vi) All parts of question should be attempted at one place., , Part-A, Answer the following questions :, 1. Income and Expenditure Account is a :, (a) Personal Account, (c) Nominal Account, , 1×8=8, (b) Real Account, (d) None of these, , 2. Specific donation is :, (a) Capital Receipt, (c) An Asset, , (b) Revenue Receipt, (d) None of these, , 3. Liability of Partners is :, (a) Limited, (c) Restricted, 4. Revaluatio Account is a :, (a) Personal Account, (c) Nominal Account, 5. Sacrificing Ratio :, (a) New Ratio – Old Ratio, (c) Gaining Ratio – Old Ratio, , (b) Unlimited, (d) None of these, (b) Real Account, (d) None of these, (b) Old Ratio – New Ratio, (d) Old Ratio – Gaining Ratio, , 6. The excess of average profits over the normal profit is called :, (a) Super Profit, (b) Fixed Profit, (c) Abnormal Profit, (d) None of these, 7. Share of goodwill brought by new partner in cash is shared by old partners in :, (a) Sacrificing ratio, (b) Old Ratio, (c) New Ratio, (d) Equal Ratio, 8. The maximum number of members in a private company is limited to :, (a) 20, (b) 7, (c) 50, (d) 200, [Ans. 1. (c), 2. (a), 3. (b), 4. (c), 5. (b), 6. (a), 7. (a), 8. (d)A]
Page 1152 :
2, , SBPD Publications Accountancy (XII), , State whether the following statements are ‘True’ or ‘False’ :, Receipts and Payments Account is a nominal account., The liability of a partner is limited., Partnership is created by an agreement., Excess of Income over Expenditure is called ‘Surplus’., Company is an artificial personal created by law., A debentureholder is an owner of the Company., [Ans. 9. False, 10. False, 11. True, 12. True, 13. True, 14. False.], 15. X and Y are partners. X’s capital is ` 10,000 and Y’s capital is ` 6,000. Interest is, payable @ 6% p.a. Y is entitled to a salary of ` 200 per month. Profit for the current, year is ` 8,000 before interest and salary to Y. Divide the profit between X and Y. 4, [Ans. Net Profit (divisible) ` 4,640, X : ` 2,320, Y : ` 2,320.], 16. ABC Ltd. purchased assets worth ` 4,18,000 from Jharkhand Industrial Corporation, and issued Equity shares of ` 100 each, fully paid, in satisfaction of the purchase, consideration. Show the journal entries in the books of ABC Ltd. assuming that the, shares were issued (i) at par, and (ii) at a premium of 10%., 4, [Ans. J/E, Securities Premium ` 38,000.], 17. From the following information, calculate goodwill by the capitalisation method : 4, 9., 10., 11., 12., 13., 14., , `, , (i) Actual Net Profit, 8,000, (ii) Normal Rate of Profit, 10%, (iii) Total Assets of the firm, 1,20,000, (iv) Liabilities, 60,000, [Ans. Goodwill ` 20,000.], 18. From the following Receipts and Payments Account, prepare an Income and Expenditure Account for the year ended 31st March, 2019 :, 6, Receipts & Payment Account, Receipts, , Amount, , Payments, , `, , Balance (1-4-2018), To Donations, To Subscriptions, To Interest on Investment, To Sale of Old Furniture, , 6,700, 8,000, 12,000, 2,500, 75, , 29,275, , Amount, `, , By, By, By, By, By, By, By, By, By, , Charities, Staff Salaries, Rent and Rates, Printing & Stationery, Postage, Advertising, Purchase of Furniture, Investments, Balance (31-3-2019), , 10,500, 2,600, 1,200, 300, 100, 250, 750, 5,000, 8,575, 29,275, , Onehalf of donation is to be treated as income, ` 100 were owing for rent, ` 300 for, staff salary and ` 50 for advertising at the end of the year. Interest on investment, ` 525 had accrued but not received., [Ans. Excess of Income over Expenditure ` 3,625.]
