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Accounting for Share Capital, , 1, , A, LEARNING OBJECTIVES, After studying this chapter,, you will be able to :, • explain the basic nature, of a joint stock company, as a form of business, organisation and the, various, kinds, of, companies based on, liability, of, their, members;, • describe the types of, shares issued by a, company;, • explain the accounting, treatment of shares, issued at par, at, premium, and, at, discount, including, oversubsription;, • outline the accounting, for forfeiture of shares, and reissue of forfeited, shares under varying, situations;, • workout the amounts to, be transferred to capital, reserve when forfeited, shares are reissued; and, prepare share forfeited, account ;, , company form of organisation is the third stage, in the evolution of forms of organisation. Its, capital is contributed by a large number of persons, called shareholders who are the real owners of the, company. But neither it is possible for all of them to, participate in the management of the company nor, considered desirable. Therefore, they elect a Board, of Directors as their representative to manage the, affairs of the company. In fact, all the affairs of the, company are governed by the provisions of the, Companies Act, 2013. A company means a company, incorporated or registered under the Companies Act,, 2013 or under any other earlier Companies Acts., According to Chief Justice Marshal, “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”., A company usually raises its capital in the form of, shares (called share capital) and debentures (debt, capital.) This chapter deals with the accounting for, share capital of companies., 1.1, , Features of a Company, , A company may be viewed as an association of, person who contribute money or money’s worth to, a common inventory and use it for a common, purpose. It is an artificial person having corporate, legal entity distinct from its members (shareholders), and has a common seal used for its signature. Thus,, , 2018-19
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2, , Accountancy : Company Accounts and Analysis of Financial Statements, , it has certain special features which distinguish it from the other forms of, organisation. These are as follows:, • Body Corporate: A company is formed according to the provisions of, Law enforced from time to time. Generally, in India, the companies are, formed and registered under Companies Law except in the case of Banking, and Insurance companies for which a separate Law is provided for., • Separate Legal Entity: A company has a separate legal entity which is, distinct and separate from its members. It can hold and deal with any, type of property. It can enter into contracts and even open a bank account, in its own name., • Limited Liability: The liability of the members of the company is limited, to the extent of unpaid amount of the shares held by them. In the case of, the companies limited by guarantee, the liability of its members is limited, to the extent of the guarantee given by them in the event of the company, being wound up., • Perpetual Succession: The company being an artificial person created by, law continues to exist irrespective of the changes in its membership. A, company can be terminated only through law. The death or insanity or, insolvency of any member of the company in no way affects the existence of, the company. Members may come and go but the company continues., • Common Seal: The company being an artificial person, cannot sign its name, by itself. Therefore, every company is required to have its own seal which, acts as official signatures of the company. Any document which does not, carry the common seal of the company is not binding on the company., • Transferability of Shares: The shares of a public limited company are, freely transferable. The permission of the company or the consent of any, member of the company is not necessary for the transfer of shares. But, the Articles of the company can prescribe the manner in which the transfer, of shares will be made., • May Sue or be Sued: A company being a legal person can enter into, contracts and can enforce the contractual rights against others. It can, sue and be sued in its name if there is a breach of contract by the company., 1.2, , Kinds of Companies, , Companies can be classified either on the basis of the liability of its members or, on the basis of the number of members. On the basis of liability of its members, the companies can be classified into the following three categories:, (i) Companies Limited by Shares: In this case, the liability of its members is, limited to the extent of the nominal value of shares held by them. If a, member has paid the full amount of the shares, there is no liability on, , 2018-19
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Accounting for Share Capital, , 3, , his part whatsoever may be the debts of the company. He need not pay a, single paise from his private property. However, if there is any liability, involved, it can be enforced during the existence of the company as well, as during the winding up., (ii) Companies Limited by Guarantee: In this case, the liability of its members, is limited to the amount they undertake to contribute in the event of the, company being wound up. Thus, the liability of the members will arise, only in the event of its winding up., (iii) Unlimited Companies: When there is no limit on the liability of its, members, the company is called an unlimited company. When the, company’s property is not sufficient to pay off its debts, the private, property of its members can be used for the purpose. In other words, the, creditors can claim their dues from its members. Such companies are, not found in India even though permitted by the Companies Act., On the basis of the number of members, companies can be divided into, three categories as follows:, (i) Public Company: A public company means a company which (a) is not a, private company; (b) is a company which is not a subsidiary of a private, company., (ii) Private Company: A private company is one which by its articles:, (a), Restricts the right to transfer its shares;, (b), A private company must have at least 2 persons, except in case of, one person company;, (c), Limits the number of its members to 200 (excluding its employees);, (iii) One Person Company (OPC): Sec. 2 (62) of the companies Act, 2013,, defines OPC as a “company which has only one person as a member”., Rule 3 of the Companies (Incorporation) Rules, 2014 provides that:, (a), Only a natural person being an Indian citizen and resident in, India can form one person company,, (b), It cannot carry out non-banking financial investment activities., (c), Its paid up share capital is not more than Rs. 50 Lakhs, (d), Its average annual turnover of three years does not exceed, Rs. 2 Crores., 1.3, , Share Capital of a Company, , A company, being an artificial person, cannot generate its own capital which has, necessarily to be collected from several persons. These persons are known as, shareholders and the amount contributed by them is called share capital. Since the, number of shareholders is very very large, a separate capital account cannot be, opened for each one of them. Hence, innumerable streams of capital contribution, merge their identities in a common capital account called as ‘Share Capital Account’., , 2018-19
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4, , Accountancy : Company Accounts and Analysis of Financial Statements, , 1.3.1 Categories of Share Capital, From accounting point of view the share capital of the company can be classified, as follows:, • Authorised Capital: Authorised capital is the amount of share capital, which a company is authorised to issue by its Memorandum of, Association. The company cannot raise more than the amount of capital, as specified in the Memorandum of Association. It is also called Nominal, or Registered capital. The authorised capital can be increased or, decreased as per the procedure laid down in the Companies Act. It should, be noted that the company need not issue the entire authorised capital, for public subscription at a time. Depending upon its requirement, it, may issue share capital but in any case, it should not be more than the, amount of authorised capital., • Issued Capital: It is that part of the authorised capital which is actually, issued to the public for subscription including the shares allotted to, vendors and the signatories to the company’s memorandum. The, authorised capital which is not offered for public subscription is known, as ‘unissued capital’. Unissued capital may be offered for public, subscription at a later date., • Subscribed Capital: It is that part of the issued capital which has been actually, subscribed by the public. When the shares offered for public subscription, are subscribed fully by the public the issued capital and subscribed capital, would be the same. It may be noted that ultimately, the subscribed capital, and issued capital are the same because if the number of share, subscribed, is less than what is offered, the company allot only the number of shares for, which subscription has been received. In case it is higher than what is offered,, the allotment will be equal to the offer. In other words, the fact of over, subscription is not reflected in the books., • Called up Capital: It is that part of the subscribed capital which has, been called up on the shares. The company may decide to call the entire, amount or part of the face value of the shares. For example, if the face, value (also called nominal value) of a share allotted is Rs. 10 and the, company has called up only Rs. 7 per share, in that scenario, the called, up capital is Rs. 7 per share. The remaining Rs. 3 may be collected from, its shareholders as and when needed., • Paid up Capital: It is that portion of the called up capital which has been, actually received from the shareholders. When the shareholders have, paid all the call amount, the called up capital is the same to the paid up, capital. If any of the shareholders has not paid amount on calls, such an, amount may be called as ‘calls in arrears’. Therefore, paid up capital is, equal to the called-up capital minus call in arrears., • Uncalled Capital: That portion of the subscribed capital which has not, yet been called up. As stated earlier, the company may collect this amount, any time when it needs further funds., , 2018-19
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Accounting for Share Capital, , •, , 5, , Reserve Capital: 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. It is available only for, the creditors on winding up of the company., Authorised Share Capital, Issued Capital, , Unissued Capital, , Subscribed Capital, Subscribed and Fully Paid up, , Subscribed but not Fully Paid up, , Exhibit. 1.1 : Categories of Share Capital, , Let us take the following example and show how the share capital will be, shown in the balance sheet. Sunrise Company Ltd., New Delhi, has registered, its capital as Rs. 40,00,000, divided into 4,00,000 shares of Rs. 10 each. The, company offered to the public for subscription of 2,00,000 shares of Rs. 10, each, as Rs. 2 on application, Rs.3 on allotment, Rs.3 on first call and the balance, on final call. The company received applications for 2,50,000 shares. The, company finalised the allotment on 2,00,000 shares and rejected applications, for 50,000 shares. The company did not make the final call. The company received, all the amount except on 2,000 shares where call money has not been received., The above amounts will be shown in the Notes to Accounts of the balance sheet, of Sunrise Company Ltd. as follows:, Notes to Accounts, Share Capital, Authorised or Registered or Nominal Capital:, 4,00,000 Shares of Rs. 10 each, , 40,00,000, , Issued Capital, 2,00,000 Shares of Rs. 10 each, , 20,00,000, , (Rs.), , Subscribed Capital, Subscribed but not fully paid up, 2,00,000 Shares of Rs. 10 each, Rs. 8 called up, Less : Calls in Arrears, , 16,00,000, (6,000), , 2018-19, , 15,94,000
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6, , Accountancy : Company Accounts and Analysis of Financial Statements, , 1.4 Nature and Classes of Shares, Shares, refer to the units into 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 a company. The persons who contribute money, through shares are called shareholders., The amount of authorised capital, together with the number of shares in, which it is divided, is stated in the Memorandum of Association but the classes, of shares in which the company’s capital is to be divided, along with their, respective rights and obligations, are prescribed by the Articles of Association, of the company. As per The Companies Act, a company can issue two types, of shares (1) preference shares, and (2) equity shares (also called ordinary, shares)., 1.4.1 Preference Shares, According to Section 43 of The Companies Act, 2013, a preference share is one,, which fulfils the following conditions :, (a) That it carries a preferential right to dividend to be paid either as a, fixed amount payable to preference shareholders or an amount, calculated by a fixed rate of the nominal value of each share before, any dividend is paid to the equity shareholders., (b) That with respect to capital it carries or will carry, on the winding up, of the company, the preferential right to the repayment of capital before, anything is paid to equity shareholders., However, notwithstanding the above two conditions, a holder of the, preference share may have a right to participate fully or to a limited extent in, the surpluses of the company as specified in the Memorandum or Articles of, the company. Thus, the preference shares can be participating and nonparticipating. Similarly, these shares can be cumulative or non-cumulative, and, redeemable or irredeemable., 1.4.2 Equity Shares, According to Section 43 of The Companies Act, 2013, an equity share is a share, which is not a preference share. In other words, shares which do not enjoy any, preferential right in the payment of dividend or repayment of capital, are termed, as equity/ordinary shares. The equity shareholders are entitled to share the, distributable profits of the company after satisfying the dividend rights of the, preference share holders. The dividend on equity shares is not fixed and it may, , 2018-19
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Accounting for Share Capital, , 7, , vary from year to year depending upon the amount of profits available for, distribution. The equity share capital may be (i) with voting rights; or (ii) with, differential rights as to voting, dividend or otherwise in accordance with such, rules and subject to such conditions as may be prescribed., Test your Understanding – I, State which of the following statements are true :, (a) A company is an artificial person., (b) Shareholders of a company are liable for the acts of the company., (c) Every member of a company is entitled to take part in its management., (d) Company’s shares are generally transferable., (e) Share application account is a personal account., (f) The director of a company must be a shareholder., (g) Paid up capital can exceed called up capital., (h) Capital reserves are created from capital profits., (i) At the time of issue of shares, the maximum rate of securities, premium is 10%., (j) The part of capital which is called up only on winding up is called, reserve capital., (k) The shares originally issued at discount may be re-issued at a premium., , 1.5, , Issue of Shares, , A salient characteristic of the capital of a company is that the amount on its, shares can be gradually collected in easy instalments spread over a period of, time depending upon its growing financial requirement. The first instalment is, collected along with application and is thus, known as application money, the, second on allotment (termed as allotment money), and the remaining instalment, are termed as first call, second call and so on. The word final is suffixed to the, last instalment. However, this in no way prevents a company from calling the, full amount on shares right at the time of application., The important steps in the procedure of share issue are :, • Issue of Prospectus: The company first issues the prospectus to the, public. Prospectus is an invitation to the public that a new company has, come into existence and it needs funds for doing business. It contains, complete information about the company and the manner in which the, money is to be collected from the prospective investors., •, , Receipt of Applications: When prospectus is issued to the public,, prospective investors intending to subscribe the share capital of the, , 2018-19
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8, , Accountancy : Company Accounts and Analysis of Financial Statements, , company would make an application along with the application money, and deposit the same with a scheduled bank as specified in the, prospectus. The company has to get minimum subscription within 120, days from the date of the issue of the prospectus. If the company fails to, receive the same within the said period, the company cannot proceed for, the allotment of shares and application money should be returned within, 130 days of the date of issue of prospectus., •, , Allotment of Shares: If minimum subscription has been received, the, company may proceed for the allotment of shares after fulfilling certain, other legal formalities. Letters of allotment are sent to those whom the, shares have been alloted, and letters of regret to those to whom no, allotment has been made. When allotment is made, it results in a valid, contract between the company and the applicants who now became the, shareholders of the company., Minimum Subscription, , The minimum amount that, in the opinion of directors, must be raised to meet the, needs of business operations of the company relating to:, l, , the price of any property purchased, or to be purchased, which has to be met, wholly or partly out of the proceeds of issue;, , l, , preliminary expenses payable by the company and any commission payable, in connection with the issue of shares;, , l, , the repayment of any money borrowed by the company for the above two, matters;, , l, , working capital; and, , l, , any other expenditure required for the usual conduct of business operations., , It is to be noted that ‘minimum subscription’ of capital cannot be less than 90%, of the issued amount according to SEBI (Disclosure and Investor Protection), Guidelines, 2000 [6.3.8.1 and 6.3.8.2]. If this condition is not satisfied, the company, shall forthwith refund the entire subscription amount received. If a delay occurs, beyond 8 days from the date of closure of subscription list, the company shall be, liable to pay the amount with interest at the rate of 15% [Section 73(2)]., , Shares of a company are issued either at par or at a premium. Shares are to, be issued at par when their issue price is exactly equal to their nominal value, according to the terms and conditions of issue. When the shares of a company, are issued more than its nominal value (face value), the excess amount is called, premium., , 2018-19
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Accounting for Share Capital, , 9, , Irrespective of the fact that shares are issued at par or at a premium, the, share capital of a company as stated earlier, may be collected in instalments, payable at different stages., 1.6, , Accounting Treatment, , On application : The amount of money paid with various instalment represents, the contribution to share capital and should ultimately be credited to share, capital. However, for the sake of convenience, initially individual accounts are, opened for each instalment. All money received along with application is deposited, with a scheduled bank in a separate account opened for the purpose. The journal, entry is as follows:, Bank A/c, Dr., To Share Application A/c, (Amount received on application for — shares @ Rs. ______ per share), , On allotment : When minimum subscription has been received and certain legal, formalities on the allotment of shares have been duly compiled with, the directors, of the company proceed to make the allotment of shares., The allotment of shares implies a contract between the company and the, applicants who now become the allottees and assume the status of shareholders, or members., Allotment of Shares, (Implications from accounting point of view), l, , It is customary to ask for some amount called “Allotment Money” from the, allottees on the shares allotted to them as soon as the allotment is made., , l, , With the acceptance to the offer made by the applicants, the amount of, application money received has to be transferred to share capital account as it, has formally become the part of the same., , l, , The money received on rejected applications should either be fully returned to, the applicant within period prescribed by law/SEBI., , l, , In case lesser number of shares have to be allotted, than those applied for the, excess application money must be adjusted towards the amount due on allotment, from the allottees., , l, , The effect of the later two steps is to close the share application account which, is only a temporary account for share capital transactions., , 2018-19
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10, , Accountancy : Company Accounts and Analysis of Financial Statements, , The journal entries with regard to allotment of shares are as follows:, 1., , 2., , 3., , 4., , 5., , For Transfer of Application Money, Share Application A/c, Dr., To Share Capital A/c, (Application money on _____ Shares allotted/, transferred to Share Capital), For Money Refunded on Rejected Application, Share Application A/c, Dr., To Bank A/c, (Application money returned on rejected application for ___shares), For Amount Due on Allotment, Share Allotment A/c, Dr., To Share Capital A/c, For Adjustment of Excess Application Money, Share Application A/c, Dr., To Share Allotment A/c, (Application Money on __Shares @ Rs__per shares, adjusted to the amount due on allotment)., For Receipt of Allotment Money, Bank A/c, Dr., To Share Allotment A/c, (Allotment money received on ___Shares @, Rs. — per share Combined Account), , Note:- The journal entries (2) and (4) can also be combined as follows:, Share Application A/c, To Share Allotment A/c, To Bank A/c, (Excess application money adjusted to share, allotment and balance refunded), , Sometimes a combined account for share application and share allotment called, ‘Share Application and Allotment Account’ is opened in the books of a company., The combined account is based on the reasoning that allotment without, application is impossible while application without allotment is meaningless., These two stages of share capital are closely inter-related. When a combined, account is maintained, journal entries are recorded in the following manner:, 1., , For Receipt of Application and Allotment, Bank A/c, , Dr., , To Share Application and Allotment A/c, (Money received on applications for shares, @ Rs. _____ per share)., , 2018-19
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Accounting for Share Capital, 2., , 11, , For Transfer of Application Money and Allotment Amount Due, Share Application and Allotment A/c, , Dr., , To Share Capital A/c, (Transfer of application money to Share Capital Account, for amount due or allotment of — Share @ Rs. _____ per share), 3., , For Money Refunded on Rejected Applications, Share Application and Allotment A/c, , Dr., , To Bank A/c, (Application money returned on rejected application, for ___ shares), 4., , On Receipt of Allotment Amount, Bank A/c, , Dr., , To Share Application and Allotment A/c, (Balance of Allotment Money Received), , On Calls : Calls play a vital role in making shares fully paid-up and for realising, the full amount of shares from the shareholders. In the event of shares not being, fully called up till the completion of allotment, the directors have the authority, to ask for the remaining amount on shares as and when they decide about the, same. It is also possible that the timing of the payment of calls by the shareholders, is determined at the time of share issue itself and given in the prospectus., Two points are important regarding the calls on shares. First, the amount, on any call should not exceed 25% of the face value of shares. Second, there, must be an interval of at least one month between the making of two calls unless, otherwise provided by the articles of association of the company., When a call is made and the amount of the same is received, the journal, entries are as given below:, 1., , 2., , For Call Amount Due, Share Call A/c, Dr., To Share Capital A/c, (Call money due on ___Shares @ Rs. ____ per share), For Receipt of Call Amount, Bank A/c, Dr., To Share Call A/c, (Call money received), , The word/words First, Second, or Third must be added between the words, “Share” and ‘Call’ in the Share Call account depending upon the identity of the, call made. For example, in case of first call it will be termed as ‘Share First Call, Account’, in case of second call it will be ‘Share Second Call Account’ and so on., , 2018-19
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12, , Accountancy : Company Accounts and Analysis of Financial Statements, , Another point to be noted is that the words ‘and Final’ will also be added to the, last call, say, if second call is the last call it will be termed as ‘Second and Final, Call’ and if it is the third call which is the last call, it will be termed as ‘Third and, Final Call’. It is also possible that the whole balance after allotment may be, collected in one call only. In that case the first call itself, shall be termed as the, ‘First and Final Call’., The following points should be kept in mind while issuing the share capital for, public subscription :, 1. The application money should be at least 5% of the face value of the share., 2. Calls are to be made as per the provisions of the articles of association., 3. Where there is no articles of association of its own, the following provisions, of Table A will apply:, (a) A period of one month must elapse between two calls;, (b) The amount of call should not exceed 25% of the face value of the share;, (c) A minimum of 14 days’ notice is given to the shareholders to pay the, amount; and, (d) Calls must be made on a uniform basis on all shares within the same, class., 4. The procedure for accounting for the issue of both equity and preference shares, is the same. To differentiate between the two the words ‘Equity’ and ‘Preference’, is prefixed to each and every instalment., , Illustration 1, Mona Earth Mover Limited decided to issue 12,000 shares of Rs.100 each, payable at Rs.30 on application, Rs.40 on allotment, Rs.20 on first call and, balance on second and final call. Applications were received for 13,000 shares., The directors decided to reject application of 1,000 shares and their application, money being refunded in full. The allotment money was duly received on all the, shares, and all sums due on calls are received except on 100 shares., Record the transactions in the books of Mona Earth Movers Limited, Solution, Books of Mona Earth Mover Limited, Journal, Date, , Particulars, , Bank A/c, Dr., To Share Application A/c, (Application money on 13,000 shares @ Rs.30, per share received), Share Application A/c, Dr., To Share Capital A/c, (Application money transferred to share capital), , 2018-19, , L.F., , Debit, Amount, (Rs.), 3,90,000, , Credit, Amount, (Rs.), 3,90,000, , 3,60,000, 3,60,000
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Accounting for Share Capital, , 13, , Share Application A/c, Dr., To Bank A/c, (Application money on 1,000 shares returned], Share Allotment A/c, To Share Capital A/c, (Money due on allotment of 12,000, shares @ Rs. 40 per share), , Dr., , 30,000, 30,000, 4,80,000, 4,80,000, , Bank A/c, Dr., To Share Allotment A/c, (Money received on 12,000 shares @ Rs. 40 per, share on allotment), , 4,80,000, , Share First Call A/c, Dr., To Share Capital A/c, (Money due on 12,000 shares @ Rs. 20 per, share on first Call), Bank A/c, Dr., To Share First Call A/c, (First Call money received except for 100 shares), , 2,40,000, , Share Second and Final Call A/c, To Share Capital A/c, (Money due on 12,000 shares @ Rs. 10 per, share on Second and final Call ), , Dr., , 1,20,000, , Bank A/c, To Share Second and Final Call A/c, (Second and final call money received, except for 100 shares), , Dr., , 4,80,000, , 2,40,000, , 2,38,000, 2,38,000, , 1,20,000, , 1,19,000, 1,19,000, , Illustration 2, Eastern Company Limited issued 40,000 shares of Rs. 10 each to the public for, the subscription out of its share capital, payable as Rs. 4 on application,, Rs. 3 on allotment and the balance on Ist and final call. Applications were received, for 40,000 shares. The company made the allotment to the applicants in full. All, the amounts due on allotment and first and final call were duly received., Give the journal entries in the books of the company., , 2018-19
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14, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution, Books of Eastern Company Limited, Journal, Date, , Particulars, , Bank A/c, To Share Application A/c, (Application money on 40,000 shares @, Rs.4 per share received), , L.F., , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 1,60,000, 1,60,000, , Share Application A/c, Dr., To Share Capital A/c, (Application money transferred to share capital), , 1,60,000, , Share Allotment A/c, Dr., To Share Capital A/c, (Money due on allotment of 40,000 shares @, Rs. 3 per share), , 1,20,000, , Bank A/c, Dr., To Share allotment A/c, (Money received on 40,000 shares @ Rs. 3 per, share on allotment), , 1,20,000, , Share First and Final Call A/c, Dr., To Share Capital A/c, (Money due on 40,000 shares @ Rs. 3 per share, on First and final call), , 1,20,000, , Bank A/c, To Share First and Final Call A/c, (First and final call money received), , 1,20,000, , Dr., , 1,60,000, , 1,20,000, , 1,20,000, , 1,20,000, , 1,20,000, , Do it Yourself, On April 01, 2015, a limited company was incorporated with an authorised capital of, Rs. 40,000 divided into shares of Rs. 10 each. It offered to the public for subscription, of 3,000 shares payable as follows:, On, On, On, On, , Application, Allotment, First Call (One month after allotment), Second and Final Call, , Rs. 3 per share, Rs. 2 per share, Rs. 2.50 per share, Rs. 2.50 per share, , The shares were fully subscribed for by the public and application money duly, received on April 15, 2015. The directors made the allotment on May 1, 2015., How will you record the share capital transactions in the books of a company if, the amounts due has been duly received, and the company maintains the combined, account for application and allotment., , 2018-19
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Accounting for Share Capital, , 15, , 1.6.1 Calls in Arrears, It may happen that shareholders do not pay the call amount on due date. When, any shareholder fails to pay the amount due on allotment or on any of the calls,, such amount is known as ‘Calls in Arrears’/‘Unpaid Calls’. Calls in Arrears, represent the debit balance of all the calls account. Such amount shall appear, as ‘Note to Accounts (Refer Chapter 3). However, where a company maintains, ‘Calls in Arrears’ Account, it needs to pass the following additional journal entry:, Calls in Arrears A/c, , Dr., , To Share First Call Account A/c, To Share Second and Final Call Account A/c, (Calls in arrears brought into account), , The Articles of Association of a company may empower the directors to charge, interest at a stipulated rate on calls in arrears. If the articles are silent in this, regard, the rule contained in Table F shall be applicable which states that the, interest at a rate not exceeding 10% p.a. shall have to be paid on all unpaid, amounts on shares for the period intervening between the day fixed for payment, and the time of actual payment thereof., On receipt of the call amount together with interest, the amount of interest, shall be credited to interest account while call money shall be credited to the, respective call account or to calls in arrears account. When the shareholder, makes the payment of calls in arrears together with interest, the entry will be as, follows:, Bank A/c, , Dr., , To Calls in Arrears A/c, To Interest A/c, (Calls in arrears received with interest), Note: If nothing is specified, there is no need to take the interest on calls in arrears, account and record the above entry, , Illustration 3, Cronic Limited issued 10,000 equity shares of Rs. 10 each payable at Rs. 2.50, on application, Rs. 3 on allotment, Rs. 2 on first call, and the balance of Rs. 2.50, on second and final call. All the shares were fully subscribed and paid except of, a shareholder having 100 shares who could not pay for second and final call., Give journal entries to record these transactions., , 2018-19
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16, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution:, Books of Cronic Limited, Journal, Date, , Particulars, , L.F., , Bank A/c, To Share Application A/c, (Money received on applications for, 10,000 shares @ Rs. 2.50 per share), , Dr., , Equity Share Application A/c, To Share Capital A/c, (Transfer of application money on 10,000, shares to share capital), , Dr., , Equity Share Allotment A/c, To Share Capital A/c, (Amount due on the allotment of 10,000, shares @ Rs. 3 per share), , Dr., , Bank A/c, To Share Allotment A/c, (Allotment money received), , Dr., , Share First Call A/c, To Share Capital A/c, (First call money due on 10,000 shares, @ Rs. 2 per share), , Dr., , Bank A/c, To Share First Call A/c, (First call money received), , Dr., , Share Second and Final Call A/c, To Share Capital A/c, (Final call money due), , Dr., , Bank A/c, Call in Arrears A/c, To Share Second and Final Call A/c, (Final call money received except that, of 100 shares), , Dr., Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 25,000, 25,000, , 25,000, 25,000, , 30,000, 30,000, , 30,000, 30,000, , 20,000, 20,000, , 20,000, 20,000, , 2018-19, , 25,000, 25,000, , 24,750, 250, 25,000
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Accounting for Share Capital, , 17, , 1.6.2 Calls in Advance, Sometimes shareholders pay a part or the whole of the amount of the calls not, yet made. The amount so received from the shareholders is known as “Calls in, Advance”. The amount received in advance is a liability of the company and, should be credited to ‘Call in Advance Account.” The amount received will be, adjusted towards the payment of calls as and when they becomes due. Table F, of the Companies Act provides for the payment of interest on calls in advance at, a rate not exceeding 12% per annum., The following journal entry is recorded for the amount of calls received in advance., Bank A/c, , Dr., , To Calls in Advance A/c, (Amount received on call in advance), , On the due date of the calls, the amount of ‘Calls in Advance’ is adjusted by the, following entry :, Calls in Advance A/c, , Dr., , To Particular Call A/c, (Calls in advance adjusted with the call money due), , The balance in ‘Calls in Advance’ account is shown as a separate item under the, title Equity and Liabilities in the company’s balance sheet under the head ‘current, liabilities’, as sub-head ‘others current liabilities’. It is not added to the amount of, paid-up capital., As ‘Calls in Advance’ is a liability of the company, it is under obligation, if, provided by the Articles, to pay interest on such amount from the date of its, receipt up to the date when appropriate call is due for payment. A stipulation is, generally made in the Articles regarding the rate at which interest is payable., However, if Articles are silent on this account, Table F is applicable which provides, for interest on calls in advance at a rate not exceeding 12% per annum., The accounting treatment of interest on Calls in Advance is as follows:, 1., , For Payment of Interest, Interest on Calls in Advance A/c, To Bank A/c, (Interest paid on Calls in Advance), Or, 2.(a) For Interest due, Interest on Calls in Advance A/c, To Sundry Shareholder’s A/c, (Interest paid on Calls in Advance), 2.(b) For Interest Paid, Sundry Shareholder’s A/c, To Bank A/c, , 2018-19, , Dr., , Dr., , Dr.
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18, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 4, Konica Limited registered with an authorised equity capital of Rs. 2,00,000, divided into 2,000 shares of Rs. 100 each, issued for subscription of 1,000, shares payable at Rs. 25 per share on application, Rs. 30 per share on allotment,, Rs. 20 per share on first call and the balance as and when required., Application money on 1,000 shares was duly received and allotment was, made to them. The allotment amount was received in full, but when the first call, was made, one shareholder failed to pay the amount on 100 shares held by him, and another shareholder with 50 shares, paid the entire amount on his shares., The company did not make any other call., Give the necessary journal entries in the books of the company to record, these share capital transactions., Solution, Books of Konica Limited, Journal, Date, , Particulars, , Bank A/c, To Equity Share Application A/c, (Money received on application for 1,000, shares @ Rs. 25 per share), , L.F., , Dr., , Debit, Amount, (Rs.), 25,000, , 25,000, , Equity Share Application A/c, Dr., To Equity Share Capital A/c, (Transfer of application money on 1,000 shares, to share capital), , 25,000, , Equity Share Allotment A/c, To Equity Share Capital A/c, (Amount due on the allotment of 1,000, shares @ Rs. 30 per share), , Dr., , 30,000, , Bank A/c, To Equity Share Allotment A/c, (Allotment money received), , Dr., , Equity Share First Call A/c, To Equity Share Capital A/c, (First call money due on 1,000 shares @, Rs. 20 per share), , Dr., , 25,000, , 30,000, , 30,000, 30,000, , Bank A/c, Dr., Calls in Arrears A/c, Dr., To Equity Share First Call A/c, To Calls in Advance A/c, (First call money received on 900 shares, calls in, arrears for 100 shares @ Rs.20 per share and calls, in advance for 50 shares @ Rs.25 per share.), , 2018-19, , Credit, Amount, (Rs.), , 20,000, 20,000, , 19,250, 2,000, 20,000, 1,250
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Accounting for Share Capital, , 19, , In practice the entries for the amount received are recorded in the cash, book and not in the journal (See Illustration 5)., Illustration 5, Unique Pictures Limited was registered with an authorised capital of Rs. 5,00,000, divided into 20,000, 5% preference shares of Rs. 10 each and 30,000 equity, shares of Rs. 10 each. The company issued 10,000 preference and 15,000 equity, shares for public subscription. Calls on shares were made as under, Equity Shares, Preference Shares, (Rs.), (Rs.), Application, 2, 2, Allotment, 3, 3, First Call, 2.50, 2.50, Second and Final Call, 2.50, 2.50, All these shares were fully subscribed. All the dues were received except the, second and final call on 100 equity shares and on 200 preference shares. Record, these transactions in the journal. You are also required to prepare the cash, book and balance sheet., Solution, Books of Unique Pictures Limited, Journal, Date, , Particulars, , L.F., , Equity Share Application A/c, 5% Preference Share Application A/c, To Equity Share Capital A/c, To 5% Preference Share Capital A/c, (Transfer of application money), , Dr., Dr., , Equity Share Allotment A/c, 5% Preference Share Allotment A/c, To Equity Share Capital A/c, To 5% Preference Share Capital A/c, (Amount due on allotment), , Dr., Dr., , Debit, Amount, (Rs.), 30,000, 20,000, , 30,000, 20,000, 45,000, 30,000, 45,000, 30,000, , Equity Share First Call A/c, Dr., 5% Preference Share First Call A/c, Dr., To Equity Share Capital A/c, To 5% Preference Share Capital A/c, (First call money due), Equity Share Second and Final Call A/c, Dr., 5% Preference Share Second and final Call A/cDr., To Equity Share Capital A/c, To 5% Preference Share Capital A/c, (First call money due), , 37,500, 25,000, , Call in Arrears A/c, Dr., To Equity Share Second and Final Call A/c, To 5% Preference Share Final Call A/c, (For Calls in Arrears), , 750, , 2018-19, , Credit, Amount, (Rs.), , 37,500, 25,000, 37,500, 25,000, 37,500, 25,000, , 250, 500
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20, , Accountancy : Company Accounts and Analysis of Financial Statements, , Cash Book (Bank Column), Dr., Date, , Cr., Receipts, , L.F., , Amount Date, (Rs.), , Equity Share, Application, 5% Preference Share, Application, Equity Share, Allotment, 5% Preference, Share Allotment, Equity Share First, Call, 5% Preference Share, First Call, Equity Share Second, and Final Call, 5% Preference Share, Second and Final Call, , 30,000, , Payments, Balance c/d, , L.F., , Amount, (Rs.), 2,49,250, , 20,000, 45,000, 30,000, 37,500, 25,000, 37,250, 24,500, 2,49,250, , 2,49,250, , Balance Sheet of unique pictures as at . . . . ., Particulars, , Note, No., , Amount, (Rs.), , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, , 1, , 2,49,250, 2,49,250, , II. Assets, 1. Current assets, a) Cash and Cash Equivalents, , 2, , 2,49,250, 2,49,250, , Notes to Accounts, 1. Share Capital, Authorised Capital, 30,000 Equity Shares of Rs. 10 each, 20,000 5% Preference Shares of Rs. 10 each, Issued Capital, 15,000 Equity Shares of Rs. 10 each, 10,000 5% Preference Shares of Rs. 10 each, , 2018-19, , 3,00,000, 2,00,000, 5,00,000, 1,50,000, 1,00,000, 2,50,000
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Accounting for Share Capital, , 21, , Subscribed Capital, Subscribed and fully paid-up, 14,900 Equity Shares of Rs. 10 each, 9,800, 5% Preference Shares of Rs. 10 each, , 1,49,000, 98,000, 2,47,000, , Subscribed but not fully paid-up, 100 Equity Shares of Rs. 10 each, Less: Calls in Arreras, , 1,000, -250, , 200, 5% Preference Shares of Rs. 10 each, Less : Calls in Arrers, , 2,000, -500, , 750, , 1,500, 2,49,250, , Illustration 6, Rohit & Company issued 30,000 shares of Rs.10 each payable Rs.3 on, application, Rs.3 on allotment and Rs.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 Rs.2 which had not been made as, yet., Give the necessary journal entries in the books of the company., Solution:, Books of Rohit & Company, Journal, Date, , Particulars, , L.F., , Bank A/c, To Share Application A/c, (Application money received on 30,000, shares @ Rs.3 per share), , Dr., , Share Application A/c, To Share Capital A/c, (Application money transferred to share, capital account), , Dr., , Share Allotment A/c, To Share Capital A/c, (Allotment money due on 30,000 shares, @ Rs.3 per share), , Dr., , Bank A/c, To Share Allotment A/c, (Allotment money received), , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 90,000, 90,000, , 90,000, 90,000, , 90,000, 90,000, , 90,000, 90,000, , 2018-19
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22, , Accountancy : Company Accounts and Analysis of Financial Statements, Share First Call A/c, To Share Capital A/c, (First call money due on 30,000 shares, @ Rs.2 per share), , Dr., , Bank A/c, Dr., Call in Arrears A/c, Dr., To Share First Call A/c, To Calls in Advance A/c, (Calls in arrears for 400 shares @Rs.2 per share, and calls in advance on 300 shares, @Rs.2 per share), , 60,000, 60,000, , 59,800, 800, 60,000, 600, , Do it Your self, 1. A company issued 20,000 equity shares of Rs.10 each payable Rs.3 on, application, Rs.3 on allotment, Rs.2 on first call and Rs.2 on second and the, final call. The allotment money was payable on or before May 01, 2015; first, call money on or before August Ist, 2015; and the second and final call on or, before October Ist, 2015; ‘X’, whom 1,000 shares were allotted, did not pay the, allotment and call money; ‘Y’, an allottee of 600 shares, did not pay the two, calls; and ‘Z’, whom 400 shares were allotted, did not pay the final call. Pass, journal entries and prepare the balance sheet of the company., 2. Alfa Company Ltd. issued 10,000 shares of Rs.10 each for cash payable Rs.3, on application, Rs.2 on allotment and the balance in two equal instalments., The allotment money was payable on or before March 31, 2015; the first call, money on or before 30 June, 2015; and the final call money on or before, August, 31. 2015. Mr. ‘A’, to whom 600 shares were allotted, paid the entire, remaining face value of shares allotted to him on allotment. Record journal, entries in company’s books and also exhibit the share capital in the balance, sheet on the date., , 1.6.3 Over Subscription, There are instances when applications for more shares of a company are received, than the number offered to the public for subscription. This usually happens in, respect of shares issue of well-managed and financially strong companies and, is said to be a case of ‘Over Subscription’., In such a condition, three alternatives are available to the directors to deal, with the situation: (1) they can accept some applications in full and totally reject, the others; (2) they can make a pro-rata allotment to all; and (3) they can adopt, a combination of the above two alternatives which happens to be the most, common course adopted in practice., The problem of over subscription is resolved with the allotment of shares., Therefore, from the accounting point of view, it is better to place the situation of, , 2018-19
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Accounting for Share Capital, , 23, , over subscription within the total frame of application and allotment, i.e. receipt, of application amount, amount due on allotment and its receipt from the, shareholders, and the same has been observed in the pattern of entries., First Alternative : When the directors decide to fully accept some applications, and totally reject the others, the application money received on rejected, applications is fully refunded. For example, a company invited applications for, 20,000 shares and received the applications for 25,000 shares. The directors, rejected the applications for 5,000 shares which are in excess of the required, number and refunded their application money in full. In this case, the journal, entries on application and allotment will be as follows :, The journal entries on application and allotment according to this alternative, are as follows:, 1, , Bank A/c, Dr., To Share Application A/c, (Money received on application for 25,000, shares @ Rs. _ per share), , 2, , Share Application A/c, Dr., To Share Capital A/c, To Bank A/c, (Transfer of application for money 20,000 for, shares allotted and money refunded on, applications for 5,000 shares rejected), , 3, , Share Allotment A/c, To Share Capital A/c, (Amount due on the allotment of 20,000, shares @ Rs. _ per share), , Dr., , 4, , Bank A/c, To Share Allotment A/c, (Allotment money received), , Dr., , Second Alternative : When the directors opt to make a proportionate allotment, to all applicants (called ‘pro-rata’ allotment), the excess application money, received is normally adjusted towards the amount due on allotment. In case,, the excess application money received is more than the amount due on allotment, of shares, such excess amount may either be refunded or credited to calls in, advance., For example, in the event of applications for 20,000 shares being invited, and those received are for 25,000 shares, it is decieded to allot shares in the, ratio of 4:5 to all applicants. It is a case of pro-rata allotment and the excess, application money received on 5,000 shares would be adjusted towards the, amount due on the allotment of 20,000 shares. In this case, the journal entries, on application and allotment will be as follows., , 2018-19
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24, , Accountancy : Company Accounts and Analysis of Financial Statements, 1, , Bank A/c, Dr., To Share Application A/c, (Application money received on 25,000 shares, @ Rs. _ per Share), , 2, , Share Application A/c, To Share Capital A/c, To Share Allotment A/c, , Dr., , (Transfer of application money to share, capital and the excess application money, on 5,000 shares credited to share allotment, account), 3, , Share Allotment A/c, Dr., To Share Capital A/c, (Amount due on allotment of 25,000 share, @ Rs. _ per share), , 4, , Bank A/c, Dr., To Share Allotment A/c, (Allotment money received after adjusting, the amount already received as excess, application money), , Third Alternative : When the application for some shares are rejected outrightly;, and pro-rata allotment is made to the remaining applicants, the money on rejected, applications is refunded and the excess application money received from, applicants to whom pro-rata allotment has been made is adjusted towards the, amount due on the allotment of shares allotted., For example, a company invited applications for 10,000 shares and received, applications for 15,000 shares. The directors decided to reject the applications, for 2,500 shares outright and to make a pro-rata allotment of 10,000 shares to, the applicants for the remaining 12,500 shares so that four shares are allotted, for every five shares applied. In this case, the money on applications for 2,500, shares rejected would be refunded fully and that on the remaining 2,500 shares, (12,500 shares – 10,000 shares) would be adjusted against the allotment amount, due on 10,000 shares allotted and credited to share allotment account, the, journal entries on application and allotment recorded as follows:, 1, , Bank A/c, Dr., To Share Application A/c, (Money received on application for 15,000, shares @ Rs. _ per share), , 2018-19
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Accounting for Share Capital, , 25, , 2, , Share Application A/c, Dr., To Share Capital A/c, To Share Allotment A/c, To Bank A/c, (Transfer of application money to share, capital, and the excess application amount of, pro-rata allottees credited to share allotment and, the amount on rejected applications refunded), , 3, , Share Allotment A/c, To Share Capital A/c, (Amount due on the Allotment of 10,000, shares @ Rs. _ per share), , 4, , Bank A/c, Dr., To Share Allotment A/c, (Allotment money received after adjusting the, amount already received as excess, application money), , Dr., , Illustration 7, Janta Papers Limited invited applications for 1,00,000 equity shares of Rs. 25, each payable as under:, On Application, , Rs. 5.00 per share, , On Allotment, , Rs. 7.50 per share, , On First Call, (due two months after allotment), , Rs. 7.50 per share, , On Second and Final Call, (due two months after First Call), , Rs. 5.00 per share, , Applications were received for 4,00,000 shares on January 01, 2017 and, allotment was made on February 01, 2017., Record journal entries in the books of the company to record these share, capital transactions under each of the following circumstances:, 1 The directors decide to allot 1,00,000 shares in full to selected applicants, and the applications for the remaining 3,00,000 shares were rejected, outright., 2 The directors decide to make a pro-rata allotment of 25 per cent of the, shares applied for to every applicant; to apply the balance of application, money towards amount due on allotment; and to refund the amount, remaining thereafter., 3 The directors totally reject applications for 2,00,000 shares, accept, full applications for 80,000 shares and make a pro-rata allotment of, the 20,000 shares to remaining applicants and the excess application, money is to be adjusted towards allotment and calls to be made., , 2018-19
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26, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution, Books of Janta Papers Limited, Journal, First Alternative, Date, , Particulars, , L.F., , 2017, January 01 Bank A/c, Dr., To Equity Share Application A/c, (Money received on applications for 4,00,000, shares @ Rs. 5 per share), , Debit, Amount, (Rs.), 20,00,000, , 20,00,000, , February 01 Equity Share Application A/c, Dr., To Equity Share Capital A/c, To Bank A/c, (Transfer of application money on 1,00,000, shares to share capital and money refunded, on rejected applications), , 20,00,000, , February 01 Equity Share Allotment A/c, Dr., To Equity Share Capital A/c, (Amount due on the allotment of 1,00,000, shares @ Rs 7.50 per share), , 7,50,000, , Bank A/c, To Equity Share Allotment A/c, (Allotment money received), April 01, , April 01, , June 01, , June 01, , Dr., , 5,00,000, 15,00,000, , 7,50,000, , 7,50,000, 7,50,000, , Equity Share First Call A/c, Dr., To Equity Share Capital A/c, (First call money due on 1,00,000 shares @, Rs. 7.50 per share), Bank A/c, Dr., To Equity Share First Call A/c, (First call money received), , 7,50,000, , Equity Share Second and Final Call A/c Dr., To Equity Share Capital A/c, (Final Call money due on 1,00,000 shares, @ Rs. 5 per share), , 5,00,000, , Bank A/c, Dr., To Equity Share Second and Final Call A/c, (Final call money received), , 5,00,000, , 2018-19, , Credit, Amount, (Rs.), , 7,50,000, , 7,50,000, 7,50,000, , 5,00,000, , 5,00,000
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Accounting for Share Capital, , 27, , Second Alternative, Date, , Particulars, , L.F., , 2017, January 01 Bank A/c, Dr., To Equity Share Application A/c, (Money received on applications for 4,00,000, shares @ Rs. 5 per share), , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 20,00,000, 20,00,000, , February 01 Equity Share Application A/c, Dr., To Equity Share Capital A/c, To Equity Share Allotment A/c, To Bank A/c, (Transfer of application money on Shares, allotted to share capital, excess application, amount credited to allotment account and, money refunded on rejected applications), , 20,00,000, , February 01 Equity Share Allotment A/c, Dr., To Equity Share Capital A/c, (Amount due on the allotment of Rs. 1,00,000, shares @ Rs 7.50 per share), , 7,50,000, , 5,00,000, 7,50,000, 7,50,000, , 7,50,000, , Note : The entries regarding the two calls would be the same as given in preceding method., , Third Alternative, Date, , Particulars, , 2017, January 01 Bank A/c, Dr., To Equity Share Application A/c, (Money received on applications for 4,00,000, shares @ Rs. 5 per share), , 2018-19, , L.F., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 20,00,000, 20,00,000
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28, , Accountancy : Company Accounts and Analysis of Financial Statements, , February 01 Equity Share Application A/c, Dr., To Equity Share Capital A/c, To Equity Share Allotment A/c, To Calls-in-Advance A/c, To Bank A/c, (Amount on share application adjusted to, share capital, share allotment and calls in, advance and the balance refunded including, the money on rejected applications), , 20,00,000, , February 01 Equity Share Allotment A/c, Dr., To Equity Share Capital A/c, (Transfer of application money on shares, allotted to share capital and amount due, on the allotment of 1,00,000 shares @, Rs. 7.50 per share), , 7,50,000, , April 01, , April 01, , June 01, , June 01, , Note:, , Bank A/c, To Equity Share Allotment A/c, (Allotment money received), , Dr., , Equity Share First Call A/c, To Equity Share Capital A/c, (First Call money due on 1,00,000, shares @ Rs. 7.50 per share), , Dr., , 5,00,000, 1,50,000, 2,50,000, 11,00,000, , 7,50,000, , 6,00,000, 6,00,000, 7,50,000, 7,50,000, , Bank A/c, Dr., Calls in Advance A/c, Dr., To Equity Share First Call A/c, (Calls-in-advance adjusted against first call, and the balance money on call received), , 6,00,000, 1,50,000, , Equity Share Second and Final Call A/c, To Equity Share Capital A/c, (Final Call money due on 1,00,000, shares @ Rs. 5 per share), , 5,00,000, , Dr., , Bank A/c, Dr., Calls in Advance A/c, Dr., To Equity Share Second and Final Call A/c, (Calls-in-advance adjusted against final call, and the balance money on call received), , 7,50,000, , 5,00,000, , 4,00,000, 1,00,000, 5,00,000, , The balance of excess application money as a result of pro-rata distribution in, journal entry 3 above is large enough to meet the demands on allotted shares in, respect of the allotment and the two call money, as well as to leave an amount to, be refunded along with that on the rejected applications., , 2018-19
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Accounting for Share Capital, , 29, , Working Notes:, (Rs.), Excess Application Money, , (Rs.), 15,00,000, , Less Transfers :, Share Allotment —, 20,000 shares @ Rs. 7.50, , 1,50,000, , Share Calls —, 20,000 shares @ Rs. 12.50, Amount to be refunded (including that on, the rejected applications), , 2,50,000, , 4,00,0001, 11,00,000, , 1.6.4 Under Subscription, Under subscription is a situation where number of shares applied for is less, than the number for which applications have been invited for subscription. For, example, a comapny offered 2 lakh shares for subscription to the public but the, applications were received for 1,90,000 shares, only. In such a situation, the, allotment will be confirmed to 1,90,000 shares and entries shall be made, accordingly. However, as stated earlier, it must be ensured that the company, has received the minimum subscriptions and the company will have to refund, the entire subscription amount received., 1.6.5 Issue of Shares at a Premium, It is quite common for the shares of financially strong and well-managed, companies to be issued at a premium, i.e. at an amount more than the nominal, or par value of shares. Thus, when a share of the nominal value of Rs. 100 is, issued at Rs. 105, it is said to have been issued at a premium of 5 per cent., When the issue of shares is at a premium, the amount of premium may, technically be called at any stage of the issue of shares. However, premium is, generally called with the amount due on allotment, sometimes with the, application money and rarely with the call money. The premium amount is, credited to a separate account called ‘Securities Premium Account’ and is, shown under the title ‘Equity and Liabilities’ of the company’s balance sheet, under the head ‘Reserves and Surpluses’. It can be used only for the following, five purposes:, (a) to issue fully paid bonus shares to the extent not exceeding unissued, share capital of the company;, (b) to write-off preliminary expenses of the company;, (c) to write-off the expenses of, or commission paid, or discount allowed, on any securities of the company; and, (d) to pay premium on the redemption of preference shares or debentures, of the company., , 2018-19