Page 1153 :
3, , Latest Model Paper, , 19. Jupiter Company Limited issued 35,000 equity shares of ` 10 each at a premium of, ` 2 payable as follows :, 6, On Application, ` 3, On Allotment, ` 5 Including Premium, Balance on First and Final Call, The issue was fully subscribed and all the money was duly received. Record Journal, entries in the books of Rudra Company Limited., [Ans. J/E, Securities Premium Reserve A/c (Cr.) ` 70,000.], 20. Santosh Ltd. offered for public subscription 10,000 debentures of ` 100 each payable, as ` 30 per debenture on application, ` 50 per debenture on allotment and the balance, on a call. Applications were received for 8,000 debentures and these were issued. All, the calls were duly made and money due thereon realised in full. show the Cash Book, and Journal Santosh., 6, [Ans. Cash Book (Bank Column) Balance ` 8,00,000.], , Part-B, 21. Prepare Balance Sheet of A and B, who share profits in the ratio of 2 : 1., Liabilities, , Amount, , Assets, , Amount, , `, , Bank Overdraft, Reserve Fund, Sundry Creditors, Capital :, A, B, , 15,000, 12,000, 20,000, 40,000, 30,000, , 70,000, 1,17,000, , `, , Sundry Debtors, Less : Provision, Stock, Building, Patents, Machinery, , 40,000, 3,600, , 36,400, 20,000, 25,000, 2,000, 33,600, 1,17,000, , They admitted C into partnership on this date. New profit sharing ratio is agree as 3/6 :, 2/6 : 1/6. C brings in proportionate capital after the following adjustments :, 1. C brings in ` 10,000 in cash as his share of Goodwill., 2. Provision for doubtful debts is to be reduced by ` 2,000., 3. There is an old furniture valued ` 2,600. It does not appear in the books of the firm., It is now to be recorded., 4. Patents are valueless., 5. 2% discount is to be received from creditors., Prepare Revaluation A/c, Capital A/cs and the Opening Balance Sheet., 8, [Ans. Revaluation A/c : Profit ` 3,000; Capital A/cs Balance : A ` 60,000, B ` 35,000,, C ` 19,000, Balance Sheet Total ` 1,48,600, Hint : Cash A/c ` 29,000.], 22. Priyank Ltd. issued 4,000, 6% debentures of ` 100 each at ` 105. The debentureholders, have the option of converting debentures within one year into 8% Preference shares, of ` 100 at ` 125. At the end of the first year interest on debentures was outstanding., Holders of 200 debentures dicided to take the advantages of the option. Give journal, entries and show there items in the Balance Sheet of the Company., 8, [Ans. J/E, Securities Premium A/c (Cr.) 20,000 in case of issue of debentures and, ` 4,000 in case of conversion, Balance Sheet Total ` 4,20,000.]
Page 1154 :
4, , SBPD Publications Accountancy (XII), , 23. Describe the objectives of financial statement analysis., 24. Prepare Comparative Statement of Profit and Loss from the following data :, 31.3.2018, , Particulars, Revenue from Operation, Gross Profit Ratio, Administrative Expenses, Income Tax, , 4, 4, , 31.3.2019, , `, , `, , 6,00,000, 30%, 40,000, 50%, , 8,00,000, 40%, 1,00,000, 50%, , [Ans. Change in Percentage (Increase) Revenue from Operations 33.33%, Cost of goods, sold 14.29%, Gross Profit 77.78%, Administrative Expenses 150%, Profit before, Tax 57.14%, Income tax 57.14%. Net Profit after Tax 57.14.], 25. Calculate the Debtors Turnover Ratio from the following information :, Total Sales, ` 4,00,000, Cash Sales, 20% of Total Sales, Debtors on 1.1.2018, ` 40,000, Debtors on 31.12.2018, ` 1,20,000, [Ans. 4 times.], 26. From the following Balance Sheets of Goodluck Ltd., prepare Cash Flow Statement, according Revised AS-3 by Indirect Method :, 31.3.2018 31.3.2019, , Particulars, , `, , I., , Equity and Liabilities :, 1. Shareholders Funds :, Share Capital, Reserve, Statement of Profit & Loss (Surplus), 2. Current Liabilities :, Trade Payables, , II. Assets :, 1. Non-Current Assets :, Machinery, Goodwill, 2. Current Assets :, Trade Receivables, Inventory, Cash at Bank, , Total, , Total, , `, , 2,25,000, 20,000, 15,000, , 2,50,000, 35,000, 24,000, , 38,500, 2,98,500, , 50,500, 3,59,500, , 1,20,000, 36,000, , 1,60,000, 20,000, , 1,19,000, 10,000, 13,500, 2,98,500, , 1,54,500, 15,000, 10,000, 3,59,500, , Depreciation charged on machinery ` 30,000., [Ans. (A) Net Cash generated from Operating Activities ` 41,500; (B) Net Cash used, in Investing Activities ` 70,000; (C) Net Cash generated from Financing, Activities ` 25,000; Net Cash Decrease in Cash and Cash Equivalents (A+B+C), ` 3,500.], [Hint : Net Profit before Tax ` 24,000; Operating Profit before w.c. changes ` 70,000.], , ❖❖
Page 1155 :
XC-ACT-(Comp.)-C, Commerce [XII], , EXAMINATION PAPER, 2019, Jharkhand Academic Council, (JAC) Ranchi, , ACCOUNTANCY, Class-XII, Time : 3 Hours], , [Full Marks :80; Pass Marks : 26, , General Instructions :, (i) All question are compulsory., (ii) This question paper contains two parts–A and B., (iii) Both parts A and B are compulsory for all candidates., (iv) All parts of question should be attempted at one place., , Part-A, Objective Type Questions, , 1., , 2., , 3., , 4., , 5., , 6., , 7., , Answer the following questions :, Choose the correct option :, 1×8=8, Payment of honorarium to secretary is treated as :, (a) Revenue Expenditure, (b) Capital Expenditure, (c) Revenue Income, (d) None of these, Income and Expenditure Account generally indicates :, (a) Net profit/ loss, (b) Bank balance, (c) Capital fund, (d) None of these, Super profit means :, (a) less than normal profit, (b) above normal profit, (c) average profit, (d) none of these, A and B are partners in a firm. C is admitted for ¼ share. The sacrificing ratio of A and, B is :, (a) 1 : 1, (b) 1 : 2, (c) 2 : 1, (d) none of these, Securities premium cannot be applied :, (a) for paying Dividend to members, (b) for issuing Bonus shares to members, (c) for writing off Preliminary Expenses of company, (d) for writing off discount on issue of debentures, Debenture holders receive :, (a) Profit, (b) Interest, (c) Dividend, (d) None of these, Balance of forfeited shares account after re-issue of forfeited shares is transferred to :, (a) General Reserve A/c, (b) Capital Reserve A/c, (c) Revenue Reserve A/c, (d) None of these
Page 1156 :
2, , Accountancy (XII), 8. Financial statements are :, (a) Recorded facts, (b) Anticipated facts, (c) Estimated facts, (d) None of these, State whether the following statements are ‘True’ or‘False ’., , 9., 10., 11., 12., , 1×6=6, , Interest received on Endowment fund is a Revenue Income., Capital items are entered in Income and Expenditure Account., A partnership can be formed only for a legal business., When a partner is admitted, there is dissolution of a firm., , 13. Goodwill of the firm is a part of Current Asset., 14. The balance of forfeited share A/c represents a capital loss., 15. Distinguish between Receipts and Payments Account and Income and Expenditure, Account., 4, 16. Subscriptions received during the year ending on 31.12.2017 were as follows :, (` ), (` ), For 2016, 80, For 2017, 4,220, For 2018, 160, 4,460, There are 450 members, each paying an annual subscription of ` 10. ` 90 were in arrears, for 2016 at the beginning of 2017. Calculate the income from subscription in the income, and expenditure account for the year ending on 31st December, 2017., 4, 17. Ajay and Vijay are partners with capitals of ` 30,000 and ` 10,000 respectively on 1st, April, 2017. The trading profit (before taking into account the provisions of deed) for, the year ended on 31st March, 2018 was ` 12,000. Interest on capital is to be allowed at, 6% per annum. Vijay is entitled to a salary of ` 3,000 p.a. The drawings of the partners, were ` 3,000 and ` 2,000. The interest on drawings for Ajay is ` 100 and for Vijay ` 50., 18. Sunita and Asha are partners sharing profits in the ratio 3 : 2. Sonali is admitted for, , 3, share of half of which was gifted by Sunita and the remaining share was taken by, 10, Sonali equally from Sunita and Asha. Calculate new profit-sharing ratio., 19. Pragati Ltd. has 5000, 10% Debentures of ` 100 each due for redemption on 31st March,, 2018. Assume that Debenture Redemption Reserve has a balance of ` 90,000 on that, date. It was decided to invest the required amount towards Debenture Redemption, Investment. Record the necessary Journal entries at the time of redemption of debentures., 6, 20. From the following information, calculate the value of goodwill :, 6, (i) Average capital employed in the business ` 6,00,000., (ii) Net trading profits of the firm for the past three years were ` 1,07,600; ` 90,700 and, ` 1,12, 500, (iii) The rate of interest expected from capital having regard to the risk involved is 12%, p.a., (iv) Fair remuneration to the partners for their services ` 12,000 p.a. not charged to, Profit and Loss Account so far., (v) Sundry Assets of the firm ` 7,54,762; Current Liabilities ` 31,329., (vi) Goodwill is valued on the basis of 3 years purchase of the super profit.