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30, , Accountancy : Company Accounts and Analysis of Financial Statements, , (e) Purchase of its own shares (i.e., buy back of shares)., The journal entries for shares issued at a premium are as follows:, 1., , For Premium Amount called with Application money, , (a) Bank A/c, , Dr., , To Share Application A/c, (Money received on application for —, shares @ Rs. — per share including premium), (b) Share Application A/c, Dr., To Share Capital A/c, To Securities Premium Reserve A/c, (Transfer of application money to share, capital and securities premium account), 2., , Premium Amount called with Allotment Money, , (a) Share Allotment A/c, Dr., To Share Capital A/c, To Securities Premium Reserve A/c, (Amount due on allotment of shares @, Rs — per share including premium), (b) Bank A/c, Dr., To Share Allotment A/c, (Allotment money received including premium), 3., Premium Amount called with Call Money, (a) Share Application A/c, To Share Capital Reserve A/c, To Securities Premium A/c, (Amount due on Ist/2nd call @Rs— per share including premium), (b) Bank A/c, Dr., To Share Call A/c, (Call money received including premium), Illustration 8, Jupiter Company Limited issued 35,000 equity shares of Rs. 10 each at a, premium of Rs.2 payable as follows:, On Application, Rs. 3, On Allotment, Rs. 5 (including premium), Balance on First and Final Call, The issue was fully subscribed. All the money was duly received., Record journal entries in the books of the Company., , 2018-19
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Accounting for Share Capital, , 31, , Solution:, Books of Jupiter Company Limited, Journal, Date, , Particulars, , L.F., , Debit, Amount, (Rs.), , Bank A/c, Dr., To Equity Share Application A/c, (Money received on applications for 35,000 shares, @ Rs. 3 per share), , 1,05,000, , Equity Share Application A/c, To Equity Share Capital A/c, (Transfer of application money on allotment, to share capital), , 1,05,000, , Dr., , Credit, Amount, (Rs.), 1,05,000, , 1,05,000, , Equity Share Allotment A/c, Dr., To Equity Share Capital A/c, To Securities Premium Reserve A/c, (Amount due on allotment of 35,000 shares @, Rs. 5 per share including premium), , 1,75,000, , Bank A/c, To Equity Share Allotment A/c, (Money received including premium ), , 1,75,000, , Dr., , 1,05,000, 70,000, , 1,75,000, , Equity Share First and Final Call A/c, Dr., To Equity Share Capital A/c, (Amount due on First and Final Call of Rs. 4, per share on 35,000 shares), , 1,40,000, , Bank A/c, To Equity Share First and Final Call A/c, , 1,40,000, , Dr., , 1,40,000, , 1,40,000, , (Money received on First and Final Call ), , 1.6.6 Issue of Shares at a Discount, There are instances when the shares of a company are issued at a discount, i.e., at an amount less than the nominal or par value of shares, the difference between, the nominal value and issue price representing discount on the issue of shares., For example, when a share of the nominal value of Rs. 100 is issued at Rs. 98, it, is said to have been issued at a discount of two per cent., As a general rule, a company cannot ordinarily issue shares at a discount. It, can do so only in cases such as ‘reissue of forfeited shares’ (to be discussed later), and issue of sweat equity shares., , 2018-19
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32, , Accountancy : Company Accounts and Analysis of Financial Statements, , 1.6.7 Issue of Shares for Consideration other than Cash, There are instances where a company enters into an arrangement with the, vendors from whom it has purchased assets, whereby the latter agrees to accept,, the payment in the form of fully paid shares of the company issued to them., Normally, no such cash is received for issue of shares. These shares can also be, issued either at par, at premium or at discount, and the number of shares to be, issued will depend upon the price at which the shares are issued and the amount, payable to the vendor. The number of shares to be issued to the vendor will be, calculated as follows:, Amount Payable, Issue Price, For example, Rahul Limited purchased building from Handa Limited for, Rs.5,40,000 and the payment is to be made by the issue of shares of Rs.100, each. The number of shares to be issued shall be worked out as follows in different, situations:, Number of shares to be issued =, , (a), , When shares are issued at par, i.e. at Rs.100, Number of shares to be issued, , =, =, , Amount Payable, Issue Price, Rs. 5,40,000, Rs. 100, , =, , 5,400 shares, , (b) When shares issued at premium of 20%, i.e. at Rs. 120 (100 + 20), Number of shares to be issued, , =, , Amount Payable, Issue Price, , =, , Rs. 5,40,000, Rs. 120, , =, , 4,500 shares, , The journal entries recorded for the shares issued for consideration other, than cash in above situations will be as follows :, Books of Rahul Limited, Journal, Date, , Particulars, , Building A/c, To Handa Limited, (Building purchased), , L.F., , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 5,40,000, 5,40,000, , 2018-19
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Accounting for Share Capital, (a), , (b), , 33, , When shares are issued at par, Handa Limited, To Share Capital A/c, (5,400 Shares issued at par), , Dr., , 5,40,000, 5,40,000, , When shares are issued at premium of 20%, Handa Limited, To Share Capital A/c, To Securities Premium Reserve A/c, (4,500 shares issued at Rs.120 per share), , Dr., , 5,40,000, 4,50,000, 90,000, , Illustration 9, Jindal and Company purchased a machine from High Life Machine Limited for, Rs.3,80,000. As per purchase agreement, Rs. 20,000 were paid in cash and, balance by issue of shares of Rs.100 each. What will be the entries passed if the, shares are issued :, (a) at par, (b) at 20% premium, Solution:, Number of shares will be calculated as follows:, (a), , When shares issued at par, Rs. 3,60,000, Rs.100, , (b), , = 3,600 shares, , When shares issued at premium, Rs. 3,60,000 = 3,000 shares, Rs.120, , Books of Jindal and Company, Journal, Date, , Particulars, , L.F., , Machine A/c, Dr., To Bank A/c, To High Life Machine Limited, (Machine purchased and Rs. 20,000 paid in cash, and the balance paid by issue of share), (a), , When shares are issued at par, High Life Machine Limited, To Share Capital A/c, (3,600 Shares are Rs.100 each), , 2018-19, , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 3,80,000, 20,000, 3,60,000, , 3,60,000, 3,60,000
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34, , Accountancy : Company Accounts and Analysis of Financial Statements, (b), , When shares are issued at premium, High Life Machine Limited, To Share Capital A/c, To Securities Premium Reserve A/c, (3,000 shares issued at Rs.120 per share), , Dr., , 3,60,000, 3,00,000, 60,000, , Test your Understanding – II, Choose the correct answer., (a) Equity shareholders are:, (i) creditors, (ii) owners, (iii) customers of the company, (iv) none of the above, (b) Nominal share capital is :, (i) that part of the authorised capital which is issued by the company., (ii) the amount of capital which is actually applied for by the prospective, shareholders., (iii) the maximum amount of share capital which a company is authorised, to issue., (iv) the amount actually paid by the shareholders., (c) Interest on calls in arrears is charged according to “Table F” at :, (i) 10%, (ii) 6%, (iii) 8%, (iv) 11%, (d) Money received in advance from shareholders before it is actually called-up by, the directors is :, (i) debited to calls in advance account, (ii) credited to calls in advance account, (iii) debited to calls account, (iv) none of the above, (e) Shares can be forfeited :, (i) for non-payment of call money, (ii) for failure to attend meetings, (iii) for failure to repay the loan to the bank, (iv) for which shares are pledged as a security, (f) The Profit on reissue of forfeited shares is transferred to :, (i) general reserve, (ii) capital redemption reserve, (iii) capital reserve, (iv) reveneue reserve, (g) Balance of share forfeiture account is shown in the balance sheet under the, item :, (i) current liabilities and provisions, (ii) reserves and surpluses, (iii) share capital, (iv) unsecured loans, , 2018-19
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Accounting for Share Capital, , 1.7, , 35, , Forfeiture of Shares, , It may happen that some shareholders fail to pay one or more instalments,, viz. allotment money and/or call money. In such circumstances, the company, can forfeit their shares, i.e. cancel their allotment and treat the amount already, received thereon as forfeited to the company within the framework of the, provisions in its articles. These provisions are usually based on Table F, which authorise the directors to forefeit the shares for non-payment of calls, made. For this purpose, they have to strictly follow the procedure laid down, in this regard. Following is the accounting treatment of shares issued at par,, premium or at a discount. When shares are forefeited all entries relating to, the shares forfeited except those relating to premium, already recorded in, the accounting records must be reversed. Accordingly, share capital account, is debited with the amount called-up in respect of shares are forfeited and, crediting the respective unpaid calls accounts’s or calls in arrears account, with the amount already received. Thus, the journal entry will be as follows:, (a), , Forfeiture of Shares issued at Par:, Share Capital A/c..........(Called up amount), To Share Forfeiture A/c...........(Paid up amount), To Share Allotment A/c, To Share Calls A/c (individually), (..... shares forfeited for non-payment of, allotment money and calls made), , Dr., , It may be noted here that when the shares are forfeited, all entries relating to the, forfeited shares must be reversed except the entry relating to share premium received, if, any. Accordingly, the share capital is debited to the extent to called-up capital and credited, to (i) respective unpaid calls account i.e., calls in arrears and (ii) share forfeiture account, with the amount already received on shares., , The balance of shares forfeited account is shown as an addition to the total, paid-up capital of the company under the head ‘Share Capital’ under title, ‘Equity and Liabilities’ of the Balance Sheet till the forfeited shares are reissued., Illustration 10, Honda Limited issued 10,000 equity shares of 100 each payable as follows:, Rs. 20 on application, Rs. 30 on allotment, Rs. 20 on first call and Rs. 30 on, second and final calls 10,000 shares were applied for and allotted. All money, due was received with the exception of both calls on 300 shares held by Supriya., These shares were forfeited. Give necessary journal entries., , 2018-19
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36, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution, Books of Honda Limited, Journal, Date, , Particulars, , L.F., , Bank A/c, To Share Application A/c, (Application money on 10,000 shares, @Rs.20 per share received), , Dr., , Share Application A/c, To Share Capital A/c, (Application money transferred to, share capital), , Dr., , Share Allotment A/c, To Share Capital A/c, (Money due on allotment of 10,000 shares, @Rs. 30 per share), , Dr., , Bank A/c, To Share Allotment A/c, (Allotment Money received on 10,000 shares, @ Rs. 30 per share on ), , Dr., , Share First Call A/c, To Share Capital A/c, (Money due on 10,000 shares, @ Rs. 20 per share on Ist Call), , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 2,00,000, 2,00,000, , 2,00,000, 2,00,000, , 3,00,000, 3,00,000, , 3,00,000, 3,00,000, , 2,00,000, 2,00,000, , Bank A/c, Dr., To Share First Call A/c, (First call money received except for 300 shares), , 1,94,000, , Share Second and Final Call A/c, To Share Capital A/c, (Money due on 10,000 shares @ Rs. 30 per, share on Second and Final Call), , 3,00,000, , Dr., , 3,00,000, , Bank A/c, Dr., To Share Second and Final Call A/c, (Second and Final Call money received except, for 300 shares), Share Capital A/c, To Share First Call A/c, To Share Second and Final Call A/c, To Share Forfeiture A/c, (300 shares Forfeited), , 2018-19, , 1,94,000, , Dr., , 2,91,000, 2,91,000, , 30,000, 6,000, 9,000, 15,000
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Accounting for Share Capital, , 37, , Forfeiture of Shares issued at a Premium: If shares were initially issued at a, premium and the premium amount has been fully realised, but some of the, shares are forfeited due to non-payment of call money, the accounting treatment, for forfeiture shall be on the same pattern as in the case of shares issued at par., The important point to be noted in this context is that the securities premium, account is not to be debited at the time of forfeiture if the premium has been, received in respect of the forefeited shares and the amount of forfeiture shall be, excluding premium amount., In case, however, if the premium amount has not been received, either wholly, or partially, in respect of the shares forfeited, the Securities Premium Reserve, Account will also be debited with the amount of premium not received along, with the Share Capital Account at the time forfeiture. This will usually be the, case when even the amount due on allotment has not been received. Thus, the, journal entry to record the forfeiture of shares issued at a premium on which, premium has not been fully received, will be :, Share Capital A/c, Dr., Securities Premium Reserve A/c, Dr., To Share Forfeiture A/c, To Share Allotment A/c, and/or, To Share Calls A/c (individually), (..... shares forefeited for non-payment of, allotment money and calls made), Note: If Calls in Arrears Account is maintained, Calls in Arrears Account is credited and, not the Share Allotment and/or Share Call/Calls Accounts., , Illustration 11, Sahil, a share holder, failed to pay the money for second and final call of Rs. 20, on 1,000 shares issued to him at Rs. 120 (face value of Rs. 100 per share). His, shares were forfeited after the second and final call. Give the necessary journal, entry for forefeiture of the shares., Solution:, Date, , Particulars, , Share Capital A/c, To Share second and Final Call A/c, To Share Forfeiture A/c, (Forfeiture of 1,000 shares for non-payment, of the second and final call), , L.F., , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 1,00,000, 20,000, 80,000, , Illustration 12, Sunena, a shareholder holding 500 shares of Rs. 10 each, did not pay the, allotment money of Rs. 4 per share (including a premium of Rs. 2) and the first, , 2018-19
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38, , Accountancy : Company Accounts and Analysis of Financial Statements, , and final call of Rs. 3. Her shares were forfeited after the first and final call. Give, journal entry for forefeiture of the shares., Solution:, Date, , Particulars, , Share Capital Reserve A/c, Securities Premium A/c, To Share Allotment A/c, To Share first and final Call A/c, To Share Forfeiture A/c, (Forfeiture of 500 shares for nonpayment of first and final call), , L.F., , Dr., Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 5 ,000, 1,000, 2,000, 1,500, 2,500, , Illustration 13, Ashok Limited issued 3,00,000 equity shares of Rs. 10 each at a premium of, Rs. 2 per share, payable as Rs. 3 on application, Rs. 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 applicants. The excess application money was adjusted towards, allotment. 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 and also show the balance sheet:, Solution:, Books of Ashok Limited, Journal, Date, , Particulars, , Bank A/c, To Equity Share Application A/c, (Application money received on, 4,00,000 shares), , L.F., , Dr., , Equity Share Application A/c, Dr., To Equity Share Capital A/c, To Equity Share Allotment A/c, (Application money on 3,00,000 shares transferred, to share capital account and the excess amount, adjusted to share allotment account), , 2018-19, , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 12,00,000, 12,00,000, , 12,00,000, 9,00,000, 3,00,000
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Accounting for Share Capital, , 39, , Equity Share Allotment A/c, To Equity Share Capital A/c, To Securities Premium Reserve A/c, (Allotment money due on 3,00,000 shares), , Dr., , Bank A/c, To Equity Share Allotment Reserve A/c, (Allotment amount received after adjusting, excess money received with application), , Dr., , Equity Share First Call A/c, To Equity Share Capital A/c, (First Call amount due on 3,00,000 shares), , Dr., , 15,00,000, 9,00,000, 6,00,000, 12,00,000, 12,00,000, , 6,00,000, 6,00,000, , Bank A/c, Dr., Calls in Arrears A/c, Dr., To Equity Share First Call A/c, (First Call amount received on 2,99,200 shares), , 5,98,400, 1,600, , Equity Share Second and Final Call A/c, Dr., To Equity Share Capital A/c, (Second Call amount due on 3,00,000 Shares), , 6,00,000, , Bank A/c, Dr., Calls in Arrears A/c, Dr., To Equity Share Second and Final Call A/c, (Amount on 2,99,200 shares received), , 5,98,400, 1,600, , Equity Share Capital A/c, To Share Forfeiture A/c, To Call in Arrears A/c, (Forfeiture of 800 shares), , 6,00,000, , 6,00,000, , 6,00,000, , Dr., , 8,000, 4,800, 3,200, , Balance Sheet of Ashok Limited as on .............., Particulars, , Note No., , Amount (Rs.), , I EQUITY AND LIABILITIES, 1. Shareholders’ Funds, (a) Share Capital, (b) Reserves and Surplus, , 1, 2, , II ASSETS, 1.Current Assets, Cash and Cash Equivalents, , 3, , 2018-19, , 29,96,800, 6,00,000, 35,96,800, , 35,96,800, 35,96,800
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40, , Accountancy : Company Accounts and Analysis of Financial Statements, , Notes to Accounts, 1. Share Capital, Authorised Capital, ... Equity shares of Rs. 10 each, , Rs., , Issued Capital, 3,00,000 Equity shares of Rs. 10 each, , 30,00,000, , Subscribed Capital, Subscribed and Fully Paid-up, 2,99,200 Equity shares of Rs. 10 each, , 29,92,000, , Add: Share forfeiture accounts, , 4,800, 29,96,800, , 2. Reserves and Surplus, Securities Premium Reserve, , 6,00,000, , 3. Cash and Cash Equivalents, Cash at bank, , 35,96,800, , Illustration 14, High Light India Ltd. invited applications for 30,000 Shares of Rs. 100 each at a, premium of Rs. 20 per share payable as follows:, On Application, , Rs. 40 (including Rs.10 premium), , On Allotment, , Rs. 30 (including Rs.10 premium), , On First Call, , Rs. 30, , On Second and Final Call, , Rs. 20, , Applications were received for 40,000 shares and pro-rata allotment was, made on the application for 35,000 share. Excess application money was utilised, towards allotment., Rohan to whom 600 shares were allotted failed to pay the allotment money, and his shares were forfeited immediately after allotment., Aman who applied for 1,050 shares failed to pay first call and his share were, forfeited immediatelyafter first Call., Second and final call was made. All the money due on second call have been, received., Of the shares forfeited, 1,000 share were reissued as fully paid-up for Rs. 80, per share, which included the whole of Aman’s shares., , 2018-19
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Accounting for Share Capital, , 41, , Record necessary journal entries in the books of High Light India Ltd., Solution:, Date, , Particulars, , L.F., , Debit, Amount, (Rs.), , Bank A/c, Dr., To Share Application A/c, (Application money received on 40,000 shares), , 16,00,000, , Share Application A/c, Dr., To Share Capital A/c, To Securities Premium Reserve A/c, To Share Allotment A/c, (Application money transferred to share capital, account, securities premium account and the, excess money transfered to share allotment account), , 14,00,000, , Share Application A/c, To Bank A/c, (Amount returned on 500 shares), Share Allotment A/c, To Share Capital A/c, To Securities Premium Reserve A/c, (Money due on allotment), , Dr., , Bank A/c, To Share Allotment A/c, (Amount received in allotment), , Dr., , Share Capital A/c, Securities Premium Reserve A/c, To Share Allotment A/c, To Share Forfeiture A/c, (Forfeiture of 600 shares of Rohan for, non-payment of allotment money), , Dr., Dr., , Share First Call A/c, To Share Capital A/c, (First Call money due on 29,400 shares), , Dr., , Bank A/c, To Share First Call A/c, (First call money received on 28,500 shares), , Dr., , 2018-19, , Credit, Amount, (Rs.), 16,00,000, , 9,00,000, 3,00,000, 2,00,000, , 2,00,000, 2,00,000, , Dr., , 9,00,000, 6,00,000, 3,00,000, , 6,86,000, 6,86,000, , 30,000, 6,000, 14,000, 22,000, , 8,82,000, 8,82,000, , 8,55,000, 8,55,000
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42, , Accountancy : Company Accounts and Analysis of Financial Statements, Share Capital A/c, To Share First Call A/c, To Share Forfeiture A/c, (Forfeiture of 900 Aman Shares), , Dr., , 72,000, 27,000, 45,000, , Share Second and Final Call A/c, Dr., To Share Capital A/c, (Second and Final Call money due on 28,500 shares), , 5,70,000, , Bank A/c, To Share Second and Final Call A/c, (Due money received), , Dr., , 5,70,000, , Bank A/c, Share Forfeiture A/c, To Share Capital A/c, (Reissue of 1,000 forfeited shares), , Dr., Dr., , 5,70,000, , 5,70,000, , 80,000, 20,000, 1,00,000, , Share Forfeiture A/c, Dr., To Capital Reserve, (Profit on 1,000 reissued shares transferred to, capital reverve), , 18,333, 18,333, , Working Notes:, (I), , Excess amount received on Rohan’s application, Rohan has been alloted = 600 Shares, He must have applied for, , Rs. 35,000, Rs. 30,000, , 600, , 700 Shares, Rs., , Amount received from Rohan, , = 700 × Rs. 40, , 28,000, , Amount Adjusted on Application, , = 600 × Rs. 40, , (24,000), 4,000, , Amount Adjusted on Allotment, Money due on Allotment, Money Adjusted, , = 600 × Rs. 30, , 18,000, (4,000), 14,000, , Balance due on Allotment, , 2018-19
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Accounting for Share Capital, (II), , 43, , Amount recieved on allotment, Total Amount due on Allotment = Rs. 30,000 × Rs. 30, Amount received on Application, , = 9,00,000, (2,00,000), 7,00,000, , Amount not received on Rohan’s Share, , (14,000), 6,86,000, , (III), , Money received on First Call, First Call money due on 29,400 shares, Application money not received on, 900 Shares, , 29,400 × Rs. 30 =, , 900 × Rs. 30, , 8,82,000, (27,000), 8,55,000, , (IV), , 1000 shares have been reissued including 900 shares of, Aman and Balance 100 shares of Rohan, Profit on 100 shares =, , 22,000, 600, , 100, , Profit in 900 shares, , =, , 3,667, , =, , 45,000, 48,667, , Less: Loss on reissue of 1,000 shares, , (20,000), 28,667, , (V), , Balance in Share Forfeiture Account of 500 shares, Rs., , 22,000, 600, , 500, , = Rs. 18,333, , Do it Yourself, 1., , A company forfeited 100 equity shares of Rs.10 each issued at a premium of, 20% for non-payment of final call of Rs.5 including the premium. Show the, journal entry for forefeiture of shares., , 2., , A company forfeited 800 equity shares of Rs.10 each issued at a discount of, 10% for non-payment of first and final calls of Rs.2 each. Calculate the, amount forfeited by the company and pass the journal entry for forefeiture of, the shares., , 2018-19
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44, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 15, X Ltd. issued for public subscription 40,000 equity shares of Rs. 10 each at, premium of Rs. 2 per share payable as under :, On application, Rs. 4 per share, On Allotment, Rs. 5 per share (including premium), On Call, Rs. 3 per share, Applications were received for 60,000 shares. Allotment was made pro-rata, to the applicants for 48,000 shares, the remaining applications being rejected., Money overpaid on application was applied towards sums due on allotment., Shri Chitnis, to whom 1,600 shares were allotted, failed to pay the allotment, money and Shri Jagdale, to whom 2,000 shares were allotted, failed to pay the, call money. These shares were subsequently forfeited., Record journal entries in the books of the company to record the above, transactions., Solution:, Books of X Ltd., Journal, Date, , Particulars, , L.F., , Bank A/c, To Equity Share Application A/c, (Money received on applications for 60,000, shares @ Rs. 4 per share), , Dr., , Equity Share Application A/c, To Equity Share Capital A/c, To Equity Share Allotment A/c, To Bank a/c, (Application amount transferred to share, capital, excess application money, under pro-rata distribution credited to, share allotment and money refunded, on rejected application), , Dr., , Equity Share Allotment A/c, To Equity Share Capital A/c, To Securities Premium Reserve A/c, (Amount due on allotment of 40,000 shares, @ Rs. 5 per share including premium), , Dr., , 2018-19, , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 2,40,000, 2,40,000, , 2,40,000, 1,60,000, 32,000, 48,000, , 2,00,000, 1,20,000, 80,000
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Accounting for Share Capital, , 45, , Bank A/c, Dr., Calls-in-Arrears A/c, Dr., To Equity Share Allotment A/c, (Money received consequent upon allotment), , 1,61,280, 6,720, , Equity Share Call A/c, To Equity Share Capital A/c, (First call money due on 40,000, shares @ Rs. 3 per share), , Dr., , 1,20,000, , Bank A/c, Calls-in-Arrears A/c, To Equity Share Call A/c, (Money received on first call), , Dr., Dr., , Equity Share Capital A/c, Securities Premium Reserve A/c, To Share Forfeiture A/c, To Call-in-Arrears A/c, (Entry for forfeiture of 3,600 shares), , Dr., Dr., , 1,68,000, , 1,20,000, , 1,09,200, 10,800, 1,20,000, , 36,000, 3,200, 21,680, 17,520, , Working Notes :, I., , Amount received on allotment, (a) Amount due on allotment, 40,000 shares × Rs. 5 per share, (b) Amount actually due on allotment, Amount due on allotment, Less Excess Application amount applied for allotment, Amount actually due, (c), , 2,00,000, 32,000, 1,68,000, , Allotment amount due from Chitnis, Allotment money due on Chitnis’s share, 1,600 shares × Rs. 5 per share, Less excess application money paid, Due to pro-rata distribution –, (1,920 shares – 1,600 shares) 320 × 4, Allotment amount due from Chitnis, , (d), , Rs., 2,00,000, , 8,000, , 1,280, 6,720, , According to the ratio of pro-rata distribution (40,000 shares : 48,000 shares),, for 1,600 shares to be allotted, Chitnis must have applied for 1,920 shares, (1,600 shares × 6/5)., Allotment money received, (Amount actually due on Allotment), 1,68,000, Less Amount unpaid by Chitnis, (6,720), Amount received, , 1,61,280, , 2018-19
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46, II., , Note :, , Accountancy : Company Accounts and Analysis of Financial Statements, Balance on Shares Forfeited Account, Amount paid by Chitnis :, 1,920 Shares applied for × Rs. 4 per share, Amount paid by Jagdale :, , 7,680, , 2,000 Shares × (Rs. 4 + Rs. 3) Rs.7 per share, , 14,000, , Total balance, , 21,680, , Premium amount on Jagdale’s shares will not be taken into account as it has, been received in full by the company., , 1.7.1 Re-issue of Forfeited Shares, The directors can either cancel or re-issue the forefeited shares. In most cases,, they reissue such shares which may be at par, at premium or at a discount., Forfeited shares may be reissued as fully paid at a par, premium, discount. In, this context, it may be noted that the amount of discount allowed cannot exceed, the amount that had been received on forfeited shares at the time of initial issue,, and that the discount allowed on reissue of forfeited shares should be debited to, the ‘Forfeited Share Account’. The balance, if any, left in the Share-Forfeited, Account relating to reissued Shares, should be treated as capital profit and, transferred to Capital Reserve Account. For example, when a company forfeits, 200 shares of Rs. 10 each on which Rs. 600 had been received, it can allow a, maximum discount of Rs. 600 on their reissue. Assuming that the company, reissues these shares for Rs. 1,800 as fully paid, the necessary journal entry, will be:, Bank A/c, , Dr., , 1,800, , Share Forfeiture A/c, , Dr., , 200, , To Share Capital A/c, , 2,000, , (Reissue of 200 forfeited shares at Rs. 9 per, share as fully paid), , This shall leave a balance of Rs. 400 in share forfeited account which should, be transferred to Capital Reserve Account by recording the following journal, entry:, Share Forfeiture A/c, , Dr., , To Capital Reserve, , 400, 400, , (Profit on reissue of forfeited shares, transferred), , Another important point to be noted in this context is that the capital profit, arises only in respect of the forefited share reissued, and not on all forefeited, shares. Hence, when a part of the forfeited shares are reissued, the whole balance, of share forfeiture account cannot be transferred to the capital reserve. In such, , 2018-19
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Accounting for Share Capital, , 47, , a situation, it is only the proportionate amount of balance that relates to the, forefeited shares reissued which should be transferred to capital reserve,, ensuring that the remaining balance in share forefeiture account is proportionate, to the amount forefeited on shares not yet reissued., Illustration 16, The director of Poly Plastic Limited resolved that 200 equity shares of Rs.100, each be forfeited for non-payment of the second and final call of Rs.30 per share., Out of these, 150 shares were re-issued at Rs.60 per share to Mohit., Show the necessary journal entries ., Solution:, Books of Poly Plastic Limited, Journal, Date, , Particulars, , L.F., , Share Capital A/c, To Shares Forfeiture A/c, To Share Second and Final Call A/c, (200 shares forfeited for non-payment, of final call at Rs.30 per share), , Dr., , Bank A/c, Shares Forfeiture A/c, To Share Capital A/c, (Reissue of 150 shares of Rs.100 each,, issued as fully paid for Rs.60 each), , Dr., Dr., , Shares Forfeiture A/c, , Dr., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 20,000, 14,000, 6,000, , 9,000, 6,000, 15,000, , To Capital Reserve A/c, , 4,500, 4,500, , (Profit on reissue of 150 forfeited shares, transferred to capital reserve), Working Notes :, Total amount forfeited on 200 shares, Amount forfeited on 150 shares, Amount of loss on reissue of 150 shares, Amount of profit on reissued shares, transferred to capital reserve, Amount forfeited on 50 shares, Balance left in share forfeited account, (equal to amount forfeited on 50 shares), , 2018-19, , Rs., = 14,000 (200 shares × Rs. 70), = 10,500 (150 shares × Rs. 70), = 6,000 (150 shares × Rs. 40), =, =, =, , 4,500 (Rs. 10,500 – Rs. 6,000), 3,500 (50 shares × Rs. 70), 3,500 (Rs.14,000 – Rs. 6,000, – Rs. 4,500)
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48, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 17, On January 1, 2015, the Director of X Ltd. issued for public subscription 50,000, equity shares of Rs. 10 each at Rs. 12 per share payable as to Rs. 5 on application, (including premium), Rs. 4 on allotment and the balance on call on May 01,, 2015., The lists were closed on February 10, 2015 by which date applications for, 70,000 shares were received. Of the cash received Rs. 40,000 was returned and, Rs.60,000 was applied to the amount due on allotment, the balance of which, was paid on February 16, 2015., All the shareholders paid the call due on May 01, 2015 with the exception of, an allottee of 500 shares., These shares were forfeited on September 29, 2015 and reissued us fully, paid at Rs. 8 per share on November 01, 2015., The company, as a matter of policy, does not maintain a calls-in-arrears, account., Give journal entries to record these share capital transactions in the books, of X. Ltd., Solution:, Book of X. Ltd., Journal, Date, 2015, Feb.10, , Particulars, , Bank A/c, , L.F., , Dr., , Debit, Amount, (Rs.), 3,50,000, , To Equity Share Application A/c, (Amount received on application for, 70,000 shares @ Rs. 5 per share, Including Premium), Feb.16, , Feb.16, , 3,50,000, , Equity Share Application A/c, To Equity Share Capital A/c, To Securities Premium Reserve A/c, (Transfer of application money on 50,000, shares to share capital and premium, accounts consequent upon allotment), , Dr., , Equity Share Application A/c, To Bank A/c, To Equity Share Allotment A/c, (Excess application money credited to share, allotment and money refunded on rejected, application), , Dr., , 2018-19, , Credit, Amount, (Rs.), , 2,50,000, 1,50,000, 1,00,000, , 1,00,000, 40,000, 60,000
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Accounting for Share Capital, Feb.16, , Feb.16, , May 1, , May 1, , 49, , Equity Share Allotment A/c, Dr., To Equity Share Capital A/c, (Amount due on allotment of 50,000) Shares, @ Rs. 4 per share), Bank A/c, Dr., To Equity Share Allotment A/c, (Money received on allotment), , 2,00,000, , Equity Share First and Final Call A/c, To Equity Share Capital A/c, (First call money due), , Dr., , 1,50,000, , Bank A/c, To Equity Share First and Final Call A/c, (Money received on first call), , Dr., , 2,00,000, , 1,40,000, 1,40,000, , 1,50,000, , 1,48,500, 1,48,500, , Sept. 29 Equity Share Capital A/c, Dr., To Shares Forfeiture A/c, To Equity Share First and Final Call A/c, (Forfieted of 500 shares for non-payment of call), , 5,000, , Nov. 1, , 4,000, 1,000, , Nov. 1, , Bank A/c, Shares Forfeiture A/c, To Equity Share Capital A/c, (Reissue of 500 forfeited shares as fully, paid at Rs. 8 per share), , Dr., Dr., , Shares Forfeiture A/c, Dr., To Capital Reserve, (Profit on reissue of Forfeited Shares Accounts, transferred to capital reserve), , 3,500, 1,500, , 5,000, , 2,500, 2,500, , Illustration 18, O Limited issued a prospectus offering 2,00,000 equity shares of Rs. 10 each, at, a premium of Rs. 2 per share, payable as follows:, On Application, Rs. 2.50 per share, On Allotment, Rs. 4.50 per share, (including premium), On First Call (three months from allotment), Rs. 2.50 per share, On Second Call (three months after first call) Rs. 2.50 per share, Subscriptions were received for 3,17,000 shares on April 23, 2017 and the, allotment made on April 30, was as under:, , 2018-19
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50, , Accountancy : Company Accounts and Analysis of Financial Statements, , Shares Allotted, Allotment in full (two applicants paid in, 38,000, full on allotment in respect of 4,000 shares each), (ii) Allotment of two shares for every, 1,60,000, three shares applied for, (iii) Allotment of one share for every, 2,000, four shares applied for, Cash amounting to Rs. 77,500 (being application money received with, applications on 31,000 shares upon which no allotments were made) was, returned to applicants on May 6, 2017., The amounts called from the allottees were received on the due dates with, the exception of the final call on 100 shares. These shares were forfeited on, November 15, 2017 and reissued to Aman on November 16 for payment of, Rs. 9 per share., Record journal entries other than those relating to cash, in the books of, O Limited, and also show how to transaction would appear in the balance sheet, assuming that the company paid interest due from it on October 31, 2017., (i), , Solution:, Books of O Limited, Journal, Date, , Particulars, , 2017, Share Application A/c, Dr., April 30, To Equity Share Capital A/c, To Bank, To Equity Share Allotment A/c, To Calls in Advance, (Transfer of Application Money to share, capital after allotment and excess application, money on 86,000 shares due to pro-rata, allotment credited to share allotment and, calls in advance), April 30 Equity Share Allotment A/c, Dr., To Equity Share Capital A/c, To Securities Premium Reserve A/c, (Allotment amount due on 2,000,000, shares @ Rs. 4.50 per share including premium), , 2018-19, , L.F., , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 7,92,000, 5,00,000, 77,500, 2,09,000, 6,000, , 9,00,000, 5,00,000, 4,00,000
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Accounting for Share Capital, , 51, , July 31 Equity Share First Call A/c, To Equity Share Capital A/c, (First call money due on 2,00,000 shares, @ Rs. 2.50 per share), , Dr., , Oct. 31 Equity Share Second and Final Call A/c, To Equity Share Capital A/c, (Second call money due on 2,00,000 shares, @ Rs. 2.50 per share), , Dr., , 5,00,000, 5,00,000, , 5,00,000, 5,00,000, , Oct. 31 Calls in Advance A/c, Dr., Calls in Arrears A/c, Dr., To Equity Share Second and Final Call A/c, (Calls in advance on 8,000 shares, adjusted against second call money due), , 21,000, 250, , Nov. 15 Equity Share Capital A/c, Dr., To Calls in Arrears A/c, To Share Forfeiture A/c, (Forfeiture of 100 shares for the non-payment, of call money), , 1,000, , Nov. 16 Share Forfeiture A/c, To Equity Share Capital A/c, (Amount due from A for the reissue, of 100 shares as fully paid at Rs. 9, per share), , 21,250, , Dr., , 250, 750, , 100, 100, , Nov. 16 Share Forfeiture A/c, Dr., To Capital Reserve, (Profit on reissue of forfeited Shares transferred, to Capital reserve), , 650, 650, , Cash Book, Dr., Receipts, Equity Share Application, Equity Share Allotment, Calls in Advance, Equity Share First Call, Equity Share Second and, Final Call, Equity Share Capital, , Amount, (Rs.), 7,92,500, 6,91,000, 40,000, 4,75,000, , Payments, Equity Shares Application, Balance c/d, , 4,78,750, 900, 24,78,150, , * Date column omitted., , 2018-19, , Cr., Amount, (Rs.), 77,500, 24,00,650, , 24,78,150
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52, , Accountancy : Company Accounts and Analysis of Financial Statements, , Working Notes :, 1., , Excess Application Money, Categories of, Allotment, , No. of Shares, Applied, , No. of Share, Alloted, , Ratio of, Allotment, , 38,000, 2,40,000, 8,000, , 38,000, 1,60,000, 2,000, , 100%, 2/3, 1/4, , 2,86,000, , 2,00,000, , i, ii, iii, , Therefore, refund of application money, , = (3,17,000 – 2,86,000) × Rs. 2.50, = Rs. 77,500, , Application money received, (2,86,000 shares @ Rs. 2.50), , = Rs. 7,15,000, , Application money due :, (2,00,000 shares @ Rs. 2.50), , = Rs. 5,00,000, , Excess application money, 2., , Rs. 2,15,000, , Amount of Calls in Advance, As two allotees, each holding 4,000 shares, paid the full amount on allotment, amount, of calls-in-advance is thus :, 8,000 shares × (Rs. 2.50 + Rs. 2.50) = Rs. 40,000, Buy-back of Shares : When a company purchase its own shares, it is called, ‘Buy-back of Shares’. Section 68 of The Companies Act, 2013 provides that the, company can buy their own shares from either of the following sources :, (a) Existing equity shareholders on a proportionate basis, (b) Open Market, (c) Odd-lot shareholders, (d) Employees of the company, The company can buy back its own shares either from the free reserves, securities, premium or from the proceeds of any shares or other specified securities. In case, shares are bought back out of free reserves, the company must transfer a sum equal, to the nominal value of shares bought back to ‘Capital Redemption Reserve Account’., The following procedures have been laid down for buy back of shares :, (a) The Articles of the Association must authorise the company for the buy back, of shares., (b) A special resolution must be passed in the companies’ Annual General Body, meeting., (c) The amount of buy back of shares in any financial year should not exceed, 25% of the paid-up capital and free reserves., (d) The debt-equity ratio should not be more than a ratio of 2:1 after the buy, back., (e) All the shares of buy back should be fully paid-up., , 2018-19
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Accounting for Share Capital, (f), (g), , 53, , The buy-back of the shares should be completed within 12 months from the, date of passing the special resolution., The company should file a solvency declaration with the Registrar and SEBI, which must be signed by at least two directors of the company., , Illustration 19, Garima Limited issued a prospectus inviting applications for 3,000 shares of, Rs. 100 each at a premium of Rs.20 payable as follows:, On Application, Rs.20 per share, On Allotment, Rs.50 per share (Including premium), On First call, Rs.20 per share, On Second call, Rs.30 per share, Applications were received for 4,000 shares and allotments made on prorata basis to the applicants of 3,600 shares, the remaining applications being, rejected, money received on application was adjusted on account of sums due, on allotment., Renuka to whom 360 shares were allotted, failed to pay allotment money, and calls money, and her shares were forfeited., Kanika, the applicant of 200 shares failed to pay the two calls, her shares, were also forfeited. All these shares were sold to Naman as fully paid for Rs.80, per share. Show the journal entries in the books of the company., Solution:, Books of Garima Limited, Journal, Date, , Particulars, , Bank A/c, To Share Application A/c, (Application money received on 4,000, shares @ Rs. 20 per share), , L.F., , Dr., , Share Application A/c, Dr., To Share Capital A/c, To Share Allotment A/c, To Bank A/c, (Transfer of application money on 3,000 shares, to Share Capital Account, on 600 shares, to Allotment Account, and on of 400, shares refunded), , 2018-19, , Debit, Amount, (Rs.), , Credit, Amount, (Rs.), , 80,000, 80,000, , 80,000, 60,000, 12,000, 8,000
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54, , Accountancy : Company Accounts and Analysis of Financial Statements, Share Allotment A/c, To Share Capital A/c, To Securities Premium Reserve A/c, (Money due on allotment @ Rs. 50 per share, on 3,000 shares including Rs.20 on account, of share premium), , Dr., , Bank A/c, To Share Allotment A/c, (Money received on share allotment), , Dr., , Share First Call A/c, To Share Capital A/c, (Money due on call on 3,000 shares @, Rs.20 per share), , Dr., , Bank A/c, To Share First Call A/c, (First call money received on 2,440 shares), , Dr., , Share Second and Final Call A/c, To Share Capital A/c, (Money due on call on 3,000 shares @, Rs.30 per share), , Dr., , Bank A/c, To Share Second and Final Call A/c, (Second and Final Call money received, on 2,440 shares), , Dr., , Share Capital A/c, Securities Premium Reserve A/c, To Share Allotment A/c, To Share First Call A/c, To Share Second and Final A/c, To Share Forfeiture A/c, (Forfeiture of 560 shares), , Dr., , Bank A/c, Shares Forfeiture A/c, To Share Capital A/c, (Reissue of 560 forfeited shares), , Dr., Dr., , Shares Forfeiture A/c, To Capital Reserve, (Profit on reissue of 560 forfeited, shares transferred to Capital reserve), , Dr., , 2018-19, , 1,50,000, 90,000, 60,000, , 1,21,440, 1,21,440, 60,000, 60,000, , 48,800, 48,800, 90,000, 90,000, , 73,200, 73,200, , 56,000, 7,200, 16,560, 11,200, 16,800, 18,640, 44,800, 11,200, 56,000, 7,440, 7,440
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Accounting for Share Capital, , 55, , Working Notes :, Amount received on allotment has been calculated as follows:, , Less :, , Less :, , Total money due on allotment (including premium), Application money received on 600 shares adjusted, towards allotment money, Net amount due on allotment on 3,000 shares, Allotment money due on 360 shares alloted to, Renuka, not received, , (Rs.), 1,50,000, (12,000), 1,38,000, , 360, × 1,38,000, 3,000, , (16,560), , Net amount received on 2,640 shares, , 1,21,440, , Since the allotment money which includes securities premium of Rs. 20 per share, has not been received on 360 shares held by Renuka (now forfeited) has been, debited to Securities premium account as per rules., Amount forefeited has been worked out as follows :, Application money received from Renuka: 360 ×, , 3,600, 3,000, , = 432 × Rs. 20 =Rs. 8,640, , Application and Allotment money received from Kanika on 200 shares Rs. 10,000, Total amount received on forefeited shares, , Rs. 18,640, , Do it Yourself, Excel Company Limited made an issue of 1,00,000 Equity Shares of Rs.10 each,, payable as follows :, On Application, Rs.2.50 per share, On Allotment, Rs.2.50 per share, On First and Final Call, Rs.5.00 per share, X, the holder of 400 shares did not pay the call money and his shares were forfeited., 200 of the forfeited shares were reissued as fully paid at Rs.8 per share. Draft necessary, journal entries and prepare Share Capital and Share Forfeiture accounts in the, books of the company., Test Your Understanding – III, (a), , If a Share of Rs. 10 on which Rs. 8 is called-up and Rs. 6 is paid as forfeited., State with what amount the Share Capital account will be debited., , (b), , If a Share of Rs. 10 on which Rs. 6 has been paid is forfeited, at what minimum, price it can be reissued., , (c), , Ahluwalia Ltd. issued 1,000 equity shares of Rs. 100 each as fully paid-up in, consideration of the purchase of plant and machinery worth Rs. 1,00,000. What, entry will be recorded in company’s journal., , 2018-19
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56, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 20, Sunrise Company Limited offered for public subscription 10,000 shares of Rs.10, each at Rs. 11 per share. Money was payable as follows:, Rs. 3 on application, Rs. 4 on allotment (including premium), Rs. 4 on first and final call., Applications were received for 12,000 shares and the directors made prorata 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 Rs. 8 per share. Record journal entries for the, above transactions and prepare the share forfeiture account., Solution:, Books of Sunrise Company Limited, Journal, Date, , Particulars, , Bank A/c, Dr., To Share Application A/c, (Application money received on 12,000 shares, @ Rs. 3 per share), , L.F., , Debit, Amount, (Rs.), 36,000, , 36,000, , Share Application A/c, Dr., To Share Capital A/c, To Share Allotment A/c, (Transfer of application money to share capital, account on 10,000 shares and the balance, to allotment account), , 36,000, , Share Allotment A/c, Dr., To Share Capital A/c, To Securities Premium Reserve A/c, (Money due on allotment @ Rs. 4 per share, on 10,000 shares including Rs. 1 on account, of premium), , 40,000, , Bank A/c, Dr., To Share Allotment A/c, (Money received on share allotment: See note 1), , 33,660, , 2018-19, , Credit, Amount, (Rs.), , 30,000, 6,000, , 30,000, 10,000, , 33,660
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Accounting for Share Capital, , 57, , Share first and Final Call A/c, Share Capital A/c, (Money due on call on 10,000 shares, @ Rs. 4 per share), , Dr., , Bank A/c, To Share first and Final Call A/c, (Call money received on 9,700 shares), , Dr., , Share Capital A/c, Securities Premium Reserve A/c, To Share Allotment A/c, To Share first and Final Call A/c, To Share Forfeiture A/c, (Forfeiture of 300 shares), , Dr., , Bank A/c, Shares Forfeiture A/c, To Share Capital A/c, (Reissue of 150 forfeited shares), , Dr., Dr., , Shares Forfeiture A/c, To Capital Reserve, (Profit on reissue of 150, forfeited shares transferred), , Dr., , 40,000, 40,000, , 38,800, 38,800, 3,000, 100, 340, 1,200, 1,560, 1,200, 300, 1,500, 360, 360, , Share Forfeiture Account, Dr., , Cr., , Date, , Particulars, , J.F., , Amount Date, (Rs.), , Share Capital, Capital Reserve, Balance c/d, , 300, 360, 900, , Particulars, Sundries, , 1,560, , J.F., , Amount, (Rs.), 1,560, , 1,560, , Working Notes :, 1., , Amount received on allotment has been calculated as follows:, , Less:, , Total money due on 10,000 shares @ Rs. 4 per share, Application Money Received on 2,000 shares adjusted, against allotment money, , Less:, , Net amount due on allotment, Amount due from an applicant for 120 shares who, was allotted only 100 shares, , 100, × 34,000, 10,000, Amount received on allotment, , (Rs.), 40,000, (6,000), 34,000, , (340), 33,660, , 2018-19
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58, , Accountancy : Company Accounts and Analysis of Financial Statements, 2., , Securities Premium Account has been debited only with Rs. 100 relating to 100, shares allotted Mr. Ahmad’s shares from whom the allotment money (including, premium) has not been received., , 3., , Shares Forfeiture Account represents the money received on forfeited shares, excluding Securites premium. This has been worked out as follows:, (Rs.), Mr. Ahmad has paid application money @ Rs. 3 per share on 120 shares 360, Mr. Basu has paid @ Rs. 6 per share on 200 shares, 1,200, in (application and allotment money excluding premium), Total amount received, , 4., , 1,560, , Amount received from Mr. Ahmad on 100 shares forfeited, which have been reissued, , (Rs.), 360, , Amount received from Mr. Basu on 50, 50, × Rs. 1,200, 200, Total amount received on 150 shares which have, been forfeited and later reissued, Less: Discount on reissue of forfeited shares (150 × Rs. 2), shares forfeited which have been reissued, , Amount of Capital Profit transferred to capital reserve, , 300, 660, 300, 360, , Illustration 21, Devam Limited issued a prospectus inviting application for 30,000 equity shares, of Rs.10 each at a premium of Rs. 4 per share payable as follows:, With Application (including premium Rs.1), Rs. 3, On Allotment (including premium Rs.1), Rs. 4, On First call (including premium Rs.1), Rs. 4, On Second and Final call, Balance, Applications were received for 45,000 shares. 20% of the applications, received were rejected and their application money was refunded. Remaining, applicants were allotted shares on pro-rata basis., Mr. Sudhir, who has applied for 600 shares, failed to pay the allotment money, and his shares were forfeited immediately after that., Ms. Muskan, to whom 750 shares were allotted failed to pay the first call, and hence her shares were forfeited., The forfeited shares of Mr. Sudhir were re-issued to Lakshya for Rs. 8 per, share as fully paid up., Final call was made due on remaining applicants and was received except, on 1,000 shares of Amit. These shares were forfeited., , 2018-19
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Accounting for Share Capital, , 59, , Of the shares forfeited, 1,500 shares were re-issued to Devika for Rs. 12 per, share as fully paid up, the whole of Lakshya’s share being included. Record, journal entries in the books of the company., Solution:, Books of Devam Limited, Journal, Date, , Particulars, , Bank A/c, , L.F., , Dr., , Debit, Amount, (Rs.), 1,35,000, , To Equity Share Application A/c, (Application money received on 45,000 shares), , 1,35,000, , Equity Share Application A/c, Dr., To Equity Share Capital A/c, To Securities Premium Reserve, To Equity Share Allotment A/c, To Bank A/c, (Application money on 30,000 shares transferred, to share capital A/c and securities premium reserve, account, on 9,000 shares refunded and the excess, amount adjusted to share allotment account), , 1,35,000, , Equity Share Allotment A/c, Dr., To Equity Share Capital A/c, To Securities Premium Reserve, (Allotment amount due on 30,000 Shares, @ Rs. 4 per share including premium), Bank A/c, Dr., To Equity Share Allotment A/c, (Allotment amount received after adjusting, excess money received on application except, shares of Sudhir), , 1,20,000, , Equity Share Capital A/c, Securities Premium Reserve A/c, To Equity Share Allotment A/c, To Share Forfeiture A/c, (Forfeiture of 500 shares of Sudhir), Equity Share First Call A/c, To Equity Share Capital A/c, To Securities Premium Reserve, (First Call amount due on 29,500 shares), , Dr., Dr., , 60,000, 30,000, 18,000, 27,000, , 90,000, 30,000, , 1,00,300, 1,00,300, , 2,500, 500, 1,700, 1,300, , Dr., , Bank A/c, Dr., To Equity Share First Call A/c, (First call amount received on 28,750 shares), , 2018-19, , Credit, Amount, (Rs.), , 1,18,000, 88,500, 29,500, 1,15,000, 1,15,000
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60, , Accountancy : Company Accounts and Analysis of Financial Statements, , Equity Share Capital A/c, Securities Premium Reserve A/c, To Equity Share First Call A/c, To Share Forfeiture A/c, (Forfeiture of 750 shares of Muskan), , Dr., , Bank A/c, Share Forfeiture A/c, To Equity Share Capital A/c, (Re-issue of 500 forfeited shares of Sudhir), , Dr., Dr., , Share Forfeiture A/c, To Capital Reserve, (Profit on 500 re-issued shares transferred, to Capital reserve), , Dr., , Equity Share Second and Final, To Equity Share Capital A/c, To Securities Premium Reserve A/c, (Second and Final Call money due, on 28,750 shares), , Dr., , 6,000, 750, 3,000, 3,750, 4,000, 1,000, 5,000, 300, 300, , 86,250, 57,500, 28,750, , Bank A/c, Dr., To Equity Share Second and Final Call A/c, (Second and final call amount received, on 27,750 shares), , 83,250, , Equity Share Capital A/c, Dr., Securities Premium Reserve, Dr., To Equity Share Second and Final Call A/c, To Share Forfeiture A/c, (Forfeiture of 1,000 shares of Amit), , 10,000, 1,000, , Bank A/c, Dr., To Equity Share Capital A/c, To Securities Premium Reserve A/c, (Re-issue of 1,500 forfeited shares, including, 1,000 shares of Lakshya and 500 shares, of Muskan), , 18,000, , Share Forfeiture A/c, To Capital Reserve, (Profit on 1,500 re-issued shares transferred, to Capital Reserve), , 10,500, , 2018-19, , Dr., , 83,250, , 3,000, 8,000, , 15,000, 3,000, , 10,500
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Accounting for Share Capital, , 61, , Working Notes:, 1., , Amount received on allotment, a. Amount due on allotment, 30,000 shares × Rs. 4 per share, b. Amount actually due on allotment, Amount due on allotment, Less: Excess Application amount applied for allotment, Amount actually due., c. Allotment money due from Sudhir, Shares Applied by Sudhir, =, 600, Shares Allotted to Sudhir, , =, , (Rs.), 1,20,000, 1,20,000, 18,000, 1,02,000, , 30,000 × 600 = 500, 36,000, , Allotment money due from Sudhir, 500 shares × Rs. 4 per share, Less – Excess application money paid, (600 shares – 500 shares) × Rs. 3, Allotment money due from Sudhir, , d. Amount actually due on Allotment, Less Amount Unpaid by Sudhir, Amount received on allotment, , 2,000, 300, 1,700, 1,02,000, 1,700, 1,00,300, , 2. 1,500 shares have been re-issued including 1,000 shares of Amit and, balance 500 shares of Muskan., Profit on 1,000 shares of Amit, 8,000, Profit on 500 shares of Muskan = 3,750 × 500 =, 750, , 2,500, 10,500, , 3. Balance in Share Forfeiture Account of 250 shares, of Muskan = 3,750 × 250 = 1,250, 750, Do it Yourself, Journalise the following :, (a), , The directors of a company forfeited 200 equity shares of Rs.10 each on which, Rs. 800 had been paid. The shares were reissued upon payment of Rs.1,500., , (b), , A holds 100 shares of Rs.10 each on which he has paid Re.1 per share on, application. B holds 200 shares of Rs.10 each on which he has paid Re.1 on, application Rs.2 on allotment. C holds 300 shares of Rs.10 each who has paid, Re.1 on applications, Rs.2 on allotment and Rs.3 on first call. They all failed to, pay their arrears and second call of Rs.4 per share as well. All the shares of A,, B and C were forfeited and subsequently reissued at Rs.11 per share as fully, Paid-up., , 2018-19
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62, , Accountancy : Company Accounts and Analysis of Financial Statements, , Termes Used in the Chapter, 1., 2., 3., 4., 5., 6., 7., 8., 9., 10., 11., 12., 13., 14., 15., , Joint Stock Company, Share Capital, Authorised Capital, Issued Capital, Unissued Capital, Subscribed Capital, Subscribed and fully paid-up, Subscribed but not fully paid up, Paid-up Capital, Reserve Capital, Shares, Preference Shares, Non-redeemable Preference Shares, Equity Shares, Issue of Shares for Consideration, Other than Cash, , 16., 17., 18., 19., 20., 21., 22., 23., 24., 25., 26., , Premium on Shares, Application Money, Minimum Subscription, Calls on Shares, Calls in Arrears, Calls in Advance, Over subscription, Under subscription, Forfeiture of Shares, Reissue of forfeited shares, Buy-back of Shares, , Summary, Company: An organisation consisting of individuals called ‘shareholders’ by virtue, of their holding the shares of a company, who can act as legal person as regards, its business through board of directors., Share: Fractional part of the capital, and forms the basis of ownership in a company., Shares are generally of two types, viz. equity shares and preference shares,, according to the provisions of the Companies Act, 2013. Preference shares again, are of different types based on varying shades of rights attached to them., Share Capital of a company is collected by issuing shares to either a select, group of persons through the route of private placements and/or offered to the, public for subscription. Thus, the issue of shares is basic to the capital of a, company. Shares are issued either for cash or for consideration other than, cash, the former being more common. Shares are said to be issued for, consideration other than cash when a company purchases business, or some, asset/assets, and the vendors have agreed to receive payment in the form of, fully paid shares of a company., Stages of Share Issue: The issue of shares for cash is required to be made in strict, conformity with the procedure laid down by law for the same. When shares are, issued for cash, the amount on them can be collected at one or more of the following, stages:, (i), (ii), (iii), , Application for shares, Allotment of shares, Call/Calls on shares., , Calls in Arrears: Sometimes, the full amount called on allotment and/or call (calls), is not received from the allottees/shareholders. The amount not so received are, , 2018-19
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Accounting for Share Capital, , 63, , cumulatively called ‘Unpaid calls’ or ‘Calls in Arrears’. However, it is not mandatory, for a company to maintain a separate Calls-in-Arrears Account. There are also, instances where some shareholders consider it discreet to pay a part or whole of, the amount not yet called-up on the shares allotted to them. Any amount paid by, a shareholder in the excess of the amount due from him on allotment/call (calls) is, known as ‘Calls in Advance’ for which a separate account is maintained. A company, has the power to charge interest on calls in arrears and is under an obligation to, pay interest on calls-in-advance if it accepts them in accordance with the provisions, of Articles of Association., Over Subscription: It is possible for the shares of some companies to be over, subscribed which means that applications for more shares are received than the, number offered for subscription., If the amount of minimum subscription is not received to the extent of 90%, the, issue dissolves. In case the applications received are less than the number of, shares offered to the public, the issue is termed as ‘under subscribed’., Issue of Shares at Premium: Irrespective of the fact that shares have been issued for, consideration other than cash, they can be issued either at par or at premium., The issue of shares at par implies that the shares have been issued for an amount, exactly equal to their face or nominal value. In case shares are issued at a premium,, i.e. at an amount more than the nominal or par value of shares, the amount of, premium is credited to a separate account called ‘Securities Premium Reserve, Account’, the use of which is strictly regulated by law., Issue of Shares at Discount: Shares can as well be issued at a discount, i.e. for an, amount less than the nominal or par value of shares provided the company fully, complies with the provisions laid down by law with regard to the same. Apart from, such compliance, shares of a company cannot ordinarily be issued at a discount., According to the Companies Act, 2013, only sweat equity shares can be issued at, a discount. When shares are issued at a discount, the amount of discount is debited, to ‘Discount on Issue of Share Account’, which is in the nature of capital loss for, the company., Forfeiture of Shares: Sometimes, shareholders fail to pay one or more instalments, on shares allotted to them. In such a case, the company has the authority to forfeit, shares of the defaulters. This is called ‘Forfeiture of Shares’. Forfeiture means the, cancellation of allotment due to breach of contract and to treat the amount already, received on such shares as forfeited to the company. The precise accounting, treatment of share forfeiture depends upon the conditions on which the shares, have been issued — at par, premium or discount. Generally speaking, accounting, treatment on forfeiture is to reverse the entries passed till the stage of forfeiture,, the amount already received on the shares being credited to Forfeiture Shares, Account., Reissue of Shares: The management of a company is vested with the power to, reissue the shares once forfeited by it, subject of course, to the terms and conditions, in the articles of association relating to the same. The shares can be reissued even, at a discount provided the amount of discount allowed does not exceed the credit, , 2018-19
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64, , Accountancy : Company Accounts and Analysis of Financial Statements, , balance of Share forfeiture account relating to shares being reissued. Therefore,, discount allowed on the reissue of forfeited shares is debited to Share forfeiture, account., Once all the forfeited shares have been reissued, any credit balance on Share, forfeiture account is transferred to Capital Reserve representing profit on forfeiture, of shares. In the event of all forfeited share not being reissued, the credit amount, on Share forfeiture account relating to shares yet to be reissued is carried forward, and the remaining balance on the account only is credited to capital reserve, account., , Question for Practice, Short Answer Questions, 1., 2., 3., 4., 5., 6., 7., 8., , What is public company?, What is a private company., When can shares be Forfeited?, What is meant by Calls in Arrears?, What do you mean by a listed company?, What are the uses of securities premium?, What is meant by Calls in Advance?, Write a brief note on “Minimum Subscription”., , Long Answer Questions, 1., 2., 3., 4., 5., 6., 7., 8., 9., 10., , What is meant by the word ‘Company’? Describe its characteristics., Explain in brief the main categories in which the share capital of a company, is divided., What do you mean by the term ‘share’? Discuss the type of shares, which, can be issued under the Companies Act, 2013 as amended to date., Discuss the process for the allotment of shares of a company in case of over, subscription., What is a ‘Preference Share’? Describe the different types of preference, shares., Describe the provisions of law relating to ‘Calls in Arrears’ and ‘Calls in, Advance’., Explain the terms ‘Over subscription’ and ‘Under subscription’. How are, they dealt with in accounting records?, Describe the purposes for which a company can use the amount of Securities, Premium., State clearly the conditions under which a company can issue shares at a, discount., Explain the term ‘Forfeiture of Shares’ and give the accounting treatment, on forfeiture., , 2018-19
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Accounting for Share Capital, , 65, , Numerical Questions, 1. Anish Limited issued 30,000 equity shares of Rs.100 each payable at Rs.30, on application, Rs.50 on allotment and Rs.20 on Ist and final call. All money, was duly received., Record these transactions in the journal of the company., 2. The Adarsh Control Device Ltd. was registered with the authorised capital of, Rs.3,00,000 divided into 30,000 shares of Rs.10 each, which were offered to the, public. Amount payable as Rs.3 per share on application, Rs.4 per share on, allotment and Rs.3 per share on first and final call. These shares were fully, subscribed and all money was dully received. Prepare journal and Cash Book., 3. Software Solution India Ltd. invited applications for 20,000 equity shares of, Rs.100 each, payable Rs.40 on application, Rs.30 on allotment and Rs.30 on, call. The company received applications for 32,000 shares. Application for, 2,000 shares were rejected and money returned to applicants. Applications, for 10,000 shares were accepted in full and applicants for 20,000 shares, allotted half of the number of shares applied and excess application money, adjusted into allotment. All money due on allotment and call was received., Prepare journal and cash book., 4. Rupak Ltd. issued 10,000 shares of Rs.100 each payable Rs.20 per share on, application, Rs.30 per share on allotment and balance in two calls of Rs.25 per, share. The application and allotment money were duly received. On first call,, all members paid their dues except one member holding 200 shares, while, another member holding 500 shares paid for the balance due in full. Final call, was not made., Give journal entries and prepare cash book., 5. Mohit Glass Ltd. issued 20,000 shares of Rs.100 each at Rs.110 per share,, payable Rs.30 on application, Rs.40 on allotment (including Premium), Rs.20, on first call and Rs.20 on final call. The applications were received for 24,000, shares and allotted 20,000 shares and rejected 4,000 shares and amount, returned thereon. The money was duly received., Give journal entries., 6. A limited company offered for subscription of 1,00,000 equity shares of Rs.10, each at a premium of Rs.2 per share, 2,00,000 10% Preference shares of Rs.10, each at par., The amount on share was payable as under :, Equity Shares, Preference Shares, On Application, Rs.3 per share, Rs.3 per share, Rs.4 per share, On Allotment, Rs.5 per share, (including premium), On First Call, Rs.4 per share, Rs.3 per share, All the shares were fully subscribed, called-up and paid., Record these transactions in the journal and cash book of the company:, , 2018-19
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66, , Accountancy : Company Accounts and Analysis of Financial Statements, , 7. Eastern Company Limited, with an authorised capital of Rs.10,00,000 is divided, into shares of Rs.10 each, issued 50,000 shares at a premium of Rs.3 per, share payable as follows:, On Application, , Rs.3 per share, , On Allotment (including premium), , Rs.5 per share, , On first call (due three months after allotment) Rs.3 per share, and the balance as and when required., Applications were received for 60,000 shares and the directors allotted the, shares as follows :, (a), , Applicants for 40,000 shares received in full., , (b), , Applicants for 15,000 shares received an allotment of 8,000 shares., , (c), , Applicants for 500 shares received 200 shares on allotment, excess money, being returned., , All amounts due on allotment were received., The first call was duly made and the money was received with the exception of, the call due on 100 shares., Give journal and cash book entries to record these transactions of the company., Also prepare the Balance Sheet of the company., 8. Sumit Machine Ltd. issued 50,000 shares of Rs.100 each at premium of 5%., The shares were payable Rs.25 on application, Rs. 50 on allotment and Rs.30, on first and final call. The issue was fully subscribed and money was duly, received except the final call on 400 shares. The premium was adjusted on, allotment., Give journal entries and prepare the balance sheet., 9. Kumar Ltd. purchased assets of Rs.6,30,000 from Bhanu Oil Ltd. Kumar Ltd., issued equity share of Rs.100 each fully paid in consideration. What journal, entries will be made, if the shares are issued, (a) at par, and (b) at premium of 20%., (Answer: Numbers of shares issued (a) 6,300 (b) 5,250), 10. Bansal Heavy Machine Ltd. purchased machine worth Rs.3,20,000 from Handa, Trader. Payment was made as Rs.50,000 cash and remaining amount by, issue of equity shares of the face value of Rs. 100 each fully paid at an issue, price of Rs.90 each., Give journal entries to record the above transaction., (Answer: Numbers of shares issued = 3,000 shares), 11. Naman Ltd. issued 20,000 shares of Rs.100 each, payable Rs.25 on application,, Rs.30 on allotment , Rs.25 on first call and the balance on final call. All money, , 2018-19
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Accounting for Share Capital, , 67, , duly received except Anubha, who holding 200 shares did not pay allotment, and calls money and Kumkum, who holding 100 shares did not pay both the, calls. The directors forfeited the shares of Anubha and Kumkum., Give journal entries., 12. Kishna Ltd. issued 15,000 shares of Rs.100 each at a premium of Rs.10 per, share, payable as follows:, On application, , Rs.30, , On allotment, , Rs.50 [including premium], , On first and final call, , Rs.30, , All the shares subscribed and the company received all the money due, with, the exception of the allotment and call money on 150 shares. These shares, were forfeited and reissued to Neha as fully paid share of Rs.12 each., Give journal entries in the books of the company., (Answer: Capital Reserve = Rs. 4,500), 13. Arushi Computers Ltd. issued 10,000 equity shares of Rs.100 each at 10%, premium. The net amount payable as follows:, On application, , Rs.20, , On allotment, , Rs.50 (Rs.40 + premium Rs.10 ), , On first call, , Rs.30, , On final call, , Rs.10, , A shareholder holding 200 shares did not pay final call. His shares were, forfeited. Out of these 150 shares were reissued to Ms.Sonia at Rs.75 per share., Give journal entries in the books of the company., (Answer: Capital Reserve = Rs.9,750), 14. Raunak Cotton Ltd. issued a prospectus inviting applications for 6,000 equity, shares of Rs.100 each at a premium of Rs.20 per shares, payable as follows:, On application, , Rs.20, , On allotment, , Rs.50 [including premium], , On first call, , Rs.30, , On final call, , Rs.20, , Applications were received for 10,000 shares and allotment was made pro-rata, to the applicants of 8,000 shares, the remaining applications being refused., Money received in excess on the application was adjusted toward the amount, due on allotment., , 2018-19
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68, , Accountancy : Company Accounts and Analysis of Financial Statements, , Rohit, to whom 300 shares were allotted failed to pay allotment and calls money,, his shares were forfeited. Itika, who applied for 600 shares, failed to pay the, two calls and her shares were also forfeited. All these shares were sold to Kartika, as fully paid for Rs.80 per share., Give journal entries in the books of the company., (Answer: Capital Reserve = Rs.15,500), 15. Himalaya Company Limited issued for public subscription of 1,20,000 equity, shares of Rs.10 each at a premium of Rs.2 per share payable as under :, With Application, , Rs. 3 per share, , On allotment (including premium), , Rs. 5 per share, , On First call, , Rs. 2 per share, , On Second and Final call, , Rs. 2 per share, , Applications were received for 1,60,000 shares. Allotment was made on prorata basis. Excess money on application was adjusted against the amount due, on allotment., Rohan, whom 4,800 shares were allotted, failed to pay for the two calls. These, shares were subsequently forfeited after the second call was made. All the, shares forfeited were reissued to Teena as fully paid at Rs. 7 per share., Record journal entries and show the transactions relating to share capital in, the company’s balance sheet., (Answer = Rs. 14,400), 16. Prince Limited issued a prospectus inviting applications for 20,000 equity shares, of Rs.10 each at a premium of Rs.3 per share payable as follows:, With Application, , Rs.2, , On Allotment (including premium), , Rs.5, , On First Call, , Rs.3, , On Second Call, , Rs.3, , Applications were received for 30,000 shares and allotment was made on prorata basis. Money overpaid on applications was adjusted to the amount due on, allotment., Mr. Mohit whom 400 shares were allotted, failed to pay the allotment money, and the first call, and his shares were forfeited after the first call. Mr. Joly,, whom 600 shares were allotted, failed to pay for the two calls and hence, his, shares were forfeited., Of the shares forfeited, 800 shares were reissued to Supriya as fully paid for, Rs.9 per share, the whole of Mr. Mohit’s shares being included., , 2018-19
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Accounting for Share Capital, , 69, , Record journal entries in the books of the Company and prepare the Balance, Sheet., (Answer: Capital Reserve = Rs. 2,000), 17. Life Machine Tools Limited issued 50,000 equity shares of Rs.10 each at Rs.12, per share, payable at to Rs.5 on application (including premium), Rs.4 on, allotment and the balance on the first and final call., Applications for 70,000 shares had been received. Of the cash received,, Rs.40,000 was returned and Rs.60,000 was applied to the amount due on, allotment. All shareholders paid the call due, with the exception of one, shareholder of 500 shares. These shares were forfeited and reissued as fully, paid at Rs.8 per share. Journalise the transactions., (Answer: Capital Reserve = Rs. 2,500), 18. The Orient Company Limited offered for public subscription 20,000 equity shares, of Rs.10 each at a premium of 10% payable at Rs.2 on application; Rs.4 on, allotment including premium; Rs.3 on First Call and Rs.2 on Second and Final, call. Applications for 26,000 shares were received. Applications for 4,000 shares, were rejected. Pro-rata allotment was made to the remaining applicants. Both, the calls were made and all the money were received except the final call on, 500 shares which were forfeited. 300 of the forfeited shares were later reissued, as fully paid at Rs.9 per share. Give journal entries and prepare the balance, sheet., (Answer: Capital Reserve = Rs. 2,100), 19. Alfa Limited invited applications for 4,00,000 of its equity shares of Rs.10 each, on the following terms :, Payable on application, , Rs.5 per share, , Payable on allotment, , Rs.3 per share, , Payable on first and final call, , Rs.2 per share, , Applications for 5,00,000 shares were received. It was decided :, (a), , to refuse allotment to the applicants for 20,000 shares;, , (b), , to allot in full to applicants for 80,000 shares;, , (c), , to allot the balance of the available shares’ pro-rata among the other, applicants; and, , (d), , to utilise excess application money in part as payment of allotment money., , One applicant, whom shares had been allotted on pro-rata basis, did not pay, the amount due on allotment and on the call, and his 400 shares were forfeited., The shares were reissued @ Rs.9 per share. Show the journal and prepare, Cash book to record the above., (Answer: Capital Reserve = Rs. 2,100), , 2018-19
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70, , Accountancy : Company Accounts and Analysis of Financial Statements, , 20. Ashoka Limited Company which had issued equity shares of Rs.20 each at a, premium of Rs. 4 per share, forfeited 1,000 shares for non-payment of final call, of Rs.2 per share. 400 of the forfeited shares were reissued at Rs.14 per share, out of the remaining shares of 200 shares reissued at Rs.20 per share. Give, journal entries for the forfeiture and reissue of shares and show the amount, transferred to capital reserve and the balance in Share Forfeiture Account., (Answer: Capital Reserve = Rs. 6,800, Balance of Share Forfeiture Account:, Rs. 4800), 21. Amit holds 100 shares of Rs.10 each on which he has paid Re.1 per share as, application money. Bimal holds 200 shares of Rs.10 each on which he has, paid Re.1 and Rs.2 per share as application and allotment money, respectively., Chetan holds 300 shares of Rs.10 each and has paid Re.1 on application, Rs.2, on allotment and Rs.3 for the first call. They all failed to pay their arrears and, the second call of Rs.2 per share and the directors, therefore, forfeited their, shares. The shares are reissued subsequently for Rs.11 per share as fully, paid. Journalise the transactions., (Answer: Capital Reserve = Rs. 2,500), 22. Ajanta Company Limited having a nominal capital of Rs.3,00,000, divided into, shares of Rs.10 each offered for public subscription of 20,000 shares payable, at Rs.2 on application; Rs.3 on allotment and the balance in two calls of Rs.2.50, each. Applications were received by the company for 24,000 shares. Applications, for 20,000 shares were accepted in full and the shares allotted. Applications, for the remaining shares were rejected and the application money was refunded., All moneys due were received with the exception of the final call on 600 shares, which were forfeited after legal formalities were fulfilled. 400 shares of the, forfeited shares were reissued at Rs.9 per share., Record necessary journal entries and prepare the balance sheet showing the, amount transferred to capital reserve and the balance in share forfeiture, account., (Answer: Capital Reserve = Rs. 2,600), 23. Journalise the following transactions in the books Bhushan Oil Ltd.:, (a) 200 shares of Rs.100 each issued at a premium of Rs.10 were forfeited, for the non-payment of allotment money of Rs.60 per share. The first, and final call of Rs.20 per share on these shares were not made. The, forfeited shares were reissued at Rs.70 per share as fully paid-up., (b) 150 shares of Rs.10 each issued at a premium of Rs.4 per share payable, with allotment were forfeited for non-payment of allotment money of, Rs.8 per share including premium. The first and final calls of Rs.4 per, share were not made. The forfeited shares were reissued at Rs.15 per, share fully paid-up., , 2018-19
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Accounting for Share Capital, , (c), , 71, , 400 shares of Rs.50 each issued at par were forfeited for non-payment of, final call of Rs.10 per share. These shares were reissued at Rs.45 per, share fully paid-up., , (Answer: Capital Reserve = (a) NIL (b) Rs. 300 (c) Rs.14,000), 24. Amisha Ltd. invited applications for 40,000 shares of Rs.100 each at a premium, of Rs.20 per share. Amount payable on application Rs.40 ; on allotment Rs.40, (Including premium): on first call Rs.25 and second and final call Rs.15., Applications were received for 50,000 shares and allotment was made on prorata basis. Excess money on application was adjusted against the sums due, on allotment., Rohit to whom 600 shares were allotted failed to pay the allotment money and, his shares were forfeited after allotment. Ashmita, who applied for 1,000 shares, failed to pay the two calls and her shares were forfeited after the second call. Of, the shares forfeited, 1,200 shares were sold to Kapil for Rs.85 per share as, fully paid, the whole of Rohit’s shares being included., Record necessary journal entries., (Answer: Capital Reserve = Rs. 48,000 Balace of Share Forfeiture A/c Rs.12,000), , Answers to Test your Understanding, Test your Understanding – I, (a) True, (b) False, (c) False, (d) True, (e) True, (f) True, (g) False, (h) True,, (i) False, (j) True, (k) True, Test your Understanding – II, (a) (ii), (b) (iii), (c) (i), (d) (ii), (e) (i), (f) (iii), (g) (iii), Test your Understanding – III, (a) Rs. 8,, , (b) Rs. 4,, , (c) Vendor, To Share Capital A/c, , Dr., , 1,00,000, 1,00,000, , 2018-19
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Issue and Redemption of Debentures, , 2, , LEARNING OBJECTIVES, After studying this chapter, you will be able to :, • state the meaning of, debenture and explain the, difference, between, debentures and shares;, • describe various types of, debentures;, • record the journal entries, for the issue of debentures, at par, at a discount and, at premium;, • explain the concept of, debentures issued for, consideration other than, cash and the accounting, thereof;, • explain the concept of, issue of debentures as a, collateral security and the, accounting thereof;, • record the journal entries for, issue of debentures with, various terms of issue,, terms of redemption;, • show the items relating to, issue of debentures in, company’s balance sheet;, • describe the methods of, writing-off discount/loss, on issue of debentures;, • explain the methods, of, redemption, of, debentures and the, accounting thereof; and, • explain the concept of, sinking fund, its use for, redemption of debentures, and the accounting, thereof., , A, , company raises its capital by means of issue of, shares. But the funds raised by the issue of, shares are seldom adequate to meet their long term, financial needs of a company. Hence, most companies, turn to raising long-term funds also through, debentures which are issued either through the route, of private placement or by offering the same to the, public. The finances raised through debentures are, also known as long-term debt. This chapter deals with, the accounting treatment of issue and redemption of, debentures and other related aspects., , SECTION I, 2.1, , Meaning of Debentures, , Debenture: The word ‘debenture’ has been derived, from a Latin word ‘debere’ which means to borrow., Debenture is a written instrument acknowledging a, debt under the common seal of the company. It, contains a contract for repayment of principal after, a specified period or at intervals or at the option of, the company and for payment of interest at a fixed, rate payable usually either half-yearly or yearly on, fixed dates. According to section 2(30) of The, Companies Act, 2013 ‘Debenture’ includes, Debenture Inventory, Bonds and any other, securities of a company whether constituting a, charge on the assets of the company or not., , 2018-19
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Issue and Redemption of Debentures, , 73, , Bond: Bond is also an instrument of acknowledgement of debt. Traditionally,, the Government issued bonds, but these days, bonds are also being issued by, semi-government and non-governmental organisations. The terms ‘debentures’, and ‘Bonds’ are now being used inter-changeably., 2.2, , Distinction between Shares and Debentures, , Ownership: A ‘share’ represents ownership of the company whereas a debenture, is only acknowledgement of Debt. A share is a part of the owned capital whereas, a debenture is a part of borrowed capital., Return: The return on shares is known as dividend while the return on, debentures is called interest. The rate of return on shares may vary from year to, year depending upon the profits of the company but the rate of interest on, debentures is prefixed. The payment of dividend is an appropriation of profits,, whereas the payment of interest is a charge on profits and is to be paid even if, there is no profit., Repayment: Normally, the amount of shares is not returned during the life of, the company, whereas, generally, the debentures are issued for a specified period, and repayable on the expiry of that period. However, in the year 1998, the, amendements (Section 77A and 77 B sub Section 2) in the Companies Act,, permitted companies to buy back its shares specially when market value of, shares are less than its book value., Voting Rights: Shareholders enjoy voting rights whereas debentureholders do, not normally enjoy any voting right., Security : Shares are not secured by any charge whereas the debentures are, generally secured and carry a fixed or floating charge over the assets of the, company., Convertibility: Shares cannot be converted into debentures whereas debentures, can be converted into shares if the terms of issue so provide, and in that case, these are known as convertible debentures., 2.3, , Types of Debentures, , A company may issue different kinds of debentures which can be classified as, under:, , 2018-19
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74, , Accountancy : Company Accounts and Analysis of Financial Statements, , 2.3.1 From the Point of view of Security, (a), , (b), , Secured Debentures: Secured debentures refer to those debentures, where a charge is created on the assets of the company for the purpose, of payment in case of default. The charge may be fixed or floating. A, fixed charge is created on a specific asset whereas a floating charge is, on the general assets of the company. The fixed charge is created, against those assets which are held by a company for use in operations, not meant for sale whereas floating charge involves all assets excluding, those assigned to the secured creditors., Unsecured Debentures: Unsecured debentures do not have a specific, charge on the assets of the company. However, a floating charge may, be created on these debentures by default. Normally, these kinds of, debentures are not issued., , 2.3.2 From the Point of view of Tenure, (a), , (b), , Redeemable Debentures: Redeemable debentures are those which are, payable on the expiry of the specific period either in lump sum or in, Instalments during the life time of the company. Debentures can be, redeemed either at par or at premium., Irredeemable Debentures: Irredeemable debentures are also known, as Perpetual Debentures because the company does not give any, undertaking for the repayment of money borrowed by issuing such, debentures. These debentures are repayable on the winding-up of a, company or on the expiry of a long period., , 2.3.3 From the Point of view of Convertibility, (a), , (b), , Convertible Debentures: Debentures which are convertible into equity, shares or in any other security either at the option of the company or, the debentureholders are called convertible debentures. These, debentures are either fully convertible or partly convertible., Non-Convertible Debentures: The debentures which cannot be, converted into shares or in any other securities are called nonconvertible debentures. Most debentures issued by companies fall in, this category., , 2.3.4 From Coupon Rate Point of view, (a), , Specific Coupon Rate Debentures: These debentures are issued with, a specified rate of interest, which is called the coupon rate. The specified, rate may either be fixed or floating. The floating interest rate is usually, tagged with the bank rate., , 2018-19
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Issue and Redemption of Debentures, , (b), , 75, , Zero Coupon Rate Debentures: These debentures do not carry a specific, rate of interest. In order to compensate the investors, such debentures, are issued at substantial discount and the difference between the, nominal value and the issue price is treated as the amount of interest, related to the duration of the debentures., , 2.3.5 From the view Point of Registration, (a), , (b), , Registered Debentures: Registered debentures are those debentures, in respect of which all details including names, addresses and, particulars of holding of the debentureholders are entered in a register, kept by the company. Such debentures can be transferred only by, executing a regular transfer deed., Bearer Debentures: Bearer debentures are the debentures which can, be transferred by way of delivery and the company does not keep any, record of the debentureholdeRs Interest on debentures is paid to a, person who produces the interest coupon attached to such debentures., Types of Debenture/Bond, , Security, , Secured/, Mortgage, debenture, , Tenure, , Mode of, Redemption, , Unsecured/ Redeemable Perpetual/, Naked, debenture Irredeemable, debenture, debenture, , Convertible, debenture, , Fully, convertible, debenture, , 2.4, , Coupon, rate, , NonZero, Specific, convertible, coupon, rate, debenture rate/Deep, Discount Rate, , Registration, , Registered, debenture, , Unregistered/, Bearer, debenture, , Partly, convertible, debenture, , Issue of Debentures, , The procedure for the issue of debentures is the same as that for the issue of shares., The intending investors apply for debentures on the basis of the prospectus issued, by the company. The company may either ask for the entire amount to be paid on, application or by means of instalments on application, on allotment and on various, calls. Debentures can be issued at par, at a premium or at a discount. They can, also be issued for consideration other than cash or as a collateral security., , 2018-19
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76, , Accountancy : Company Accounts and Analysis of Financial Statements, , 2.4.1 Issue of Debentures for Cash, Debentures are said to be issued at par when their issue price is equal to the, face value. The journal entries recorded for such issue are as under:, (a), , (b), , (c), , If whole amount is received in one instalment:, (i) On receipt of the application money, Bank A/c, Dr., To Debenture Application & Allotment A/c, (ii) On Allotment of debentures, Debenture Application & Allotment A/c, Dr., To Debentures A/c, If debenture amount is received in two instalments:, (i) On receipt of application money, Bank A/c, Dr., To Debenture Application A/c, (ii) For adjustment of applications money on allotment, Debenture Application A/c, Dr., To Debentures A/c, (iii) For allotment money due, Debenture Allotment A/c, Dr., To Debentures A/c, (iv) On receipt of allotment money, Bank A/c, Dr., To Debenture Allotment A/c, If debenture money is received in more than two instalments, Additional entries:, (i), , Note:, , On making the first call, Debenture First Call A/c, Dr., To Debentures A/c, (ii) On the receipt of the first call, Bank A/c, Dr., To Debenture First Call A/c, Similar entries may be made for the second call and final call. However, normally, the whole amount is collected on application or in two instalments, i.e., on, application and allotment., , Illustration 1, ABC Lmited issued Rs 10,000, 12% debentures of Rs 100 each payable Rs 30, on application and remaining amount on allotment. The public applied for 9,000, debentures which were fully allotted, and all the relevant allotment money was, duly received. Give journal entries in the books of ABC Ltd., and exhibit the, relevent information in the balance sheet., , 2018-19
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Issue and Redemption of Debentures, , 77, , Solution:, Books of ABC Limited, Journal, Date, , Particulars, , L.F., , Debit, Amount, (Rs), , Bank A/c, Dr., To 12% Debenture Application A/c, (Application money on 9,000 debentures received), , 2,70,000, , 12% Debenture Application A/c, Dr., To 12% Debentures A/c, (Application money transferred to debentures, Account on allotment), , 2,70,000, , 12% Debenture Allotment A/c, Dr., To 12% Debentures A/c, (Amount due on 9,000 debentures on allotment, @ Rs 70 per debenture), , 6,30,000, , Bank A/c, To 12% Debenture Allotment A/c, (Amount received on allotment), , 6,30,000, , 2,70,000, , 2,70,000, , 6,30,000, , Dr., , 6,30,000, , ABC Limited, *Balance Sheet as at ................., Particulars, , Note, No., , I. Equity and Liabilities, Non-current liabilities, Long-term borrowings, II. Assets, Current assets, Cash and cash equivalents, *, , Amount, (Rs), , 1, , 9,00,000, , 2, , 9,00,000, , Relevant data only, , Notes to Accounts, Particulars, , Amount, (Rs), , 1. Long-term borrowings, 9,000, 12% Debentures of Rs 100 each, 2. Cash and cash equivalents, Cash at bank, , 2018-19, , Credit, Amount, (Rs), , 9,00,000, 9,00,000
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78, , Accountancy : Company Accounts and Analysis of Financial Statements, , 2.4.2 Issue of Debentures at a Discount, When a debenture is issued at a price below its nominal value, it is said to be, issued at a discount. For example, the issue of Rs. 100 debentures at Rs. 95,, Rs. 5 being the amount of discount. Discount on issue of debentures is a capital, loss and is shown under the line item ‘Other Non-Current Assets’ or ‘Other, Current Assets’ depending upon the time period in which it is to be written off., The discount on issue of debentures can be written off either by debiting it to, Statement of Profit and Loss or out of Securities Premium Reserve A/c, if any,, during the life time of debentures., Discount on issue of debentures to be written off within 12 months of the, balance sheet date or the period of operating cycle is shown under ‘Other Current, Assets’ and the part which is to be written off after 12 months of balance sheet is, shown under ‘Other Non-Current Assets’., The Companies Act, 2013 does not impose any restrictions upon the issue, of debentures at a discount., Illustration 2, TV Components Ltd., issued 10,000, 12% debentures of Rs 100 each at a, discount of 5% payable as follows:, On application, Rs 40, On allotment, Rs 55, Show the journal entries including those for cash, assuming that all the, instalments were duly collected. Also show the relevant portion of the balance sheet., Solution:, Books of TV Components Ltd., Journal, Date, , Particulars, , L.F., , Bank A/c, To 12% Debenture Application A/c, (Receipt of application money @ Rs 30 per, debenture), , Dr., , 12% Debenture Application A/c, To 12% Debenture A/c, (Transfer of application money to debenture, account), , Dr., , 12% Debenture Allotment A/c, Discount on Issue of Debentures A/c, To 12% Debenture A/c, (Allotment money due on debentures), , Dr., , Bank A/c, To 12% Debenture Allotment A/c, (Receipt of allotment money on debentures), , Dr., , 2018-19, , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 4,00,000, 4,00,000, , 4,00,000, 4,00,000, , 5,50,000, 50,000, 6,00,000, 5,50,000, 5,50,000
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Issue and Redemption of Debentures, , 79, , TV Components Limited, Balance Sheet as at.................., Particulars, I., , Note, No., , Equity and Liabilities, 1. Non-current Liabilities, Long-term borrowings, , II. Assets, 1. Non-current assets, Other non-current assets, 2. Current assets, a) Cash and cash equivalents, b) Other current assets, , Amount, (Rs), , 1, , 10,00,000, , 2, , 45,000, , 3, 4, , 9,50,000, 5,000, 10,00,000, , Notes to Accounts, Particulars, , Amount, (Rs), , 1. Long-term borrowings, 10,000, 12% secured debentures of Rs 100 each, 2. Other non-current assets, Discount on issue of debentures, 3. Cash and cash equivalents, Cash at bank, 4. Other current assets, Discount on issue of debentures, (To be written-off within 12 months of the, balance sheet date or the period of operating cycle), , 10,00,000, 45,000, 9,50,000, , 5,000, , Notes:, 1 It is presumed that debentures are redeemable after 10 years., *Relevant data only., , 2.4.3 Debentures issued at Premium, A debenture is said to be issued at a premium when the price charged is more, than its nominal value. For example, the issue of Rs 100 debentures for Rs 110,, (Rs 10 is being the premium). The amount of premium is credited to Securities, Premium Reserve account and is shown on the liabilities side of the balance, sheet under the head “Reserves and Surpluses”., Illustration 3, XYZ Industries Ltd., issued 2,000, 10% debentures of Rs 100 each, at a premium, of Rs 10 per debenture payable as follows:, On application, Rs 50, On allotment, Rs 60, , 2018-19
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80, , Accountancy : Company Accounts and Analysis of Financial Statements, , The debentures were fully subscribed and all money was duly received., Record the journal entries in the books of a company. Show how the amounts, will appear in the balance sheet., Solution:, Books of XYZ Industries Limited, Journal, Date, , Particulars, , L.F., , Bank A/c, , Dr., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 1,00,000, , To 10% Debenture Application A/c, , 1,00,000, , (Application money Rs 50 per debentures received), 10% Debenture Application A/c, , Dr., , 1,00,000, , To 10% Debentures A/c, , 1,00,000, , (Transfer of application money to debenture, account), 10% Debenture Allotment A/c, , Dr., , 1,20,000, , To 10% Debentures A/c, , 1,00,000, , To Securities Premium Reserve A/c, , 20,000, , (Allotment money due on debentures, including the premium), Bank A/c, , Dr., , 1,20,000, , To 10% Debenture Allotment A/c, , 1,20,000, , (Allotment money received), , XYZ Industries Limited, Balance Sheet as at ———, Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, Reserve and Surplus, 2. Non-current Liabilities, Long-term borrowings, II. Assets, Current Assets, Cash and cash equivalents, , Amount, (Rs), , 1, , 20,000, , 2, , 2,00,000, 2,20,000, , 2,20,000, , 2018-19
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Issue and Redemption of Debentures, , 81, , Notes to Accounts, Particulars, , Amount, (Rs), , 1. Reserve and surplus, Securties Premium Reserve, 2. Long-term borrowings, 2,000, 10% debentures of Rs 100 each, 3. Cash and cash equivalents, Cash at bank, , 20,000, 2,00,000, 2,20,000, , Illustration 4, A Limited issued 5,000, 10% debentures of Rs 100 each, at a premium of Rs 10, per debenture payable as follows:, On application, , Rs 25, , On allotment, , Rs 45 (including premium), , On first and final call, , Rs 40, , The debentures were fully subscribed and all money was duly received., Record the necessary entries in the books of the company. Show how the amounts, will appear in the balance sheet., Solution:, Books of A Limited, Journal, Date, , Particulars, , Bank A/c, , L.F., , Dr., , Debit, Amount, (Rs), 1,25,000, , To 10% Debenture Application A/c, (Application money on 10% debentures received), , 1,25,000, , 10% Debenture Application A/c, Dr., To 10% Debentures A/c, (Transfer of application money on allotment), , 1,25,000, , 10% Debenture Allotment A/c, Dr., To 10% Debentures A/c, To Securities Premium Reserve A/c, (Allotment money of due on debentures including, the premium), , 2,25,000, , 2018-19, , Credit, Amount, (Rs), , 1,25,000, , 1,75,000, 50,000
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82, , Accountancy : Company Accounts and Analysis of Financial Statements, Bank A/c, To 10% Debenture Allotment A/c, (Allotment money received), , Dr., , 10% Debenture First & Final Call A/c, To 10% Debentures A/c, (First and final call money due on, debentures), , Dr., , Bank A/c, To 10% Debenture First & Final Call A/c, (First and final call money received), , Dr., , 2,25,000, 2,25,000, , 2,00,000, 2,00,000, , 2,00,000, 2,00,000, , A Limited, Balance Sheet as at ———, Particulars, I. Equity and Liabilities, 1. Shareholders’ Funds, a) Reserve and Surplus, 2. Non-current Liabilities, Long term borrowings, Total, II. Assets, 1. Current assets, a) Cash and cash equivalents, , Amount, (Rs), , 1, , 50,000, , 2, , 5,00,000, 5,50,000, , 5,50,000, , Notes to Accounts, Particulars, , Amount, (Rs), , 1. Reserve and surplus, Securities Premium Reserve, 2. Long-term borrowings, 5,000, 10% debentures of Rs 100 each, , 2.5, , Note, No., , 50,000, 5,00,000, , Over Subscription, , When the number of debentures applied for is more than the number of, debentures offered to the public, the issue is said to be over subscribed. A, company, however, cannot allot more debentures than it has invited for, subscription. The excess money received on over subscription may, however, be, retained for adjustment towards allotment and the respective calls to be made., But the money received from applicants to whom no debentures have been, allotted, will be refunded to them., , 2018-19
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Issue and Redemption of Debentures, , 83, , Illustration 5, X Limited Issued 10,000, 12% debentures of Rs 100 each payable Rs 40 on, application and Rs 60 on allotment. The public applied for 14,000 debentures., Applications for 9,000 debentures were accepted in full; applications for 2,000, debentures were allotted 1,000 debentures and the remaining applications, were, rejected. All money was duly received. Journalise the transactions., Solution:, Books of X Limited, Journal, Date, , Particulars, , Bank A/c, , L.F., , Dr., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 5,60,000, , To 12% Debenture Application A/c, , 5,60,000, , (Receipt of application money on 14,000, debentures), 12% Debenture Application A/c, , Dr., , 5,60,000, , To 12% Debentures A/c, , 4,00,000, , To Debentures Allotment A/c, , 40,000, , To Bank A/c, , 1,20,000, , (Debenture Application money transferred, to Debenuture A/c, Excess application money, credited to Debenture Allotment account and, money refunded on rejected application), 12% Debenture Allotment A/c, , Dr., , 6,00,000, , To 12% Debentures A/c, , 6,00,000, , (Amount due on allotment on 10,000 debentures), Bank A/c, , Dr., , To Debenture Allotment A/c, (Allotment money received), , 2018-19, , 5,60,000, 5,60,000
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84, , Accountancy : Company Accounts and Analysis of Financial Statements, , 2.6, , Issue of Debentures for Consideration other than Cash, , Sometimes a company purchase assets from vendors and instead of making, payment in cash issues debentures for consideration thereof. Such issue of, debentures is called debentures issued for consideration other than cash. In, that case also, the debentures may be issued at par, at a premium or at a discount, then entries made in such a situation are similar to those of the shares issued, for consideration other than cash, which are as follows :, 1. On purchase of assets, Sundry Assets A/c, To Vendor’s, , Dr., , 2. On issue of debentures, (a) At par, Vendors, To Debentures A/c, , Dr., , (b) At premium, Vendors, To Debentures A/c, To Securities Premium Reserve A/c, , Dr., , (c) At a discount, Vendors, Discount on Issue of Debenture A/c, To Debentures A/c, , Dr., Dr., , Illustration 6, Aashirward Company Limited purchased assets of the book value of Rs 2,00,000, from another company and agreed to make the payment of purchase, consideration by issuing 2,000, 10% debentures of Rs 100 each., Record the necessary journal entries., Solution:, Books of Aashirwad Company Limited, Journal, Date, , Particulars, , L.F., , Sundry Assets A/c, To Vendors, (Assets purchased from vendors), , Dr., , Vendors, To 10% Debentures A/c, (Allotment of debentures to vendors as, purchase consideration), , Dr., , 2018-19, , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 2,00,000, 2,00,000, 2,00,000, 2,00,000
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Issue and Redemption of Debentures, , 85, , Illustration 7, Rai Company purchased assets of the book value of Rs 2,20,000 from another, company and agreed to make the payment of purchase consideration by issuing, 2,000, 10% debentures of Rs 100 each at a premium of 10%., Record necessary journal entries., Solution:, Books of Rai Company Limited, Journal, Date, , Particulars, , Sundry Assets A/c, To Vendors, (Assets purchased from vendors), , L.F., , Dr., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 2,20,000, 2,20,000, , Vendors, Dr., To 10% Debentures A/c, To Securities Premium Reserve A/c, (Allotment of 2,000 debentures of Rs 100 each, at a premium of 10% as purchase consideration), , 2,20,000, 2,00,000, 20,000, , Illustration 8, National Packaging Company purchased assets of the value of Rs 1,90,000 from, another company and agreed to make the payment of purchase consideration by, issuing 2,000, 10% debentures of Rs 100 each at a discount of 5%., Record necessary journal entries., Solution:, Books of National Packaging Company, Journal, Date, , Particulars, , L.F., , Sundry Assets A/c, To Vendors, (Assets purchased from vendors), , Dr., , Vendors, Discount on Issue of Debenture A/c, To 10% Debentures A/c, (Allotment of 2,000 debentures of, Rs 100 each at a discount of 5% as, purchase consideration), , Dr., Dr., , 2018-19, , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 1,90,000, 1,90,000, , 1,90,000, 10,000, 2,00,000
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86, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 9, G.S. Rai company purchased assets of the book value of Rs. 99,000 from another, firm. It was agreed that purchase consideration be paid by issuing 11%, debentures of Rs. 100 each. Assume debentures have been issued., 1. At par, 2. At discount of 10%, and, 3. At a premium of 10%., Record necessary journal entries., Solution:, Books of G.S. Rai Company Limited, Journal, Date, , In Ist, Case, , Particulars, , L.F., , Sundry Assets A/c, To Vendors, (Assets purchased from vendors), , Dr., , Vendors, To 10% Debentures A/c, (Allotment of debentures to vendors as, purchase consideration), , Dr., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 99,000, 99,000, , 99,000, 99,000, , In IInd Vendors, Dr., Case, Discount on Issue of Debenture A/c, Dr., To 10% Debentures A/c, (Allotment of 1,100 debenture of Rs 100 issued at, discount of 10% to vendor), , 99,000, 11,000, , In IIIrd Vendors, Dr., Case, To 11% Debentures A/c, To Securities Premium Reserve A/c, (Allotment of 900 debentures of Rs 100 issued at, a premium of 10% to the vendors), , 99,000, , 1,10,000, , 90,000, 9,000, , Sometimes a company may purchase the assets as well as takeover its, liabilities of another concern. It happens usually in case of purchase of the whole, business of the other concern. In such a situation, the purchase consideration, will be equal to the value of net assets (Assets - Liabilities) taken over, and if the, whole amount of the consideration is paid by issue of debentures, the journal, entry will be:, , 2018-19
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Issue and Redemption of Debentures, , 87, , Sundry Assets A/c, , Dr., , To Sundry Liabilities A/c, To Vendors, (Purchase of the Vendors’ business), , Illustration 10, Romi Ltd. acquired assets of Rs. 20 lakh and took over creditors of Rs. 2 lakh, from Kapil Enterprises. Romi Ltd., issued 8% debentures of Rs 100 each at par, as purchase consideration. Record necessary journal entries in the books of, Romi Ltd., Solution:, Books of Romi Ltd., Journal, Date, , Particulars, , Sundry Assets A/c, , L.F., , Dr., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 20,00,000, , To Kapil Enterprises, To Sundry Creditors A/c, , 18,00,000, 2,00,000, , (Purchase of business from Kapil Enterprises), Kapil Enterprises, , Dr., , To 8% Debentures A/c, (Issue of 18,000, 8% debentures of, Rs 100 each), , 18,00,000, 18,00,000, , In case of the whole business being taken over if the amount of debentures, issued is more than the amount of the net assets taken over, the difference (excess), will be treated as value of goodwill and the same shall also be debited while, passing the journal entry for the purchase of vender’s business (see Illustration, 11). But if it is the other way round, i.e., the value of debentures is less than the, value of the net assets taken over the difference will be credited to capital Reserve, accounts (See Illustration 12)., Illustration 11, Blue Prints Ltd., purchased building worth Rs.1,50,000, machinery worth, Rs.1,40,000 and furniture worth Rs.10,000 from XYZ Co., and took over its, liabilities of Rs. 20,000 for a purchase consideration of Rs. 3,15,000. Blue Prints, Ltd., paid the purchase consideration by issuing 12% debentures of Rs.100, each at a premium of 5%. Record necessary journal entries., , 2018-19
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88, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution:, Books of Blue Prints Limited, Journal, Date, , Note:, , Particulars, , L.F., , Debit, Amount, (Rs), , Building A/c, Dr., Plant & Machinery A/c, Dr., Furniture A/c, Dr., Goodwill A/c 1, Dr., To Liabilities (Sundry), To XYZ Co., (Purchase of assets and taking over of liabilities, of XYZ Co.), , 1,50,000, 1,40,000, 10,000, 35,000, , XYZ Co., Dr., To 12% Debentures A/c, To Securities Premium Reserve A/c, (Issue of 3,000 debentures at a premium of 5%), , 3,15,000, , Credit, Amount, (Rs), , 20,000, 3,15,000, , 3,00,000, 15,000, , 1. Since the purchase consideration is more than net assets taken over, the, difference has been debited to goodwill account., 2. No. of debentures issued, , =, , Purchase Consideration, Issue Price of a Debenture, , =, , Rs 3,15,000 = 3,000, 105, , Illustration 12, A Limited took over the assets of Rs. 3,00,000 and liabilities of Rs.10,000 from, B & Co. Ltd., for an agreed purchase consideration of Rs. 2,70,000 to be satisfied, by issue of 15% debentures of Rs. 100 at 20% premium. Show the journal, entries in the journal of A Limited., Solution:, Books of A Limited, Journal, Date, , Particulars, , Sundry Assets A/c, Dr., To Sundry Liabilities A/c, To B & Co. Ltd., To Capital Reserve, (Purchased assets and took over liabilities from B Ltd.), , 2018-19, , L.F., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 3,00,000, 10,000, 2,70,000, 20,000
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Issue and Redemption of Debentures, , 89, , B & Co. Ltd., , Dr., , 2,70,000, , To 15% Debentures A/c, To Securities Premium Reserve A/c, (Issue of 2,250 debentures of Rs 100 each at a, premium of 20%), , 2,25,000, 45,000, , Do it Yourself, 1., , 2., , 3., , 4., , Amrit Company Limited purchased assets of the value of Rs. 2,20,000 from, another company and agreed to make the payment of purchase consideration, by issuing 2,000, 10% debentures of Rs.100 each at a premium of 10%. Record, necessary journal entries., A company purchased assets of the value of Rs.1,90,000 from another company, and agreed to make the payment of purchase consideration by issuing 2,000,, 10% debentures of Rs. 100 each at a discount of 5%. Record necessary journal, entries., Rose Bond Limited purchased a business for Rs. 22,00,000. Purchase Price was, paid by 6% debentures. Debentures of Rs. 20,00,000 were issued at a premium, of 10% for the purpose. Record necessary journal entries., Nikhil and Ashwin Limited bought business of Agarwal Limited consisting sundry, assts of Rs. 3,60,000, sundry creditors Rs.1,00,000 for a consideration of, Rs. 3,07,200. It issued 14% debentures of Rs. 100 each fully paid at a discount, of 4% in satisfaction of purchase consideration. Record necessary journal entries., , Illustration 13, Suvidha Ltd. purchased machinery worth Rs.1,98,000 from Suppliers Ltd. The, payment was made by issue of 12% debentures of Rs.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; and, (iii) Debentures are issued at 10% premium, Solution:, Books of Suvidha Ltd., Journal, Date, , Particulars, , Machinery A/c, , L.F., , Dr., , To Suppliers Ltd., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 1,98,000, 1,98,000, , (Machinery purchased), , 2018-19
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90, , Accountancy : Company Accounts and Analysis of Financial Statements, , Case (i) When debentures are issued at par:, Suppliers Ltd., To 12% Debentures A/c, (12% Debentures issued to Suppliers Ltd.), , Dr., , 1,98,000, 1,98,000, , Case (ii) When debentures are issued at 10% discount:, Suppliers Ltd., Dr., Discount on Issue of Debentures A/c, Dr., To 12% Debentures A/c, (12% Debentures issued to Suppliers Ltd. at, 10% discount), , 1,98,000, 22,000, 2,20,000, , Case (iii) When debentures are issued at 10% premium:, Suppliers Ltd., Dr., To 12% Debentures A/c, Securities Premium Reserve A/c, (12% Debentures issued to Suppliers Ltd., at 10% premium), , 1,98,000, 1,80,000, 18,000, , Workings:, (a), (Rs), 100, 10, 90, , Face value of debenture, Less: Discount 10%, Value at which debenture issued, , Rs. 1,98,000, 90, = 2,200 debenture, , Number of debentures issued in case of 10% discount =, (b), , (Rs), 100, 10, 110, , Face value of debenture, Add: Premium 10%, Value at which debenture issued, , Rs.1,98,000, 110, = 1,800 Debentures, , Number of debentures issued in case of 10% premium =, , 2.7, , Issue of Debentures as a Collateral Security, , A collateral security may be defined as a subsidiary or secondary or additional, security besides the primary security when a company obtains a loan or overdraft, from a bank or any other financial Institution. It may pledge or mortgage some, assets as a secured loan against the said loan. But the lending institutions may, , 2018-19
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Issue and Redemption of Debentures, , 91, , insist on additional assets as collateral security so that the amount of loan can, be realised in full with the help of collateral security in case the amount from the, sale of principal security falls short of the loan money. In such situation, the, company may issue its own debentures to the lenders in addition to some other, assets already pledged. Such an issue of debentures is known as ‘Debentures, issued as Collateral Security’., If the company fails to repay the loan along with interest, the lender is free to, receive his money from the sale of primary security and if the realisable value of, the primary security falls short to cover the entire amount, the lender has the, right to invoke the benefit of collateral security whereby debentures may either, be presented for redemption or sold in the open market., Debentures issued as collateral security can be dealt within two ways in the, books of the company:, First Method, No entry is made in the books of accounts since no liability is created by such, issue. However, on the liability side of the balance sheet, below the item of loan,, a note to the effect that it has been secured by issue of debentures as a collateral, security is appended. For example, X Company has issued 9%, 10,000, debentures of Rs.100 each for a loan of Rs.10, 00,000 taken from a bank. This, fact may be shown in the balance sheet as under:, X Company, Balance Sheet as at __________, Particulars, , Note, No., , I. Equity and Liabilities, 1. Non-current Liabilities, Long-term borrowings, , 1, , Notes to Accounts, Particulars, , Amount, (Rs), , 10,00,000, , Amount, (Rs), , 1. Long-term borrowings, Bank Loan, (Secured by issue of 10,000, 10% debentures 10,00,000, of Rs. 10 each as Collatoral Security), , Second Method, The issue of debentures as a collateral security may be recorded by means of, journal entry as follows:, , 2018-19
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92, , Accountancy : Company Accounts and Analysis of Financial Statements, , Journal Entries, i., , Issue of 10,000, 9% debentures of Rs. 100 each as collateral security, for bank loan of Rs. 10,00,000., Debenture Suspense A/c, Dr., 10,00,000, To 9% Debentures A/c, 10,00,000, , ii., , For cancellation of 9% debentures as collateral security on repayment, of bank loan., , Debenture Suspense account will appear as a deduction from the debentures, in notes to accounts of long-term borrowings. When loan is repaid the above, entry will be cancelled by a reverse entry :, 9% Debentures A/c, Dr., 10,00,000, To Debenture Suspense A/c, 10,00,000, Balance Sheet of X Co. _____________ (Extract), Particulars, , Note, No., , I. Equity and Liabilities, 1. Non-current Liabilities, Long term borrowings, , 1, , Notes to Accounts, Particulars, , 10,00,000, , Amount, (Rs), 10,00,000, , (Rs), 1. Long term borrowings, Bank loan, 10,000, 9% debentures of, Rs 100 each, Less: Debenture suspense, , Amount, (Rs), , 10,00,000, 10,00,000, 10,00,000, , Illustration 14, A company took a loan of Rs. 10,00,000 from Punjab National Bank and issued, 10% debentures of Rs. 12,00,000 of Rs. 100 each as a collateral security. Explain, how you will deal with the issue of debentures in the books of the company., , 2018-19
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Issue and Redemption of Debentures, , 93, , Solution:, First Method:, , Balance Sheet (Extract), Particulars, , Note, No., , I. Equity and Liabilities, 1. Non-current Liabilities, Long-term borrowings, , 10,00,000, , 1, , Notes to Accounts, Particulars, , Amount, (Rs), , Amount, (Rs), , 1. Long-term borrowings, Bank loan, (Secured by issue of 12,000,, 10% debentures of Rs. 100 each, as Collatoral Security, , 10,00,000, , Second Method:, , Journal Entries, Date, , Particulars, , L.F., , Debenture Suspense A/c, , Dr., , Debit, Amount, (Rs), 12,00,000, , To 10% Debentures A/c, , 12,00,000, , (12,000 debenture of Rs. 100 each issued as, collateral security to P.N.Bank), , Balance Sheet (Extract), Particulars, , Note, No., , I. Equity and Liabilities, 1. Non-current Liabilities, Long-term borrowings, , 1, , Notes to Accounts, Particulars, , Amount, (Rs), , (Rs), 1. Long-term borrowings, Secured Loan from, PNB, 12,000, 10% debentures of, Rs. 100 each, Less: Debenture, Suspense, , Credit, Amount, (Rs), , 10,00,000, 12,00,000, , 12,00,000, 10,00,000, , 2018-19, , Amount, (Rs), , 10,00,000
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94, , Accountancy : Company Accounts and Analysis of Financial Statements, Do it Yourself, 1. Raghuveer Limited issued Rs 10,00,000, 8% debentures as follows to:, Rs, Sundry Subscribers for Cash at 90%, 5,50,000, Vendor of Machinery for Rs 2,00,000, 2,00,000, in satisfaction of his claim, 3. Bankers as Collateral Security for a bank loan, 2,50,000, worth Rs 20,00,000 for which principal security is Business Premises, worth Rs 22,50,000., The issue (1) and (2) are redeemable at the end of 10 years at par. State, how the debenture will be dealt with while preparing the balance sheet of, a company., 2. Hassan Limited took a loan of Rs 30,00,000 from a bank against primary security, worth Rs 40,00,000 and issued 4,000, 6% debentures of Rs 100 each as a collateral, security. The company again after one year took a loan of Rs 50,00,000 from, bank against Plant as primary security and deposited 6,000, 6% debentures of, Rs 100 each as collateral security. Record necessary journal entries and prepare, balance sheet of the company., 3. Meghnath Limited took a loan of Rs 1,20,000 from a bank and deposited 1,400, 8%, debentures of Rs 100 each as collateral security along with primary security worth, Rs 2 lakh. Company again took a loan of Rs 80,000 after two months from a bank, and deposited 1,000, 8% debentures of Rs 100 each as collateral security. Record, necessary journal entries and prepare balance sheet of the company., 1., 2., , 2.8, , Terms of Issue of Debentures, , When a company issues debentures, it usually mentions the terms on which, they will be redeemed on their maturity. Redemption of debentures means, discharge of liability on account of debentures by repayment made to the, debenture holders. Debentures can be redeemed either at par or at a premium., Depending upon the terms and conditions of issue and redemption of, debentures, the following six situations are commonly found in practice., (i), , Issued at par and redeemable at par, , (ii), , Issued at discount and redeemable at par, , (iii), , Issued at a premium and redeemable at par, , (iv), , Issued at par and redeemable at a premium, , (v), , Issued at a discount and redeemable at a premium, , (vi), , Issued at a premium and redeemable at a premium, , In all the above six cases, the following journal entries will be passed:, , 2018-19
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Issue and Redemption of Debentures, 1., , 95, , Issue at par and redeemable at par, (a), , Bank A/c, , Dr., , To Debenture Application & Allotment A/c, (Receipt of application money), (b), , Debenture Application & Allotment A/c, , Dr., , To Debentures A/c, (Allotment of debentures), 2., , Issue at a discount and redeemable at par, (a), , Bank A/c, , Dr., , To Debenture Application & Allotment A/c, (Receipt of application money), (b), , Debenture Application & Allotment A/c, , Dr., , Discount on Issue of Debentures A/c, , Dr., , To Debentures A/c, (Allotment of debentures at a discount), 3., , Issue at premium and redemption at par, (a), , Bank A/c, , Dr., , To Debenture Application & Allotment A/c, (Receipt of application money), (b), , Debenture Application & Allotment A/c, , Dr., , To Debentures A/c, To Securities Premium Reserve A/c, (Allotment of debentures at a premium), 4., , Issue at par and redeemable at premium, (a), , Bank A/c, , Dr., , To Debenture Application & Allotment A/c, (Receipt of application money), (b), , Debenture Application & Allotment A/c, , Dr., , Loss on Issue of Debentures A/c, , Dr. (with premium on redemption), , To Debentures A/c, , (with nominal value of debenture), , To Premium on Redemption, of Debenture A/c, , (with premium on redemption), , (Allotment of debentures at par and, redeemade at a premium), , 2018-19
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96, 5., , Accountancy : Company Accounts and Analysis of Financial Statements, Issue at discount and redemption at premium, Bank A/c, , Dr., , To Debenture Application & Allotment A/c, (Receipt of application money), Debenture Application & Allotment A/c, Loss on Issue of Debentures A/c, , Dr., Dr. (with discount on issue plus, premium on redemption), , To Debentures A/c, , (with nominal value of debenture), , To Premium on Redemption, of Debentures A/c, , (with premium on redemption), , (Allotment of debentures at a discount, and redeemable at premium), 6., , Issued at a premium and redeemable at premium, Bank A/c, , Dr., , To Debenture Application & Allotment A/c, (Receipt of application money), Debenture Application & 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, Notes:, , Dr., Dr. (with premium on redemption), (with nominal value of debenture), (with premium on issue), (with premium on redemption), , 1. When debentures are redeemable at a premium, a provision has to be made, right at the time of the issue by debiting the amount to ‘Loss on Issue of, Debentures A/c’. It may be noted that when debentures are issued at a, discount and are redeemable at a premium, the amount of discount on issue, is also debited to ‘Loss on Issue of Debentures’. It may be noted that when, the debentures are issued at a discount and are redeemable at par, the amount, debited to ‘Discount on Issue of Debentures A/c’ as usual., 2. Premium on redemption is a liability of a company payable in future. It is a, provision and is shown under the head Non-current liabilities under subhead ‘Long-term Borrowings’ until debentures are redeemed., 3. Loss on issue of debentures is a capital loss and it is to be written-off gradually, charged to statement of profit and loss or securities premium account., , Illustration 15, Give Journal entries for the following:, 1. Issue of Rs 1,00,000, 9% debentures of Rs 100 each at par and, redeemable at par., , 2018-19
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Issue and Redemption of Debentures, , 2., 3., 4., 5., 6., , 97, , Issue of Rs 1,00,000, 9% debentures of Rs 100 each at premium of, 5% but redeemable at par., Issue of Rs 1,00,000, 9% debentures of Rs 100 each at discount of, 5% repayable at par., Issue of Rs 1,00,000, 9% debentures of Rs 100 each at par but, repayable at a premium of 5%., Issue of Rs 1,00,000, 9% debentures of Rs 100 each at discount of, 5% but redeemable at premium of 5%., Issue of Rs 1,00,000, 9% debentures of Rs 100 each at premium of, 5% and redeemable at premium of 5%., , Solution:, Journal, Date, , 1, , 2, , 3, , Particulars, , L.F., , Debit, Amount, (Rs), , Bank A/c, Dr., To 9% Debenture Application & Allotment A/c, (Debentures Application money received), , 1,00,000, , Debenture Application & Allotment A/c, To 9% Debentures A/c, (Application money transferred to, Debentures Account), , 1,00,000, , Dr., , 1,00,000, , 1,00,000, , Bank A/c, Dr., To 9% Debenture Application & Allotment A/c, (Debentures application money received), , 1,05,000, , Debenture Application & Allotment A/c, Dr., To 9% Debentures A/c, To Securities Premium Reserve A/c, (Debentures application money transferred to, Debentures & Securities Premium account), , 1,05,000, , Bank A/c, Dr., To 9% Debenture Application & Allotment A/c, (Debentures application money received), , 95,000, , 9% Debenture Application & Allotment A/c, Discount on Issue of Debentures A/c, To 9% Debentures A/c, (Debentures application money transferred, to Debentures account), , 95,000, 5,000, , 2018-19, , Credit, Amount, (Rs), , Dr., Dr., , 1,05,000, , 1,00,000, 5,000, , 95,000, , 1,00,000
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98, , Accountancy : Company Accounts and Analysis of Financial Statements, 4, , 5, , 6, , Bank A/c, Dr., To 9% Debenture Application & Allotment A/c, (Debentures Application money received), , 1,00,000, , Debenture Application & Allotment A/c, Dr., Loss on Issue of Debentures A/c, Dr., To 9% Debentures A/c, To Premium on Redemption of Debentures A/c, (Debentures Application money transferred, to Debentures account), , 1,00,000, 5,000, , Bank A/c, Dr., To 9% Debenture Application & Allotment A/c, (Debentures Application money received), , 95,000, , Debenture Application & Allotment A/c, Dr., Loss on Issue of Debentures A/c, Dr., To 9% Debentures A/c, To Premium on Redemption of Debentures A/c, (Debentures application money transferred, to debentures and Premium on debenture account), , 95,000, 10,000, , 1,00,000, , 1,00,000, 5,000, , 95,000, , 1,00,000, 5,000, , Bank A/c, Dr., To 9% Debenture Application & Allotment A/c, (Debentures Application money received), , 1,05,000, , Debenture Application & Allotment A/c, Dr., Loss on Issue of Debentures A/c, Dr., To 9% Debenture A/c, To Premium on Redemption of Debentures A/c, To Securities Premium Reserve A/c, (Debenture application money transferred, to debentures account), , 1,05,000, 5,000, , 1,05,000, , 1,00,000, 5,000, 5,000, , Illustration 16, You are required to pass the journal entries relating to the issue of the debentures, in the books of X Ltd., and show how they would appear in its balance sheet, under the following cases:, (a), , 120, 8% debentures of Rs 1,000 each are issued at 5% discount and, repayable at par., , (b), , 150, 7% debentures of Rs 1,000 each are issued at 5% discount and, repayable at premium of 10%., , 2018-19
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Issue and Redemption of Debentures, , 99, , (c), , 80, 9% debentures of Rs 1,000 each are issued at 5% premium., , (d), , Another 400, 8% debentures of Rs 100 each are issued as collateral, security against a loan of Rs 40,000., , Solution:, Books of X Ltd., Journal, , (a), Date, , Particulars, , L.F., , Debit, Amount, (Rs), , Bank A/c, Dr., To Debenture Application and Allotment A/c, (Debenture application money received), , 1,14,000, , Debenture Application and Allotment A/c Dr., Discount on Issue of Debentures A/c, Dr., To 8% Debentures A/c, (Debentures application money transferred to, Debentures A/c), , 1,14,000, 6,000, , Credit, Amount, (Rs), , 1,14,000, , 1,20,000, , Books of X Ltd., Balance Sheet as at_____________, Particulars, , Note, No., , I. Equity and Liabilities, 1. Non-current Liabilities, Long-term borrowings, II. Assets, 1. Non-current assets, Other non-current assets, 2. Current assets, Cash and cash equivalents, Other current assets, , Notes to Accounts, Particulars, , 1, , 1,20,000, 1,20,000, , 2, , 4,800, , 3, 4, , 1,14,000, 1,200, 1,20,000, , Amount, (Rs), , 1. Long-term borrowings, 120, 8% debentures of Rs 1,000 each, 2. Other non-current assets, Discount on issue of debentures, 3. Cash and cash equivalents, Cash at bank, 4. Other current assets, Discount on issue of debentures, Note:, , Amount, (Rs), , 1,20,000, 4,800, 1,14,000, 1,200, , Discount on Issue of Debentures is written-off in 5 years, presuming that, debentures are redeemable after 5 years., , 2018-19
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100, , Accountancy : Company Accounts and Analysis of Financial Statements, , Books of X Ltd., Journal, , (b), Date, , Particulars, , L.F., , Debit, Amount, (Rs), , Bank A/c, Dr., To Debenture Application and Allotment A/c, (Debenture application money received), , 1,42,500, , Debenture Application and Allotment A/c, Dr., Loss on Issue of Debentures A/c, Dr., To 8% Debentures A/c, To Premium on Redemption of Debenture A/c, (Debentures application money transferred to, Debentures A/c), , 1,42,500, 22,500, , 1,42,500, , 1,50,000, 15,000, , Books of X Ltd., Balance Sheet as at_________________, Particulars, , Note, No., , I. Equity and Liabilities, 1. Non-current Liabilities, a) Long-term borrowings, b) Other long-term liabilities, II. Assets, 1. Non-current assets, Other non-current assets, 2. Current assets, a) Cash and cash equivalents, b) Other current assets, , Notes to Accounts, Particulars, , Amount, (Rs), , 1, 2, , 1,50,000, 15,000, 1,65,000, , 3, , 18,000, , 4, 5, , 1,42,500, 4,500, 1,65,000, , Amount, (Rs), , 1. Long-term borrowings, 150, 7% debentures of Rs 1,000 each, 2. Other long-term liabilities, Premium on redemption of debentures, 3. Other non-current assets, Loss on issue of debentures, 4. Cash and cash equivalents, Cash at bank, 5. Other current assets, Loss on issue of debentures, , 2018-19, , Credit, Amount, (Rs), , 1,50,000, 15,000, 18,000, 1,42,500, 4,500
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Issue and Redemption of Debentures, Note:, , 101, , Discount on Issue of Debentures is written-off in 5 years, presuming that, debentures are redeemable after 5 years., , Books of X Ltd., Journal, , (c), Date, , Particulars, , L.F., , Debit, Amount, (Rs), , Bank A/c, Dr., To Debenture Application and Allotment A/c, (Debenture application money received), , 84,000, , Debenture Application and Allotment A/c, Dr., To 9% Debentures A/c, To Securities Premium Reserve A/c, (Debentures application money transferred to, Debentures A/c and securities premium reserve A/c), , 84,000, , Credit, Amount, (Rs), 84,000, , 80,000, 4,000, , X Ltd., Balance Sheet as at .............., Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholder’s funds, Reserves and surplus, 2. Non-current Liabilities, Long-term borrowings, II. Assets, 1. Current assets, Cash and cash equivalents, , Notes to Accounts, Particulars, , Date, , 1, , 4,000, , 2, , 80,000, 84,000, , 3, , 84,000, 84,000, , Amount, (Rs), , 1. Reserves and surplus, Securities premium reserve, 2. Long-term borrowings, 80, 9% debentures of Rs 1,000 each, , (d), , Amount, (Rs), , 4,000, 80,000, , Books of X Ltd., Journal, Particulars, , Debenture Suspense A/c, Dr., To 8% Debentures A/c, (Issue of 400, 8% debentures of Rs 100 each as, collateral security against a loan of Rs 40,000), , 2018-19, , L.F., , Debit, Amount, (Rs), 40,000, , Credit, Amount, (Rs), 40,000
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102, , Accountancy : Company Accounts and Analysis of Financial Statements, , X Ltd., Balance Sheet as at _____________ (Extract), Particulars, I. Equity and Liabilities, 1. Long-term borrowings, Notes to Accounts, Particulars, , Note, No., , Amount, (Rs), , 1, , 40,000, , Amount, (Rs), , 1. Long-term borrowings, Bank loan, 400, 8% debentures of Rs 100 each, Less: Debentures suspense, , Amount, (Rs), 40,000, , 40,000, 40,000, , 40,000, , Do it Yourself, , 2.9, , 1., , Nena Limited issued 50,000, 10% debentures of Rs 100 each on the basis of, the following conditions:, a. Debentures issued at par and redeemable at par., b. Debentures issued at discount @ 5% and redeemable at par., c. Debentures issued at premium @ 10% and redeemable at par., d. Debentures issued at par and redeemable at premium @ 10%., e. Debentures issued at discount of 5% and redeemable at a premium of, 10%., f. Debentures issued at premium of 6% and redeemable at a premium of, 4%., Record necessary journal entries in the above mentioned cases at the time of, issue and redemption of debentures., , 2., , Record necessary journal entries in each of the following cases:, a. 27,000, 7% debentures of Rs 100 each issued at par, redeemable at, par., b. 25,000, 7% debentures of Rs 100 each issued at par redeemable at 4%, premium., c. 20,000, 7% debentures of Rs 100 each issued at 5% discount and, redeemable at par., d. 30,000, 7% debentures of Rs 100 each issued at 5% discount and, redeemable at 2½ % premium., e. 35,000, 7% debentures of Rs 100 each issued at 4% premium and, redeemable at premium of 5%., , Interest on Debentures, , When a company issues debentures, it is under an obligation to pay interest thereon, at fixed percentage (half yearly) periodically until debentures are repaid. This, , 2018-19
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Issue and Redemption of Debentures, , 103, , percentage is usually as part of the name of debentures like 8% debentures, 10%, debentures, etc., and interest payable is calculated at the nominal value of, debentures., Interest on debenture is a charge against the profit of the company and, must be paid whether the company has earned any profit or not. According to, Income Tax Act, 1961, a company must deduct income tax at a prescribed rate, from the interest payable on debentures if it exceeds the prescribed limit. It is, called Tax Deducted at Source (TDS) and is to be deposited with the tax, authorities. Of course, the debentureholders can adjust this amount against, the tax due from them., 2.9.1 Accounting Treatment, The following journal entries are recorded in the books of a company in connection, with the interest on debentures:, 1., , When interest is due, Debenture Interest A/c, Dr., To Income Tax payable A/c, To Debentureholders A/c, (Amount of interest due on debenture and tax deducted at source ), , 2., , For payment of interest to debentureholders, Debentureholders A/c, To Bank A/c, (Amount of interest paid to debentureholders), , Dr., , 3., , On transfer debenture Interest Account to statement of Profit and Loss, Statement of Profit and Loss, Dr., To Debenture Interest A/c, (Debenture interest transferred to profit and loss A/c), , 4., , On payment of tax deducted at source to the Government, Income Tax Payable A/c, Dr., To Bank A/c, (Payment of tax deducted at source on interest on debentures), , Illustration 17, A Ltd., issued 2,000, 10% debentures of Rs 100 each on April 01, 2016 at a, discount of 10% redeemable at a premium of 10%., Give journal entries relating to the issue of debentures and debenture interest, for the period ending March 31, 2017 assuming that interest was paid half, yearly on September 30 and March 31 and tax deducted at source is 10%., , 2018-19
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104, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution:, Book of A Ltd., Journal, Date, , Particulars, , L.F., , 2016, Apr. 01, , Bank A/c, To 10% Debenture Application &, Allotment A/c, (Application money received on 2,000,, 10% debentures), , Apr. 01, , 10% Debentures Application &, Allotment A/c, Dr., Loss on Issue of Debenture A/c, Dr., To 10% Debentures A/c, To Premium on Redemption of, Debentures A/c, (Allotment of debentures at a discount of 10%, and redeemable at a premium of 10%), , Sept.30, , Debenture Interest A/c, To Debentureholders A/c, To Income Tax Payable A/c, (Interest due for 6 months and tax, deducted at source), , Dr., , Debit, Amount, (Rs), 1,80,000, , 1,80,000, , Dr., , 1,80,000, 40,000, 2,00,000, 20,000, , 10,000, 9,000, 1,000, , Income Tax payable A/c, Dr., Bank A/c, (Tax deducted at source paid to the government), , 1,000, , 2017, Sept., , Debentureholders A/c, To Bank A/c, (Payment of interest), , Dr., , 9,000, , March 31, , Debenture interest A/c, To Debentureholders A/c, To Income Tax Payable A/c, (Interest due for 6 months and tax, deducted at source), , Dr., , Debenturesholders A/c, To Bank A/c, (Payment of interest), , Dr., , March 31, , March 31, , March 31, , Credit, Amount, (Rs), , 1000, , 9,000, 10,000, 9,000, 1,000, , 9,000, 9,000, , Income Tax Payable A/c, Dr., To Bank A/c, (Paid tax deducted at source to the government), Statement of Profit and Loss, To Debenture Interest A/c, (Debenture interest transferred to profit, and loss account), , 2018-19, , Dr., , 1,000, 1,000, 20,000, 20,000
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Issue and Redemption of Debentures, , 105, Do it Yourself, , 1., , 2., , Diwakar enterprises Ltd. Issued 10,00,000, 6% debentures on April 1, 2016., Interest is paid on September 30, 2016 and March 31, 2017., Record necessary journal entries assuming that income tax is deducted @10%, of the amount of interest., Laser India Ltd. Issued 7,00,000, 8% debentures of Rs 100 each at par. Interest, is to be paid on these debentures half-yearly on September 30 and March 31,, every year. Record necessary journal entries asuming that income tax is deducted, @ 10% of the amount of interest., , 2.10 Writing-off Discount/Loss on Issue of Debentures, The discount/loss on issue of debentures is a capital loss or a fictitious asset, and, therefore, must be written-off during the life time of debentures. The, amount of discount/loss on issue of debentures should normally not be, written-off in the year of issue itself since the benefit of the debentures would, accrue to the company till their redemption. The discount/loss on it is,, therefore, treated as capital loss. The discount may be charged to Securities, Premium A/c or may be written-off over 3 to 5 years through statement of, profit and loss as per guidelines issued by ICAI. In case, however, there are, no capital profits or if the capital profits are not adequate, the amount of, such discount/loss can be written-off against the revenue profits every year, by passing the following journal entry., Statement of Profit and Loss, To Discount/Loss on Issue of, Debentures A/c, (Discount/loss on issue of debentures, written-off), , Dr., , There are two methods, which can be adopted to write off discount/loss on, issue of debentures against the revenue profits. These are as follows., 1. Fixed Instalment Method: When the debentures are redeemed at the end of, a specified period, the total amount of discount should be written off in equal, instalments of fixed amount over that period. For example, if the debentures, are to be redeemed after 10 years then out of the total amount of discount of, Rs. 1,00,000, Rs. 10,000 will be written-off every year., 2. Fluctuating Instalment Method: When debentures are repaid by annual, drawings or in instalments, the discount should be written-off in the ratio of, debentures outstanding as at the end of each accounting year. The amount, of discount, under this method, goes on reducing year. The amount of, discount, under this method, goes on reducing every year and so this method, may also be known as Reducing Instalment Method., For example, a company issues Rs. 15,00,000, 9% debentures at a discount of, 10% redeemable by annual drawings of Rs. 3,00,000 at the end of each year., The amount of discount to be written-off will be calculated as under:, , 2018-19
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106, , Accountancy : Company Accounts and Analysis of Financial Statements, , Year, Amount utilised during the Year, Ratio, First Year, Rs. 15,00,000, 5, Second Year, Rs. 12,00,000, 4, Third Year, Rs. 9,00,000, 3, Fourth Year, Rs. 6,00,000, 2, Fifth Year, Rs. 3,00,000, 1, Hence, the amount of discount to be written-off every year will be as under :, First Year, Rs. 1,50,000 5/15 =, Rs. 50,000, Second Year, Rs. 1,50,000 4/15 =, Rs. 40,000, Third Year, Rs. 1,50,000 3/15 =, Rs. 30,000, Fourth Year, Rs. 1,50,000 2/15 =, Rs. 20,000, Fifth Year, Rs. 1,50,000 1/15 =, Rs. 10,000, Do it Yourself, 1., , X Ltd. issued 2,000, 10% debentures of Rs 100 each at a discount of 8% on, April, 2014 which are redeemable at par by annual drawings in 4 years, commencing from March 31, 2015 as per the following redemption plan:, Ist Draw 10%, 2nd Draw 20%, 3rd Draw 30%, and 4th Draw 40%. Calculate, the amount of discount to be written-off each year assuming that X Ltd.,, follows calendar year as its accounting year., , 2., , Z Ltd. issued 15,00,000, 10% debentures of Rs 50 each at premium of 10%, payable as Rs 20 on application and balance on allotment. Debentures are, redeemable at par after 6 years All the money due on allotment was called, and duly received. Record necessary entries when premium money is included:, (i) in application money, (ii) in allotment money, , 3., , Z Ltd. issued 5,000, 10% debentures of Rs 100 each at a discount of 10% on, 1.4.2014. The debentures are to be redeemed every year by draw of lots –, 1,000 debentures to be redeemed every year starting on 31.03.2015. Record, the necessary journal entries including the payment of interest and writing off, the discount on issue of debentures. The interest is payable on September 30, and March 31. Z Ltd. closes its books of accounts on March 31 every year., , 4., , M Ltd. issued 10,000, 8% debentures of Rs 100 each at a premium of 10% on, 1.1.2016. It purchased sundry assets of the value of Rs,2,50,000 and took, over the liabilities of Rs,60,000 and issued 8% debentures at a discount of, 5% to the vendor. On the same date, it took loan from the Bank for Rs, 1,00,000 and issued 8% debentures as Collateral Security. Record the relevant, journal entries in the books of M Ltd. and prepare the extract of balance, sheet on 31.03.2017. Ignore interest., , 5., , On 1.4.2016, Fast Computers Ltd. issued 20,00,000, 6% debentures of Rs, 100 each at a discount of 4%, redeemable at a premium of 5% after three, years. The amount was payable as follows:, On application Rs 50 per debenture,, Balance on allotment,, , 2018-19
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Issue and Redemption of Debentures, , 6., , 107, , Record the necessary journal entries for issue of debentures., D Ltd. purchased machinery worth Rs 2,00,000 from E Ltd. on 1.4.2016., Rs 50,000 were paid immediately and the balance was paid by issue of Rs, 1,60,000, 12% Debentures in D Ltd. Record the necessary journal entries for, recording the transactions in the books of D Ltd., , Illustration 18, A Ltd. Company has issued Rs 1,00,000, 9% debentures at a discount of 6%., These debentures are to be redeemed equally, spread over 5 annual instalments., Show Discount on issue of debentures account for five years, Solution:, Books of A Ltd., Discount on Issue of Debentures Account, Dr., , Cr., , Date, , Particulars, , Ist, year, , Debenture, , Amount, (Rs), 6,000, , Date, Ist, year, , Particulars, , Amount, (Rs), Statement of Profit & Loss, 2,000, Balance c/d, 4,000, , 6,000, IInd, year, , Balance b/d, , 4,000, , 6,000, IInd, year, , Statement of Profit & Loss, Balance c/d, , 4,000, IIIrd, year, , Balance b/d, , 2,400, , 4,000, IIIrd, year, , Statement of Profit & Loss, Balance c/d, , 2,400, IVth, year, , Balance b/d, , 1,200, , Balance b/d, , 400, , 1,200, 1,200, 2,400, , IVth, year, , Statement of Profit & Loss, Balance c/d, , 1,200, Vth, year, , 1,600, 2,400, , 800, 400, 1,200, , Vth, year, , Statement of Profit & Loss, , 400, , 400, , Workings Notes:, Total discount on the issue of debentures =, , 2018-19, , 400, , 1, 00, 000 ×, , 6, 100, , = Rs 6, 000
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108, , Accountancy : Company Accounts and Analysis of Financial Statements, Amount of discount to be written-off is determined as follows:, Year, , Amount (Rs.), , Ratio, , Amount (Rs), 5, , 1, , 1,00,000, , 5, , _______, , 2, , 80,000, , 4, , _______, , 3, , 60,000, , 3, , _______, , 4, , 40,000, , 2, , _______, , 5, , 20,000, , 1, , _______, , 15, 4, , 15, 3, , 15, 2, , 15, 1, , 15, , × 6,000 =, , 2,000, , × 6,000 =, , 1,600, , × 6,000 =, , 1,200, , × 6,000 =, , 800, , × 6,000 =, , 400, , 15, , Test your Understanding-I, State whether the following statements are True (T) or False (F):, 1., , Debenture is a part of owned capital., , 2., , The payment of interest on debentures is a charge on the profits of the, company., , 3., , The debentures cannot be issued at a discount of more than 10% of the face, value., , 4., , Redeemable debentures are those debentures, which are payable on the expiry, of the specific period., Perpetual debentures are also known as irredeemable debentures., Debentures cannot be converted into shares., Debentures cannot be issued at a premium., A collateral security is a subsidiary security., Debentures cannot be issued at a premium and redeemable at par., Loss on issue of debentures account is a revenue loss., Premium on redemption of debentures account is shown under the ‘Securities, Premium’ in the balance sheet., , 5., 6., 7., 8., 9., 10., 11., , 2018-19
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Issue and Redemption of Debentures, , 109, , SECTION II, 2.11 Redemption of Debentures, Redemption of debentures refers to extinguishing or discharging the liability on, account of debentures in accordance with the terms of issue. In other words, redemption of debentures means repayment of the amount of debentures by, the company. There are four ways by which the debentures can be redeemed., These are :, 1., , Payment in lump sum, , 2., , Payment in instalments, , 3., , Purchase in the open market, , 4., , By conversion into shares or new debentures., Methods of Redemption of Debentures, , Payment in, Lump sum, , Payment in, Instalments, , Purchase in, Open Market, , Conversion into Shares, or New Debentures, , Payment in lump sum : The company redeems the debentures by paying the, amount in lump sum to the debentureholders at the maturity thereof as per, terms of issue., Payment in instalments : Under this method, normally redemption of debentures, is made in instalments on the specified date during the tenure of the debentures., The total amount of debenture liability is divided by the number of years. It is to, note that the actual debentures redeemable are identified by means of drawing, the requisite number of lots out of the debentures outstanding for payment., Purchase in open market: When a company purchases its own debentures for, the purposes of cancellation, such an act of purchasing and cancelling the, debentures constitutes redemption of debentures by purchase in the open, market., Conversion into shares or new debentures : A company can redeem its, debentures by converting them into shares or new class of debentures. If, debentureholders find that the offer is beneficial to them, they can exercise their, right of converting their debentures into shares or new class of debentures. These, new shares or debentures can be issued at par, at a discount or at a premium., It should be noted that only the actual proceeds of debentures are to be taken, into account for ascertaining the number of shares to be issued in lieu of the, , 2018-19
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110, , Accountancy : Company Accounts and Analysis of Financial Statements, , debentures to be converted. If debentures were originally issued at discount,, the actual amount realised from them at the time of issue would be used as the, basis for computing the actual number of shares to be issued. It may be noted, that this method is applicable only to convertible debentures., The following factors should be taken into consideration by the company at, the time of redemption of debentures :, 1. Time of redemption of debentures :- Generally, debentures are, redeemed on due date but a company may redeem its debentures before, maturity date, if its articles provides for such., 2. Sources of Redemption of debentures :- A company may source its, redemption of debentures either out of capital or out of profits., a. Out of Capital :- Only those companies which are exempted from creating, DRR may redeem debentures out of Capital., b. Out of Profits :- When any company planning to redeem its debentures, purely out of profit, it should transfer 100 percent of the face value of the, redeemable debentures to DRR out of the surplus available for payment, of dividend., c. Out of Capital and Profits :- In case, Company is planning to redeem its, debentures by using both the sources partially, it does not transfer 100, percent of face value of outstanding debentures of a particular class to, DRR out of the surplus available for payment of dividend., 2.12 Redemption by Payment in Lump Sum, When the company pays the whole amount in lump sum, the following journal, entries are recorded in the books of the company:, 1., , 2., , If debentures are to be redeemed at par, (a) Debentures A/c, To Debentureholders, (b) Debentureholders, To Bank A/c, If debentures are to be redeemed at premium, (a), , (b), , Debentures A/c, Premium on Redemption of Debentures A/c, To Debentureholders, Debentureholders, To Bank A/c, , 2018-19, , Dr., Dr., , Dr., Dr., Dr.
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Issue and Redemption of Debentures, , 111, , Illustration 19, Give the necessary journal entries at the time of redemption of debentures in, each of the following cases., 1., 2., 3., 4., , X Ltd. issued 5,000, 9% debentures of Rs 100 each at par and, redeemable at par at the end of 5 years out of capital., X Ltd. issued 1,000, 12% debentures of Rs 100 each at par. These, debentures are redeemable at 10% premium at the end of 4 years, X Ltd. issued 12% debentures of the total face value of Rs 1,00,000 at, premium of 5% to be redeemed at par at the end of 4 years, X Ltd. issued Rs 1,00,000, 12% debentures at a discount of 5% but, redeemable at a premium of 5% at the end of 5 years, , Solution:, Journal, Date, , 1., , Particulars, , 9% Debentures A/c, , L.F., , Dr., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 5,00,000, , To Debentureholders A/c, , 5,00,000, , (Amount due on redemption debentures), Debentureholders A/c, , Dr., , 5,00,000, , To Bank A/c, , 5,00,000, , (Payment made to debentureholders), 2., , 12% Debentures A/c, , Dr., , 1,00,000, , Premium on Redemption of Debentures A/c, , Dr., , 10,000, , To Debentureholders, , 1,10,000, , (Amount due on redemption of debentures), Debentureholders A/c, , Dr., , 1,10,000, , To Bank A/c, , 1,10,000, , (Payment made to debentureholders), 3., , 12% Debentures A/c, , Dr., , To Debentureholders A/c, , 1,00,000, 1,00,000, , (Amount due on redemption), , 2018-19
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112, , Accountancy : Company Accounts and Analysis of Financial Statements, , Debentureholders A/c, , Dr., , 1,00,000, , To Bank A/c, , 1,00,000, , (Payment made to debentureholders), 4., , 12% Debentures A/c, , Dr., , 1,00,000, , Premium on Redemption of Debentures A/c, , Dr., , 5,000, , To Debentureholders A/c, , 1,05,000, , (Amount due on redemption of debentures), Debentureholders A/c, To Bank A/c, (Payment made to debentureholders), , Dr., , 1,05,000, 1,05,000, , As per the provisions of the Companies Act, 2013, the company must set, aside a portion of profits every year and transfer it to Debenture Redemption, Reserve for redemption of debentures until the debentures are redeemed. The, journal entry recorded for the purpose is as follows :, (a) Where a company has issued debentures, it shall create a Debenture, Redemption Reserve for the redemption of such debentures, to which, adequate amount shall be credited, from out of its profit every year, until such debentures are redeemed., (b) The amount credited to the Debenture Redemption Reserve shall not, be utilised by the company except for the purpose of redemption of, debentures., According to Rule 18(7) of COMPANIES (SHARE CAPITAL AND, DEBENTURES) RULES, 2014, the company shall create a Debenture Redemption, Reserve for the purpose of redemption of debentures, in accordance with the, conditions given below:, (a) The Debenture Redemption Reserve shall be create out of the profits of, the company available for payment of dividend;, (b) The company shall create Debenture Redemption Reserve (DRR) in, accordance with following conditions:, i. No DRR is required for debentures issued by All India Financial, Institutions (AIFIs) regulated by Reserve Bank of India and, Banking Companies for both public as well as privately placed, debentures., ii. For NBFCs registered with the RBI and for Housing Finance, Companies registered with the National Housing Bank, DRR will, be 25% of the value of outstanding debentures issued through, , 2018-19
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Issue and Redemption of Debentures, , (c), , (d), , (e), , 113, , public issue as per present SEBI (Issue and Listing of Debt, Securities) Regulations, 2008, and no DRR is required in the case, of privately placed debentures., iii. For other companies including manufacturing and infrastructure, companies, the adequacy of DRR will be 25% of the value of, outstanding debentures issued through public issue as per, present SEBI (Issue and Listing of Debt Securities) Regulations,, 2008., iv. 25% DRR is required in the case of privately placed debentures, by listed companies. For unlisted companies issuing debentures, on private placement basis, the DRR will be 25% of the value of, outstanding debentures., Every company required to create Debenture Redemption Reserve shall, on or before the 30th day of April in each year, invest or deposit, as the, case may be, a sum which shall not be less than fifteen per cent, of the, amount of its debentures maturing during the year ending on the 31st, day of March of the next year, in any one or more of the following, methods, namely :i. Deposits with any scheduled bank, free from any charge or lien;, ii. Securities of the Central Government or of any State Government;, iii. Securities mentioned in sub-clauses (a) to (d) and (ee) of section, 20 of the Indian Trusts Act, 1882;, iv. Bonds issued by any other company which is notified under subclause (f) of section 20 of the Indian Trusts Act, 1882;, v. The amount invested or deposited as above shall not be used for, any purpose other than for redemption of debentures maturing, during the year referred above:, In case of partly convertible debentures, Debenture Redemption, Reserve shall be created in respect of non-convertible portion of, debenture issue., The amount credited to the Debenture Redemption Reserve shall not, be utilised by the company except for the purpose of redemption of, debentures., , Illustration 20, XYZ Ltd. issued 200, 15% debentures of Rs 100 each on April 01, 2013 at, discount of 10% redeemable at premium of 10% out of profits. Give journal, entries at the time of issue and redemption of debentures if debentures are, to be redeemed in lump sum at the end of 4th year. The directors decided to, transfer the minimum amount to Debenture Redemption Reserve on March, 31, 2016., , 2018-19
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114, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution:, Books of XYZ Ltd., Journal, Date, , Particulars, , 2013, Bank A/c, April 01, To Debenture Application and, Allotment A/c, , L.F., , Dr., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 18,000, 18,000, , (Application money received on debentures), April 01 Debenture Application and Allotment A/c, Loss on Issue of Debentures A/c, To 15% Debentures A/c, To Premium on Redemption of, Debentures A/c, (Issue of Debentures at 10% discount an, redeemable at 10% premium), , Dr., Dr., , 18,000, 4,000, , 2016, Balance in Statement of Profit and loss, March 31, To Debenture Redemption Reserve A/c, (Transfer of profits to DRR), , Dr., , April 30 Debenture Redemption Investment A/c, To Bank A/c, (Required amount invested in DRI), , Dr., , 2017, Bank A/c, March 31, To Debenture Redemption Investment, (DRI encashed at the time of redemption, of debentures), , Dr., , March 31 15% Debentures A/c, Premium on Redemption of, Debentures A/c, To Debentureholders A/c, (Amount due on redemption), , Dr., , 20,000, , Dr., , 2,000, , March 31 Debentureholders A/c, To Bank A/c, (Amount paid to debentureholders), , Dr., , March 31 Debenture Redemption Reserve A/c, To General Reserve, (Transfer of DRR to General Reserve, After redemption of debentures), , Dr., , 20,000, 2,000, , 5,000, 5,000, 3,000, 3,000, 3,000, 3,000, , 22,000, , 2018-19, , 22,000, 22,000, 5,000, 5,000
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Issue and Redemption of Debentures, , 2.12.2, , 115, , Redemption by Payment in Instalments, , When, as per terms of the issue, the debentures are to be redeemed in instalments, beginning from a particular year, the actual debentures to be redeemed are, selected usually by draw of lots, and the redemption to be made either out of, profits or out of capital. The entries will be:, 1., , 2., , If redeemed out of profits, (a), , Statement of profit and loss, Dr., To Debenture Redemption Reserve A/c, , (b), , Debentures A/c, To Debentureholders, , Dr., , (c), , Debentureholders, To Bank A/c, , Dr., , If redeemed out of capital, (a), , Debentures A/c, To Debentureholders, , Dr., , (b), , Debentureholders, To Bank A/c, , Dr., , Illustration 21, ABC Ltd. issued 3,000, 14% Debentures of Rs 100 each at a discount of 5% on, April 1, 2012. Interest on these debentures is payable annually on March 31, each year. The debentures are redeemable at par in three equal instalments at, the end of the third, fourth and fifth year. Prepare 14% Debentures Account,, Discount on Issue of Debentures Account and Debenture Interest Account in, the books of the company., Solution:, 14% Debentures Account, Dr., Date, 2013, Mar.31, , Particulars, , Balance c/d, , J.F., , Amount, (Rs), 3,00,000, , Date, 2012, Apr.01, , 3,00,000, , 2018-19, , Particulars, , Debenture, Application, Discount, on Issue of, Debentures, , J.F., , Cr., Amount, (Rs), 2,85,000, 15,000, , 3,00,000
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116, 2014, Mar.31, , Accountancy : Company Accounts and Analysis of Financial Statements, , Balance c/d, , 3,00,000, , 2013, Apr.01, , Balance b/d, , 3,00,000, 2015, Mar.31, Mar.31, , Bank A/c, Balance c/d, , 1,00,000, 2,00,000, , 3,00,000, 2014, Apr.01, , Balance b/d, , 3,00,000, 2016, Mar.31, Mar.31, , Bank A/c, Balance c/d, , 1,00,000, 1,00,000, , Balance c/d, , 1,00,000, , 3,00,000, 3,00,000, , 2015, Apr.01, , Balance b/d, , 2,00,000, 2017, Mar.31, , 3,00,000, , 2,00,000, 2,00,000, , 2016, Apr.01, , Balance b/d, , 1,00,000, , 1,00,000, 1,00,000, , Debentures Interest Account, Dr., Date, , Particulars, , J.F., , Amount, (Rs), , Date, , Particulars, , Cr., J.F. Amount, (Rs), , 2013, Mar.31, , Bank, , 2013, 42,000 Mar.31, , Statement of, Profit and Loss, , 42,000, , 2014, Mar.31, , Bank, , 2014, 42,000 Mar.31, , Statement of, Profit and Loss, , 42,000, , 2015, Mar.31, , Bank, , 2015, 42,000 Mar.31, , Statement of, Profit and Loss, , 42,000, , 2016, Mar.31, , Bank, , 2016, 28,000 Mar.31, , Statement of, Profit and Loss, , 28,000, , 2017, Mar.31, , Bank, , 2017, 14,000 Mar. 31, , Statement of, Profit and Loss, , 14,000, , Discount on Issue Debentures Account, Dr., Date, 2012, Apr.01, , Particulars, , To 14%, debentures A/c, , J.F., , Amount, (Rs), , Date, , 2013, 15,000 Mar.31, Mar.31, 15,000, , 2018-19, , Particulars, Statement of, Profit and Loss, Balance c/d, , Cr., J.F. Amount, (Rs), 3,750, 11,250, 15,000
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Issue and Redemption of Debentures, 2013, Apr.01, , Balance b/d, , 117, , 11,250, , 2014, Mar. 31, Mar. 31, , Statement of, Profit and Loss, Balance c/d, , 11,250, 2014, Apr.01, , Balance b/d, , 7,500, , 11,250, 2015, Mar. 31, Mar. 31, , Statement of, Profit and Loss, Balance c/d, , 7,500, 2015, Apr.01, , Balance b/d, , 3,750, , Balance b/d, , 1,250, , 3,750, 3,750, 7,500, , 2016, Mar. 31, Mar. 31, , Statement of, Profit and Loss, Balance c/d, , 3,750, 2016, Apr.01, , 3,750, 7,500, , 2,500, 1,250, 3,750, , 2017, Mar. 31, , Statement of, Profit and Loss, , 1,250, , 1,250, 1,250, , Working Notes:, 1. Debenture interest is calculated @ 14% on the amount of debentures outstanding, in the beginning of each year. The amount of debentures outstanding on April 1,, each year is:, Debenture Outstanding, Rs, April 2012, 3,00,000, April 2013, 3,00,000, April 2014, 3,00,000, April 2015, 2,00,000, April 2016, 1,00,000, 2., , Discount on Issue of Debentures is written-off in the ratio of the amount of, debentures outstanding in the beginning of each year. The ratio is 3:3:3:2:1. So, amount of discount to be written-off will be, Year, , Amount, Rs, , Rs, 2012, , Rs 15,000, , 2013, , Rs 15,000, , 2014, , Rs 15,000, , 2015, , Rs 15,000, , 2016, , Rs 15,000, , 3, 12, 3, 12, 3, 12, 2, 12, 1, 12, , 3,750, 3,750, 3,750, 2,500, 1,250, , 2.13 Redemption by Purchase in Open Market, When a company purchases its own debentures in the open market for the, purpose of immediate cancellation, the purchase and cancellation of such, , 2018-19
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118, , Accountancy : Company Accounts and Analysis of Financial Statements, , debentures are termed as redemption by purchase in the open market. The, advantage of such an option is that a company can redeem the debentures at its, convenience whenever it has surplus funds. Secondly, the company can purchase, them when they are available in market at a discount., When the debentures are purchased from the market at a discount and, cancelled, the journal entries are recorded as follows :, 1., , 2., , On purchase of own debentures for immediate cancellation, Debentures A/c, Dr., To Bank A/c, To Profit on Redemption of Debentures A/c, On transfer of Profit on Redemption, Profit on Redemption of Debenture A/c, Dr., To Capital Reserve, , In case, the debentures are purchased from the market at a price which is above, the nominal value of debenture, the excess will be debited to loss on redemption, of debentures. The journal entry in that case will be, 1., , 2., , Debentures A/c, Loss on Redemption of Debentures A/c, To Bank A/c, Statement of profit and loss, To Loss on Redemption of Debentures A/c, , Dr., Dr., Dr., , Illustration 22, X Ltd. purchased its own debentures of Rs 100 each of the face value of Rs, 20,000 from the open market for cancellation at Rs 92. Record necessary journal, entries., Solution:, Books of X Limited, Journal, Date, , Particulars, , Debentures A/c, Dr., To Bank A/c, To Profit on Redemption of Debentures A/c, (Own debentures purchased at Rs 92, from the market), , 2018-19, , L.F., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 20,000, 18,400, 1,600
Page 119 :
Issue and Redemption of Debentures, , 119, , Profit on Redemption of Debenture A/c, To Capital Reserve, (Transfer of profit on cancellation of, debentures to capital reserve), , Dr., , 1,600, 1,600, , * Alternatively, the following two journal entries may be passed:, Date, , Particulars, , L.F., , Debit, Amount, (Rs), , Own Debentures A/c, To Bank A/c, (Purchased its own debentures of Rs. 20,000 @ Rs., 92 each), , 18,000, , Debentures A/c, To Own Debentures A/c, To Profit on Redemption of Debentures A/c, (Own debentures purchased being cancelled), , 20,000, , Credit, Amount, (Rs), 18,000, , 18,000, 2,000, , Illustration 23, X Ltd. decided to redeem 250, 12% debentures of Rs 100 each amounting to, Rs 25,000. For this purpose, the company purchased debentures amounting, to Rs 20000 in the open market at Rs 98.50 each. Expenses of Rs 100 was, incurred on it. The balance of debentures amounting to Rs 5,000 were reedemed, by draw of lots. Journalise., Solution:, Books of X Ltd., Journal, Date, , Particulars, , L.F., , Debit, Amount, (Rs), , Balance in Statement of profit and loss A/c Dr., To Debenture Redemption Reserve A/c, (Transfer of profits to Debenture Reserve A/c, , 6,250, , Debenture Redemption Investment A/c, To Bank A/c, (Required amount invested in DRI), , 3,750, , Dr., , Bank A/c, Dr., To Debenture Redemption Investment A/c, (DRI encashed at the time of redemption, of debentures), , 2018-19, , Credit, Amount, (Rs), 6,250, , 3,750, 3,750, 3,750
Page 120 :
120, , Accountancy : Company Accounts and Analysis of Financial Statements, 12% Debentures A/c, Dr., To Bank A/c, To Profit on Redemption of Debentures A/c, (Purchase of 200 debentures @ Rs. 98.50 plus, expenses amounting to Rs. 100.), Profit on Redemption of Debentures A/c, To Capital Reserve, (Profit on Redemption transferred to Capital, Reserve.), , Dr., , 12% Debentures A/c, To Bank A/c, (Redemption of Rs. 50 debentures), , Dr., , Debenture Redemption Reserve A/c, To General Reserve, (Balance is DRR transferred to General, Reserve on Redemption of Debentures), , Dr., , 20,000, 19,800, 200, , 200, 200, , 5,000, 5,000, 6,250, 6,250, , Illustration 24, On April 01, 2013, a company made an issue of 1,000, 6% debentures of, Rs 1,000 each at Rs 960 per debenture. The terms of issue provided for the, redemption of 200 debentures every year starting from 31 March 2015 either by, purchase or by draw of lot at par at the company’s option. Rs 10,000 was writtenoff as the debenture discount account in years ending on March 31, 2014–15. On, 31.03.2015, the company purchased for cancellation debentures of the face, value of Rs 80,000 at Rs 950 per debenture and of the face value of Rs 1,20,000, at Rs 900 per debenture., Journalise the above transaction and show the profit on redemption would, be treated., Solution:, Date, , Particulars, , L.F., , Debit, Amount, (Rs), , 2013 Bank A/c, Dr., Apr. 01, To 6% Debentures Application & Allotment A/c, (Debentures application money received), , 9,60,000, , Apr. 01 6% Debentures Application & Allotment A/c Dr., Discount on Issue of Debentures A/c, Dr., To 6% Debentures A/c, (Debentures application money transferred, to Debentures A/c), , 9,60,000, 40,000, , 2018-19, , Credit, Amount, (Rs), 9,60,000, , 10,00,000
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Issue and Redemption of Debentures, , 121, , 2014, Statement of profit and loss, Dr., Mar. 31, To Discount on Issue of Debenture A/c, (Discount on issue of debentures written-off), Mar. 31 Balance in Statement of profit and loss, To Debenture Redemption Reserve A/c, (Transfer of profits DRR), , Dr., , Apr. 30 Debenture Redemption Investment A/c, To Bank A/c, (Required amount invested in DRI), , Dr., , 10,000, 10,000, 2,00,000, 2,00,000, 30,000, 30,000, , 2015, Bank A/c, Dr., Mar. 31, To Debenture Redemption Investment A/c, (DRI encashed at the time of Redemption of, debentures), , 30,000, , Mar. 31 6% Debentures A/c, Dr., To Bank A/c, To Profit on Redemption of Debenture A/c, (Redemption of 80 debentures by purchasing @ Rs, 950 per debenture), , 80,000, , 30,000, , 76,000, 4,000, , Mar. 31 6% Debentures A/c, Dr., To Bank A/c, To Profit on Redemption of Debentures A/c, (Redemption of 80 debentures @ Rs 900 by, purchasing in open market), , 1,20,000, , Mar. 31 Profit on Redemption of Debentures A/c, Dr., To Capital Reserve A/c, (Transfer of profits on cancellation of debentures, of Capital Reserve A/c), , 16,000, , Mar. 31 Statement of profit and loss, To Discount on Issue of Debentures A/c, (Discount on debentures written-off), , Dr., , 10,000, , Mar. 31 Debenture Redemption Reserve A/c, , Dr., , 1,08,000, 12,000, , 16,000, , 10,000, , To General Reserve A/c, (Debenture Redemption Reserve in r/o debentures, redeemed transferred to General Reserve A/c), , 50,000, 50,000, , 2.14 Redemption by Conversion, As stated earlier the debentures can also be redeemed by converting them into, shares or new debentures. If debentureholders find that the offer is beneficial to, them, they will take advantage of this offer. The new shares or debentures may, be issued at par, at a discount or at a premium. It may be noted that no, Debenture Redemption Reserve is required in case of convertible debentures, because no funds are required for redemption., , 2018-19
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122, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 25, Arjun Plastics Limited redeemed 1,000, 15% debentures of Rs 100 each by, converting them into equity shares of Rs 10 each at a premium of Rs 2.50 per, share. The company also redeemed 500 debentures by utilising Rs 50,000 out, of profit. Give the necessary journal entries., Solution:, Books of Arjun Plastic Limted, Journal, Date, , Particulars, , L.F., , Statement of Profit and Loss, To Debenture Redemption Reserve A/c, (Transfer of profit to Debenture Redemption, Reserve), , Dr., , Debenture Redemption Investment A/c, To Bank A/c, (Required amount invested in DRI), , Dr., , 15% Debentures A/c, To Debentureholders A/c, (Amount due to debentureholders), , Dr., , Debit, Amount, (Rs), , Credit, Amount, (Rs), , 50,000, 50,000, , 7,500, 7,500, 1,00,000, 1,00,000, , Debentureholders A/c, Dr., To Equity Shares Capital A/c, To Securities Premium Reserve A/c, (Issue of 800 equity shares at a premium of Rs, 2.50 per share), , 1,00,000, , Bank A/c, Dr., To Debenture Redemption Investment A/c, (DRI encashed at the time of redemption of, debentures), , 7,500, , Debenture A/c, To Debentureholders A/c, (Amount due to debentureholders), , Dr., , Debentureholders A/c, To Bank A/c, (Payment to debentureholders), , Dr., , 80,000, 20,000, , 7,500, , 50,000, 50,000, 50,000, 50,000, , Debenture Redemption Reserve A/c, Dr., To General Reserve, (Debenture Redemption Reserve transferred, to General Reserve on redemption of Debentures), , 2018-19, , 50,000, 50,000
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Issue and Redemption of Debentures, , 123, , Illustration 26, On April 01, 2013, a company made an issue of 10,000, 9% Debentures of, Rs 100 each at Rs. 92 per debenture. The terms of issue provided for the redemption, of 2,000 debentures every year starting from the March 31, 2016 either by conversion, in to equity shares of Rs 20 each or by draw of lot at per at the company’s option., On March 31, 2016, company redemption, 2,000, 9% debentures by converting, them into Equity shares of Rs 20 each. Give the necessary Journal entries., , Books of a Company, Journal, Date, , Particulars, , L.F., , Debit, Amount, (Rs), , 2016, 9% Debentures A/c, Dr., Mar. 31, To Debentureholders A/c, To Statement of Profit & Loss, To Discount on Issue of Debentures A/c, (Amount due to debentureholders on redemption, by conversion), , 2,00,000, , Mar. 31 Debentureholders A/c, Dr., To Equity Share Capital A/c, (New equity shares issued to debentureholders), , 1,84,000, , Credit, Amount, (Rs), 1,84,000, 9,600, 8,400, , 1,84,000, , Working Notes :-, , i., , Total Discount on the issue of 10,000 Debentures = 10,00,000 × 8, 100, = Rs 80,000, , Amount of Discount to be written off is determined as follows :, Year, , Amount (Rs), , Ratio, , 2013-14, , 10,00,000, , 5, , 2014-15, , 10,00,000, , 5, , 2015-16, , 10,00,000, , 5, , 2016-17, , 8,00,000, , 4, , 2017-18, , 6,00,000, , 3, , 2018-19, , 4,00,000, , 2, , 2019-20, , 20,000, , 1, 25, , 2018-19, , Amount (Rs), 80,000 × 5 =, 25, 80,000 × 5 =, 25, 80,000 × 5 =, 25, 80,000 × 4 =, 25, 80,000 × 3 =, 25, 80,000 × 2 =, 25, 80,000 × 1 =, 25, , 16,000, 16,000, 16,000, 12,800, 9,600, 6,400, 3,200, 80,000
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124, , Accountancy : Company Accounts and Analysis of Financial Statements, , ii., , Up to March 31, 2016 discount on issue of debentures written off is, Rs 48,000 out of total amount of Rs. 80,000., So, on 2,000 debentures, now converted into shares amount of discount, 48000, = Rs. 9,600, on issue of debentures written off is = (2,00,000 × 8 ) ×, 10 0 80000, Remaining amount of discount amounting to Rs. 6,400 (Rs. 16,000 – Rs., 9,600) is not written off till March 31, 2016., 2.15 Sinking Fund Method, Sufficient funds are required to redeem debentures at the end of a specified, period. To meet this requirement, the company may decide to create a sinking, fund and invest adequate amount in marketable securities or bonds of other, business entities. Normally, a company ensures that an equal amount is set, aside every year to arrange the necessary funds at the time of redemption. This, is called Sinking Fund method according to which the company makes necessary, arrangements is sets aside a part of divisible profit every year and invest the, same outside the business in marketable securities. An appropriate amount is, calculated by referring to on Sinking Fund Table depending upon the rate of, return on investments and the number of years for which investments are made., The amount thus ascertained is transferred from profits every year to Debenture, Redemption Fund and its investment is termed as Debenture Redemption Fund, Investment. These investment earn certain amount of income (call it interest), which is reinvested together with the fixed appropriated amount for the purpose, in subsequent years In last year, the interest earned and the appropriated fixed, amount are not invested. In fact, at this stage the Debenture Redemption Fund, Investments are encashed and the amount so obtained is used for the redemption, of debentures. Any profit or loss made on the encashment of Debenture, Redemption Fund investments is also transferred to Debenture Redemption, Fund Account. The creation of Debenture Redemption Fund Account serves, the purpose of Debenture Redemption Reserve as required by law and the SEBI, guidelines, and is, after redemption is transferred to general reserve., Thus, the steps involved in the working of sinking fund method are :, 1., 2., 3., , Calculate the amount of profit to be set aside annually with the help of, sinking fund table., Set aside the amount of profit at the end of each year and credit to, Debenture Redemption Fund (DRF) Account., Purchase the investments of the equivalent amount at the end of first, year and debit Debenture Redemption Fund Investment (DRFI), Account., , 2018-19
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Issue and Redemption of Debentures, , 4., 5., , 6., 7., 8., 9., , 10., 11., , 125, , Receive interest on investment at the end of each subsequent year., Purchase the investments equivalent to the fixed amount of profit set, aside and the interest earned every year except last year (year of, redemption)., Receive interest on investment for the last year., Set aside the fixed amount of profit for the last year., Encash the investments at the end of the year of redemption., Transfer the profit/loss on sale of investments reflected in the balance, of Debenture Redemption Fund Investment Account to Debenture, Redemption Fund Account., Make payment to debentureholdeRs, Transfer Debenture Redemption Fund A/c balance to General Reserve., , The sinking fund method is used for redemption of debentures by payment, in lump sum on maturity, and the journal passed from year to year are as, follows:, 1., At the end of First Year, (a) For setting aside the fixed amount of profit for redemption, Statement of profit and loss, To Debenture Redemption Fund A/c, (b), , For investing the amount set aside for redemption, Debenture Redemption Fund Investment A/c, To Bank A/c, , 2., , Dr., , Dr., , At the end of second year and subsequent years other than last year, (a), , (b), , For receipt of interest on Debenture Redemption Fund Investments, Bank A/c, Dr., To Interest on Debenture Redemption A/c, Fund Investment A/c, For transfer of Interest on Debenture Redemption Fund Investment to, Debenture Redemption Fund Account, Interest on Debenture Redemption Fund Investment A/c Dr., To Debenture Redemption Fund A/c, , (c), , For setting aside the fixed amount of profit for redemption, Statement of profit and loss, To Debenture Redemption Fund A/c, , 2018-19, , Dr.
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126, , Accountancy : Company Accounts and Analysis of Financial Statements, , (d), , For investments of the amount set aside for redemption and the interest, earned on DRFI, Debenture Redemption Fund Investment A/c, To Bank A/c, , Dr., , 3. At the end of last year, (a), , (b), , (c), , (d), , (e), , (f), , (g), , (h), , For receipt of interest, Bank A/c, Dr., To Interest on Debenture Redemption, Fund Investment A/c, For transfer of interest on Debenture Redemption Fund Investment to, Debenture Redemption Fund Investment A/c, Interest on Debenture Redemption Fund Investment A/c Dr., To Debenture Redemption Fund A/c, For setting aside the fixed amount of profit for redemption, Statement of profit and loss, Dr., To Debenture Redemption Fund A/c, For encashment of Debenture Redemption Fund Investments, Bank A/c, Dr., To Debenture Redemption Fund Investment A/c, For the transfer of profit/loss on realisation of Debenture Redemption, Fund Investments, (i) In case of Profit, Debenture Redemption Fund Investment A/c, Dr., To Debenture Redemption Fund A/c, Or, (ii) In case of Loss, Debenture Redemption Fund A/c, Dr., To Debenture Redemption Fund Investment A/c, For amount due to debentureholders on redemption, Debenture A/c, Dr., To DebentureholdeRs A/c, For payment to debentureholders, Debentureholders A/c, Dr., To Bank A/c, For transfer of Debenture Redemption Fund Account balance to, General Reserve, Debenture Redemption Fund A/c, Dr., To General Reserve A/c, , 2018-19
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Issue and Redemption of Debentures, , 127, , Illustration 27, X Ltd. issued Rs 10,00,000 debentures on April 01, 2014. These were to be, redeemed on March 31, 2017. For this purpose, the company established a, sinking fund. The investments were expected to earn interest @ 5% p.a. Sinking, fund table shows that Rs 0.317208 invested annually at 5% amount to Re.1 in, 3 years on March 31, 2017, the bank balance was Rs 4,20,000 before receipt of, interest on Sinking Fund Investments. On that date, the investments were sold, for Rs 6,56,000., Calculate the interest to nearest rupee and investments be made to the nearest, of Rs 100. Record necessary journal entries. Show Debentures Account,, Debenture Redemption Fund Account and Debenture Redemption Fund, Investment Account in the books of the company. Ignore entries for interest on, debentures., Solution:, Books of X Ltd., Journal, Date, , 2014, Apr.1,, , Particulars, , Bank A/c, To Debentures A/c, (Issue of debentures of Rs 10,00,000), , L.F., , Dr., , 2016, Mar.31, Bank A/c, To Interest on DRFI A/c, (Interest received @ 5% on investment ), , Dr., , 10,00,000, , 3,17,208, 3,17,208, , 3,17,200, 3,17,200, , Dr., , Mar. 31, Interest on DRFI A/c, Dr., To Debenture Redemption Fund Investment A/c, (Interest on DRFI transferred to Debenture, Redemption Fund), , 2018-19, , Credit, Amount, (Rs), , 10,00,000, , Mar.31, Statement of Profit and Loss, Dr., To Debenture Redemption Fund A/c, (Annual instalment for redemption debited to, statement of profit and loss), Debenture Redemption Fund Investments A/c, To Bank A/c, (Investment purchased), , Debit, Amount, (Rs), , 15,860, 15,860, , 15,860, 15,860
Page 128 :
128, , Accountancy : Company Accounts and Analysis of Financial Statements, Statement of profit and loss, Dr., To Debenture Redemption Fund A/c, (Annual instalment debited to Profit and Loss, Appropriation Account), , 3,17,208, , Debenture Redemption Fund Investment A/c Dr., To Bank A/c, (Investment purchased for annual instalment, plus interest), , 3,33,100, , 2017, Mar.31, Bank A/c, To Interest on DRFI A/c, (Interest received @ 5% on investment), , Dr., , 3,33,100, , 32,516, 32,516, , Interest on DRFI A/c, To Debenture Redemption Fund A/c, (Interest on DRFI transferred to Debenture, Redemption Fund), , Dr., , Statement of profit and loss, To Debenture Redemption Fund A/c, (Annual instalment debited to Profit & Loss, Appropriation Account), , Dr., , 32,516, 32,516, , 3,17,208, 3,17,208, , Bank A/c, Dr., To Debenture Redemption Fund Investment A/c, (Sale proceeds of DRFI), Debenture Redemption Fund Investment A/c Dr., To Debenture Redemption Fund A/c, (Transfer of profit on sale of investments to, Debenture Redemption Fund), Debentures A/c, To Debenturesholders A/c, (Debentures amount transferred to, debentureholders), , Dr., , Debenturesholders A/c, To Bank A/c, (Debentures holders paid the money), , Dr., , Debenture Redemption Fund A/c, To General Reserve A/c, (Transfer of credit balance of Debenture, Redemption Fund General Reserve), , Dr., , 2018-19, , 3,17,208, , 6,56,000, 6,56,000, , 5,700, 5,700, , 10,00,000, 10,00,000, , 10,00,000, 10,00,000, , 10,05,700, 10,05,700
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Issue and Redemption of Debentures, , 129, , Debentures Account, Dr., Date, 2015, Mar.31, , Particulars, , J.F., , Balance c/d, , Amount, (Rs), 10,00,000, , Date, , Particulars, , 2014, Apr.01, , Bank, , J.F., , 10,00,000, , 10,00,000, 2016, Mar.31, , Balance c/d, , 10,00,000, , 10,00,000, 2015, Apr.01, , Balance b/d, , 10,00,000, , 10,00,000, 2017, Mar.31, , Bank, , 10,00,000, , Cr., Amount, (Rs), , 10,00,000, 2016, Apr.01, , Balance b/d, , 10,00,000, , 10,00,000, , 10,00,000, , Debentures Redemption Fund Account, Dr., Date, 2015, Mar.31, , Particulars, , Balance c/d, , J.F., , Amount, (Rs), 3,17,208, , Date, 2014, Apr.01, , Particulars, , Statement of, profit and loss, , 3,17,208, 2016, Mar.31, , Balance c/d, , 6,50,276, , General Reserve, , 10,05,700, , Cr., Amount, (Rs), 3,17,208, 3,17,208, , 2015, Apr.01, , Balance b/d, Interest on DRFI, Statement of, profit and loss, , 6,50,276, 2017, Mar.31, , J.F., , 3,17,208, 15,860, 3,17,208, 6,50,276, , 2016, Apr.01, , 10,05,700, , 2018-19, , Balance b/d, Interest on DRFI, Profit & Loss, Appropriation, DRFI, , 6,50,276, 32,516, 3,17,208, 5,700, 10,05,700
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130, , Accountancy : Company Accounts and Analysis of Financial Statements, , Debenture Redemption Fund Investment Account, Dr., Date, 2015, Mar.31, , Particulars, , J.F., , Bank, , Amount, (Rs), 3,17,200, , Date, , Particulars, , 2015, Mar.31, , Balance c/d, , J.F., , 3,17,200, , 3,17,200, 2015, Apr.01, Mar.31, , Balance b/d, Bank, , 3,17,200, 3,33,100, , 3,17,200, 2016, Mar.31, , Balance c/d, , 6,50,300, , 6,50,300, 2016, Apr.01, Mar.31, , Balance b/d, DRF, , 6,50,300, 5,700, , Cr., Amount, (Rs), , 6,50,300, 2017, Mar.31, , Bank, (Sale Proceeds), , 6,56,000, , 6,56,000, , 6,56,000, , Bank Account, Date, 2017, Mar.31, , Particulars, , Balance b/d, DRF, , J.F., , Amount, (Rs), , Date, , 2017, 4,20,000 Mar.31, 6,56,000 Mar.31, 10,76,000, , 2017, Apr.01, , Balance b/d, , Particulars, , Debenture, Balance c/d, , J.F., , Amount, (Rs), 10,00,000, 76,000, 10,76,000, , 76,000, , Note : The annual instalment of profit to be set aside for redemption has been worked out, as 0.317208 × 10,00,000 = Rs 3,17,208., , Illustration 28, The balance sheet of XYZ Ltd., disclosed the following information as on March, 31, 2015., Rs, 15% debentures, 15,00,000, Debenture Redemption Fund, 11,63,600, Debenture Redemption Fund Investment, 11,63,600, (10% Govt. Securities), , 2018-19
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Issue and Redemption of Debentures, , 131, , The contribution to Debenture Redemption Fund was Rs 1,30,800 p.a. for, the year 2015–16 and 2016–17. Debentures are due for payment on December, 31, 2017. Prepare the above accounts in the books of company assuming that, securities were realised on March 31, 2017 for a sum of Rs 13,52,000 and, interest on securities on March 31, was immediately invested., Solution:, Debentures Account, Dr., Date, 2016, Mar.31, , Particulars, , J.F., , Balance c/d, , Amount, (Rs), 15,00,000, , Date, 2015, Apr.01, , Particulars, , J.F., , Balance b/d, , 15,00,000, , 15,00,000, 2017, Mar.31, , Bank, , 15,00,000, , Cr., Amount, (Rs), , 15,00,000, 2016, Apr.01, , Balance b/d, , 15,00,000, , 15,00,000, , 15,00,000, , Debentures Redemption Fund Account, Dr., Date, , Particulars, , 2016, Mar.31 Balance c/d, , J.F., , Amount, (Rs), 14,10,760, , Date, 2015, Apr.01, Mar.31, Mar.31, , Particulars, , Balance b/d, Interest on DRFI, Statement of, profit and loss, , 14,10,760, , 2017, , Debenture, , Mar.31 Redemption Fund, Investment, Mar.31 General Reserve, , J.F., , Cr., Amount, (Rs), 11,63,600, 1,16,360, 1,30,800, 14,10,760, , 2016, 58,760, , Apr.01, , 16,23,876, , 2017, Mar.31, , 16,82,636, , Mar.31, , 2018-19, , Balance b/d, Interest on DRFI, Statement of, profit and loss, , 14,10,760, 1,41,076, 1,30,800, 16,82,636
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132, , Accountancy : Company Accounts and Analysis of Financial Statements, , Debenture Redemption Fund Investment Account, Dr., Date, , Particulars, , 2015, Apr.01, 2016, Mar.31, 2016, Apr.01, , J.F., , Balance b/d, Bank, , Balance b/d, , Amount, (Rs), 11,63,600, 2,47,160*, 14,10,760, 14,10,760, , Date, , Particulars, , 2016, Mar.31, , Balance c/d, , J.F., , Cr., Amount, (Rs), 14,10,760, 14,10,760, , 2017, Mar.31, , Bank, Debenture, Redemption, Fund, , 14,10,760, , 13,52,000, 58,760, 14,10,760, , * (Interest + Instalment = Rs 1,16,360 + Rs 1,30,800 = Rs 2,47,160), , Illustration 29, LCM Ltd. purchased for cancellation its own 10,00,000, 9% Debentures of Rs, 500 each at Rs 480 each. Record necessary journal entries., Solution:, Books of LCM Ltd., Journal, Date, , Particulars, , L.F., , Debit, Amount, (Rs), , Own Debentures A/c, Dr., To Bank A/c, (Purchased its own debentures @ Rs 480 each), , 48,00,00,000, , 9% Debenture A/c, Dr., To Own Debenture, To Profit on cancellation of, debentures A/c, (Own debenture purchased being cancelled), , 50,00,00,000, , Profit on cancellation of debentures A/c Dr., To Capital Reserve, (Profits on cancellation of debentures, transferred to capital reserve), , 2,00,00,000, , 2018-19, , Credit, Amount, (Rs), 48,00,00,000, , 48,00,00,000, 2,00,00,000, , 2,00,00,000
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Issue and Redemption of Debentures, , 133, , Illustration 30, The following balances appeared in the books of Madhu Ltd. as on April 01,, 2016:, (Rs), 12% Debentures, 1,50,000, Debenture Redemption Fund, 1,25,000, Debenture Redemption Fund Investments, 1,25,000, The Debenture Redemption Fund Investments were represented by Rs, 1,30,000, 9% Govt. Securities., The annual instalment added to the fund was Rs 20,600. On March 31, 2017, the bank balance before the receipt of interest on investments was Rs, 40,000. On the date, all the investments were sold at 84% and the debentures, were duly redeemed., Prepare Debentures Account, Debenture Redemption Fund Account,, Debenture Redemption Fund Investment Account and Bank Account for, 2016–2017. The company closes its books on March 31, every year., Solution:, Books of Madhu Ltd., Debenture Redemption Fund Account, Dr., Date, , Cr., Particulars, , J.F., , 2017, Mar.31 Debenture, Redemption, Fund Investment, (Loss on Sale), Mar.31 General Reserve, (Transfer), , Amount, (Rs), , Date, 2016, April 1, 2017, Mar.31, , 15,800, 1,41,500 Mar.31, , Particulars, , J.F., , Balance b/d, Interest on, Debenture, Redemption Fund, Investment, (9% on Rs 1,30,000), Statement of, profit and loss, , Amount, (Rs), 1,25,000, , 11,700, 20,600, , 1,57,300, , 1,57,300, , Debenture Redemption Fund Investment Account, Dr., Date, , Cr., Particulars, , 2016, April 01 Balance b/d, (Face value, Rs 1,30,000), , J.F., , Amount, (Rs), , Date, 2017, Mar.31, , Particulars, , Bank, (84% of Rs 1,30,000), , 1,25,000, , J.F., , Amount, (Rs), 1,09,200, 15,800, , By Debenture, Redemption Fund, 1,25,000, , 2018-19, , (Loss on Sale), , 1,25,000
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134, , Accountancy : Company Accounts and Analysis of Financial Statements, , Bank Account, Dr., , Cr., , Date, , Particulars, , J.F., , 2017, Mar.31 Balance b/d, Interest on D.R.F, Investment, Mar.31 Debenture, Redemption, Fund Investment, (Sales Proceeds), , Amount, (Rs), 40,000, 11,700, , Date, , Particulars, , 2017, Mar.31, Mar.31, , Debenture, Balance c/d, , J.F., , Amount, (Rs), 1,50,000, 10,900, , 1,09,200, , 1,60,900, , 1,60,900, , 12% Debentures Account, Dr., , Cr., , Date, , Particulars, , 2017, Mar.31 Bank A/c, , J.F., , Amount, (Rs), 1,50,000, , Date, 2016, April 30, , Particulars, , Balance b/d, , 1,50,000, , J.F. Amount, (Rs), 1,50,000, 1,50,000, , Working Notes :, 1. Interest on Debenture Redemption Fund Investments of 1,30,000 at 9% will be, Rs 11,700., 2. Investments realised at 84%. Hence, the investments of Rs 1,30,000 will realise, Rs 1,09,200., Test your Understanding – II, Select the correct answer for the following multiple choice questions:, 1. Debentures which are transferable by mere delivery are:, (a) Registered debentures,, (b), First debentures,, (c) Bearer debentures., 2., , The following journal entry appears in the books of X Co. Ltd., Bank a/c, Dr., 4,75,000, Loss on issue of debenture a/c, Dr., 75,000, To 12% Debentures a/c, To Premium on Redemption of Debenture A/c, Debentures have been issued at a discount of:, (a) 15%,, (b) 5%,, (c) 10%., , 2018-19, , 5,00,000, 50,000
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Issue and Redemption of Debentures, , 135, , 3., , X Co. Ltd. purchased assets worth Rs 28,80,000. It issued debentures of Rs, 100 each at a discount of 4 per cent in full satisfaction of the purchase, consideration. The number of debentures issued to vendor is:, (a) 30,000,, (b) 28,800,, (c) 32,000., , 4., , Convertible debentures cannot be issued at a discount if:, (a) They are to be immediately converted,, (b) They are not to be immediately converted,, (c) None of the above., , 5., , Discount on issue of debentures is shown under the following head in the, Balance Sheet:, (a) Statement of profit and loss,, (b) Other non-Corrent Assets,, (c) Debentures account., , 6., , When debentures are issued at par and are redeemable at a premium, the, loss on such an issues debited to :, (a) Statement of profit and loss,, (b) Debentures applications and allotment account,, (c) Loss on issue of debentures account., , 7., , Excess value of net assets over purchase consideration at the time of purchase, of business is credited to :, (a) General reserve,, (b) Capital reserve,, (c) Vendors’ account., , 8., , When all the debentures are redeemed, balance in the debentures redemption, fund account is transferred to :, (a) Capital reserve,, (b) General reserve,, (c) Statement of profits and loss., , 9., , The nominal and book values of debenture redemption fund investments, account are respectively Rs 1,00,000 and Rs 96,000. The company sold, investments of nominal value of Rs 30,000 at a price which was just sufficient, to redeem debentures of Rs 30,000 at 10% premium, the profit on sale of, investment is :, (a) Rs 4,200, (b) Rs 3,000, (c) Rs Nil., , 10., , Own, (a), (b), (c), , debentures are those debentures of the company which:, The company allots to its own promoters,, The company allots to its Director,, The company purchases from the market and keeps them as investments., , 11., , Profit on cancellation of own debentures is transferred to :, (a) Statement of profit and loss,, (b) Debenture redemption reserve,, (c) Capital reserve., , 2018-19
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136, , Accountancy : Company Accounts and Analysis of Financial Statements, 12., , When debentures are redeemed out of profits, an equal amount is transferred, to :, (a) General reserve,, (b) Debenture redemption reserve,, (c) Capital reserve., , 13., , Profit on sale of debenture redemption fund investments in the first instance, is credited to :, (a) Debenture redemption fund account,, (b) Statement of profit and loss,, (c) General reserve account., , 14., , The balance of sinking fund investment account after the realisation of, investments is transferred to:, (a) Statement of Profit and Loss,, (b) Debentures account,, (c) Sinking fund account., , 15., , When debentures are issued at a discount and are redeemable at a premium,, which of the following accounts is debited at the time of issue:, (a) Debentures account,, (b) Premium on redemption of debentures account,, (c) Loss on issue of debentures account., Test your Understanding – III, , I. Identify the account to be debited in case of the following transactions., 1., 2., 3., 4., 5., , Issue of debentures to a vendor in consideration of the business purchase., Setting aside the amount for creating sinking fund for redemption of debentures., The balance of debenture redemption reserve account after redemption of the, debentures., Purchase of own debentures by the company., Writing-off discount on issue of debentures., , II. Identify the account to be credited in case of the following transactions., 1. Debentures issued at a discount and are redeemable at par., 2. Transfer of interest on Sinking fund investments to sinking fund account., 3. Balance of DRR account after the redemption of Debentures., 4. Profit on sale of sinking fund investment account., 5. Writing-off the loss on issue of debentures., Do it Yourself, 1., , 2., , G. Ltd., has Rs 800 lakh, 10% debentures of Rs 100 each due for redemption, on March 31, 2017. Assume that Debenture Redemption Reserve has a, balance of Rs 3,40,00,00,000 on that date. Record necessary entries at the, time of redemption of debentures., R. Ltd., issued 88,00,000, 8% debenture of Rs 50 each at a premium of 5 %, on July 1, 2014 redeemable at par by conversion of debentures into shares of, , 2018-19
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Issue and Redemption of Debentures, , 3., , 4., , 5., , 6., , 137, , Rs 20 each at a premium of Rs 2 per share on June 30, 2017. Record necessary, entries for redemption of debentures., C. Ltd. has outstanding 11,00,000, 10% debentures of Rs 200 each, on April, 1, 2017. The Board of Directors have decided to purchase 20% of own, debentures for cancellation at Rs 200 each. Record necessary entries for the, same., Record necessary journal entries in the books of the Company in each of the following, cases for redemption of 1,000, 12% Debentures of Rs 10 each issued at par:, (a) Debentures redeemed at par by conversion into 12% Preference Shares, of Rs 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%., On 31 March, 2017 Janta Ltd. converted its Rs 88,00,000, 6% debentures into, equity shares of Rs 20 each at a premium of Rs 2 per share. Record necessary, journal entries in the books of the company for redemption of debentures., Anirudh Ltd. has 4,000, 8% debentures of Rs 100 each due for redemption on, March 31, 2017. The company has a debenture redemption reserve of, Rs 50,000 on that date. Assuming that no interest is due, record the necessary, journal entries at the time of redemption of debentures., , Illustration 31, The following balances appeared in the books of a company on April 01, 2016:, 12% Debentures, Rs 4,00,000, 12% Debentures Sinking Fund, Rs 3,00,000, 12% Debentures Sinking Fund, Rs 3,00,000, Investment, (Represented by 10%, Rs 4,00,000 secured Bonds of Govt. of India), Annual contribution to the sinking fund was Rs 60,000 made on March 31, each year. On March 31, 2017, balance at Bank was Rs 3,00,000 after receipt of, interest on Debentures 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 2016–17:, (i) Debentures account,, (ii) Debentures sinking fund account,, (iii) Debentures sinking fund investment account,, (iv) Bank account., , 2018-19
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138, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution:, 12% Debentures Account, Dr., , Cr., , Date, , Particulars, , 2017, Mar.31, , Bank, , J.F., , Amount, (Rs), 4,00,000, , Date, 2016, Apr.01, , Particulars, , J.F., , Balance b/d, , Amount, (Rs), 4,00,000, , 4,00,000, , 4,00,000, , 12% Debenture Sinking Fund Account, Dr., Date, , Cr., Particulars, , J.F., , Amount, (Rs), , 2017, , Date, , Particulars, , J.F., , Amount, (Rs), , 2017, , Mar.31 General Reserve, , 4,28,000 Apr.01 Balance b/d, , 3,00,000, , 2017, Mar.31 Statement of, profit and loss, Mar.31 Interest on, Debenture, Sinking Fund, Investment, Mar.31 Debenture Fund, Investment, , 60,000, 40,000, , 28,000, , 4,28,000, , 4,28,000, , 12% Debenture Sinking Fund Investment Account, Dr., Date, 2016, Apr.01, Mar.31, , Cr., Particulars, , Balance b/d, To Debenture, Sinking Fund, (Profit Transfers), , J.F., , Amount, (Rs), 3,00,000, 28,000, , Date, 2017, Mar.31, , 3,28,000, , 2018-19, , Particulars, , Bank, , J.F., , Amount, (Rs), 3,28,000, , 3,28,000
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Issue and Redemption of Debentures, , 139, , Bank Account, Dr., , Cr., , Date, 2016, Apr.1, , Mar.31, , Particulars, , J.F., , Amount, (Rs), , Date, , 2017, 3,00,000 Mar.31, , Balance b/d, balance, includes Rs 40,000,, interest @ 10% on, Rs 4,00,000 ), 12% Debentures, Sinking Fund, Investment, , Particulars, , J.F., , 12% Debentures, Balance c/d, , Amount, (Rs), 4,00,000, 2,28,000, , 3,28,000, , 6,28,000, , 6,28,000, , Illustration 32, The following balances stood as on 31 March, 2017 in the books of a Company:, 12% Debentures, Rs 10,00,000, Debenture Redemption Fund, Rs 10,00,360, Debenture Redemption Fund Investments represented by:, Rs 4,00,000, 9% Loan, Rs 3,80,000, Rs 7,00,000, 8% Govt. Paper, Rs 6,20,360, 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 also redeemed, accordingly. Show the necessary ledger accounts., Solution:, 12% Debentures Account, Dr., Date, 2017, March 31, , Cr., Particulars, Bank, , J.F., , Amount, (Rs), , Date, , 10,00,000 2017, 10,00,000 March 31, , 2018-19, , Particulars, Balance b/d, , J.F., , Amount, (Rs), 10,00,000, 10,00,000
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140, , Accountancy : Company Accounts and Analysis of Financial Statements, , Debenture Redemption Fund Account, Dr., , Cr., , Date, 2017, , Particulars, , J.F., , General Reserve, , Amount, (Rs), , Date, , 10,30,000 2017, , March 31, , Particulars, , J.F., , balance b/d, , Amount, (Rs), 10,00,360, , March 31 Debenture, , 29,640, , Redemption Fund, Investment, 10,30,000, , 10,30,000, , Debenture Redemption Fund Investment Account, Dr., , Cr., , Date, 2017, March 31, March 31, March 31, , Particulars, , J.F., , Balance b/d, 9% Loan, 8% Govt.Paper, Debenture, Redemption, Fund, , Amount, (Rs), , Date, , Particulars, , 2017, Bank (9% Loan ), 3,80,000 March 31 Bank, 6,20,360 March 31 (8% Govt.Paper), 29,640, , 10,30,000, , J.F., , Amount, (Rs), 4,00,000, 6,30,000, , 10,30,000, , Bank Account, Dr., , Cr., , Date, 2017, , Particulars, , J.F., , Amount, (Rs), , To Debenture, , Date, 2017, , March 31 Redemption Fund, , Particulars, , J.F. Amount, (Rs), By 12% Debentures, 10,00,000, , March 31, , Investment:, , By Balance c/d, , 9% Loan, , 4,00,000, , 8% Govt. Paper, , 6,30,000, 10,30,000, , Note: The Bank Balance has not been given in the question., , 2018-19, , 30,000, , 10,30,000
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Issue and Redemption of Debentures, , 141, , Do it Yourself, 1., , X Ltd. decides to redeem 8,000, 10% debentures of Rs 100 each on April 1,, 2017 at a premium of 5%. The company has a surplus of Rs 9,00,000 in the, statement of profit and loss. The company closes its books on December 31, every year. What journal entries the company will be recording to redeem the, above debentures ?, , 2., , G Ltd. issued 5,00,000, 12% debentures of Rs 100 each on April 1, 2013, redeemable at par on July 1, 2017. The company received applications for, 6,00,000 debentures and the allotment was made to all the applicants on, pro-rata basis. The debentures were redeemed on due date. How much amount, of Debenture Redemption Reserve is to be created before the redemption is, carried out? Also record necessary journal entries regarding issue and, redemption of debenture. Ignore tax deducted at source., , Terms Introduced in the Chapter, 1., 2., 3., 4., 5., 6., 7., 8., 9., 10., 11., 12., 13., , Debenture, Bond, Mortgaged Debenture, Perpetual Debenture, Zero Coupon Rate Debenture, Specific Coupon Rate Debenture, Registered Debenture, Bearer Debenture, Charge, Fixed Charge, Floating Charge, First Charge, Maturity Date, , 14., 15., 16., 17., 18., 19., 20., 21., 22., 23., 24., 25., 26., , Principal, Discount/Loss on Issue of Debenture, Purchase Consideration, Redemption of Debenture, Draw of Lots, Own Debentures, Redemption out of Capital, Redemption out of Profits, Redemption of Convertible Debenture, Debentures Sinking Fund, Collateral Security, Second Charge, Purchase of Debenture from Open, Market, , Summary, Debenture: Debenture is the acknowledgements of debt. It is a loan capital raised by the, company from general public. A person/holder of such a written acknowledgement is called, ‘debenture holder’., Bond: Bond is similar to debenture in terms of contents and texture. The only difference is, with respect of issue condition, i.e, bonds can be issued without pre-determined rate of, interest as it is in case of deep discount bonds., Charge: Charge is an incumbrance to meet the obligation under trust deed on certain, assets which company agrees to mortgage either by way of first or second charge. First, charge implies the priority in repayment of loan. Those who hold first charge against any, , 2018-19
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142, , Accountancy : Company Accounts and Analysis of Financial Statements, , specific asset will realise their claim from the net realisable value of such assets. Any, amount of surplus from such assets given under first charge will be utilised for setting the, claims for holder of second charge., Types of Debenture: Debentures are of various types such as: secured and unsecured, debentures redeemable and perpetual debentures, convertible and non-convertible, debentures, zero coupon rate and specific rate, registered and bearer debentures., Issue of Debenture: Debentures are said to be issued at par when the amount to be collected, on them is equal to their nominal or face value. If the issue price is more than nominal or, face value, it is said to be issued at a premium. If the issue price is less than the nominal, or face value, it is said to be issued on discount. The amount received as premium is, credited to ‘securities premium account’ whereas amount of discount allowed is debited to, “loss/discount on issue” and is written-off over the years, Issue of Debentures for consideration other than Cash: Sometimes debentures can be, issued to vendor or suppliers of patents, copyrights and for transfer of intellectual property, rights on preferential basis without receiving money in cash., Purchase Consideration: Purchase consideration is amount paid by purchasing company, in consideration for purchase of assets/business firm, another enterprise/vendor., Collateral Security: Any security in addition to primary security is called ‘collateral security’., Redemption of Debenture: Means discharge of liability on account of debenture/bond by, repayment made to debenture holders Normally, the redemption takes place on the expiry, of period for which they have been issued, depending upon the terms and conditions of, issue., , Questions for Practice, Short Answer Questions, 1., , What is meant by a Debenture?, , 2., , What does a Bearer Debenture mean?, , 3., , State the meaning of ‘Debentures issued as a collateral security’., , 4., , What is meant by ‘Issue of debentures for consideration other than cash’?, , 5., , What is meant by Issue of debenture at discount and redeemable at premium?, , 6., , What is ‘Capital Reserve’?, , 7., , What is meant by a ‘Irredeemable Debenture’?, , 8., 9., , What is a ‘Convertible Debenture’?, What is meant by ‘Mortgaged Debentures’?, , 10., , What is discount on issue of debentures?, , 11., , What is meant by ‘Premium on Redemption of Debentures’?, , 12., , How debentures are different from shares? Give two points., , 13., , Name the head under which ‘discount on issue of debentures’ appears in the, balance sheet of a company., , 2018-19
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Issue and Redemption of Debentures, , 143, , 14., , What is meant by redemption of debentures?, , 15., , Can the company purchase its own debentures?, , 16., , What is meant by redemption of debentures by conversion?, , 17., , How would you deal with ‘Premium on Redemption of Debentures?, , 18., , What is meant by ‘Redemption out of Capital?, , 19., , What is meant by redemption of debentures by ‘Purchase in the Open Market’?, , 20., , Under which head is the ‘Debenture Redemption Reserve’ shown in the balance, sheet., , Long Answer Questions, 1., , Explain the different types of debentures?, , 2., , Distinguish between a debenture and a share. Why debenture is known as loan, capital? Explain., , 3., , Describe the meaning of ‘Debenture Issued as Collateral Securities’. What, accounting treatment is given to the issue of debentures in the books of accounts?, , 4., , How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How, will you deal with the ‘discount in issue of debentures’ when the debentures are to, be redeemed in instalments?, , 5., , Explain the different terms for the issue of debentures with reference to their, redemption., , 6., , Differentiate between redemption of debentures out of capital and out of profits., , 7., , Explain the guidelines of SEBI for creating Debenture Redemption Reserve., , 8., , Describe the steps for creating Sinking Fund for redemption of debentures., , 9., , Can a company purchase its own debentures in the open market? Explain., , 10., , What is meant by conversion of debentures? Describe the method of such a, conversion., , Numerical Questions, 1., , G. Ltd. issued 75,00,000, 6% debentures of Rs 50 each at par payable Rs 15 on, application and Rs 35 on allotment, redeemable at par after 7 years from the date, of issue of debentures. Record necessary entries in the books of Company., , 2., , Y. Ltd. issued 2,000, 6% debentures of Rs 100 each payable as follows: Rs 25 on, application; Rs 50 on allotment and Rs 25 on first and final call., , 3., , A. Ltd. issued 10,000, 10% debentures of Rs 100 each at a premium of 5% payable, as follows:, Rs 10 on Application;, Rs 20 along with premium on allotment and balance on first and final call., Record necessary Journal Entries., , 2018-19
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144, , Accountancy : Company Accounts and Analysis of Financial Statements, , 4., , A. Ltd. issued 90,00,000, 9% debenture of Rs 50 each at a discount of 8%,, redeemable at par any time after 9 years Record necessary entries in the books of, A. Ltd., , 5., , A. Ltd. issued 4,000, 9% debentures of Rs 100 each on the following terms:, Rs 20 on Application;, Rs 20 on Allotment;, Rs 30 on First call; and, Rs 30 on Final call., The public applied for 4,800 debentures. Applications for 3,600 debentures were, accepted in full. Applications for 800 Debentures were allotted 400 debentures, and applications for 400 Debentures were rejected., , 6., , T. Ltd. offered 2,00,000, 8% debenture of Rs 500 each on June 30, 2014 at a, premium of 10% payable as Rs 200 on application (including premium) and balance, on allotment, redeemable at par after 8 years But application are received for, 3,00,000 debentures and the allotment is made on pro-rata basis. All the money, due on application and allotment is received. Record necessary entries regarding, issue of debentures., , 7., , X. Ltd. invites application for the issue of 10,000, 14% debentures of Rs 100 each, payable as to Rs 20 on application, Rs 60 on allotment and the balance on call., The company receives applications for 13,500 debentures, out of which applications, for 8,000 debentures are allotted in full, applications for 5000 debentures were, alloted 40% of received application, and the remaining applications were rejected., The surplus money on partially allotted applications is utilised towards allotment., All the sums due are duly received., , 8., , R. Ltd. offered 20,00,000, 10% debentures of Rs 200 each at a discount of 7%, redeemable at premium of 8% after 9 years Record necessary entries in the books, of R. Ltd., , 9., , M. Ltd. took over assets of Rs 9,00,00,000 and liabilities of Rs 70,00,000 of S.Ltd., and issued 8% debentures of Rs 100 each. Record necessary entries in the books, of M. Ltd., , 10., , B. Ltd. purchased assets of the book value of Rs 4,00,000 and took over the liability, of Rs 50,000 from Mohan Bros. It was agreed that the purchase consideration,, settled at Rs. 3,80,000, be paid by issuing debentures of Rs 100 each., What Journal entries will be made in the following three cases, if debentures are, issued: (a) at par; (b) at discount; (c) at premium of 10%? It was agreed that any, fraction of debentures be paid in cash., (Note: Goodwill Rs 30,000), , 2018-19
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Issue and Redemption of Debentures, , 145, , 11., , X. Ltd. purchased a Machinery from Y. Ltd. at an agreed purchase consideration, of Rs 4,40,000 to be satisfied by the issue of 12% debentures of Rs 100 each at a, premium of Rs 10 per debenture. Journalise the transactions., , 12., , X. Ltd. issued 15,000, 10% debentures of Rs 100 each. Give journal entries and, present it in the balance sheet in each of the following cases:, (i), (ii), (iii), (iv), , 13., , The debentures are issued at a premium of 10%;, The debentures are issued at a discount of 5%;, The debentures are issued as a collateral security to bank against a loan of, Rs 12,00,000; and, The debentures are issued to a supplier of machinery costing Rs 13,50,000., , Journalise the following:, (i) A debenture issued at Rs 95, repayable at Rs 100;, (ii) A debenture issued at Rs 95, repayable at Rs 105; and, (iii) A debenture issued at Rs 100, repayable at Rs 105;, The face value of debenture in each of the above cases is Rs 100., , 14., , A. Ltd. issued 50,00,000, 8% debentures of Rs 100 at a discount of 6% on April 01,, 2009, redeemable at premium of 4% by draw of lots as under:, 20,00,000 debentures on March, 2011, 10,00,000 debentures on March, 2013, 20,00,000 debentures on March, 2014., Compute the amount of discount to be written-off in each year till debentures are, paid. Also prepare discount/loss on issue of debenture account., , 15., , A company issues the following debentures:, (i) 10,000, 12% debentures of Rs 100 each at par but redeemable at premium of, 5% after 5 years;, (ii) 10,000, 12% debentures of Rs 100 each at a discount of 10% but redeemable, at par after 5 years;, (iii) 5,000, 12% debentures of Rs 1000 each at a premium of 5% but redeemable, at par after 5 years;, (iv) 1,000, 12% debentures of Rs 100 each issued to a supplier of machinery, costing Rs 95,000. The debentures are repayable after 5 years; and, (v) 300, 12% debentures of Rs 100 each as a collateral security to a bank which, has advanced a loan of Rs 25,000 to the company for a period of 5 years, Pass the journal entries to record the: (a) issue of debentures; and (b), repayment of debentures after the given period., , 16., , A company issued debentures of the face value of Rs,5,00,000 at a discount of 6%, on April 01, 2012. These debentures are redeemable by annual drawings of, Rs,1,00,000 made on March 31 each year. The directors decided to write-off discount, based on the debentures outstanding each year., Calculate the amount of discount to be written-off each year. Give journal entries, also., , 2018-19
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146, 17., , Accountancy : Company Accounts and Analysis of Financial Statements, A company issued 10% debentures of the face value of Rs.1,20,000 at a discount, of 6% on April 01, 2011. The debentures are payable by annual drawings of Rs, 40,000 commencing from the end of third year., How will you deal with discount on debentures?, Show the discount on debentures account in the company ledger for the period of, duration of debentures. Assume accounts are closed on March 31 every year., , 18., , B. Ltd. issued debentures at 94% for Rs 4,00,000 on April 01, 2011 repayable by, five equal drawings of Rs 80,000 each. The company prepares its final accounts on, March 31 every year., Indicate the amount of discount to be written-off every accounting year assuming, that the company decides to write-off the debentures discount during the life of, debentures. (Amount to be written-off: 2012 Rs 8,000; 2013 Rs 6,400; 2014, Rs 4,800; 2015 Rs 2,000; 2016 Rs 1,600)., , 19., , B. Ltd. issued 1,000, 12% debentures of Rs 100 each on April 01, 2014 at a discount, of 5% redeemable at a premium of 10%., Give journal entries relating to the issue of debentures and debentures interest, for the period ending March 31, 2015 assuming that interest is paid half-yearly on, September 30 and March 31 and tax deducted at source is 10%., , 20., , What journal entries will be made in the following cases when company redeems, debentures at the expiry of period by serving the notice: (a) when debentures were, issued at par with a condition to redeem them at premium; (b) when debentures, were issued at premium with a condition to redeem at par; and (c) when debentures, were issued at discount with a condition to redeem them at premium?, , 21., , On April 01, 2012, X. Ltd. issues 5,000, 8% debentures of Rs 100 each repayable at, par at the end of three years It has been decided to set up a cumulative sinking, fund for the purpose of their redemption. The investments are expected to realise, 4% net. The Sinking Fund Table shows that Rs 0.320348 amounts to one rupee, @4% per annum in three years. On March 31, 2015 the balance at Bank was Rs, 2,42,360 and the investments realised Rs 3,25,000. The debentures were paid off., Give journal entries and show ledger account., (Answer: Loss on sale of Investment Rs 2,246), , 22., , On April 01, 2014 a company issued 15% debentures of Rs 10,00,000 at par. The, debentures were redeemable at par after three years from the date of Issue. A, sinking fund was set up to raise funds for redemption of debentures. The amount, for the purpose was invested in 6% Government securities of Rs 100 each available, at par. The sinking fund table shows that if investments earn 6% per annum, to, get Re.1 at the end of 3 years, one has to invest Rs 0.31411 every year together, with interest that will be earned. On March 31, 2017, all the Government securities, were sold at a total loss of Rs 6,000 and the debentures were redeemed at par., Prepare Debentures Account Sinking Fund Account, Sinking Fund Investment, Account and Interest on Sinking Fund Investment Company closes its books of, accounts every year on March 31., , 2018-19
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Issue and Redemption of Debentures, 23., , 24., , 25., , 147, , On April 01, 2016 the following balances appeared in the books of Z. Ltd.:, Rs, 6% Debentures, 1,00,000, Debentures Redemption Reserve Fund, 80,000, D.R. Reserve Fund Investments, 80,000, The investments consisted of 4% Government securities of the face value of Rs, 90,000., The annual instalment was Rs 16,400. On March 31, 2017, the balance at Bank, was Rs 26,000 (after receipt of interest on D.R. Reserve Fund Investment)., Investments were realised at 92% and the debentures were redeemed. The interest, for the year had already been paid., Show the ledger accounts affecting redemption., The following balances appeared in the books of A. Ltd. on April 01, 2017, Rs, 12% Debentures, 4,00,000, Debentures Redemption Fund, 3,60,000, Debentures Redemption Fund Investment, 3,60,000, Securities Premium, 30,000, Bank Balance, 1,00,000, On April 01, 2017, the company redeemed all the debentures at 105 per cent out of, funds raised by selling all the investments at Rs 3,48,000. Prepare the necessary, ledger accounts., The following balances appeared in the books of Z. Ltd. on April 01, 2016, Rs, 12% Debentures, 1,50,000, Debentures Redemption Fund, 1,25,000, Debentures Redemption Fund Investment, 1,25,000, (Represented by Rs 1,47,500, 3% Govt. Securities, 1,25,000, The annual instalment added to the fund is Rs 20,575. On March 31, 2017, the, Bank balance after the receipt of interest on the investment was Rs 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 2016–17., (Answer: Loss Rs 2,575), , 26., , What entries for the redemption of debentures will be done when : (a) debentures, are redeemed by annual drawings out of profits; (b) debentures are redeemed by, drawing a lot out of capital; and (c) debentures are redeemed by purchasing them, in the open market when sinking fund for the redemption of debentures is not, maintained – (i) when out of profit, and (ii) when out of capital?, , 27., , A. Ltd. Company issued Rs. 5,00,000 debentures at a discount of 5% repayable at, par by annual drawings of Rs 1,00,000., Make the necessary ledger accounts in the books of the company for the first year., , 2018-19
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148, 28., , Accountancy : Company Accounts and Analysis of Financial Statements, X. Ltd. issued 5,000, 15% debentures of Rs 100 each on April 01, 2013 at a discount, of 10%, redeemable at a premium of 10% in equal annual drawings in 4 years out, of capital., Give journal entries both at the time of issue and redemption of debentures., (Ignore the treatment of loss on issue of debentures and interest)., , 29., , Z. Ltd. issued 2,000, 14% debentures of Rs 100 each on April 01, 2013 at a discount, of 10%, redeemable at a premium of 10% in equal annual drawings in 4 years out, of profits., Give journal entries both at the time of issue and redemption of debentures., (Ignore the treatment of loss on issue of debentures and interest)., , 30., , A. Ltd. purchased its own debentures of the face value of Rs 2,00,000 from the, open market for immediate cancellation at Rs 92. Record the journal entries., , 31., , X. Ltd. redeemed 1,000, 12% debentures of Rs 50 each by converting them into, 15% New Debentures of Rs 100 each. Journalise., , 32., , On April 01, 2014, a company made an issue of 5,000, 8% debentures of Rs 100, each at Rs 94 per debentures. The terms of issue provided for the redemption of, 1,000 debenture every year starting from March 31, 2016 either by purchase from, open market or by converting them into Equity shares of Rs 10 each at a premium, of Rs 2.50 per share. On March 31, 2016, the company redeemed 1,000 debentures, by converting them into equity shares. Give the necessary journal entries., , Answers to Test your Understanding, Test your Understanding – I, 1. False,, 2. True,, 3. False,, 4. True,, 8. True, 9. False, 10. False, 11. False., , 5. True,, , 6. False,, , 7. False,, , Test your Understanding – II, 1 (c),, 11 (c),, , 2 (b),, , 3 (a),, , 12 (b),, , 4 (a),, , 13 (a),, , 5 (b),, , 14 (c),, , 6 (c),, , 7 (b),, , 8 (b),, , 9 (a),, , 10 (c),, , 15 (c)., , Test your Understanding – III, (I) Vendors Account, (2) Surplus i.e, Balance in Statement of Profit and Loss (3) Debenture, Redemption Reserve Account, (4) Own Debentures Account, (5) Statement of Profit, and Loss., (II) (1) Debenture Account, (2) Sinking Fund Account, (3) General Reserve Account,, (4) Sinking Fund Account, (5) Loss on Issue of Debentures Account., , 2018-19
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Financial Statements of a Company, , 3, , H, , LEARNING OBJECTIVES, After studying this chapter,, you will be able to :, • explain the nature and, objectives of financial, statements, of, a, company;, • describe the form and, content of Statement of, Profit and Loss of a, company as per, schedule III;, • describe the form and, content of balance sheet, of a company as per, schedule III;, • explain the significance, and limitations of, financial statements;, and, • prepare the financial, statements., , aving understood how a company raises its, capital, we have to learn the nature, objectives, and types of financial statements it has to prepare, including their contents, format, uses and, limitations. The financial statements are the end, products of accounting process. They are prepared, following the consistent accounting concepts,, principles, procedures and also the legal, environment in which the business organisations, operate. These statements are the outcome of the, summarising process of accounting and are,, therefore, the sources of information on the basis of, which conclusions are drawn about the profitability, and the financial position of a company. Hence, they, need to be arranged in a proper form with suitable, contents so that the shareholders and other users, of financial statements can easily understand and, use them in their economic decisions in a meaningful, way., 3.1, , Meaning of Financial Statements, , Financial statements are the basic and formal annual, reports through which the corporate management, communicates financial information to its owners, and various other external parties which include, investors, tax authorities, government, employees,, etc. These normally refer to: (a) the balance sheet, (position statement) as at the end of accounting, period, and (b) the statement of profit and loss of a, company. Now-a-days, the cash flow statement is, also taken as an integral component of the financial, statements of a company., , 2018-19
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150, , 3.2, , Accountancy : Company Accounts and Analysis of Financial Statements, , Nature of Financial Statements, , The chronologically recorded facts about events expressed in monetary terms, for a defined period of time are the basis for the preparation of periodical financial, statements which reveal the financial position as on a date and the financial, results obtained during a period. The American Institute of Certified Public, Accountants states the nature of financial statements as, “the statements, prepared for the purpose of presenting a periodical review of report on progress, by the management and deal with the status of investment in the business and, the results achieved during the period under review. They reflect a combination, of recorded facts, accounting principles and personal judgements”., The following points explain the nature of financial statements:, 1., , 2., , 3., , Recorded Facts: Financial statements are prepared on the basis of, facts in the form of cost data recorded in accounting books. The original, cost or historical cost is the basis of recording transactions. The figures, of various accounts such as cash in hand, cash at bank, trade, receivables, fixed assets, etc., are taken as per the figures recorded in, the accounting books. The assets purchased at different times and at, different prices are put together and shown at costs. As these are not, based on market prices, the financial statements do not show current, financial condition of the concern., Accounting Conventions: Certain accounting conventions are followed, while preparing financial statements. The convention of valuing, inventory at cost or market price, whichever is lower, is followed. The, valuing of assets at cost less depreciation principle for balance sheet, purposes is followed. The convention of materiality is followed in dealing, with small items like pencils, pens, postage stamps, etc. These items, are treated as expenditure in the year in which they are purchased, even though they are assets in nature. The stationery is valued at cost, and not on the principle of cost or market price, whichever is less. The, use of accounting conventions makes financial statements comparable,, simple and realistic., Postulates: Financial statements are prepared on certain basic, assumptions (pre-requisites) known as postulates such as going, concern postulate, money measurement postulate, realisation, postulate, etc. Going concern postulate assumes that the enterprise is, treated as a going concern and exists for a longer period of time. So the, assets are shown on historical cost basis. Money measurement, postulate assumes that the value of money will remain the same in, different periods. Though there is drastic change in purchasing power, of money, the assets purchased at different times will be shown at the, , 2018-19
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Financial Statements of a Company, , 151, , amount paid for them. While, preparing statement of profit and loss, the revenue is included in the sales of the year in which the sale was, undertaken even though the sale price may be received over a number, of years. The assumption is known as realisation postulate., 4. Personal Judgements: Under more than one circumstance, facts and, figures presented through financial statements are based on personal, opinion, estimates and judgements. The depreciation is provided taking, into consideration the useful economic life of fixed assets. Provisions, for doubtful debts are made on estimates and personal judgements., In valuing inventory, cost or market value, whichever is less is being, followed. While deciding either cost of inventory or market value of, inventory, many personal judgements are to be made based on certain, considerations. Personal opinion, judgements and estimates are made, while preparing the financial statements to avoid any possibility of, over statement of assets and liabilities, income and expenditure,, keeping in mind the convention of conservatism., Thus, financial statements are the summarised reports of recorded facts and, are prepared the following accounting concepts, conventions and requirements, of Law., 3.3, , Objectives of Financial Statements, , Financial statements are the basic sources of information to the shareholders, and other external parties for understanding the profitability and financial, position of any business concern. They provide information about the results of, the business concern during a specified period of time in terms of assets and, liabilities, which provide the basis for taking decisions. Thus, the primary, objective of financial statements is to assist the users in their decision-making., The specific objectives include the following:, 1. To provide information about economic resources and obligations of, a business: They are prepared to provide adequate, reliable and, periodical information about economic resources and obligations of a, business firm to investors and other external parties who have limited, authority, ability or resources to obtain information., 2. To provide information about the earning capacity of the business:, They are to provide useful financial information which can gainfully, be utilised to predict, compare and evaluate the business firm’s earning, capacity., 3. To provide information about cash flows: They are to provide, information useful to investors and creditors for predicting, comparing, and evaluating, potential cash flows in terms of amount, timing and, related uncertainties., , 2018-19
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152, , 3.4, , Accountancy : Company Accounts and Analysis of Financial Statements, , 4., , To judge effectiveness of management: They supply information, useful for judging management’s ability to utilise the resources of a, business effectively., , 5., , Information about activities of business affecting the society: They, have to report the activities of the business organisation affecting the, society, which can be determined and described or measured and which, are important in its social environment., , 6., , Disclosing accounting policies: These reports have to provide the, significant policies, concepts followed in the process of accounting and, changes taken up in them during the year to understand these, statements in a better way., , Types of Financial Statements, , The financial statements generally include two statements: balance sheet and, statement of profit and loss which are required for external reporting and also, for internal needs of the management like planning, decision-making and, control. Apart from these, there is also a need to know about movements of, funds and changes in the financial position of the company. For this purpose,, a statement of changes in financial position of the company or a cash flow, statement is prepard., Every company registered under The Companies Act 2013 shall prepare, its balance sheet, statement of profit and loss and notes to account thereto in, accordance with the manner prescribed in the revised Schedule III to the, Companies Act, 2013 to harmonise the disclosure requirement with the, accounting standards and to converge with new reforms. With regard to this,, the Ministry of Corporate Affairs (MCA) had prescribed a (Revised) Schedule, VI to the Companies Act, 1956 (vide Notification dated 28.02.2011). It is, applied to the financial statements prepared for all financial periods beginning, on or after April 01, 2011 by the Indian Companies., , 2018-19
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Financial Statements of a Company, , 153, , Balance Sheet as at 31st March, 20....., Particulars, , Note No., , Figure as, at the end, of Current, reporting, period, , I. EQUITY AND LIABILITIES, 1) Shareholder’s Funds, (a) Share Capital, (b) Reserves and 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, II. ASSETS, 1) Non-Current Assets, (a) Fixed assets, (i) Tangible assets, (ii) Intangible assets, (iii) Capital work-in-progress, (iv) Intangible assets under development, (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) Inventories, (c) Trade receivables, (d) Cash and cash equivalents, (e) Short term loans and advances, (f) Other current assets, Total, See accompanying notes to the financial statements, NOTES:, Exhibit. 3.1: Vertical Form of Balance Sheet, , 2018-19, , Figure as, at the end, of Previous, reporting, period
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154, , Accountancy : Company Accounts and Analysis of Financial Statements, , Important Features of Presentation, 1., 2., , 3., 4., 5., 6., 7., , It applies to all Indian companies preparing financial statement, commencing on or after April 01, 2011., It does not apply to (i) Insurance or Banking Company, (ii) Company for, which a form of balance sheet or income statement is specified under, any other Act., Accounting standards shall prevail over Schedule III of the Companies, Act, 2013., Disclosure on the face of the financial statements or in the notes are, essential and mandatory., Terms in the revised Schedule III will carry the meaning as defined by, the applicable accounting standards., Balance to be maintained between excessive details that may not assist, users of financial statements and not providing important information., Current and non-current bifurcation of assets and liabilities is applicable., , Box 1, Rounding-off Rule for figures in the Presentation of Financial Statements, Rounding off of figures to be reported in the financial statements is based on the size of, turnover:, 1. Turnover < Rs.100 crore: Nearest hundreds, thousands, lakhs or millions or, decimal thereof;, 2. Turnover > Rs.100 crore: Nearest lakhs or millions or decimal thereof;, , 8., 9., 10., 11., 12., , Rounding off requirements is mandatory (refer box 1)., Vertical format for presentation of financial statement is prescribed (refer, Exhibit 3.1)., Debit balance in the statement of profit and loss to be disclosed as negative, figure under the head “Surplus”., Mandatory disclosure for share application money pending allotment., ‘Sundry Debtors’ and ‘Sundry Creditors’ replaced by terms ‘Trade, Receivables’ and ‘Trade Payables’., , Shareholders Fund, The shareholders’ funds are sub-classified on the face of the balance sheet., a) Share Capital, b) Reserves and Surplus, c) Money received against Share Warrants, , 2018-19
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Financial Statements of a Company, , 155, , Share Capital, Disclosures relating to share capital are to be given in notes to accounts. The, following additions/modifications are significant:, a) For each class of shares, recognition of the number of shares outstanding, at the beginning and at the end of the reporting period is required., b) The rights, preferences and restrictions attached to each class of shares, including restrictions on the distribution of dividends and repayment of, capital., c) In order to bring clarity regarding the identity of ultimate owners of the, company:, i), Disclosure of shares in respect of each class in the company held, by its holding company or its ultimate holding company including, shares held by subsidiaries or associates of holding company or, the ultimate holding company in aggregate., ii) Disclosure of shares in the company held by each shareholder, holding more than 5% shares specifying the number of shares held., iii) Disclosure of the following for the period of 5 years immediately, preceding the date of the balance sheet:, — Aggregate number and class of shares allotted as fully paid up, pursuant to contracts without payment being received in cash., — Aggregate number and class of shares allotted as fully paid up, by way of bonus shares., — Aggregate number and class of shares bought back., This may be noted that the information of shareholders funds are presented, on the face of financial statements limited only to broad and significant items. Details, are given in Notes to Accounts., d) For each class of share capital:, i) The number and amount of share authorised., ii) The number of shares issued, subscibed, fully paid and subscribed, but not fully paid., iii) Par value per share., iv) Reconciliation of the number of shares outstanding at the beginning, and end of the accounting period., v) Rights, preferences and restrictions attaching each class of shares, including restrictions on the distribution of dividends and, repayment of capital., vi) Aggregate number of shares with respect to each class in the, company held by its holding company, its ultimate holding, company including shares held by or by subsidiaries or associates, of the holding company or the ultimate holding company., , 2018-19
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156, , Accountancy : Company Accounts and Analysis of Financial Statements, , vii) Shares reserved for issue under options and contracts/, commitments for the sale of shares/disinvestment, including terms, and amount., viii) For a period of 5 years immediately proceeding the date at which, balance sheet in prepared for:, (a) Shares reserved under contracts/commitments., (b) Number and class of shares bought back., (c) Number and class of shares allotted for consideration other, than cash and bonus shares., ix) Terms of any securities convertible into equity/preference shares, issued along with earliest date of conversion in descending order,, starting from the farthest such date., x) Calls unpaid (aggregate)., xi) Forfeited shares (amout originally paid up)., Reserve and Surplus, Reserves and Surplus are required to be classified as:, i) Capital Reserve, ii) Capital Redemption Reserve, iii) Securities Premium Reserve, iv) Debenture Redemption Reserve, v) Revaluation Reserve, vi) Share Options Outstanding Account, vii) Other Reserves (Specifying nature and purpose), viii) Surplus: Balance in statement of profit and loss; disclosing allocations, and Appropriation such as dividend, bonus shares, transfer to/from, reserve, etc., Significant additions/modifications regarding disclosure of reserve and surplus, are as follows:, a) A reserve specifically represented by earmarked investments shall be, termed as “Fund”., b) ‘Debit’ balance of statement of profit and loss shall be shown as a negative, figure under ‘Surplus’ head., c) The balance of “Reserve and Surplus” after adjusting negative balance of, Surplus, if any, shall be shown under “Reserve and Surplus” read even, if the resulting figure is ‘negative’., d) Share options outstanding account has been recognised as a separate, item under ‘Reserve and Surplus’. ICAI’s Guidance Note on Accounting, for Employee share based payments requires a credit balance in the ‘Stock, option outstanding Account’ to be disclosed in balance sheet under, separate heading’ between share capital and reserves and surplus as a, part of shareholders fund., , 2018-19
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Financial Statements of a Company, , 157, , Money Received against share warrants, Money received against share warrants’ to be disclosed as a separate line item, under ‘shareholder’s fund’., Illustration 1, Dinkar Ltd. has an authorised capital of Rs. 50,00,000 divided into equity shares, of Rs. 100 each. The company invited applications for 40,000 shares, applications, for 36,000 shares were received. All calls were made and duly received except, for 500 shares on which the final call of Rs. 20 was not received. The company, forfeited 200 shares on which final call was not received. Show how share capital, will appear in the balance sheet of the company. Also prepare ‘Notes to Accounts’, for the same., Solution:, Books of Dinkar Limited, Balance Sheet as at .......... (Date), Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ funds, a) Share capital, , 1, , Notes to Accounts, Particulars, , Amount, (Rs.), , 35,90,000, , Amount, (Rs.), , 1. Share capital, Authorised share capital, 50,000 equity shares of Rs. 100 each, Issued capital, 40,000 equity shares of Rs. 100 each, Subscirbed and fully paid up capital, 35,500 equity shares of Rs. 100 each, fully paid, Subscirbed but not fully paid-up capital, 300 equity shares of Rs. 100 each fully, called up, Less: Calls-in-arrears (300×20), Add: Share forfeiture A/c (200 shares × Rs. 80), , Amount, (Rs.), , 50,00,000, 40,00,000, , 35,50,000, , 30,000, (6,000), 24,000, 16,000, , 40,000, 35,90,000, , Current and Non-current Classification, The classified balance sheet in terms of current and non-current assets, and current and non-current liabilities have been introduced. The, , 2018-19
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158, , Accountancy : Company Accounts and Analysis of Financial Statements, , criteria for defining current assets and liabilities has been clearly spelled out, with non-current assets and liabilities being the residual items., Current/Non-current distinction, An item is classified as current:, — if it is involved in entity’s operating cycle or,, — is expected to be realised/settled within twelve months or,, — if it is held primarily for trading or,, — is cash and cash equivalent or,, — if entity does not have on unconditional rights to defer settlement of, liability for atleast 12 months after the reporting period,, — Other assets and liabilities are non-current., Illustration 2, Show the following items in the balance sheet of Amba Ltd. as on March 31,, 2017:, Rs., 8% Debentures, Equity share capital, Securities premium, Preliminary expenses, Statement of Profit & Loss (cr.), Discount on issue of 8% debentures, (Amount to be written in next 4 years approx.), Loose tools, Bank balance, Cash in hand, , 10,00,000, 50,00,000, 20,000, 40,000, 1,50,000, 40,000, 20,000, 60,000, 38,000, , Solution:, Books of Amba Ltd., *Balance Sheet as at March 31, 2017, Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus, 2. Non-current Liabilities, a) Long-term borrowings, II. Assets, 1. Non-current assets, a) Other non-current assets, 2. Current assets, a) Inventories, b) Cash and cash equivalents, c) Other current assets, *, , Relevant items only, , 2018-19, , Amount, (Rs.), , 1, , 50,00,000, 1,30,000, , 2, , 10,00,000, , 3, , 30,000, , 4, 5, 6, , 20,000, 98,000, 10,000
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Financial Statements of a Company, , 159, , Notes to Accounts, Particulars, 1. Reserve and surplus, Securities premium, Less: Preliminary expenses, , Amount, (Rs.), , Amount, (Rs.), , (20,000), 1,50,000, , 1,30,000, , 20,000, (40,000), , Statement of profit and loss, 2. Long-term borrowings, 8% debentures, 3. Other non-current assets, Discount on issue of 8% debentures, (¾ of Rs. 40,000), 4. Inventory, Loose tools, 5. Cash and cash equivalents, Bank balance, Cash in hand, 6. Other current assets, Discount on issue of 8% debentures, (¼ of Rs. 40,000), , 10,00,000, 30,000, , 20,000, 60,000, 38,000, , 98,000, 10,000, , Important points:, — Preliminary expenses are to be written-off completely in the year in which, such expenses are incurred. They should be written-off first from, securities premium and the balance if any, from statement of profit &, loss., — Borrowing costs such as discount on issue of debentures could be writtenoff over loan period., Share application money pending allotment, Share application money not exceeding the issued capital and to the extent, non-refundable shall be classified as non-current. It will be shown on this face, of balance sheet as share application money pending allotment., Borrowings, Total borrowings are categorised into long-term borrowings, short-term, borrowings and current maturities to long-term debt., (i) Loans which are repayable in more than twelve months/operating cycle, are classified as long-term borrowings on the face of balance sheet., , 2018-19
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160, , Accountancy : Company Accounts and Analysis of Financial Statements, , (ii), , Loans repayable on demand or whose original tenure is not more than, twelve months/operating cycle are classified as short-term borrowings, on the face of balance sheet., (iii) Current maturities to long-term loan include amount repayable within, twelve months/operating cycle under other current liabilities with Note, to Account., Deferred tax assets/liabilities are always non-current. This is in accordance, to IAS-I., Trade payables, Sundry creditors have been replaced with the term Trade payables and are, classified as current and non-current. Trade payables to be settled beyond 12, months from the date of balance sheet or beyond the operating cycle are classified, under “other long-term liabilities” with Note to Account. For example, purchase, of goods and services in normal course of business. The balance of trade payables, are classified as current liabilities on the face of balance sheet., Provisions, The amount of provision settled within 12 months from balance sheet date or, within operating cycle period from date of its recognition is classified as short, term provisions and shown under current liabilities on the face of balance sheet., Others are depicted as long-term provisions under non-current liabilities on the, face of balance sheet., Fixed assets, There is no change in the treatment of fixed assets. Both tangible and intangible, assets are non-current. This may also be noted if the useful life of the asset is, less than 12 months, it will still fall under non-current., Investments, Investments are also classified into current and non-current categories., Investments expected to realise within twelve months are considered as current, investments under current assets. Others are classified as non-current, investments under non-current assets. Both are however shown on the face of, the balance sheet., Inventories, All inventories are always treated as current., , 2018-19
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Financial Statements of a Company, , 161, , Trade receivables, Trade receivables realised beyond twelve months from reporting date/operating, cycle starting from the date of their recognition are classified as “Other noncurrent assets” under the head non-current assets with Note to Accounts. For, example, sale of goods or services rendered in normal course of business. Others, are classified as current assets and shown on the face of the balance sheet., Cash and cash equivalent, It is always current however, amounts which qualify as cash and cash equivalents, as per IAS-3 is shown here. The supremacy is accorded to AS over Schedule III,, cash and cash equivalents are to the disclosed in accordance to IAS-3., Illustration 3, Show the following items in the balance sheet of Sunfill Ltd. as at March 31,, 2017:, Particulars, General Reserve (since 31 March 2012), , Amount (Rs.), 5,00,000, , Statement of profit & loss (debit balance) for 2016–17, , (3,00,000), , Solution:, Books of Sunfill Ltd., Balance Sheet as at March 31, 2017, Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, Reserve and surplus, , 1, , Notes to Accounts, Particulars, , 31st March, 2017 (Rs.), , 31st March, 2016 (Rs.), , 2,00,000, , 5,00,000, , Amount, (Rs.), , 1. Reserve and surplus, General Reserve (1 April, 2016), Less: Statement of profit and loss, (Dr. balance), , 5,00,000, (3,00,000), 2,00,000, , 2018-19
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162, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 4, Show the following items in the balance sheet of Avalon Ltd., as at March 31,, 2017:, Rs. in, Lakh, 5, (8), , General Reserve (since 31 March 2016), Statement of Profit & Loss (Debit Balance) for 2016–17, , Solution:, Books of Avalon Ltd., Balance Sheet as at March 31, 2017, Particulars, I. Equity and Liabilities, 1. Shareholders’ Funds, a) Reserve and Surplus, , Note, No., , 31 March, 2017 (Rs.), , 1, , (3,00,000), , Notes to Accounts, Particulars, , Amount, (Rs.), , 1. Reserve and Surplus, i) General reserve (1 April, 2012), ii) Less: Statement of profit and loss, (debit balance), , 5,00,000, (8,00,000), (3,00,000), , Illustration 5, Arushi Ltd. issued 5,000, 10% debentures of Rs. 100 each at par but redeemable, at a premium of 5% after 5 years. Give journal entries and also prepare the, balance sheet of the company., Solution:, Books of Arushi Ltd., Journal, Date Particulars, , L.F., , Bank A/c, Dr., To 10% Debenture Application, and Allotment A/c, (Being application money received), 10% Debenture Application, Dr., and Allotment A/c, Loss on Issue of Debentures A/c, Dr., To 10% Debentures A/c, To Premium on Redemption of, Debentures A/c, (Being debentures issued at par but, redeemable at premium), , 2018-19, , Debit, (Rs.), 5,00,000, , Credit, (Rs.), 5,00,000, , 5,00,000, 25,000, 5,00,000, 25,000
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Financial Statements of a Company, , 163, , Arushi Ltd., Balance Sheet as at ............, Particulars, , Note, No., , I. Equity and Liabilities, 1. Non-current Liabilities, a) Long-term borrowing, b) Other long-term liabilities, Total, II. Assets, 1. Non-current assets, a) Other non-current assets, 2. Current Assets, a) Cash and cash equivalents, b) Other current assets, Total, Notes to Accounts, Particulars, , Amount, (Rs.), , 1, 2, , 5,00,000, 25,000, 5,25,000, , 3, , 20,000, , 4, 5, , 5,00,000, 5,000, 5,25,000, , Amount, (Rs.), , 1. Long-term borrowings, 5,000, 10% debentures of Rs. 100 each, 2. Other long term liabilities, Premium on redemption of debentures A/c, 3. Other non-current assets, Loss on issue of debentures, (4/5th of Rs. 25,000), 4. Cash and cash equivalents, Cash at bank, 5. Other current assets, Loss on issue of debentures, (1/5th of Rs. 25,000, i.e., amount to, be written-off in next 12 months), , 5,00,000, 25,000, 20,000, , 5,00,000, 5,000, , Do it yourself, Classify the following items in the balance sheet of a company under Major, heads and Sub-heads, S. No., 1., 2., 3., 4., 5., 6., 7., 8., , Items, Goodwill, Forfeited shares, Acceptances, Preliminary expenses, Capital reserve, Loans from banks, Investment in shares and, debentures, Interest accrued and due on, debentures, , Major Head Sub-head (if any), , 2018-19
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164, , Accountancy : Company Accounts and Analysis of Financial Statements, 9., 10., 11., 12., 13., 14., 15., 16., 17., 18., 19., 20., 21., 22., 23., , 24., , 25., 26., 27., 28., 29., 30., 31., 32., 33., 34., 35., 36., 37., 38., 39., 40., 41., 42., 43., 44., 45., 46., , Interest accrued but not due on, Secured Loans, Interest accrued but not due on, Unsecured Loans, Interest accrued on Investments, Surplus, Securities Premium Reserve, Loose Tools, Provision for Taxation, Under writing Commission, Bills of Exchange, Unclaimed dividend, Short term loans & advances, Live stock, Calls unpaid/calls in arrears, Uncalled liability on shares partly, paid, Discount allowed on issue of shares, and debentures (if amortised after, 12 months), Discount allowed on issue of shares, and debentures (if amortised within, 12 months), Pre-paid Insurance, Stores and spare parts, Advances from customers, Debentures redemption reserve, Premium on redemption of, debentures, Loss on issue of debentures, Debentures redemption fund, Debentures redemption fund, investment, Vehicles, Sinking fund, Sinking fund investment, Advances to suppliers, Patents, trademarks, design, Calls in advance, Deposits with custom authorities, Arrears of fixed cumulative, dividend, Furniture and fittings, Brokerage on issues of shares, Statement of profit & loss (Dr.), Capital work-in-progress, Provision for doubtful debts, Statement of profit & loss (Cr.), , 2018-19
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Financial Statements of a Company, 47., , 165, , Uncalled liability on partly paid, shares held as investments, Claims against the company not, acknowledged as debt, Capital redemption reserve, Public deposits, Authorised capital, , 48., 49., 50., 51., , Illustration 6, From the given particulars of Shine and Bright Co. Ltd., as at March 31, 2017,, prepare balance sheet in accordance to the Schedule III:, Particulars, Preliminary expenses, Discount on Issue of shares, 10% Debentures, Stock in trade, Cash at bank, Bills receivables, , Amount, Rs., 2,40,000, 20,000, 2,00,000, 1,40,000, 1,35,000, 1,20,000, , Particulars, Goodwill, Loose Tools, Motor vehicles, Provision for tax, , Amount, Rs., 30,000, 12,000, 4,75,000, 16,000, , Solution:, Book of Shine and Bright Ltd., Balance Sheet as at March 31, 2017, Particulars, , Note, No., , I. Equity and Liabilities, 1. Non-current Liabilities, a) Long-term borrowings, 2. Current liabilities, a) Short-term provisions, II. Assets, 1. Non-current assets, a) Fixed assets, Tangible assets, Intangible assets, 2. Other non-current assets*, Current assets, a) Inventories, b) Trade receivables, c) Cash and cash equivalents, , 2018-19, , Figure as, at the end, of current, reporting, period, , 1, , 2,00,000, , 2, , 16,000, , 3, 4, 5, , 4,75,000, 30,000, 2,60,000, , 6, 7, , 1,52,000, 12,000, 1,35,000, , Figure as, at the end, of previous, reporting, period
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166, , Accountancy : Company Accounts and Analysis of Financial Statements, , Notes to Accounts, Particulars, , Amount, (Rs.), , 1. Long-term borrowings:, 10% debentures, 2. Short-term provisions:, Provision for taxation, 3. Fixed assets:, (i) Tangible assets, Motor vehicles, (ii) Intangible assets, Goodwill, 4. Other non-current assets, Preliminary expenses, Discount on issue of debentures, 5. Inventories, Stock in trade, Loose tools, 6. Trade receivables, Bills receivables, 7. Cash & cash equivalents, Cash at bank, *, , 2,00,000, 16,000, , 4,75,000, 30,000, 2,40,000, 20,000, , 2,60,000, , 1,40,000, 12,000, , 1,52,000, 12,000, 1,35,000, , It has been assumed that discount on issue of debentures is not written-off in the next, 12 months of the reporting period., , 3.4.2 Form and content of Statement of Profit and Loss, Statement of Profit and Loss for the year ended ______________, Particulars, , I, II, III, IV, , Note No., , 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, , 2018-19, , Figure as, at the end, of Current, reporting, period, , Figure as, at the end, of Previous, reporting, period
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Financial Statements of a Company, , V, VI, VII, VIII, IX, X, , XI, XII, XIII, XIV, XV, XVI, , 167, , Work-in-progress and stock-in-trade, Employee benefits expense, Finance costs, Depreciation and amortisation expense, Other expenses, Total expenses, Profit before extraordinary items and tax, (III-IV), Exceptional items, Profit before extraordinary items and tax, (V-VI), Extraordinary items, Profit before tax (VII-VIII), Tax expense:, (1) Current tax, (2) Deferred tax, Profit/(Loss) for the period from continuing, operations (IX-X), Profit/(Loss) from discontinuing operations, Tax expense of discontinuing operations, Profit/(Loss) from Discontinuing operations, (after tax) (XII-XIII), Profit/(Loss) for the period (XI + XIV), Earnings per equity share:, (1) Basic, (2) Diluted, Exhibit. 3.2: Form of Statement of Profit and Loss, , The items of statement of profit and loss are discussed as follows:, Revenue from operations, This includes:, (i) Sale of products, (ii) Sale of services, (iii) Other operating revenues, In respect to a finance company, revenue from operational shall include, revenue from interest, dividend and income from other financial services., It may be noted that under each of the above heads shall be disclosed, separately by way of notes to accounts to the extent applicable., 2., Other income, (i) Interest income (in case of a company other than a finance company),, (ii) Dividend income,, (iii) Net gain/loss on sale of investments,, (iv) Other non-operating income (net of expenses directly attributable to, such income)., 1., , 2018-19
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168, , 3., , Accountancy : Company Accounts and Analysis of Financial Statements, , Expense, , Expenses incurred to earn the income shown under various heads as discussed below:, (a) Cost of Materials, , (b) Purchase of Stock-in-trade, (c) Changes in inventories of, finished goods, WIP and, stock-in-trade, (d) Employees benefit expenses, , (e) Finance cost, , (f), , Depreciation, , (g) Other expenses, , It applies to manufacturing companies. It consists of, raw materials and other materials consumed in, manufacturing of goods., It means purchases of goods for the purpose of trading., It is the difference between opening inventory (stock), of finished goods, WIP and stock-in-trade and closing, inventory., Expenses incurred on employees towards salary, wages,, leave encashment, staff welfare, etc., are shown under, this head. Employees benefit expenses may be further, categorised into direct and indirect expenses., It is the expenses towards interest charges during the, year on the borrowings. Only the interest cost is to be, shown under this head. Other financial expenses such, as bank charges are shown under “Other Expenses”., Depreciation is the diminution in the value of fixed, assets whereas amortisation is writing off the amount, relating to intangible assets., All other expenses which do not fall in the above, categories are shown under other expenses. Other, expenses may further be categorised into direct, expenses, indirect expenses and non-operating, expenses., , Illustration 8, From the following particulars, prepare Statement of profit and loss for the year, ending March 2017:, Balances, , Rs., , Plant and Machinery, Land, Depreciation on Plant and Machinery, Purchases (Adjusted), Closing stock, Wages, Sales (Net), Salaries, Bank overdraft, 10% debentures (issued on 1st April, 2016), Equity share capital – shares of Rs. 100 each (fully paid), Preference share capital – 1,000; 6% shares of Rs. 100, each (fully paid), , 10,00,000, 80,000, 2,00,000, 1,00,000, 2,00,000, 1,00,000, 16,00,000, , 2018-19, , Rs., , 1,60,000, 6,74,000, 16,000, 4,00,000, 1,50,000, 1,20,000, , 16,00,000
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Financial Statements of a Company, , 169, , Additional information, (i) Equity dividend @ 10% declared on paid up capital., (ii) Dividend on the preference share capital paid in full., (iii) Rs. 2,00,000 transferred to general reserve., Solution, Statement of Profit and Loss, for the year ending 31st March, 2017, Particulars, , Note, No., , I. Income, Revenue from operations (Sales), , Amount, (Rs.), 10,00,000, , Total, , 10,00,000, , II. Expenses, Cost of materials consumed (Adjusted purchase), Employees benefit expenses, Finance cost, Depreciation and amortisation, Total, Profit before tax (I-II), , 1, , 4,00,000, 2,00,000, 10,000, 16,000, 6,26,000, 3,74,000, , Notes to Accounts, Particulars, Employee Benefit Expenses, (i) Wages, (ii) Salary, , 3.5, , Amount, Rs., , Amount, Rs., , 1,20,000, 80,000, , 2,00,000, , Uses and Importance of Financial Statements, , The users of financial statements include management, investors, shareholders,, creditors, government, bankers, employees and public at large. Financial, statements provide the necessary information about the performance of the, management to these parties interested in the organisation and help in taking, appropriate economic decisions. It may be noted that the financial statements, constitute an integral part of the annual report of the company in addition to, the directors report, auditors report, corporate governance report, and, management discussion and analysis., The various uses and importance of financial statements are as follows:, 1. Report on stewardship function: Financial statements report the, performance of the management to the shareholders. The gaps between, the management performance and ownership expectations can be, understood with the help of financial statements., , 2018-19
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170, , Accountancy : Company Accounts and Analysis of Financial Statements, , 2., , 3., , 4., , 5., , 6., , 7., , 3.6, , Basis for fiscal policies: The fiscal policies, particularly taxation policies, of the government, are related with the financial performance of, corporate undertakings. The financial statements provide basic input, for industrial, taxation and other economic policies of the government., Basis for granting of credit: Corporate undertakings have to borrow, funds from banks and other financial institutions for different purposes., Credit granting institutions take decisions based on the financial, performance of the undertakings. Thus, financial statements form the, basis for granting of credit., Basis for prospective investors: The investors include both short-term, and long-term investors. Their prime considerations in their investment, decisions are security and liquidity of their investment with reasonable, profitability. Financial statements help the investors to assess longterm and short-term solvency as well as the profitability of the concern., Guide to the value of the investment already made: Shareholders of, companies are interested in knowing the status, safety and return on, their investment. They may also need information to take decision, about continuation or discontinuation of their investment in the, business. Financial statements provide information to the shareholders, in taking such important decisions., Aids trade associations in helping their members: Trade associations, may analyse the financial statements for the purpose of providing, service and protection to their members. They may develop standard, ratios and design uniform system of accounts., Helps stock exchanges: Financial statements help the stock exchanges, to understand the extent of transparency in reporting on financial, performance and enables them to call for required information to protect, the interest of investors. The financial statements enable the Stock, brokers to judge the financial position of different concerns and take, decisions about the prices to be quoted., , Limitations of Financial Statements, , Though utmost care is taken in the preparation of the financial statements and, provide detailed information to the users, they suffer from the following, limitations:, 1. Do not reflect current situation: Financial statements are prepared on, the basis of historical cost. Since the purchasing power of money is, changing, the values of assets and liabilities shown in financial, statement do not reflect current market situation., 2. Assets may not realise: Accounting is done on the basis of certain, conventions. Some of the assets may not realise the stated values, if, , 2018-19
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Financial Statements of a Company, , 3., , 4., , 5., , 6., , 7., , 171, , the liquidation is forced on the company. Assets shown in the balance, sheet reflect merely unexpired or unamortised cost., Bias: Financial statements are the outcome of recorded facts, accounting, concepts and conventions used and personal judgements made in, different situations by the accountants. Hence, bias may be observed, in the results, and the financial position depicted in financial statements, may not be realistic., Aggregate information: Financial statements show aggregate, information but not detailed information. Hence, they may not help, the users in decision-making much., Vital information missing: Balance sheet does not disclose information, relating to loss of markets, and cessation of agreements, which have, vital bearing on the enterprise., No qualitative information: Financial statements contain only, monetary information but not qualitative information like industrial, relations, industrial climate, labour relations, quality of work, etc., They are only interim reports: Statement of Profit and Loss discloses, the profit/loss for a specified period. It does not give an idea about the, earning capacity over time similarly, the financial position reflected in, the balance sheet is true at that point of time, the likely change on a, future date is not depicted., Terms Introduced in the Chapter, , 1., 2., 3., 4., 5., , Financial Statements, Statement of profit and loss, Balance Sheet, Cost of Material consumed, Shareholders Funds, , Summary, Financial Statements: Financial statements are the end products of accounting, process, which reveal the financial results of a specified period and financial position, as on a particular date. Financial Statements are prepared and published by, corporate undertakings for the benefit of various stakeholders. These statements, include Statement of profit and loss and balance sheet. The basic objective of, these statements is to provide information required for decision-making by the, management as well as other outsiders who are interested in the affairs of the, undertaking., , 2018-19
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172, , Accountancy : Company Accounts and Analysis of Financial Statements, , Balance Sheet: The balance sheet shows all the assets owned by the concern, all, the obligations or liabilities payable to outsiders or creditors and claims of the, owners on a particular date. It is one of the important statements depicting the, financial position or status or strength of an undertaking., Statement of Profit and Loss: The Statement of profit and loss is prepared for a, specific period to determine the operational results of an undertaking. It is a, statement of revenue earned and the expenses incurred for earning the revenue., It is a performance report showing the changes in income, expenses, profits and, losses as a result of business operations during the year between two balance, sheet dates., Significance of Financial Statements: The users of financial statements include, Shareholders, Investors, Creditors, Lenders, Customers, Management, Government,, etc. Financial statements help all the users in their decision-making process. They, provide data about general purpose needs of these members., Limitations of Financial Statements: Financial statements are not free from limitations., They provide only aggregate information to satisfy the general purpose needs of, the users. They are technical statements understood by only persons having some, accounting knowledge. They reflect historical information but not current situation,, which is essential in any decision making. In addition, one can get idea about the, organisation’s performance in terms of quantitative changes but not in qualitative, terms like labour relations, quality of work, employees satisfaction, etc. The financial, statements are neither complete nor accurate as the flow of income and expenses, are segregated using best judgement apart from accepted concepts. Hence, these, statements need proper analysis before their use in decision-making., , Questions for Practice, Short Answer Questions, 1., , State the meaning of financial statements?, , 2., , What are limitations of financial statements?, , 3., , List any three objectives of financial statements?, , 4., , State the importance of financial statements to :, (i) shareholders, (ii) creditors, (iii) government, (iv) investors, , 2018-19
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Financial Statements of a Company, , 5., , 173, , How will you disclose the following items in the Balance Sheet of a company;, (i), (ii), , Loose tools, Uncalled liability on partly paid-up shares, , (iii), , Debentures redemption reserve, , (iv), , Mastheads and publishing titles, , (v), (vi), (vii), (viii), (ix), (x), , 10% debentures, Proposed dividend, Share forfeited account, Capital redemtion reserve, Mining rights, Work-in-progress, , Long Answer Questions, 1., , Explain the nature of the financial statements., , 2., , Explain in detail about the significance of the financial statements., , 3., , Explain the limitations of financial statements., , 4., , Prepare the format of statement of profit and loss and explain its items., , 5., , Prepare the format of balance sheet and explain the various elements of, balance sheet., , 6., , Explain how financial statements are useful to the various parties who are, interested in the affairs of an undertaking?, , 7., , ‘Financial statements reflect a combination of recorded facts, accounting, conventions and personal judgements’. Discuss., , 8., , Explain the process of preparing income statement and balance sheet., , Numerical Questions, 1., , Show the following items in the balance sheet as per the provisions of the, companies Act, 2013 in Schedule III:, , Particulars, Preliminary Expenses, Discount on issue of shares, , Rs., 2,40,000, 20,000, , Particulars, Goodwill, Loose tools, , 10% Debentures, , 2,00,000, , Motor Vehicles, , Stock in trade, , 1,40,000, , Provision for tax, , Cash at bank, , 1,35,000, , Bills receivable, , 1,20,000, , 2018-19, , Rs., 30,000, 12,000, 4,75,000, 16,000
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174, , Accountancy : Company Accounts and Analysis of Financial Statements, , 2., , On 1 April, 2017, Jumbo Ltd., issued 10,000; 12% debentures of, Rs. 100 each a discount of 20%, redeemable after 5 years. The, company decided to write-off discount on issue of such debentures, over the life time of the Debentures. Show the items in the balance, sheet of the company immediately after the issue of these, debentures., , 3., , From the following information prepare the balance sheet of Gitanjali, Ltd., Inventories Rs. 14,00,000; Equity Share Capital Rs. 20,00,000;, Plant and Machinery Rs. 10,00,000; Preference Share Capital, Rs. 12,00,000; Debenture Redemption Reserve Rs. 6,00,000;, Outstanding Expenses Rs. 3,00,000; Proposed Dividend Rs. 5,00,000;, Land and Building Rs. 20,00,000; Current Investments Rs. 8,00,000;, Cash Equivalent Rs. 10,00,000; Short term loan from Zaveri Ltd. (A, Subsidiary Company of Twilight Ltd.) Rs. 4,00,000; Public Deposits, Rs. 12,00,000., , 4., , From the following information prepare the balance sheet of Jam, Ltd., Inventories Rs. 7,00,000; Equity Share Capital Rs. 16,00,000; Plant, and Machinery Rs. 8,00,000; Preference Share Capital Rs., 6,00,000; General Reserves Rs. 6,00,000; Bills payable Rs. 1,50,000;, Provision for taxation Rs. 2,50,000; Land and Building Rs., 16,00,000; Non-current Investments Rs. 10,00,000; Cash at Bank, Rs. 5,00,000; Creditors Rs. 2,00,000; 12% Debentures Rs., 12,00,000., , 5., , Prepare the balance sheet of Jyoti Ltd., as at March 31, 2017 from, the following information., Building Rs. 10,00,000; Investments in the shares of Metro Tyers, Ltd. Rs. 3,00,000; Stores & Spares Rs. 1,00,000; Discount on issue, of 10% debentures Rs. 10,000; Statement of Profit and Loss (Dr.), Rs. 90,000; 5,00,000 Equity Shares of Rs. 20 each fully paid-up;, Capital Redemption Reserve Rs. 1,00,000; 10% Debentures Rs. 3,00,000;, Unpaid dividends Rs. 90,000; Share options outstanding account Rs., 10,000., , 6., , Brinda Ltd., has furnished the following information:, (a) 25,000, 10% debentures of Rs.100 each;, (b) Bank Loan of Rs.10,00,000 repayable after 5 years;, (c) Interest on debentures is yet to be paid., , 2018-19
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Financial Statements of a Company, , 175, , Show the above items in the balance sheet of the company as at March 31,, 2017., 7., , Prepare a balance sheet of Black Swan Ltd., as at March 31, 2017 from the, following information:, Rs., General Reserve, , :, , 3,000, , 10% Debentures, , :, , 3,000, , Balance in Statement of, , :, , 1,200, , Profit and Loss, Depreciation on fixed assets, , :, , 700, , Gross Block, , :, , 9,000, , Current Liabilities, , :, , 2,500, , Preliminary Expenses, , :, , 300, , 6% Preference Share Capital, , :, , 5,000, , Cash & Cash Equivalents, , :, , 6,100, , 2018-19
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Analysis of Financial Statements, , 4, , Y, , ou have learnt about the financial statements, (Income Statement and Balance Sheet) of, companies. Basically, these are summarised, financial reports which provide the operating results, and financial position of companies, and the detailed, information contained therein is useful for assessing, the operational efficiency and financial soundness, of a company. This requires proper analysis and, interpretation of such information for which a, number of techniques (tools) have been developed, by financial experts. In this chapter we will have an, overview of these techniques., 4.1 Meaning of Analysis of Financial Statements, LEARNING OBJECTIVES, After studying this chapter,, you will be able to :, • explain the nature and, significance of financial, analysis;, • identify the objectives of, financial analysis;, • describe the various tools, of financial analysis;, • state the limitations of, financial analysis;, • prepare comparative and, common size statements, and interpret the data, given therein; and, • calculate the trend, percentages and interpret, them., , The process of critical evaluation of the financial, information contained in the financial statements in, order to understand and make decisions regarding, the operations of the firm is called ‘Financial, Statement Analysis’. It is basically a study of, relationship among various financial facts and, figures as given in a set of financial statements, and, the interpretation thereof to gain an insight into the, profitability and operational efficiency of the firm to, assess its financial health and future prospects., The term ‘financial analysis’ includes both, ‘analysis and interpretation’. The term analysis, means simplification of financial data by methodical, classification given in the financial statements., Interpretation means explaining the meaning and, significance of the data. These two are, complimentary to each other. Analysis is useless, , 2018-19
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Analysis of Financial Statements, , 177, , without interpretation, and interpretation without analysis is difficult or even, impossible., Financial statement analysis is a judgemental process which aims to estimate, current and past financial positions and the results of the operation of an, enterprise, with primary objective of determining the best possible estimates, and predictions about the future conditions. It essentially involves regrouping, and analysis of information provided by financial statements to establish, relationships and throw light on the points of strengths and weaknesses of a, business enterprise, which can be useful in decision-making involving comparison, with other firms (cross sectional analysis) and with firms’ own performance,, over a time period (time series analysis)., , 4.2, , Significance of Analysis of Financial Statements, , Financial analysis is the process of identifying the financial strengths and, weaknesses of the firm by properly establishing relationships between the various, items of the balance sheet and the statement of profit and loss. Financial analysis, can be undertaken by management of the firm, or by parties outside the firm,, viz., owners, trade creditors, lenders, investors, labour unions, analysts and, others. The nature of analysis will differ depending on the purpose of the analyst., A technique frequently used by an analyst need not necessarily serve the purpose, of other analysts because of the difference in the interests of the analysts., Financial analysis is useful and significant to different users in the following, ways:, (a) Finance manager: Financial analysis focusses on the facts and, relationships related to managerial performance, corporate efficiency,, financial strengths and weaknesses and creditworthiness of the company., A finance manager must be well-equipped with the different tools of, analysis to make rational decisions for the firm. The tools for analysis, help in studying accounting data so as to determine the continuity of the, operating policies, investment value of the business, credit ratings and, testing the efficiency of operations. The techniques are equally important, in the area of financial control, enabling the finance manager to make, constant reviews of the actual financial operations of the firm to analyse, the causes of major deviations, which may help in corrective action, wherever indicated., (b) Top management: The importance of financial analysis is not limited to, the finance manager alone. It has a broad scope which includes top, management in general and other functional managers. Management of, the firm would be interested in every aspect of the financial analysis. It is, , 2018-19
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178, , (c), , (d), , (e), , (f), , (g), , 4.3, , Accountancy : Company Accounts and Analysis of Financial Statements, , their overall responsibility to see that the resources of the firm are used, most efficiently and that the firm’s financial condition is sound. Financial, analysis helps the management in measuring the success of the, company’s operations, appraising the individual’s performance and, evaluating the system of internal control., Trade payables: Trade payables, through an analysis of financial, statements, appraises not only the ability of the company to meet its, short-term obligations, but also judges the probability of its continued, ability to meet all its financial obligations in future. Trade payables are, particularly interested in the firm’s ability to meet their claims over a, very short period of time. Their analysis will, therefore, evaluate the firm’s, liquidity position., Lenders: Suppliers of long-term debt are concerned with the firm’s longterm solvency and survival. They analyse the firm’s profitability over a, period of time, its ability to generate cash, to be able to pay interest and, repay the principal and the relationship between various sources of funds, (capital structure relationships). Long-term lenders analyse the historical, financial statements to assess its future solvency and profitability., Investors: Investors, who have invested their money in the firm’s shares,, are interested about the firm’s earnings. As such, they concentrate on, the analysis of the firm’s present and future profitability. They are also, interested in the firm’s capital structure to ascertain its influences on, firm’s earning and risk. They also evaluate the efficiency of the, management and determine whether a change is needed or not. However,, in some large companies, the shareholders’ interest is limited to decide, whether to buy, sell or hold the shares., Labour unions: Labour unions analyse the financial statements to assess, whether it can presently afford a wage increase and whether it can absorb, a wage increase through increased productivity or by raising the prices., Others: The economists, researchers, etc., analyse the financial statements, to study the present business and economic conditions. The government, agencies need it for price regulations, taxation and other similar purposes., Objectives of Analysis of Financial Statements, , Analysis of financial statements reveals important facts concerning managerial, performance and the efficiency of the firm. Broadly speaking, the objectives of, the analysis are to apprehend the information contained in financial statements, with a view to know the weaknesses and strengths of the firm and to make a, forecast about the future prospects of the firm thereby, enabling the analysts to, take decisions regarding the operation of, and further investment in the firm. To, , 2018-19
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Analysis of Financial Statements, , 179, , be more specific, the analysis is undertaken to serve the following purposes, (objectives):, • to assess the current profitability and operational efficiency of the firm, as a whole as well as its different departments so as to judge the financial, health of the firm., • to ascertain the relative importance of different components of the, financial position of the firm., • to identify the reasons for change in the profitability/financial position, of the firm., • to judge the ability of the firm to repay its debt and assessing the, short-term as well as the long-term liquidity position of the firm., Through the analysis of financial statements of various firms, an economist can, judge the extent of concentration of economic power and pitfalls in the financial, policies pursued. The analysis also provides the basis for many governmental, actions relating to licensing, controls, fixing of prices, ceiling on profits, dividend, freeze, tax subsidy and other concessions to the corporate sector., 4.4, , Tools of Analysis of Financial Statements, , The most commonly used techniques of financial analysis are as follows:, 1., Comparative Statements: These are the statements showing the, profitability and financial position of a firm for different periods of time in, a comparative form to give an idea about the position of two or more periods., It usually applies to the two important financial statements, namely,, balance sheet and statement of profit and loss prepared in a comparative, form. The financial data will be comparative only when same accounting, principles are used in preparing these statements. If this is not the case,, the deviation in the use of accounting principles should be mentioned as, a footnote. Comparative figures indicate the trend and direction of financial, position and operating results. This analysis is also known as ‘horizontal, analysis’., 2., , Common Size Statements: These are the statements which indicate the, relationship of different items of a financial statement with a common item, by expressing each item as a percentage of that common item. The, percentage thus calculated can be easily compared with the results of, corresponding percentages of the previous year or of some other firms, as, the numbers are brought to common base. Such statements also allow an, analyst to compare the operating and financing characteristics of two, companies of different sizes in the same industry. Thus, common size, statements are useful, both, in intra-firm comparisons over different years, and also in making inter-firm comparisons for the same year or for several, years. This analysis is also known as ‘Vertical analysis’., , 2018-19
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180, , Accountancy : Company Accounts and Analysis of Financial Statements, , 3., , Trend Analysis: It is a technique of studying the operational results and, financial position over a series of years. Using the previous years’ data of a, business enterprise, trend analysis can be done to observe the percentage, changes over time in the selected data. The trend percentage is the, percentage relationship, in which each item of different years bear to the, same item in the base year. Trend analysis is important because, with its, long run view, it may point to basic changes in the nature of the business., By looking at a trend in a particular ratio, one may find whether the ratio, is falling, rising or remaining relatively constant. From this observation, a, problem is detected or the sign of good or poor management is detected., , 4., , Ratio Analysis: It describes the significant relationship which exists, between various items of a balance sheet and a statement of profit and, loss of a firm. As a technique of financial analysis, accounting ratios measure, the comparative significance of the individual items of the income and, position statements. It is possible to assess the profitability, solvency and, efficiency of an enterprise through the technique of ratio analysis., , 5., , Cash Flow Analysis: It refers to the analysis of actual movement of cash, into and out of an organisation. The flow of cash into the business is called, as cash inflow or positive cash flow and the flow of cash out of the firm is, called as cash outflow or a negative cash flow. The difference between the, inflow and outflow of cash is the net cash flow. Cash flow statement is, prepared to project the manner in which the cash has been received and, has been utilised during an accounting year as it shows the sources of, cash receipts and also the purposes for which payments are made. Thus,, it summarises the causes for the changes in cash position of a business, enterprise between dates of two balance sheets., , In this chapter, we shall have a brief idea about the first three techniques,, viz., comparative statements, common size statements and trend analysis. The, ratio analysis and cash flow analysis is covered in detail in Chapters 5 and 6, respectively., , 2018-19
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Analysis of Financial Statements, , 181, Test your Understanding – I, , Fill in, 1., 2., 3., 4., 5., , 4.5, , the blanks with appropriate word(s):, Analysis simply means—————data., Interpretation means —————data., Comparative analysis is also known as ———————— analysis., Common size analysis is also known as ———————— analysis., The analysis of actual movement of money inflow and outflow in an, organisation is called——————— analysis., , Comparative Statements, , As stated earlier, these statements refer to the statement of profit and loss and, the balance sheet prepared by providing columns for the figures for both the, current year as well as for the previous year and for the changes during the, year, both in absolute and relative terms. As a result, it is possible to find out, not only the balances of accounts as on different dates and summaries of different, operational activities of different periods, but also the extent of their increase or, decrease between these dates. The figures in the comparative statements can be, used for identifying the direction of changes and also the trends in different, indicators of performance of an organisation., The following steps may be followed to prepare the comparative statements:, Step 1 : List out absolute figures in rupees relating to two points of time (as, shown in columns 2 and 3 of Exhibit 4.1)., Step 2 : Find out change in absolute figures by subtracting the first year (Col.2), from the second year (Col.3) and indicate the change as increase (+) or decrease, (–) and put it in column 4., Step 3 : Preferably, also calculate the percentage change as follows and put it, in column 5., Absolute Increase or Decrease (Col.4), × 100, First year absolute figure (Col.2), , ____________________________________________________________, , Particulars, , 1, , First Year, , Second Year, , Absolute, Increase (+) or, Decrease (–), , Percentage, Increase (+), or Decrease (–), , 2, , 3, , 4, , 5, , Rs., , Rs., , Rs., , %., , Exhibit. 4.1, , 2018-19
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182, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 1, Convert the following statement of profit and loss into the comparative statement, of profit and loss of BCR Co. Ltd.:, Particulars, (i), , Note, , 2015-16, , 2016-17, , No., , Rs., , Rs., , 60,00,000, , 75,00,000, , 1,50,000, , 1,20,000, , 44,00,000, , 50,60,000, , 35%, , 40%, , Revenue from operations, , (ii) Other incomes, (iii) Expenses, (iv) Income tax, , Solution:, Comparative statement of profit and loss for the year ended March 31, 2016, and 2017:, Particulars, , 2015-16, , 2016-17, , Absolute, Percentage, Increase (+) or Increase (+), Decrease (–) or Decrease (–), R s., R s., %, , Rs ., I. Revenue from operations, , 60,00,000 75,00,000, , 15,00,000, , 25.00, , 1,20,000, , (30,000), , (20.00), , 61,50,000 76,20,000, , 14,70,000, , 23.90, , 44,00,000 50,60,000, , 6,60,000, , 15.00, , 17,50,000 25,60,000, , 8,10,000, , 46.29, , 6,12,500 10,24,000, , 4,11,500, , 67.18, , 11,37,500 15,36,000, , 3,98,500, , 35.03, , II. Add: Other incomes, III. Total Revenue I+II, IV. Less: Expenses, Profit before tax, , 1,50,000, , V. Less: Tax, Profit after tax, , Illustration 2, From the following statement of profit and loss of Madhu Co. Ltd., prepare, comparative statement of profit and loss for the year ended March 31, 2016 and, 2017:, Particulars, , Note, , 2015-16, , 2016-17, , No., , Rs., , Rs., , 16,00,000, , 20,00,000, , Employee benefit expenses, , 8,00,000, , 10,00,000, , Other expenses, , 2,00,000, , 1,00,000, , Revenue from operations, , Tax rate 40 %, , 2018-19
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Analysis of Financial Statements, , 183, , Solution:, Comparative statement of profit and loss of Madhu Co. Limited, for the year ended March 31, 2016 and 2017:, Particulars, , 2015-16, , 2016-17, , Rs ., , R s., , I. Revenue from operations 16,00,000 20,00,000, II., , Absolute, Percentage, Increase (+) or Increase (+), Decrease (–) or Decrease (–), R s., %, 4,00,000, , 25, , Less: Expenses, , a) Employee benefit expenses, , 8,00,000, , 10,00,000, , 2,00,000, , 25, , b) Other expenses, , 2,00,000, , 1,00,000, , (1,00,000), , (50), , 6,00,000, , 9,00,000, , 3,00,000, , 50, , 2,40,000, , 3,60,000, , 1,20,000, , 50, , 3,60,000, , 5,40,000, , 1,80,000, , 50, , Profit before tax, III. Less tax @ 40%, Profit after tax, , Do it yourself, From the following particulars, prepare comparative statement of profit and loss of Narang, Colours Ltd. for the year ended March 31, 2016 and 2017:, Particulars, Note, 2016-17, 2015-16, No., 1. Revenue from operations, 40,00,000, 35,00,000, 2. Other income, 50,000, 50,000, 3. Cost of material consumed, 15,00,000, 18,00,000, 4. Changes in inventories of finished goods, 10,000, (15,000), 5. Employee benefit expenses, 2,40,000, 2,40,000, 6. Depreciation and amortisation, 25,000, 22,500, 7. Other expenses, 2,66,000, 3,02,000, 8. Profit, 20,09,000, 14.27,300, Notes to Accounts, Particulars, 1. Other expenses, i) Power and fuel, ii) Carriage outwards, iii) License fees, iv) Selling and distribution, v) Provision of tax, , 2016-17, , 2015-16, , 36,000, 40,000, 7,500, 9,500, 2,500, 2,500, 1,70,000 1,90,000, 50,000, 60,000, 2,66,000 3,02,000, , 2018-19
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184, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 3, The following are the Balance Sheets of J. Ltd. as at March 31, 2016 and 2017., Prepare a Comparative balance 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, 3. Current liabilities, Trade payables, Total, II. Assets, 1. Non-current assets, a) Fixed assets, - Tangible assets, - Intangible assets, 2. Current assets, - Inventories, - Cash and cash equivalents, Total, , March 31,, 2017, (Rs.), , March 31,, 2016, (Rs.), , 20,00,000, 3,00,000, , 15,00,000, 4,00,000, , 9,00,000, , 6,00,000, , 3,00,000, 35,00,000, , 2,00,000, 27,00,000, , 20,00,000, 9,00,000, , 15,00,000, 6,00,000, , 3,00,000, 3,00,000, , 4,00,000, 2,00,000, , 35,00,000, , 27,00,000, , Solution:, Comparative Balance Sheet of J. Limited, as at March 31, 2016 and March 2017:, (Rs. in Lakhs), Particulars, I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus, 2. Non-current Liabilities, a) Long-term borrowings, 3. Current liabilities, a) Trade payables, Total, , March 31, March 31,, 2016, 2017, , Absolute Percentage, Change Change, , 15, 04, , 20, 03, , 05, (01), , 33.33, (25), , 06, , 09, , 03, , 50, , 02, 27, , 03, 35, , 01, 08, , 50, 29.63, , 2018-19
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Analysis of Financial Statements, II. Assets, 1. Non-current assets, a) Fixed assets, - Tangible assets, - Intangible assets, b) Current assets, - Inventories, - Cash and cash equivalents, Total, , 185, , 15, 06, , 20, 09, , 05, 03, , 33.33, 50, , 04, 02, 27, , 03, 03, 35, , (01), 01, 08, , (25), 50, 29.63, , Illustration 4, From the following Balance Sheets of Amrit Limited as at March 31, 2016 and, 2017, prepare a comparative balance 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, 3. Current liabilities, Trade payables, Total, II. Assets, 1. Non-current assets, a) Fixed assets, - Tangible assets, - Intangible assets, 2. Current assets, - Inventories, - Cash and Cash Equivalents, Total, , 2018-19, , March 31,, 2017, (Rs.), , March 31,, 2016, (Rs.), , 20,00,000, 13,00,000, , 15,00,000, 14,00,000, , 19,00,000, , 16,00,000, , 3,00,000, 55,00,000, , 2,00,000, 47,00,000, , 20,00,000, 19,00,000, , 15,00,000, 16,00,000, , 13,00,000, 3,00,000, , 14,00,000, 2,00,000, , 55,00,000, , 47,00,000
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186, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution:, Comparative Balance Sheet of Amrit Limited, as at March 31, 2016 and March 31, 2017, 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, Total, II. Assets, 1) Non-current assets, Fixed assets, a) Tangible assets, b) Intangible assets, 2) Current assets, a) Inventories, b) Cash and Cash Equivalents, Total, , March 31, March 31,, Absolute, 2016, 2017, Increase (+) or, Decrease (–), Rs., Rs., Rs., , (Rs. in Lakhs), Percentage, Increase (+), or Decrease (–), %, , 15, 14, , 20, 13, , 5, (1), , 33.33, (7.14), , 16, , 19, , 3, , 18.75, , 2, 47, , 3, 55, , 1, 8, , 50, 17.02, , 15, 16, , 20, 19, , 5, 3, , 33.33, 18.75, , 14, 2, 47, , 13, 3, 55, , (1), 1, 8, , (7.14), 50, 17.02, , Do it yourself, From the Balance Sheets for the year ended March 31, 2016 and 2017, prepare the, comparative Balance Sheet of Omega Chemicals Ltd.:, Rs. in Lakhs, Particulars, Note 2017, 2016, No., I. Equity and Liabilities, 1) Shareholders’ Fund, a) Share capital, b) Reserve and surplus, 2) Non-current liabilities, Long-term borrowings, 3) Current liabilities, Trade Payable, Total, , 2018-19, , (Rs.), , (Rs.), , 5, 3, , 10, 2, , 5, , 8, , 2, 15, , 4, 24
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Analysis of Financial Statements, , 187, , II. Assets, 1) Non-current assets, a) Fixed assets, - Tangible assets, - Intangible assets, 2) Current assets, a) Inventories, b) Cash and cash equivalents, Total, , 4.6, , 14, 3, , 8, 2, , 5, 2, 24, , 4, 1, 15, , Common Size Statement, , Common Size Statement, also known as component percentage statement, is a, financial tool for studying the key changes and trends in the financial position, and operational result of a company. Here, each item in the statement is stated, as a percentage of the aggregate, of which that item is a part. For example, a, common size balance sheet shows the percentage of each asset to the total assets,, and that of each liability to the total liabilities. Similarly, in the common size, statement of profit and loss, the items of expenditure are shown as a percentage, of the net revenue from operations. If such a statement is prepared for successive, periods, it shows the changes of the respective percentages over a period of time., Common size analysis is of immense use for comparing enterprises which, differ substantially in size as it provides an insight into the structure of financial, statements. Inter-firm comparison or comparison of the company’s position, with the related industry as a whole is possible with the help of common size, statement analysis., The following procedure may be adopted for preparing the common size, statements., 1., , List out absolute figures in rupees at two points of time, say year 1,, and year 2 (Column 2 & 4 of Exhibit 4.2)., , 2., , Choose a common base (as 100). For example, revenue from operations, may be taken as base (100) in case of statement of profit and loss and, total assets or total liabilities (100) in case of balance sheet., , 3., , For all items of Col. 2 and 3 work out the percentage of that total., Column 4 and 5 shows these percentages in Exhibit 4.2., Common Size Statement, , Particulars, 1, , Year, one, , Year, two, , Percentage, of year 1, , Percentage, of year 2, , 2, , 3, , 4, , 5, , Exhibit 4.2, , 2018-19
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188, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 5, From the following information, prepare a Common size Income Statement for, the year ended March 31, 2016 and March 31, 2017:, Particulars, , 2016-17, , 2015-16, , Rs., , Rs., , Net sales, , 18,00,000, , 25,00,000, , Cost of good sold, , 10,00,000, , 12,00,000, , Operating expenses, , 80,000, , 1,20,000, , Non-operating expenses, , 12,000, , 15,000, , Depreciation, , 20,000, , 40,000, , Wages, , 10,000, , 20,000, , Solution:, Common Size Income Statement, for the year ended March 31, 2016 and March 31, 2017, Particulars, , Absolute Amounts, , Percentage of Net Sales, , 2015-16, , 2016-17, , 2015-16, , 2016-17, , Rs., 25,00,000, 12,00,000, , Rs., 18,00,000, 10,00,000, , (%), 100, 48, , (%), 100, 55.56, , 13,00,000, 1,20,000, , 8,00,000, 80,000, , 52, 4.80, , 44.44, 4.44, , Expenses**, Operating Income, (Less) Non-Operating, expenses, , 11,80,000, 15,000, , 7,20,000, 12,000, , 47.20, 0.60, , 40, 0.67, , Profit, , 11,65,000, , 7,08,000, , 46.60, , 39.33, , Net Sales, (Less) Cost of goods, Sold*, Gross Profit, (Less) Operating, , * Wages is the part of cost of goods sold;, ** Depreciation is the part of operating expenses., , Illustration 6, From the following information, prepare Common size statement of profit and, loss for the year ended March 31, 2016 and March 31, 2017:, Particulars, Revenue from operations, Other income, , 2015-16, , 2016-17, , Rs., 25,00,000, 3,25,000, , Rs., 20,00,000, 2,50,000, , 2018-19
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Analysis of Financial Statements, , 189, , Employee benefit expenses, Other expenses, Income tax (% of the profit before tax), , 8,25,000, 2,00,000, 30%, , 4,50,000, 1,00,000, 20%, , Solution:, Common size statement of Profit and Loss, for the year ended March 31, 2016 and March 31, 2017:, Particulars, , Absolute Amounts, , Percentage of Net, Revenue from operations, , Revenue from Operations, (Add) Other income, Total revenue, (Less) expenses:, a) Employee benefit, expenses, b) Other expenses, Profit before tax, (Less) taxes, Profit after tax, , 2015-16, , 2016-17, , 2015-16, , 2016-17, , Rs., 25,00,000, 3,25,000, 28,25,000, , Rs., 20,00,000, 2,50,000, 22,50,000, , (%), 100, 13, 113, , (%), 100, 12.5, 112.5, , 8,25,000, , 4,50,000, , 33, , 22.5, , 2,00,000, 18,00,000, 5,40,000, 12,60,000, , 1,00,000, 17,00,000, 3,40,000, 13,60,000, , 8, 72, 21.6, 50.4, , 5, 85, 17, 68, , Illustration 7, Prepare common size Balance Sheet of XRI Ltd. from the following information:, Particulars, , Note No., , I. Equity and Liabilities, 1. Shareholders’ Fund, a) Share capital, b) Reserves and surplus, 2. Non-current liabilities, Long-term borrowings, 3. Current liabilities, Trade Payable, Total, II. Assets, 1. Non-current assets, a) Fixed assets, - Tangible asset, Plant & machinery, - Intangible assets, Goodwill, b) Non-current investments, 2. Current assets, Inventories, Total, , 2018-19, , March 31,, 2016, , March 31,, 2017, , 15,00,000, 5,00,000, , 12,00,000, 5,00,000, , 6,00,000, , 5,00,000, , 15,50,000, 41,50,000, , 10,50,000, 32,50,000, , 14,00,000, , 8,00,000, , 16,00,000, 10,00,000, , 12,00,000, 10,00,000, , 1,50,000, 41,50,000, , 2,50,000, 32,50,000
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190, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution:, Common size Balace Sheet, as at March 31, 2016 and March 31, 2017:, Particulars, , Absolute Amounts, , Percentage of Total Assets, , 31.03.2016, , 31.03.2017, , 31.03.2016, , 31.03.2017, , Rs., I. Equity and Liabilities, 1. Shareholders fund, a) Share capital, 15,00,000, b) Reserve and surplus, 5,00,000, 2. Non-current liabilities, Long-term borrowings, 6,00,000, 3. Current liabilities, Trade payables, 15,50,000, Total, 41,50,000, II. Assets, 1. Non-current assets, a) Fixed assets, - Tangible asset, Plant & machinery, 14,00,000, - Intangible assets, Goodwill, 16,00,000, Non-current investments 10,00,000, 2. Current assets, Inventories, 1,50,000, Total, 41,50,000, , Rs., , (%), , (%), , 12,00,000, 5,00,000, , 36.14, 12.05, , 36.93, 15.38, , 5,00,000, , 14.46, , 15.38, , 10,50,000, 32,50,000, , 37.35, 100, , 32.31, 100, , 8,00,000, , 33.73, , 24.62, , 12,00,000, 10,00,000, , 38.55, 24.10, , 36.92, 30.77, , 2,50,000, 32,50,000, , 3.62, 100, , 7.69, 100, , Do it yourself, Prepare common size balance sheet of Raj Co. Ltd. as at March 31, 2016 and, March 31, 2017 from the given information:, Particulars, I. Equity and Liabilities, 1. Shareholders fund, a) Share capital, b) Reserve and surplus, 2. Non-current liabilities, Long-term borrowings, 3. Current liabilities, Trade payables, Total, , 2017, , 2016, , 20,00,000, 3,00,000, , 15,00,000, 4,00,000, , 9,00,000, , 6,00,000, , 3,00,000, 35,00,000, , 2,00,000, 27,00,000, , 2018-19
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Analysis of Financial Statements, II. Assets, 1. Non-current assets, a) Fixed assets, - Tangible assets, - Intangible assets, b) Current assets, - Inventories, - Cash and cash equivalents, Total, , 191, , 20,00,000, 9,00,000, , 15,00,000, 6,00,000, , 3,00,000, 3,00,000, 35,00,000, , 4,00,000, 2,00,000, 27,00,000, , Test your Understanding – II, Choose the right answer :, 1. The financial statements of a business enterprise include:, (a) Balance sheet, (b) Statement of Profit and loss account, (c) Cash flow statement, (d) All the above, 2. The most commonly used tools for financial analysis are:, (a) Horizontal analysis, (b) Vertical analysis, (c) Ratio analysis, (d) All the above, 3. An Annual Report is issued by a company to its:, (a) Directors, (b) Auditors, (c) Shareholders, (d) Management, 4. Balance Sheet provides information about financial position of the enterprise:, (a) At a point in time, (b) Over a period of time, (c) For a period of time, (d) None of the above, 5. Comparative statements are also known as:, (a) Dynamic analysis, (b) Horizontal analysis, (c) Vertical analysis, (d) External analysis, , 2018-19
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192, , Accountancy : Company Accounts and Analysis of Financial Statements, Test your Understanding – III, , State whether each of the following is True or False :, (a), , The financial statements of a business enterprise include cash flow statement., , (b), , Comparative statements are the form of horizontal analysis., , (c), , Common size statements and financial ratios are the two tools employed in, vertical analysis., , (d), , Ratio analysis establishes relationship between two financial statements., , (e), , Ratio analysis is a tool for analysing the financial statements of any enterprise., , (f), , Financial analysis is used only by the creditors., , (g), , Statement of profit and loss account shows the operating performance of an, enterprise for a period of time., , (h), , Financial analysis helps an analyst to arrive at a decision., , (i), , Cash Flow Statement is a tool of financial statement analysis., , (j), , In a Common size statement each item is expressed as a percentage of some, common base., , 4.7, , Limitations of Financial Analysis, , Though financial analysis is quite helpful in determining financial strengths, and weaknesses of a firm, it is based on the information available in financial, statements. As such, the financial analysis also suffers from various limitations, of financial statements. Hence, the analyst must be conscious of the impact of, price level changes, window dressing of financial statements, changes in, accounting policies of a firm, accounting concepts and conventions, personal, judgement, etc. Some other limitations of financial analysis are:, 1., , Financial analysis does not consider price level changes., , 2., , Financial analysis may be misleading without the knowledge of the, changes in accounting procedure followed by a firm., , 3., , Financial analysis is just a study of reports of the company., , 4., , Monetary information alone is considered in financial analysis while, non-monetary aspects are ignored., , 5., , The financial statements are prepared on the basis of accounting, concept, as such, it does not reflect the current position., , 2018-19
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Analysis of Financial Statements, , 193, , Terms Introduced in the Chapter, 1., , Financial Analysis, , 2., , Common Size Statements, , 3., , Comparative Statements, , 4., , Trend Analysis, , 5., , Ratio Analysis, , 6., , Cash Flow Statement, , 7., , Intra Firm Comparison, , 8., , Inter Firm Comparison, , 9., , Horizontal Analysis, , 10., , Vertical Analysis, , Summary, Major Parts of an Annual Report, An annual report contains basic financial statements, viz., Balance Sheet,, Statement of Profit and Loss and Cash Flow Statement. It also carries management’s, discussion of corporate performance of the year under review for futuristic prospects., Tools of Financial Analysis, Commonly used tools of financial analysis are: Comparative statements, Common, size statement, trend analysis, ratio analysis, and cash flow analysis., Comparative Statement, Comparative statement shows changes in all items of financial statements in, absolute and percentage terms over a period of time for a firm or between two, firms., Common Size Statement, Common size statement expresses all items of a financial statement as a percentage, of some common base such as revenue from operations for statement of profit and, loss and total assets for balance sheet., , 2018-19
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194, , Accountancy : Company Accounts and Analysis of Financial Statements, , Questions for Practice, , Short Answer Questions, 1. List the techniques of Financial Statement Analysis., 2. Distinguish between Vertical and Horizontal Analysis of financial data., 3. State the meaning of Analysis and Interpretation., 4. State the importance of Financial Analysis?, 5. What are Comparative Financial Statements?, 6. What do you mean by Common Size Statements?, Long Answer Questions, 1. Describe the different techniques of financial analysis and explain the, limitations of financial analysis., 2. Explain the usefulness of trend percentages in interpretation of financial, performance of a company., 3. What is the importance of comparative statements? Illustrate your, answer with particular reference to comparative income statement., 4. What do you understand by analysis and interpretation of financial, statements? Discuss its importance., 5. Explain how common size statements are prepared giving an example., Numerical Questions, 1., , Following are the balance sheets of Alpha Ltd., as at March 31, 2016, and 2017:, , Particulars, , March 31,, , March 31,, , 2016, , 2017, , Rs., , Rs., , Equity share capital, , 2,00,000, , 4,00,000, , Reserves and surplus, , 1,00,000, , 1,50,000, , Long-term borrowings, , 2,00,000, , 3,00,000, , Short-term borrowings, , 50,000, , 70,000, , Trade payables, , 30,000, , 60,000, , Short-term provisions, , 20,000, , 10,000, , Other current liabilities, , 20,000, , 30,000, , 6,20,000, , 10,20,000, , Fixed assets, , 2,00,000, , 5,00,000, , Non-current investments, , 1,00,000, , 1,25,000, , 60,000, , 80,000, , I. Equity and Liabilities, , Total, II. Assets, , Current investments, , 2018-19
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Analysis of Financial Statements, Inventories, , 195, 1,35,000, , 1,55,000, , Trade receivables, , 60,000, , 90,000, , Short term loans and advances, , 40,000, , 60,000, , Cash at bank, , 25,000, , 10,000, , 6,20,000, , 10,20,000, , Total, , You are required to prepare a Comparative Balance Sheet., 2., , Following are the balance sheets of Beta Ltd. at March 31, 2016 and, 2017:, , Particulars, , March 31,, , March 31,, , 2017, , 2016, , (Rs.), , (Rs.), , Equity share capital, , 4,00,000, , 3,00,000, , Reserves and surplus, , 1,50,000, , 1,00,000, , Loan from IDBI, , I. Equity and Liabilities, , 3,00,000, , 1,00,000, , Short-term borrowings, , 70,000, , 50,000, , Trade payables, , 60,000, , 30,000, , Short-term provisions, , 10,000, , 20,000, , Other current liabilities, , 1,10,000, , 1,00,000, , 11,00,000, , 7,00,000, , Fixed assets, , 4,00,000, , 2,20,000, , Non-current investments, , 2,25,000, , 1,00,000, , 80,000, , 60,000, , 1,05,000, , 90,000, , 90,000, , 60,000, , Short-term loans and advances, , 1,00,000, , 85,000, , Cash and cash equivalents, , 1,00,000, , 85,000, , Total, , 11,00,000, , 7,00,000, , 3., , Prepare Comparative Statement of profit and loss from the following, information:, , Total, II. Assets, , Current investments, Stock, Trade receivables, , Particulars, , 2016-17, , 2015-16, , (Rs.), , (Rs.), , Freight Outward, , 20,000, , 10,000, , Wages (office), , 10,000, , 5,000, , Manufacturing Expenses, , 50,000, , 20,000, , 2018-19
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196, , Accountancy : Company Accounts and Analysis of Financial Statements, Stock adjustment, , (60,000), , 30,000, , Cash purchases, , 80,000, , 60,000, , Credit purchases, , 60,000, , 20,000, , Returns inward, , 8,000, , 4,000, , (30,000), , 90,000, , 20,000, , 10,000, , 3,00,000, , 2,00,000, , 10,000, , 5,000, , Interest on short-term loans, , 20,000, , 20,000, , 10% debentures, , 20,000, , 10,000, , Profit on sale of furniture, , 20,000, , 10,000, , Loss on sale of office car, , 90,000, , 60,000, , 40%, , 50%, , Gross profit, Carriage outward, Machinery, 10% depreciation on, machinery, , Tax rate, , 4., , Prepare Comparative Statement of Profit and Loss from the following, information:, , Particulars, , 2015-16, , 2016-17, , (Rs.), , (Rs.), , Manufacturing expenses, , 35,000, , 80,000, , Opening stock, , 30,000, , 60% of closing stock, , Sales, , 9,60,000, , 4,50,000, , Returns outward, , 4,000 (out of credit, , 6,000 (out of cash, , purchase), , purchase), , 150% of opening, , 1,00,000, , Closing stock, , stock, Credit purchases, , 1,50,000, , 150% of cash purchase, , Cash purchases, , 80% of credit, , 40,000, , purchases, Carriage outward, , 10,000, , 30,000, , Building, , 1,00,000, , 2,00,000, , Depreciation on building, , 20%, , 10%, , Interest on bank overdraft, , 5,000, , -, , 10% debentures, , 2,00,000, , 20,00,000, , Profit on sale of copyright, , 10,000, , 20,000, , Loss on sale of personal car, , 10,000, , 20,000, , Other operating expenses, , 20,000, , 10,000, , Tax rate, , 50%, , 40%, , 2018-19
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Analysis of Financial Statements, , 5., , 197, , Prepare a Common size statement of profit and loss of Shefali Ltd. with, the help of following information:, , Particulars, , 2015-16, , 2016-17, , (Rs.), , (Rs.), , Revenue from operations, , 6,00,000, , 8,00,00, , Indirect expense, , 25% of gross profit, , 25% of gross profit, , Cost of revenue from operations 4,28,000, , 7,28,000, , Other incomes, , 10,000, , 12,000, , Income tax, , 30%, , 30%, , 6., , Prepare a Common Size balance sheet from the following balance sheet, of Aditya Ltd., and Anjali Ltd.:, , Particulars, , Aditya Ltd., , Anjali Ltd., , Rs., , Rs., , a) Equity share capital, , 6,00,000, , 8,00,000, , b) Reserves and surplus, , 3,00,000, , 2,50,000, , I. Equity and Liabilities, , c) Current liabilities, Total, , 1,00,000, , 1,50,000, , 10,00,000, , 12,00,000, , 4,00,000, , 7,00,000, , II. Assets, a) Fixed assets, b) Current assets, Total, , 6,00,000, , 5,00,000, , 1,00,0000, , 12,00,000, , Answers to Test your Understanding, Test your Understanding – I, 1. Simplifying, 2. explaining the impact of, 4. vertical, 5. cash flow., , 3. horizontal, , Test your Understanding – II, 1 (d), 2 (d), 3 (c), , 4 (a), , 5 (b), , Test your Understanding – III, (a) True, (b) True, (c) True, (g) True, (h) True, (i) True, , (d) True, (j) True, , (e) True, , 2018-19, , (f) False
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5, , Accounting Ratios, , F, , LEARNING OBJECTIVES, After studying this chapter,, you will be able to :, • explain the meaning,, objectives and limitations, of accounting ratios;, , •, , identify the various, types of ratios commonly, used ;, , •, , calculate various ratios, to assess solvency,, liquidity, efficiency and, profitability of the firm;, , •, , interpret the various, ratios calculated for, intra-firm and interfirm comparisons., , inancial statements aim at providing financial, information about a business enterprise to meet, the information needs of the decision-makers., Financial statements prepared by a business, enterprise in the corporate sector are published and, are available to the decision-makers. These, statements provide financial data which require, analysis, comparison and interpretation for taking, decision by the external as well as internal users of, accounting information. This act is termed as, financial statement analysis. It is regarded as an, integral and important part of accounting. As, indicated in the previous chapter, the most, commonly used techniques of financial statements, analysis are comparative statements, common size, statements, trend analysis, accounting ratios and, cash flow analysis. The first three have been, discussed in detail in the previous chapter. This, chapter covers the technique of accounting ratios, for analysing the information contained in financial, statements for assessing the solvency, efficiency and, profitability of the enterprises., 5.1, , Meaning of Accounting Ratios, , As stated earlier, accounting ratios are an important, tool of financial statements analysis. A ratio is a, mathematical number calculated as a reference to, relationship of two or more numbers and can be, expressed as a fraction, proportion, percentage and, a number of times. When the number is calculated, by referring to two accounting numbers derived from, , 2018-19
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Accounting Ratios, , 199, , the financial statements, it is termed as accounting ratio. For example, if the, gross profit of the business is Rs. 10,000 and the ‘Revenue from Operations’ are, 10, 000, 10,000, × 100 of the, 1,00,000, 1, 00, 000, ‘Revenue from Operations’ . This ratio is termed as gross profit ratio. Similarly,, inventory turnover ratio may be 6 which implies that inventory turns into, ‘Revenue from Operations’ six times in a year., It needs to be observed that accounting ratios exhibit relationship, if any,, between accounting numbers extracted from financial statements. Ratios are, essentially derived numbers and their efficacy depends a great deal upon the, basic numbers from which they are calculated. Hence, if the financial statements, contain some errors, the derived numbers in terms of ratio analysis would also, present an erroneous scenario. Further, a ratio must be calculated using, numbers which are meaningfully correlated. A ratio calculated by using two, unrelated numbers would hardly serve any purpose. For example, the furniture, of the business is Rs. 1,00,000 and Purchases are Rs. 3,00,000. The ratio of, purchases to furniture is 3 (3,00,000/1,00,000) but it hardly has any relevance., The reason is that there is no relationship between these two aspects., , Rs. 1,00,000, it can be said that the gross profit is 10%, , 5.2, , Objectives of Ratio Analysis, , Ratio analysis is indispensable part of interpretation of results revealed by the, financial statements. It provides users with crucial financial information and, points out the areas which require investigation. Ratio analysis is a technique, which involves regrouping of data by application of arithmetical relationships,, though its interpretation is a complex matter. It requires a fine understanding, of the way and the rules used for preparing financial statements. Once done, effectively, it provides a lot of information which helps the analyst:, 1. To know the areas of the business which need more attention;, 2. To know about the potential areas which can be improved with the, effort in the desired direction;, 3. To provide a deeper analysis of the profitability, liquidity, solvency, and efficiency levels in the business;, 4. To provide information for making cross-sectional analysis by, comparing the performance with the best industry standards; and, 5. To provide information derived from financial statements useful for, making projections and estimates for the future., 5.3, , Advantages of Ratio Analysis, , The ratio analysis if properly done improves the user’s understanding of the, efficiency with which the business is being conducted. The numerical, relationships throw light on many latent aspects of the business. If properly, analysed, the ratios make us understand various problem areas as well as the, , 2018-19
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200, , Accountancy : Company Accounts and Analysis of Financial Statements, , bright spots of the business. The knowledge of problem areas help management, take care of them in future. The knowledge of areas which are working better, helps you improve the situation further. It must be emphasised that ratios are, means to an end rather than the end in themselves. Their role is essentially, indicative and that of a whistle blower. There are many advantages derived from, ratio analysis. These are summarised as follows:, 1. Helps to understand efficacy of decisions: The ratio analysis helps, you to understand whether the business firm has taken the right kind, of operating, investing and financing decisions. It indicates how far, they have helped in improving the performance., 2. Simplify complex figures and establish relationships: Ratios help in, simplifying the complex accounting figures and bring out their, relationships. They help summarise the financial information effectively, and assess the managerial efficiency, firm’s credit worthiness, earning, capacity, etc., 3. Helpful in comparative analysis: The ratios are not be calculated for, one year only. When many year figures are kept side by side, they help, a great deal in exploring the trends visible in the business. The, knowledge of trend helps in making projections about the business, which is a very useful feature., 4. Identification of problem areas: Ratios help business in identifying, the problem areas as well as the bright areas of the business. Problem, areas would need more attention and bright areas will need polishing, to have still better results., 5. Enables SWOT analysis: Ratios help a great deal in explaining the, changes occurring in the business. The information of change helps, the management a great deal in understanding the current threats, and opportunities and allows business to do its own SWOT (StrengthWeakness-Opportunity-Threat) analysis., 6. Various comparisons: Ratios help comparisons with certain bench, marks to assess as to whether firm’s performance is better or otherwise., For this purpose, the profitability, liquidity, solvency, etc., of a business,, may be compared: (i) over a number of accounting periods with itself, (Intra-firm Comparison/Time Series Analysis), (ii) with other business, enterprises (Inter-firm Comparison/Cross-sectional Analysis) and, (iii) with standards set for that firm/industry (comparison with standard, (or industry expectations)., 5.4, , Limitations of Ratio Analysis, , Since the ratios are derived from the financial statements, any weakness in the, original financial statements will also creep in the derived analysis in the form of, , 2018-19
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Accounting Ratios, , 201, , ratio analysis. Thus, the limitations of financial statements also form the, limitations of the ratio analysis. Hence, to interpret the ratios, the user should, be aware of the rules followed in the preparation of financial statements and, also their nature and limitations. The limitations of ratio analysis which arise, primarily from the nature of financial statements are as under:, 1. Limitations of Accounting Data: Accounting data give an unwarranted, impression of precision and finality. In fact, accounting data “reflect a, combination of recorded facts, accounting conventions and personal, judgements which affect them materially. For example, profit of the, business is not a precise and final figure. It is merely an opinion of the, accountant based on application of accounting policies. The soundness, of the judgement necessarily depends on the competence and integrity, of those who make them and on their adherence to Generally Accepted, Accounting Principles and Conventions”. Thus, the financial statements, may not reveal the true state of affairs of the enterprises and so the, ratios will also not give the true picture., 2. Ignores Price-level Changes: The financial accounting is based on, stable money measurement principle. It implicitly assumes that price, level changes are either non-existent or minimal. But the truth is, otherwise. We are normally living in inflationary economies where the, power of money declines constantly. A change in the price-level makes, analysis of financial statement of different accounting years meaningless, because accounting records ignore changes in value of money., 3. Ignore Qualitative or Non-monetary Aspects: Accounting provides, information about quantitative (or monetary) aspects of business., Hence, the ratios also reflect only the monetary aspects, ignoring, completely the non-monetary (qualitative) factors., 4. Variations in Accounting Practices: There are differing accounting, policies for valuation of inventory, calculation of depreciation, treatment, of intangibles Assets definition of certain financial variables etc.,, available for various aspects of business transactions. These variations, leave a big question mark on the cross-sectional analysis. As there are, variations in accounting practices followed by different business, enterprises, a valid comparison of their financial statements is not, possible., 5. Forecasting: Forecasting of future trends based only on historical, analysis is not feasible. Proper forecasting requires consideration of, non-financial factors as well., Now let us talk about the limitations of the ratios. The various limitations are:, 1. Means and not the End: Ratios are means to an end rather than the, end by itself., , 2018-19
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202, , Accountancy : Company Accounts and Analysis of Financial Statements, , 2., , Lack of ability to resolve problems: Their role is essentially indicative, and of whistle blowing and not providing a solution to the problem., 3. Lack of standardised definitions: There is a lack of standardised, definitions of various concepts used in ratio analysis. For example,, there is no standard definition of liquid liabilities. Normally, it includes, all current liabilities, but sometimes it refers to current liabilities less, bank overdraft., 4. Lack of universally accepted standard levels: There is no universal, yardstick which specifies the level of ideal ratios. There is no standard, list of the levels universally acceptable, and, in India, the industry, averages are also not available., 5. Ratios based on unrelated figures: A ratio calculated for unrelated, figures would essentially be a meaningless exercise. For example,, creditors of Rs. 1,00,000 and furniture of Rs. 1,00,000 represent a, ratio of 1:1. But it has no relevance to assess efficiency or solvency., Hence, ratios should be used with due consciousness of their limitations, while evaluating the performance of an organisation and planning the future, strategies for its improvement., Test your Understanding – I, 1., , 5.5, , State which of the following statements are True or False., (a) The only purpose of financial reporting is to keep the managers informed, about the progress of operations., (b) Analysis of data provided in the financial statements is termed as financial, analysis., (c) Long-term borrowings are concerned about the ability of a firm to discharge, its obligations to pay interest and repay the principal amount., (d) A ratio is always expressed as a quotient of one number divided by another., (e) Ratios help in comparisons of a firm’s results over a number of accounting, periods as well as with other business enterprises., (f) A ratio reflects quantitative and qualitative aspects of results., , Types of Ratios, , There is a two way classification of ratios: (1) traditional classification, and, (2) functional classification. The traditional classification has been on the basis, of financial statements to which the determinants of ratios belong. On this basis, the ratios are classified as follows:, 1. ‘Statement of Profit and Loss Ratios: A ratio of two variables from the, statement of profit and loss is known as statement of profit and loss, ratio. For example, ratio of gross profit to revenue from operations is, known as gross profit ratio. It is calculated using both figures from, the statement of profit and loss., , 2018-19
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Accounting Ratios, , 203, , 2., , Balance Sheet Ratios: In case both variables are from the balance, sheet, it is classified as balance sheet ratios. For example, ratio of, current assets to current liabilities known as current ratio. It is, calculated using both figures from balance sheet., 3. Composite Ratios: If a ratio is computed with one variable from the, statement of profit and loss and another variable from the balance, sheet, it is called composite ratio. For example, ratio of credit revenue, from operations to trade receivables (known as trade receivables, turnover ratio) is calculated using one figure from the statement of, profit and loss (credit revenue from operations) and another figure, (trade receivables) from the balance sheet., Although accounting ratios are calculated by taking data from financial, statements but classification of ratios on the basis of financial statements is, rarely used in practice. It must be recalled that basic purpose of accounting is, to throw light on the financial performance (profitability) and financial position, (its capacity to raise money and invest them wisely) as well as changes occurring, in financial position (possible explanation of changes in the activity level). As, such, the alternative classification (functional classification) based on the purpose, for which a ratio is computed, is the most commonly used classification which is, as follows:, 1. Liquidity Ratios: To meet its commitments, business needs liquid, funds. The ability of the business to pay the amount due to, stakeholders as and when it is due is known as liquidity, and the, ratios calculated to measure it are known as ‘Liquidity Ratios’. These, are essentially short-term in nature., 2. Solvency Ratios: Solvency of business is determined by its ability to, meet its contractual obligations towards stakeholders, particularly, towards external stakeholders, and the ratios calculated to measure, solvency position are known as ‘Solvency Ratios’. These are essentially, long-term in nature., 3. Activity (or Turnover) Ratios: This refers to the ratios that are, calculated for measuring the efficiency of operations of business based, on effective utilisation of resources. Hence, these are also known as, ‘Efficiency Ratios’., 4. Profitability Ratios: It refers to the analysis of profits in relation to, revenue from operations or funds (or assets) employed in the business, and the ratios calculated to meet this objective are known as ‘Profitability, Ratios’., , 2018-19
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204, , Accountancy : Company Accounts and Analysis of Financial Statements, , 5.6, , Liquidity Ratios, , Liquidity ratios are calculated to measure the short-term solvency of the business,, i.e. the firm’s ability to meet its current obligations. These are analysed by looking, at the amounts of current assets and current liabilities in the balance sheet. The, two ratios included in this category are current ratio and liquidity ratio., 5.6.1 Current Ratio, Current ratio is the proportion of current assets to current liabilities. It is, expressed as follows:, Current Ratio = Current Assets : Current Liabilities or, , Current Assets, Current Liabilities, , Current assets include current investments, inventories, trade receivables, (debtors and bills receivables), cash and cash equivalents, short-term loans and, advances and other current assets such as prepaid expenses, advance tax and, accrued income, etc., Current liabilities include short-term borrowings, trade payables (creditors, and bills payables), other current liabilities and short-term provisions., Illustration 1, Calulate Current Ratio from the following information:, Particulars, Inventories, Trade receivables, Advance tax, Cash and cash equivalents, Trade payables, Short-term borrowings (bank overdraft), , Rs., 50,000, 50,000, 4,000, 30,000, 1,00,000, 4,000, , Solution:, Current Assets, , Current Ratio, , =, , Current Assets, , =, , Current Liabilities, , =, =, =, =, =, , Current Ratio, , =, , Current Liabilities, Inventories + Trade receivables + Advance tax +, Cash and cash equivalents, Rs. 50,000 + Rs. 50,000 + Rs. 4,000 + Rs. 30,000, Rs. 1,34,000, Trade payables + Short-term borrowings, Rs. 1,00,000 + Rs. 4,000, Rs. 1,04,000, Rs.1,34,000, , = 1.29 :1, , Rs.1,04,000, , 2018-19
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Accounting Ratios, , 205, , Significance: It provides a measure of degree to which current assets cover current, liabilities. The excess of current assets over current liabilities provides a measure, of safety margin available against uncertainty in realisation of current assets, and flow of funds. The ratio should be reasonable. It should neither be very high, or very low. Both the situations have their inherent disadvantages. A very high, current ratio implies heavy investment in current assets which is not a good, sign as it reflects under utilisation or improper utilisation of resources. A low, ratio endangers the business and puts it at risk of facing a situation where it, will not be able to pay its short-term debt on time. If this problem persists, it, may affect firm’s credit worthiness adversely. Normally, it is safe to have this, ratio within the range of 2:1., 5.6.2, , Quick Ratio, , It is the ratio of quick (or liquid) asset to current liabilities. It is expressed as, Quick ratio = Quick Assets : Current Liabilities or, , Quick Assets, Current Liabilities, , The quick assets are defined as those assets which are quickly convertible, into cash. While calculating quick assets we exclude the inventories at the end, and other current assets such as prepaid expenses, advance tax, etc., from the, current assets. Because of exclusion of non-liquid current assets it is considered, better than current ratio as a measure of liquidity position of the business. It is, calculated to serve as a supplementary check on liquidity position of the business, and is therefore, also known as ‘Acid-Test Ratio’., Illustration 2, Calculate quick ratio from the information given in illustration 1., Solution:, Quick Assets, , Quick Ratio, , =, , Quick Assets, , Current Liabilities, , =, =, =, =, , Quick Ratio, , =, , Current Liabilities, , Current assets – (Inventories + Advance tax), Rs. 1,34,000 – (Rs. 50,000 + Rs. 4,000), Rs. 80,000, Rs. 1,04,000, Rs. 80,000, , = 0.77 :1, , Rs. 1,04,000, , Significance: The ratio provides a measure of the capacity of the business to, meet its short-term obligations without any flaw. Normally, it is advocated to be, , 2018-19
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206, , Accountancy : Company Accounts and Analysis of Financial Statements, , safe to have a ratio of 1:1 as unnecessarily low ratio will be very risky and a high, ratio suggests unnecessarily deployment of resources in otherwise less profitable, short-term investments., Illustration 3, Calculate ‘Liquidity Ratio’ from the following information:, Current liabilities, Current assets, Inventories, Advance tax, Prepaid expenses, , =, =, =, =, =, , Rs. 50,000, Rs. 80,000, Rs. 20,000, Rs. 5,000, Rs. 5,000, , Solution, Liquid Assets, , Liquidity Ratio, , =, , Liquidity Assets, , =, =, =, , Current Liabilities, , Current assets – (Inventories + Prepaid expenses +, Advance tax), Rs. 80,000 – (Rs. 20,000 + Rs. 5,000 + Rs. 5,000), Rs. 50,000, Rs. 50,000, , Liquidity Ratio, , =, , = 1 :1, , Rs. 50,000, , Illustration 4, X Ltd., has a current ratio of 3.5:1 and quick ratio of 2:1. If excess of current, assets over quick assets represented by inventories is Rs. 24,000, calculate, current assets and current liabilities., Solution:, Current Ratio, Quick Ratio, Let Current liabilities, Current assets, and Quick assets, Inventories, 24,000, 24,000, x, Current Liabilities, Current Assets, , =, =, =, =, =, =, =, =, =, =, =, , 3.5:1, 2:1, x, 3.5x, 2x, Current assets – Quick assets, 3.5x – 2x, 1.5x, Rs.16,000, Rs.16,000, 3.5x = 3.5 × Rs. 16,000 = Rs. 56,000., , 2018-19
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Accounting Ratios, , 207, , Verification :, Current Ratio, , =, =, =, =, =, =, , Quick Ratio, , Current assets : Current liabilities, Rs. 56,000 : Rs. 16,000, 3.5 : 1, Quick assets : Current liabilities, Rs. 32,000 : Rs. 16,000, 2:1, , Illustration 5, Calculate the current ratio from the following information:, Total assets, Non-current liabilities, Shareholders’ Funds, Non-Current Assets:, Fixed assets, Non-current Investments, , =, =, =, , Rs. 3,00,000, Rs. 80,000, Rs. 2,00,000, , =, =, , Rs. 1,60,000, Rs. 1,00,000, , Solution:, Total assets, Rs. 3,00,000, Current assets, Total assets, , Rs. 3,00,000, Current liabilities, , =, =, =, =, =, , Non-current assets + Current assets, Rs. 2,60,000 + Current assets, Rs. 3,00,000 – Rs. 2,60,000 = Rs. 40,000, Equity and Liabilities, Shareholders’ Funds + Non-current liabilities +, Current liabilities, = Rs. 2,00,000 + Rs. 80,000 + Current Liabilities, = Rs. 3,00,000 – Rs. 2,80,000, = Rs. 20,000, Current Assets, , Current Ratio, , =, , Current Liabilities, Rs. 40,000, , =, , = 2 :1, , Rs. 20,000, , Do it Yourself, 1., , Current liabilities of a company are Rs. 5,60,000, current ratio is 2.5:1 and, quick ratio is 2:1. Find the value of the Inventories., , 2., , Current ratio = 4.5:1, quick ratio = 3:1.Inventory is Rs. 36,000. Calculate the, current assets and current liabilities., , 3., , Current assets of a company are Rs. 5,00,000. Current ratio is 2.5:1 and, Liquid ratio is 1:1. Calculate the value of current liabilities, liquid assets, and inventories., , 2018-19
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208, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 6, The current ratio is 2 : 1. State giving reasons which of the following transactions, would improve, reduce and not change the current ratio:, (a) Payment of current liability;, (b) Purchased goods on credit;, (c) Sale of a Computer (Book value: Rs. 4,000) for Rs. 3,000 only;, (d) Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000;, (e) Payment of dividend., Solution:, The given current ratio is 2 : 1. Let us assume that current assets are Rs. 50,000, and current liabilities are Rs. 25,000; Thus, the current ratio is 2 : 1. Now we, will analyse the effect of given transactions on current ratio., (a) Assume that Rs. 10,000 of creditors is paid by cheque. This will reduce, the current assets to Rs. 40,000 and current liabilities to Rs. 15,000., The new ratio will be 2.67 : 1 (Rs. 40,000/Rs.15,000). Hence, it has, improved., (b) Assume that goods of Rs. 10,000 are purchased on credit. This will, increase the current assets to Rs. 60,000 and current liabilities to, Rs. 35,000. The new ratio will be 1.7:1 (Rs. 60,000/Rs. 35,000). Hence,, it has reduced., (c) Due to sale of a computer (a fixed asset) the current assets will, increase to Rs. 53,000 without any change in the current liabilities., The new ratio will be 2.12 : 1 (Rs. 53,000/Rs. 25,000). Hence, it has, improved., (d) This transaction will decrease the inventories by Rs. 10,000 and, increase the cash by Rs. 11,000 thereby increasing the current, assets by Rs. 1,000 without any change in the current liabilities., The new ratio will be 2.04 : 1 (Rs. 51,000/Rs. 25,000). Hence, it has, improved., (e) Assume that `5,000 is given by way of dividend. It will reduce the, current assets to `45,000 and short-term provisions (current liabilities), by `5,000. The new ratio will be 2:25:1 (`45,000/`20,000). Hence, it, has improved., 5.7, , Solvency Ratios, , The persons who have advanced money to the business on long-term basis, are interested in safety of their periodic payment of interest as well as the, , 2018-19
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Accounting Ratios, , 209, , repayment of principal amount at the end of the loan period. Solvency ratios, are calculated to determine the ability of the business to service its debt in, the long run. The following ratios are normally computed for evaluating, solvency of the business., 1. Debt-Equity Ratio;, 2. Debt to Capital Employed Ratio;, 3. Proprietary Ratio;, 4. Total Assets to Debt Ratio;, 5. Interest Coverage Ratio., 5.7.1 Debt-Equity Ratio, Debt-Equity Ratio measures the relationship between long-term debt and, equity. If debt component of the total long-term funds employed is small,, outsiders feel more secure. From security point of view, capital structure, with less debt and more equity is considered favourable as it reduces the, chances of bankruptcy. Normally, it is considered to be safe if debt equity, ratio is 2 : 1. However, it may vary from industry to industry. It is computed, as follows:, Long − term Debts, , Debt-Equity Ratio, , =, , Shareholders’ Funds, , where:, Shareholders’ Funds (Equity), , =, , Share Capital, , =, , Shareholders’ Funds (Equity), , =, , Working Capital, , =, , Share capital + Reserves and Surplus +, Money received against share warrants, Equity share capital + Preference share capital, or, Non-current sssets + Working capital –, Non-current liabilities, Current Assets – Current Liabilities, , Significance: This ratio measures the degree of indebtedness of an enterprise, and gives an idea to the long-term lender regarding extent of security of the, debt. As indicated earlier, a low debt equity ratio reflects more security. A high, ratio, on the other hand, is considered risky as it may put the firm into difficulty, in meeting its obligations to outsiders. However, from the perspective of the, owners, greater use of debt (trading on equity) may help in ensuring higher, returns for them if the rate of earnings on capital employed is higher than the, rate of interest payable., , 2018-19
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210, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 7, From the following balance sheet of ABC Co. Ltd. as on March 31, 2015. Calculate, debt equity ratio:, ABC Co. Ltd., Balance Sheet as at 31 March, 2017, Particulars, I., , Note, No., , Equity and Liabilities, 1. Shareholders’ funds, a) Share capital, b) Reserves and surplus, c) Money received against share warrants, 2. Non-current Liabilities, a) Long-term borrowings, b) Other long-term liabilities, c) Long-term provisions, 3. Current Liabilities, a) Short-term borrowings, b) Trade payables, c) Other current liabilities, d) Short-term provisions, , II. Assets, 1. Non-Current Assets, a) Fixed 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 advances, , Amount, (Rs.), , 12,00,000, 2,00,000, 1,00,000, 4,00,000, 40,000, 60,000, 2,00,000, 1,00,000, 50,000, 1,50,000, 25,00,000, , 15,00,000, 2,00,000, 1,00,000, 1,50,000, 1,50,000, 1,00,000, 2,50,000, 50,000, 25,00,000, , Solution:, Debts, , Debt-Equity Ratio, , =, , Debt, , =, , Equity, , =, =, =, , Equity, , Long-term borrowings + Other long-term liabilities +, Long-term provisions, Rs. 4,00,000 + Rs. 40,000 + Rs. 60,000, Rs. 5,00,000, Share capital + Reserves and surplus + Money received, against share warrants, , 2018-19
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Accounting Ratios, , Alternatively,, Equity, liabilities, Working Capital, , 211, =, =, , Rs. 12,00,000 + Rs. 2,00,000 + Rs. 1,00,000, Rs. 15,00,000, , =, =, =, =, =, =, , Non-current assets + Working capital – Non-current, Rs. 18,00,000 + Rs. 2,00,000 – Rs. 5,00,000, Rs. 15,00,000, Current assets – Current liabilities, Rs. 7,00,000 –Rs. 5,00,000, Rs. 2,00,000, 50, 0000, , Debt Equity Ratio, , =, , = 0.33 : 1, , 1,50, 0000, , Illustration 8, From the following balance sheet of a company, calculate Debt-Equity Ratio:, Balance Sheet, Particulars, I., , Note, No., , Equity and Liabilities, 1. Shareholders’ funds, a) Share capital, b) Reserves and surplus, 2. Non-Current Liabilities, Long-term borrowings, 3. Current Liabilities, , 1, , Rs., , 10,00,000, 1,00,000, 1,50,000, 1,50,000, 14,00,000, , II. Assets, 1. Non-Current Assets, a) Fixed assets, - Tangible assets, 2. Current Assets, a) Inventories, b) Trade receivables, c) Cash and cash equivalents, , 2, , 11,00,000, 1,00,000, 90,000, 1,10,000, 14,00,000, , Notes to Accounts, Rs., 1. Share Capital, Equity Share Capital, Preference Share Capital, , 8,00,000, 2,00,000, 10,00,000, , 2018-19
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212, , Accountancy : Company Accounts and Analysis of Financial Statements, , Fixed Assets, Rs., 2. Tangible Assets:, Plant and Machinery, Land and Building, Motor Car, Furniture, , 5,00,000, 4,00,000, 1,50,000, 50,000, 11,00,000, , Solution:, Long - term Debts, , Debt-Equity Ratio, , =, , Long-term Debts, , =, =, , Long-term Borrowings, Rs. 1,50,000, , Equity, , =, =, , Share capital + Reserves and surplus, Rs. 10,00,000 + Rs. 1,00,000 = Rs. 11,00,000, , Debt Equity Ratio, , =, , Equity (Shareholders’ Funds), , 1, 50, 000, 11, 00, 000, , = 0.136 : 1, , 5.7.2 Debt to Capital Employed Ratio, The Debt to capital employed ratio refers to the ratio of long-term debt to the, total of external and internal funds (capital employed or net assets). It is computed, as follows:, Debt to Capital Employed Ratio = Long-term Debt/Capital Employed (or Net Assets), , Capital employed is equal to the long-term debt + shareholders’ funds., Alternatively, it may be taken as net assets which are equal to the total assets –, current liabilities taking the data of Illustration 7, capital employed shall work, out to Rs. 5,00,000 + Rs. 15,00,000 = Rs. 20,00,000. Similarly, Net Assets as, Rs. 25,00,000 – Rs. 5,00,000 = Rs. 20,00,000 and the Debt to capital employed, ratio as Rs. 5,00,000/Rs. 20,00,000 = 0.25:1., Significance: Like debt-equity ratio, it shows proportion of long-term debts in, capital employed. Low ratio provides security to lenders and high ratio helps, management in trading on equity. In the above case, the debt to Capital Employed, ratio is less than half which indicates reasonable funding by debt and adequate, security of debt., It may be noted that Debt to Capital Employed Ratio can also be computed, in relation to total assets. In that case, it usually refers to the ratio of total debts, , 2018-19
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Accounting Ratios, , 213, , (long-term debts + current liabilities) to total assets, i.e., total of non-current, and current assets (or shareholders’, funds + long-term debts + current liabilities),, and is expressed as, Debt to Capital Employed Ratio =, , Total Debts, Total Assets, , 5.7.3, , Proprietary Ratio, , Proprietary ratio expresses relationship of proprietor’s (shareholders) funds to, net assets and is calculated as follows :, Proprietary Ratio, , = Shareholders’, Funds/Capital employed (or net assets), , Based on data of Illustration 7, it shall be worked out as follows:, Rs. 15,00,000/Rs. 20,00,000 = 0.75 : 1, , Significance: Higher proportion of shareholders funds in financing the assets is, a positive feature as it provides security to creditors. This ratio can also be, computed in relation to total assets instead of net assets (capital employed). It, may be noted that the total of debt to capital employed ratio and proprietory, ratio is equal to 1. Take these ratios worked out on the basis of data of Illustration, 7, the debt to Capital Employed ratio is 0.25 : 1 and the Proprietory Ratio, 0.75 : 1 the total is 0.25 + 0.75 = 1. In terms of percentage it can be stated that, the 25% of the capital employed is funded by debts and 75% by owners’ funds., 5.7.4, , Total Assets to Debt Ratio, , This ratio measures the extent of the coverage of long-term debts by assets. It is, calculated as, Total assets to Debt Ratio = Total assets/Long-term debts, Taking the data of Illustration 8, this ratio will be worked out as follows:, Rs. 14,00,000/Rs. 1,50,000 = 9.33 : 1, The higher ratio indicates that assets have been mainly financed by owners, funds and the long-term loans is adequately covered by assets., It is better to take the net assets (capital employed) instead of total assets for, computing this ratio also. It is observed that in that case, the ratio is the reciprocal, of the debt to capital employed ratio., Significance: This ratio primarily indicates the rate of external funds in financing, the assets and the extent of coverage of their debts are covered by assets., , 2018-19
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214, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 9, From the following information, calculate Debt Equity Ratio, Total Assets to, Debt Ratio, Proprietory Ratio, and Debt to Capital Employed Ratio:, Balance Sheet as at March 31, 2017, 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, , Rs., , 4,00,000, 1,00,000, 1,50,000, 50,000, 7,00,000, , II. Assets, 1. Non-current Assets, a) Fixed assets, b) Non-current investments, 2. Current Assets, , 4,00,000, 1,00,000, 2,00,000, 7,00,000, , Solution:, Debts, i), , Debt-Equity Ratio =, Debt, Equity, , =, =, =, , Equity, Long-term borrowings = Rs. 1,50,000, Share capital + Reserves and surplus, Rs. 4,00,000 + Rs. 1,00,000 = Rs. 5,00,000, , Rs. 1,50,000, Debt-Equity Ratio =, , ii), , Rs. 5, 00, 000, , Total Assets to Debt Ratio, Total Assets, Long-term Debt, , =, =, =, , =, , = 0.3 : 1, Total assets, Long-term debts, , Fixed assets + Non-current investments + Current assets, Rs. 4,00,000 + Rs. 1,00,000 + Rs. 2,00,000 = Rs. 7,00,000, Rs. 1,50,000, , Rs. 7, 00, 000, Total Asset to Debt Ratio =, , Rs. 1,50, 000, , 2018-19, , = 4.67 : 1
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Accounting Ratios, , 215, Shareholders’ Funds, , iii) Proprietary Ratio =, , or, , Total Assets, , Rs. 5, 00, 000, =, , Rs. 7, 00, 000, , = 0.71 : 1, , Long-term, Long, - term debts, debts, iv) Debt to Capital Employed Ratio =, Capital Employed =, =, =, , Capital Employed, , Shareholders’ Funds + Long-term borrowings, Rs. 5,00,000 + Rs. 1,50,000, Rs. 6,50,000, Long-term, Long, - termdebts, debts, , Debt to Capital Employed Ratio=, , Capital Employed, , Rs. 1,50,000, =, , Rs. 6,50, 000, , = 0.23 : 1, , Illustration 10, The debt equity ratio of X Ltd. is 0.5 : 1. Which of the following would increase/, decrease or not change the debt equity ratio?, (i) Further issue of equity shares, (ii) Cash received from debtors, (iii) Sale of goods on cash basis, (iv) Redemption of debentures, (v) Purchase of goods on credit., Solution:, The change in the ratio depends upon the original ratio. Let us assume that, external funds are Rs. 5,00,000 and internal funds are Rs. 10,00,000., Now we will analyse the effect of given transactions on debt equity ratio., (i) Assume that Rs. 1,00,000 worth of equity shares are issued. This will, increase the internal funds to Rs. 11,00,000. The new ratio will be, 0.45 : 1 (5,00,000/11,00,000). Thus, it is clear that further issue of, equity shares decreases the debt-equity ratio., (ii) Cash received from debtors will leave the internal and external funds, unchanged as this will only affect the composition of current assets., Hence, the debt-equity ratio will remain unchanged., , 2018-19
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216, , Accountancy : Company Accounts and Analysis of Financial Statements, , (iii), (iv), , (v), , 5.7.5, , This will also leave the ratio unchanged as sale of goods on cash basis, neither affect Debt nor equity., Assume that Rs. 1,00,000 debentures are redeemed. This will decrease, the long-term debt to Rs. 4,00,000. The new ratio will be 0.4 : 1, (4,00,000/10,00,000). Redemption of debentures will decrease the, debit-equity ratio., This will also leave the ratio unchanged as purchase of goods on credit, neither affect Debt nor equity., Interest Coverage Ratio, , It is a ratio which deals with the servicing of interest on loan. It is a measure of, security of interest payable on long-term debts. It expresses the relationship, between profits available for payment of interest and the amount of interest, payable. It is calculated as follows:, Interest Coverage Ratio, , =, , Net Profit before Interest and Tax, Interest on long-term debts, , Significance: It reveals the number of times interest on long-term debts is covered, by the profits available for interest. A higher ratio ensures safety of interest on, debts., Illustration 11, From the following details, calculate interest coverage ratio:, Net Profit after tax Rs. 60,000; 15% Long-term debt 10,00,000; and Tax rate, 40%., Solution:, Net Profit after Tax, Tax Rate, Net Profit before tax, , =, =, =, =, =, Interest on Long-term Debt, =, Net profit before interest and tax =, =, Interest Coverage Ratio, =, , Rs. 60,000, 40%, Net profit after tax × 100/(100 – Tax rate), Rs. 60,000 × 100/(100 – 40), Rs. 1,00,000, 15% of Rs. 10,00,000 = Rs. 1,50,000, Net profit before tax + Interest, Rs. 1,00,000 + Rs. 1,50,000 = Rs. 2,50,000, Net Profit before Interest and, Tax/Interest on long-term debt, = Rs. 2,50,000/Rs. 1,50,000, = 1.67 times., , 2018-19
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Accounting Ratios, , 5.8, , 217, , Activity (or Turnover) Ratio, , These ratios indicate the speed at which, activities of the business are being, performed. The activity ratios express the number of times assets employed, or,, for that matter, any constituent of assets, is turned into sales during an accounting, period. Higher turnover ratio means better utilisation of assets and signifies, improved efficiency and profitability, and as such are known as efficiency ratios., The important activity ratios calculated under this category are, 1. Inventory Turnover;, 2. Trade receivable Turnover;, 3. Trade payable Turnover;, 4. Investment (Net assets) Turnover, 5. Fixed assets Turnover; and, 6. Working capital Turnover., 5.8.1, , Inventory Turnover Ratio, , It determines the number of times inventory is converted into revenue from, operations during the accounting period under consideration. It expresses the, relationship between the cost of revenue from operations and average inventory., The formula for its calculation is as follows:, Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory, , Where average inventory refers to arithmetic average of opening and closing, inventory, and the cost of revenue from operations means revenue from operations, less gross profit., Significance : It studies the frequency of conversion of inventory of finished, goods into revenue from operations. It is also a measure of liquidity. It determines, how many times inventory is purchased or replaced during a year. Low turnover, of inventory may be due to bad buying, obsolete inventory, etc., and is a danger, signal. High turnover is good but it must be carefully interpreted as it may be, due to buying in small lots or selling quickly at low margin to realise cash., Thus, it throws light on utilisation of inventory of goods., , 2018-19
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218, , Accountancy : Company Accounts and Analysis of Financial Statements, Test your Understanding – II, , (i), , (ii), , (iii), , (iv), , (v), , (vi), , The following groups of ratios are primarily measure risk:, A., liquidity, activity, and profitability, B., liquidity, activity, and inventory, C., liquidity, activity, and debt, D., liquidity, debt and profitability, The _________ ratios are primarily measures of return:, A., liquidity, B., activity, C., debt, D., profitability, The _________ of business firm is measured by its ability to satisfy its shortterm obligations as they become due:, A., activity, B., liquidity, C., debt, D., profitability, _________ ratios are a measure of the speed with which various accounts are, converted into revenue from operations or cash:, A., activity, B., liquidity, C., debt, D., profitability, The two basic measures of liquidity are:, A., inventory turnover and current ratio, B., current ratio and liquid ratio, C., gross profit margin and operating ratio, D., current ratio and average collection period, The _________ is a measure of liquidity which excludes _______, generally the, least liquid asset:, A., current ratio, trade receivable, B., liquid ratio, trade receivable, C., current ratio, inventory, D., liquid ratio, inventory, , Illustration 12, From the following information, calculate inventory turnover ratio :, , 2018-19
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Accounting Ratios, , 219, , Inventory in the beginning, Inventory at the end, Net purchases, Wages, Revenue from operations, Carriage inwards, , Rs., 18,000, 22,000, 46,000, 14,000, 80,000, 4,000, , =, =, =, =, =, =, , Solution:, Cost of Revenue from Operations, Inventory Turnover Ratio, , =, , Cost of Revenue from Operations, , =, , Average Inventory, Inventory in the beginning + Net, Purchases + Wages + Carriage inwards, – Inventory at the end, Rs. 18,000 + Rs. 46,000 + Rs. 14,000, + Rs. 4,000 – Rs. 22,000, Rs. 60,000, , =, =, , Inventory in the beginning + Inventory at the end, , Average Inventory, , =, , 2, Rs. 18, 000 + Rs. 22, 000, , =, , = Rs. 20,000, , 2, , Rs. 60, 000, ∴ Inventory Turnover Ratio =, , Rs. 20, 000, , = 3 Times, , Illustration 13, From the following information, calculate inventory turnover ratio:, Revenue from operations, Average Inventory, Gross Profit Ratio, , Rs., 4,00,000, 55,000, 10%, , =, =, =, , Solution:, Revenue from operations, =, Gross Profit, =, Cost of Revenue from operations =, =, , Rs. 4,00,000, 10% of Rs. 4,00,000 = Rs. 40,000, Revenue from operations – Gross Profit, Rs. 4,00,000 – Rs. 40,000 = Rs. 3,60,000, , 2018-19
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220, , Accountancy : Company Accounts and Analysis of Financial Statements, Cost of Revenue from Operations, , Inventory Turnover Ratio, , =, , Average Inventory, , Rs. 3, 60, 000, =, , = 6.55 times, , Rs. 55, 000, , Illustration 14, A trader carries an average inventory of Rs. 40,000. His inventory turnover ratio, is 8 times. If he sells goods at a profit of 20% on Revenue from operations, find, out the gross profit., Solution:, Cost of Revenue from Operations, , Inventory Turnover Ratio =, , Average Inventory, , 8=, , Cost of Revenue from Operations, Rs. 40, 000, 8 × Rs. 40,000, Rs. 3,20,000, , ∴ Cost of Revenue from operations =, =, , 100, , Revenue from operations, , = Cost of Revenue from operations ×, , 80, , 100, , = Rs. 3,20,000 ×, Gross Profit, , = Rs. 4,00,000, , 80, , = Revenue from operations – Cost of Revenue from operations, = Rs. 4,00,000 – Rs. 3,20,000 = Rs. 80,000, Do it Yourself, , 1., , 2., , Calculate the amount of gross profit:, Average inventory, =, Inventory turnover ratio, =, Selling price, =, Calculate Inventory Turnover Ratio:, Annual Revenue from operations =, Gross Profit, =, Inventory in the beginning, Inventory at the end, , =, =, , 2018-19, , Rs. 80,000, 6 times, 25% above cost, Rs. 2,00,000, 20% on cost of Revenue from, operations, Rs. 38,500, Rs. 41,500
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Accounting Ratios, , 5.8.2, , 221, , Trade Receivables Turnover Ratio, , It expresses the relationship between credit revenue from operations and trade, receivable. It is calculated as follows :, Trade Receivable Turnover ratio, , = Net Credit Revenue from Operations/Average, Trade Receivable, , Where Average Trade Receivable, , = (Opening Debtors and Bills Receivable + Closing, Debtors and Bills Receivable)/2, , It needs to be noted that debtors should be taken before making any provision, for doubtful debts., Significance: The liquidity position of the firm depends upon the speed with, which trade receivables are realised. This ratio indicates the number of times, the receivables are turned over and converted into cash in an accounting period., Higher turnover means speedy collection from trade receivable. This ratio also, helps in working out the average collection period. The ratio is calculated by, dividing the days or months in a year by trade receivables turnover ratio., i.e.,, , Number of days or Months, Trade receivables turnover ratio, , Illustration 15, Calculate the Trade receivables turnover ratio from the following information:, Rs., 4,00,000, 20% of Total Revenue from operations, 40,000, 1,20,000, , Total Revenue from operations, Cash Revenue from operations, Trade receivables as at 1.4.2016, Trade receivables as at 31.3.2017, , Solution:, Net Credit Revenue from Operations, , Trade Receivables Turnover Ratio, , =, , Credit Revenue from operations, , =, , Cash Revenue from operations, , =, , Total revenue from operations – Cash, revenue from operations, 20% of Rs. 4,00,000, , =, , Rs. 4,00,000 ×, , =, , Rs. 4,00,000 – Rs. 80,000 = Rs. 3,20,000, , Average Trade Receivables, , 20, , Credit Revenue from operations, , 2018-19, , 100, , = Rs. 80,000
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222, , Accountancy : Company Accounts and Analysis of Financial Statements, Opening Trade Receivables + Closing, , Average Trade Receivables, , Trade Receivables, , =, , 2, , Rs. 40, 000 + Rs. 1, 20, 000, , =, , = Rs. 80,000, , 2, Net Credit Revenue Form Operations, , Trade Receivables Turnover Rations =, , Average Inventoary, , Trade Receivables Turnover Ratio, , Rs. 3, 20,000, , =, , = 4 times., , Rs. 80,000, , 5.8.3, , Trade Payable Turnover Ratio, , Trade payables turnover ratio indicates the pattern of payment of trade payable., As trade payable arise on account of credit purchases, it expresses relationship, between credit purchases and trade payable. It is calculated as follows:, Trade Payables Turnover ratio, , =, , Where Average Trade Payable, , =, , Average Payment Period, , =, , Net Credit purchases/, Average trade payable, (Opening Creditors and Bills Payable +, Closing Creditors and Bills Payable)/2, , No. of days/month in a year, Trade Payables Turnover Ratio, , Significance : It reveals average payment period. Lower ratio means credit allowed, by the supplier is for a long period or it may reflect delayed payment to suppliers, which is not a very good policy as it may affect the reputation of the business., The average period of payment can be worked out by days/months in a year by, the Trade Payable Turnover Ratio., Illustration 16, Calculate the Trade payables turnover ratio from the following figures:, Credit purchases during 2016-17, Creditors on 1.4.2016, Bills Payables on 1.4.2016, Creditors on 31.3.2017, Bills Payables on 31.3.2017, , =, =, =, =, =, , Rs., 12,00,000, 3,00,000, 1,00,000, 1,30,000, 70,000, , Solution:, Net Credit Purchases, , Trade Payables Turnover Ratio =, , Average Trade Payables, , 2018-19
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Accounting Ratios, , 223, , Creditors in the beginning + Bills payables in the, beginning + Creditors at the end + Bills payables, at the end, Average Trade Payables, , =, , 2, , Rs. 3, 00, 000 + Rs. 1, 00, 000 + Rs. 1, 30, 000 + Rs. 70, 000, , =, , 2, , = Rs. 3,00,000, , Rs. 12, 00, 000, , ∴ Trade Payables Turnover Ratio =, , Rs. 3, 00,000, , = 4 times, , Illustration 17, From the following information, calculate –, (i), (ii), (iii), (iv), , Trade receivables turnover ratio, Average collection period, Trade rayable turnover ratio, Average payment period, , Given :, (Rs.), 8,75,000, 90,000, 48,000, 52,000, 4,20,000, 59,000, , Revenue from Operations, Creditors, Bills receivable, Bills payable, Purchases, Trade debtors, , Solution:, , Net Credit Revenue from operation, , (i) Trade Receivables Turnover Ratio =, , Average Trade Receivable, , Rs. 8,75, 000, =, , (Rs. 59, 000 + Rs. 48, 000)*, , = 8.18 times, * This figure has not been divided by 2, in order to calculate average Trade Receivables as, the figures of debtors and bills receivables in the beginning of the year are not available., So when only year-end figures are available use the same as it is., , 2018-19
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224, , Accountancy : Company Accounts and Analysis of Financial Statements, 365, , (ii), , Average Collection Period, , =, , =, , Trade Receivables Turnover Ratio, 365, 8.18, , = 45 days, , Purchases *, (iii), , Trade Payable Turnover Ratio, , =, , Average Trade Payables, , Purchases, , = Creditors + Bills payable, =, , 4,20,000, 90,000 + 52,000, 4,20,000, , = 1,42,000, , = 2.96 times, , 365, (iv), , =, , Average Payment Period, , =, , Trade Payables Turnover Ratio, , 365, 2.96, , = 123 days, *Since no information regarding credit purchase is given, hence it will be related as net, purchases., , 5.8.4, , Net Assets or Capital Employed Turnover Ratio, , It reflects relationship between revenue from operations and net assets (capital, employed) in the business. Higher turnover means better activity and profitability., It is calculated as follows :, Revenue from Operation, Net Assets or Capital Employed Turnover ratio, , =, , Capital Employed, , Capital employed turnover ratio which studies turnover of capital employed, (or Net Assets) is analysed further by following two turnover ratios :, (a), , Fixed Assets Turnover Ratio : It is computed as follows:, Net Revenue from Operation, , Fixed asset turnover Ratio, , =, , 2018-19, , Net Fixed Assets
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Accounting Ratios, (b), , 225, , Working Capital Turnover Ratio : It is calculated as follows :, Net Revenue from Operation, , Working Capital Turnover Ratio, , =, , Working Capital, , Significance : High turnover of capital employed, working capital and fixed assets, is a good sign and implies efficient utilisation of resources. Utilisation of capital, employed or, for that matter, any of its components is revealed by the turnover, ratios. Higher turnover reflects efficient utilisation resulting in higher liquidity, and profitability in the business., Illustration 18, From the following information, calculate (i) Net assets turnover, (ii) Fixed assets, turnover, and (iii) Working capital turnover ratios :, Amount, (Rs.), Preference shares capital, Equity share capital, General reserve, Balance in Statement of Profit and, Loss, 15% debentures, 14% Loan, Creditors, Bills payable, Outstanding expenses, , Amount, (Rs.), , 4,00,000, 6,00,000, 1,00,000, 3,00,000, , Plant and Machinery, Land and Building, Motor Car, Furniture, , 8,00,000, 5,00,000, 2,00,000, 1,00,000, , 2,00,000, 2,00,000, 1,40,000, 50,000, 10,000, , Inventory, Debtors, Bank, Cash, , 1,80,000, 1,10,000, 80,000, 30,000, , Revenue from operations for the year 2016-17 were Rs. 30,00,000, , Solution:, Revenue from Operations, , = Rs. 30,00,000, , Capital Employed, , = Share Capital + Reserves and, Surplus + Long-term Debts, (or Net Assets), = (Rs.4,00,000 + Rs.6,00,000), + (Rs.1,00,000 + Rs.3,00,000), + (Rs.2,00,000 + Rs.2,00,000), = Rs. 18,00,000, , Fixed Assets, , = Rs.8,00,000 + Rs.5,00,000 + Rs.2,00,000, , Working Capital, , = Current Assets – Current Liabilities, , + Rs.1,00,000 = Rs. 16,00,000, = Rs.4,00,000 – Rs.2,00,000 = Rs. 2,00,000, , 2018-19
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226, , Accountancy : Company Accounts and Analysis of Financial Statements, Net Assets Turnover Ratio, , = Rs.30,00,000/Rs.18,00,000, , = 1.67 times, , Fixed Assets Turnover Ratio, , = Rs.30,00,000/Rs.16,00,000, , = 1.88 times, , Working Capital Turnover Ratio = Rs.30,00,000/Rs.2,00,000, , = 15 times., , Test your Understanding – III, (i), , (ii), , (iii), , (iv), , (v), , (vi), , The _________ is useful in evaluating credit and collection policies., A., average payment period, B., current ratio, C., average collection period, D., current asset turnover, The ___________ measures the activity of a firm’s inventory., A., average collection period, B., inventory turnover, C., liquid ratio, D., current ratio, The ___________ may indicate that the firm is experiencing stockouts and lost, sales., A., average payment period, B., inventory turnover ratio, C., average collection period, D., quick ratio, ABC Co. extends credit terms of 45 days to its customers. Its credit collection, would be considered poor if its average collection period was., A., 30 days, B., 36 days, C., 47 days, D., 37 days, ___________ are especially interested in the average payment period, since it, provides them with a sense of the bill-paying patterns of the firm., A., Customers, B., Stockholders, C., Lenders and suppliers, D., Borrowers and buyers, The __________ ratios provide the information critical to the long run operation, of the firm, A., liquidity, B., activity, C., solvency, D., , profitability, , 2018-19
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Accounting Ratios, , 5.9, , 227, , Profitability Ratios, , The profitability or financial performance is mainly summarised in the statement, of profit and loss. Profitability ratios are calculated to analyse the earning capacity, of the business which is the outcome of utilisation of resources employed in the, business. There is a close relationship between the profit and the efficiency with, which the resources employed in the business are utilised. The various ratios, which are commonly used to analyse the profitability of the business are:, 1. Gross profit ratio, 2. Operating ratio, 3. Operating profit ratio, 4. Net profit ratio, 5. Return on Investment (ROI) or Return on Capital Employed (ROCE), 6. Return on Net Worth (RONW), 7. Earnings per share, 8. Book value per share, 9. Dividend payout ratio, 10. Price earning ratio., 5.9.1 Gross Profit Ratio, Gross profit ratio as a percentage of revenue from operations is computed to, have an idea about gross margin. It is computed as follows:, Gross Profit Ratio = Gross Profit/Net Revenue of Operations × 100, Significance: It indicates gross margin on products sold. It also indicates the, margin available to cover operating expenses, non-operating expenses, etc., Change in gross profit ratio may be due to change in selling price or cost of, revenue from operations or a combination of both. A low ratio may indicate, unfavourable purchase and sales policy. Higher gross profit ratio is always a, good sign., Illustration 19, Following information is available for the year 2016-17, calculate gross profit, ratio:, Revenue from Operations: Cash, : Credit, Purchases : Cash, : Credit, Carriage Inwards, , Rs., 25,000, 75,000, 15,000, 60,000, 2,000, , 2018-19
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228, , Accountancy : Company Accounts and Analysis of Financial Statements, Salaries, Decrease in Inventory, Return Outwards, Wages, , 25,000, 10,000, 2,000, 5,000, , Solution:, Revenue from Operations, , Net Purchases, Cost of Revenue from, operations, , Gross Profit, , = Cash Revenue from Operations + Credit Revenue from, Opration, = Rs.25,000 + Rs.75,000 = Rs. 1,00,000, = Cash Purchases + Credit Purchases – Return Outwards, = Rs.15,000 + Rs.60,000 – Rs.2,000 = Rs. 73,000, = Purchases + (Opening Inventory – Closing Inventory) +, Direct Expenses, = Purchases + Decrease in inventory + Direct Expenses, = Rs.73,000 + Rs.10,000 + (Rs.2,000 + Rs.5,000), = Rs.90,000, = Revenue from Operations – Cost of Revenue from, Operation, = Rs.1,00,000 – Rs.90,000, =, =, =, =, , Gross Profit Ratio, , 5.9.2, , Rs. 10,000, Gross Profit/Net Revenue from Operations ×100, Rs.10,000/Rs.1,00,000 × 100, 10%., , Operating Ratio, , It is computed to analyse cost of operation in relation to revenue from operations., It is calculated as follows:, Operating Ratio, , =, , (Cost of Revenue from Operations + Operating Expenses)/, Net Revenue from Operations ×100, , Operating expenses include office expenses, administrative expenses, selling, expenses, distribution expenses, depreciation and employee benefit expenses etc., Cost of operation is determined by excluding non-operating incomes and, expenses such as loss on sale of assets, interest paid, dividend received, loss by, fire, speculation gain and so on., , 2018-19
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Accounting Ratios, , 5.9.3, , 229, , Operating Profit Ratio, , It is calculated to reveal operating margin. It may be computed directly or as a, residual of operating ratio., Operating Profit Ratio, , = 100 – Operating Ratio, , Alternatively, it is calculated as under:, Operating Profit Ratio, , = Operating Profit/ Revenue from Operations × 100, , Where Operating Profit, , = Revenue from Operations – Operating Cost, , Significance: Operating ratio is computed to express cost of operations excluding, financial charges in relation to revenue from operations. A corollary of it is, ‘Operating Profit Ratio’. It helps to analyse the performance of business and, throws light on the operational efficiency of the business. It is very useful for, inter-firm as well as intra-firm comparisons. Lower operating ratio is a very, healthy sign., Illustration 20, Given the following information:, Revenue from Operations, Cost of Revenue from Operations, Selling expenses, Administrative Expenses, , Rs., 3,40,000, 1,20,000, 80,000, 40,000, , Calculate Gross profit ratio and Operating ratio., Solution:, Gross Profit, , Gross Profit Ratio, , =, =, =, , Revenue from Operations – Cost of Revenue from, Operations, Rs. 3,40,000 – Rs. 1,20,000, Rs. 2,20,000, , =, , Gross Profit, × 100, Revenue from operation, , =, Operating Cost, , =, =, =, =, , Operating Ratio, , =, , Rs. 2,20,000, × 100, Rs. 3,40,000, 64.71%, Cost of Revenue from Operations + Selling Expenses, + Administrative Expenses, Rs. 1,20,000 + 80,000 + 40,000, Rs. 2,40,000, Operating Cost, Net Revenue from Operations, , =, , Rs. 2,40,000, × 100, Rs. 3,40,000, , =, , 70.59%, , 2018-19, , × 100
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230, , Accountancy : Company Accounts and Analysis of Financial Statements, , 5.9.4, , Net Profit Ratio, , Net profit ratio is based on all inclusive concept of profit. It relates revenue from, operations to net profit after operational as well as non-operational expenses, and incomes. It is calculated as under:, Net Profit Ratio, , =, , Net profit/Revenue from Operations × 100, , Generally, net profit refers to profit after tax (PAT)., Significance: It is a measure of net profit margin in relation to revenue from, operations. Besides revealing profitability, it is the main variable in computation, of Return on Investment. It reflects the overall efficiency of the business, assumes, great significance from the point of view of investors., Illustration 21, Gross profit ratio of a company was 25%. Its credit revenue from operations was, Rs. 20,00,000 and its cash revenue from operations was 10% of the total revenue, from operations. If the indirect expenses of the company were Rs. 50,000,, calculate its net profit ratio., Solution:, Cash Revenue from Operations, Hence, total Revenue from Operations are, Gross profit = 0.25 × 22,22,222, Net profit, Net profit ratio, , =, =, =, =, =, =, =, =, =, , 5.9.5, , Rs.20,00,000 × 10/90, Rs.2,22,222, Rs.22,22,222, Rs. 5,55,555, Rs.5,55,555 – 50,000, Rs.5,05,555, Net profit/Revenue from Operations, × 100, Rs.5,05,555/Rs.22,22,222 × 100, 22.75%., , Return on Capital Employed or Investment, , It explains the overall utilisation of funds by a business enterprise. Capital, employed means the long-term funds employed in the business and includes, shareholders’ funds, debentures and long-term loans. Alternatively, capital, employed may be taken as the total of non-current assets and working capital., Profit refers to the Profit Before Interest and Tax (PBIT) for computation of this, ratio. Thus, it is computed as follows:, Return on Investment (or Capital Employed) =, , Profit before Interest and Tax/, Capital Employed × 100, , Significance: It measures return on capital employed in the business. It reveals, the efficiency of the business in utilisation of funds entrusted to it by shareholders,, , 2018-19
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Accounting Ratios, , 231, , debenture-holders and long-term loans. For inter-firm comparison, return on, capital employed funds is considered a good measure of profitability. It also, helps in assessing whether the firm is earning a higher return on capital employed, as compared to the interest rate paid., 5.9.6, , Return on Shareholders’ Funds, , This ratio is very important from shareholders’ point of view in assessing whether, their investment in the firm generates a reasonable return or not. It should be, higher than the return on investment otherwise it would imply that company’s, funds have not been employed profitably., A better measure of profitability from shareholders point of view is obtained, by determining return on total shareholders’ funds, it is also termed as Return, on Net Worth (RONW) and is calculated as under :, Profit after Tax, , Return on Shareholders’ Fund =, , 5.9.7, , Shareholders’ Funds, , × 100, , Earnings per Share, , The ratio is computed as:, EPS, , = Profit available for equity shareholders/Number of Equity Shares, , In this context, earnings refer to profit available for equity shareholders which, is worked out as, Profit after Tax – Dividend on Preference Shares., This ratio is very important from equity shareholders point of view and, also for the share price in the stock market. This also helps comparison with, other to ascertain its reasonableness and capacity to pay dividend., 5.9.8, , Book Value per Share, , This ratio is calculated as :, Book Value per share = Equity shareholders’ funds/Number of Equity Shares, , Equity shareholder fund refers to Shareholders’ Funds – Preference Share, Capital. This ratio is again very important from equity shareholders point of, view as it gives an idea about the value of their holding and affects market price, of the shares., 5.9.9, , Dividend Payout Ratio, , This refers to the proportion of earning that are distributed to the shareholders., It is calculated as –, Dividend per share, Dividend Payout Ratio =, , Earnings per share, , This reflects company’s dividend policy and growth in owner’s equity., , 2018-19
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232, , Accountancy : Company Accounts and Analysis of Financial Statements, , 5.9.10 Price / Earning Ratio, The ratio is computed as –, P/E Ratio = Market Price of a share/earnings per share, , For example, if the EPS of X Ltd. is Rs. 10 and market price is Rs. 100, the, price earning ratio will be 10 (100/10). It reflects investors expectation about, the growth in the firm’s earnings and reasonableness of the market price of its, shares. P/E Ratio vary from industy to industry and company to company in, the same industry depending upon investors perception of their future., Illustration 22, From the following details, calculate Return on Investment:, Share Capital : Equity (Rs.10), 12% Preference, General Reserve, 10% Debentures, , Rs. 4,00,000 Current Liabilities, Rs. 1,00,000 Fixed Assets, Rs. 1,84,000 Current Assets, Rs. 4,00,000, , Rs. 1,00,000, Rs. 9,50,000, Rs. 2,34,000, , Also calculate Return on Shareholders’ Funds, EPS, Book value per share, and P/E ratio if the market price of the share is Rs. 34 and the net profit after tax, was Rs. 1,50,000, and the tax had amounted to Rs. 50,000., Solution:, Profit before interest and tax, , Capital Employed, , =, =, =, =, =, , Return on Investment, , =, , Shareholders’ Fund, , =, =, =, , Return on Shareholders’ Funds, , EPS, , Preference Share Dividend, , Profit available to equity, Shareholders, , =, =, =, =, =, =, =, =, =, =, =, , Rs. 1,50,000 + Debenture interest + Tax, Rs. 1,50,000 + Rs. 40,000 + Rs. 50,000, Rs.2,40,000, Equity Share Capital + Preference Share, Capital + Reserves + Debentures, Rs. 4,00,000 + Rs. 1,00,000 + Rs. 1,84,000, + Rs. 4,00,000 = Rs. 10,84,000, Profit before Interest and Tax/, Capital Employed × 100, Rs. 2,40,000/Rs. 10,84,000 × 100, 22.14%, Equity Share Capital + Preference Share Capital, + General Reserve, Rs. 4,00,000 + Rs. 1,00,000 + Rs. 1,84,000, Rs. 6,84,000, Profit after tax/shareholders’ Funds × 100, Rs. 1,50,000/Rs. 6,84,000 × 100, 21.93%, Profit available for Equity Shareholders/, Number of Equity Shares, Rs. 1,38,000/ 40,000 = Rs. 3.45, Rate of Dividend × Prefence Share Capital, 12% of Rs. 1,00,000, Rs. 12,000, Profit after Tax – Preference dividend on, preference shares, , 2018-19
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Accounting Ratios, where, Dividend on Prefrence, shares, , P/E Ratio, , Book Value per share, , 233, =, =, =, =, =, =, =, =, , Rate of Dividend × Preference Share Capital, 12% of Rs. 1,00,000, Rs.12,000, Rs. 1,50,000 – Rs. 12,000 = Rs. 1,38,000, Market price of a share/ Earnings per share, 34/3.45, 9.86 Times, Equity Shareholders’ fund/No. of, equity shares, , Equity share capital, where, Number of Equity Shares =, , Face value per share, Rs. 4, 00, 000, , =, , Hence, Book value per share, , =, =, , Rs.10, 40,000 shares, Rs. 5,84,000/40,000 shares = Rs. 14.60, , It may be noted that various ratios are related with each other. Sometimes,, the combined information regarding two or more ratios is given and missing, figures may need to be calculated. In such a situation, the formula of the ratio, will help in working out the missing figures (See Illsuatration 23 and 24)., Illustration 23, Calculate current assets of a company from the following information:, Inventory turnover ratio, = 4 times, Inventory at the end is Rs. 20,000 more than the inventory in the beginning., Revenue from Operations Rs. 3,00,000 and gross profit ratio is 20% of revenue from, operations., Current liabilities, = Rs. 40,000, Quick ratio, = 0.75 : 1, , Solution:, Cost of Revenue from Operations =, =, =, =, Inventory Turnover Ratio, =, Average Inventory, =, =, Average Inventory, =, Rs. 60,000, =, Rs. 60,000, Opening Inventory, Closing Inventory, Liquid Ratio, , =, =, =, =, , Revenue from Operations – Gross Profit, Rs. 3,00,000 – (Rs. 3,00,000 × 20%), Rs. 3,00,000 – Rs. 60,000, Rs. 2,40,000, Cost of Revenue from Operations/ Average Inventory, Cost of Revenue from Operations/4, Rs. 2,40,000/4 = Rs. 60,000, (Opening inventory + Closing inventory)/2, Opening inventory + (Opening inventory, +Rs.20,000)/2, Opening inventory + Rs. 10,000, Rs. 50,000, Rs. 70,000, Liquid assets/current liabilities, , 2018-19
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234, , Accountancy : Company Accounts and Analysis of Financial Statements, 0.75, Liquid Assets, Current Assets, , =, =, =, =, , Liquid assets/Rs. 40,000, Rs. 40,000 × 0.75 = Rs. 30,000, Liquid assets + Closing inventory, Rs. 30,000 + Rs. 70,000 = Rs. 1,00,000, , Illustration 24, The current ratio is 2.5 : 1. Current assets are Rs. 50,000 and current liabilities, are Rs. 20,000. How much must be the decline in the current assets to bring the, ratio to 2 : 1, Solution:, Current liabilities, = Rs. 20,000, For a ratio of 2 : 1, the current assets must be 2 × 20,000 = Rs. 40,000, Present level of current assets, = Rs. 50,000, Necessary decline, = Rs. 50,000 – Rs. 40,000, = Rs. 10,000, , Illustration 25, Following information is given by a company from its books of accounts as on, March 31, 2017:, Particulars, Inventory, Total Current Assets, Shareholders’ funds, 13% Debentures, Current liabilities, Net Profit Before Tax, Cost of revenue from operations, , Rs., 1,00,000, 1,60,000, 4,00,000, 3,00,000, 1,00,000, 3,51,000, 5,00,000, , Calculate:, i) Current Ratio, ii) Liquid Ratio, iii) Debt Equity Ratio, iv) Interest Coverage Ratio, v) Inventory Turnover Ratio, , Solution:, Current Assets, , i), , Current Ratio, , =, , Current Liabilities, , Rs. 1, 60, 000, =, , Rs. 1, 00, 000, , 2018-19, , = 1.6 : 1
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Accounting Ratios, , 235, , ii) Liquid Assets, , =, =, =, , Liquid Ratio, , =, , Current assets – Inventory, Rs. 1,60,000 – Rs. 1,00,000, Rs. 60,000, Liquid Assets, Current Liabilities, , Rs. 60, 000, =, , Rs. 1, 00, 000, , = 0.6 : 1, , Long-term Debts, , iii) Debt-Equity Ratio, , =, , Shareholders’ Funds, , Rs. 3, 00, 000, =, iv) Net Profit before Interest =, & Tax, =, =, , Rs. 4, 00, 000, , = 0.75 : 1, , Net Profit before Tax + Interest on Long, term Debts, Rs. 3,51,000 + (13% of Rs. 3,00,000), Rs. 3,51,000 + Rs. 39,000 = Rs. 3,90,000, , Net Profit before Interest & Tax, Interest Coverage Ratio, , =, , Interest on Long Term Debts, , Rs. 3, 90, 000, =, , v) Inventory Turnover Ratio =, , Rs. 39, 000, , = 10 times, , Cost of Revenue from Operations, Average Inventory, , Rs. 5, 00,000, =, , Rs. 1, 00, 000, , = 5 times, , Note: In absence of information regarding ‘Inventory in the beginning’ and ‘Inventory, at the end’, the ‘Inventory’ is treated as Average Inventory., , Illustration 26, From the following information calculate (i) Earning per share (ii) Book value, per share (iii) Dividend payout ratio (iv) Price earning ratio, Particulars, 70,000 equity shares of Rs 10 each, Net Profit after tax but before dividend, Market price of a share, Dividend declared @ 15%, , 2018-19, , Rs., 7,00,000, 1,75,000, 13
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236, , Accountancy : Company Accounts and Analysis of Financial Statements, , Solution:, Profit available for Equity Shareholders, i), , Earning per share, , =, , Number of Equity Shares, , Rs. 1, 75, 000, =, , = Rs. 2.50, , Rs. 70, 000, , Equity Shareholders’ Funds, , ii) Book value per share, , =, , Number of Equity Shares, , Rs. 8, 75,000, =, , Rs. 70, 000, , = Rs. 12.50, , Dividend per share, , iii) Dividend payout ratio, , =, , Earnings per share, 1.50, , =, , 2.50, , = 0.6, , Market price of a share, , iv) Price earning ratio, , =, , Earnings per share, 13, , =, , 2.50, , = 5.20, , Terms Introduced in the Chapter, 1., 2., 3., 4., 5., 6., 7., , Ratio Analysis, Liquidity Ratios, Solvency Ratios, Activity Ratios, Profitability Ratios, Return on Investment (ROI), Quick Assets, , 2018-19, , 8., 9., 10., 11., 12., 13., 14., , Shareholders’ Funds (Equity), Return on Net Worth, Average Collection Period, Trade Receivables, Turnover Ratios, Efficiency Ratios, Dividend Payout
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Accounting Ratios, , 237, , Summary, Ratio Analysis: An important tool of financial statement analysis is ratio, analysis. Accounting ratios represent relationship between two accounting, numbers., Objective of Ratio Analysis: The objective of ratio analysis is to provide a, deeper analysis of the profitability, liquidity, solvency and activity levels in, the business. It is also to identify the problem areas as well as the strong, areas of the business., Advantages of Ratio Analysis: Ratio analysis offers many advantages, including enabling financial statement analysis, helping understand efficacy, of decisions, simplifying complex figures and establish relationships, being, helpful in comparative analysis, identification of problem areas, enables, SWOT analysis, and allows various comparisons., Limitations of Ratio Analysis: There are many limitations of ratio analysis., Few are based because of the basic limitations of the accounting data on, which it is based. In the first set are included factors like Historical Analysis,, Ignores Price-level Changes, Ignore Qualitative or Non-monetary Aspects,, Limitations of Accounting Data, Variations in Accounting Practices, and, Forecasting. In the second set are included factor like means and not the, end, lack of ability to resolve problems, lack of standardised definitions,, lack of universally accepted standard levels, and ratios based on unrelated, figures., Types of Ratios: There are many types of ratios, viz., liquidity, solvency,, activity and profitability ratios. The liquidity ratios include current ratio, and acid test ratio. Solvency ratios are calculated to determine the ability, of the business to service its debt in the long run instead of in the short, run. They include debt equity ratio, total assets to debt ratio, proprietary, ratio and interest coverage ratio. The turnover ratios basically exhibit the, activity levels characterised by the capacity of the business to make more, sales or turnover and include Inventory Tur nover, Trade Receivables, Turnover, Trade Payables Turnover, Working Capital Turnover, Fixed Assets, Turnover and Current assets Turnover. Profitability ratios are calculated, to analyse the earning capacity of the business which is the outcome of, utilisation of resources employed in the business. The ratios include Gross, Profit ratio, Operating ratio, Net Profit Ratio, Return on investment (Capital, employed), Earnings per Share, Book Value per Share, Dividend per Share, and Price/Earning ratio., , 2018-19
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238, , Accountancy : Company Accounts and Analysis of Financial Statements, , Questions for Practice, Short Answer Questions, 1. What do you mean by Ratio Analysis?, 2. What are various types of ratios?, 3. What relationships will be established to study:, a. Inventory turnover, b. Trade receivables turnover, c. Trade payables turnover, d. Working capital turnover, 4. The liquidity of a business firm is measured by its ability to satisfy its, long-term obligations as they become due. What are the ratios used for, this purpose?, 5. The average age of inventory is viewed as the average length of time, inventory is held by the firm for which explain with reasons., Long Answer Questions, 1. What are liquidity ratios? Discuss the importance of current and liquid, ratio., 2. How would you study the Solvency position of the firm?, 3. What are various profitability ratios? How are these worked out?, 4. The current ratio provides a better measure of overall liquidity only when, a firm’s inventory cannot easily be converted into cash. If inventory is, liquid, the quick ratio is a preferred measure of overall liquidity. Explain., Numerical Questions, 1. Following is the Balance Sheet of Raj Oil Mills Limited as at March 31, 2017., Calculate current ratio., Particulars, Equity and Liabilities:, 1. Shareholders’ funds, a) Share capital, b) Reserves and surplus, 2. Current Liabilities, Trade Payables, Total, II. Assets, 1. Non-current Assets, Fixed assets, – Tangible assets, , Rs., , I., , 7,90,000, 35,000, 72,000, 8,97,000, , 7,53,000, , 2018-19
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Accounting Ratios, , 239, , 2. Current Assets, a) Inventories, b) Trade Receivables, c) Cash and cash equivalents, Total, , 55,800, 28,800, 59,400, 8,97,000, , (Ans: Current Ratio 2:1), , 2. Following is the Balance Sheet of Title Machine Ltd. as at March 31, 2017., Particulars, , Amount, (Rs.), , 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) Short-term borrowings, b) Trade payables, c) Short-term provisions, Total, II. Assets, 1. Non-current assets, Fixed assets, - Tangible assets, 2. Current Assets, a) Inventories, b) Trade receivables, c) Cash and cash equivalents, d) Short-term loans and advances, Total, , 24,00,000, 6,00,000, 9,00,000, 6,00,000, 23,40,000, 60,000, 69,00,000, , 45,00,000, 12,00,000, 9,00,000, 2,28,000, 72,000, 69,00,000, , Calculate Current Ratio and Liquid Ratio., (Ans: Current Ratio 0.8 : 1, Liquid Ratio 0.4 : 1), 3. Current Ratio is 3.5 : 1. Working Capital is Rs. 90,000. Calculate the amount of, Current Assets and Current Liabilities., (Ans: Current Assets Rs. 1,26,000 and Current Liabilities Rs. 36,000), 4. Shine Limited has a current ratio 4.5 : 1 and quick ratio 3 : 1; if the inventory, is 36,000, calculate Current Liabilities and Current Assets., (Ans: Current Assets Rs. 1,08,000, Current Liabilities Rs. 24,000), 5. Current Liabilities of a company are Rs. 75,000. If current ratio is 4:1 and Liquid, Ratio is 1 : 1, calculate value of Current Assets, Liquid Assets and Inventory., (Ans: Current Assets Rs. 3,00,000, Liquid Assets