Page 1157 :
Examination Paper–2019 (JAC), , 3, , 21. Bihar Ltd. issued 1000, 15% debentures of ` 100 each at a premium of 10% payable as, follows :, ` 25 on Application (including premium of ` 5., ` 25 on Allotment (including premium of ` 5., ` 60 on First and Final call., , Applications were received for 1400 debentures and the allotment was made to all, applicants proportionately. Money overpaid on application was utilized towards allotment. Pass necessary Journal entries in the books of the company., 6, , Part-B, 22. The following is the Balance Sheet of Sumit and Ajit as on 31st March, 2018 :, Liabilities, , Amount, , Assets, , `, , Capitals, Sumit, Ajit, , `, , 1,00,000, 50,000, , 1,50,000, , Amount, `, , Buildings, , 80,000, , Furniture, , 30,000, , Debtors, , 60,000, , Creditors, , 50,000, , Stock, , 40,000, , Bills Payable, , 50,000, , Cash, , 40,000, , 2,50,000, , 2,50,000, , The partners share profits and losses in the ratio of 3 : 2. From 1.4.2018, they agreed to, share profits and losses equally. For this purpose, the following were agreed upon :, (i) Buildings are to be valued at ` 1,40,000., (ii) Current value of furniture is to be taken at ` 40,000., (iii) A provision for doubtful debts @ 12% is to be made on debtors., Prepare necessary Ledger Accounts and Revised Balance Sheet., 23. Jayant Company Limited offered for public subscription 10000 shares of ` 10 each at, ` 11 per share. Money was payable as follows :, ` 3 on application, ` 4 on allotment (including premium), ` 4 on first and final call., Applications were received for 12000 shares and the Directors made prorata allotment., Ayushi, an applicant for 120 shares, could not pay the allotment and call money and, Surabhi, a holder of 200 shares, failed to pay the cal. All these shares were forfeited., Out of the forfeited shares, 150 shares (the whole of Ayushi’s shares being included), were issued at ` 8 per share. Journalise entries for the above transactions and prepare, the share Forfeited Account., Or, What are the various methods of redemption of debentures ? Explain., 24. The following ledger balances were extracted from the books of Rohit Ltd. as on 31st, March, 2018 : Land and Building ` 2,00,000, 12% Debentures ` 2,00,000, share capital, 100000Equity shares of ` 10 each fully paid up, Plant and Machinery ` 8,00,000, Goodwill ` 2,00,000, Investments in shares of Ravi Ltd ` 2,00,000, Bills Receivable ` 50,000,, Debtors ` 1,50,000, Creditors ` 1,00,000, Bank Loan (Unsecured) ` 1,00,000, Provision, for Taxation ` 50,000, Discount on Issue of 12% Debentures ` 5,000, Proposed Dividend, ` 55,000, Stock ` 1,00,000, General Reserve ` 2,00,000.
Page 1158 :
4, , Accountancy (XII), You are required to prepare the Balance Sheet of the company as per Schedule III, Part, I of the Companies Act, 2013., Or, Explain the application of Electronic spreadsheet in general accounting., , 25. Calculate cash flow from operating activities of M.S. Limited from the following information by Direct Method :, Liabilities, , Amount, , Assets, , `, , Amount, `, , Cash Sales, , 2,40,000, , Rent paid, , 20,000, , Cash received from debtors, , 1,80,000, , Office Expenses paid, , 16,000, , Cash Purchases, Cash paid to creditors, Salaries paid, , 1,00,000, 1,20,000, 48,000, , Royalties received, Income-tax paid, Tax Refund received, , 1,00,000, 52,000, 8,000, , Commission received, , 40,000, , Insurance claim for earthquakes, , 1,00,000, , Or, Explain the concept of Data model with the help of an example., , vv
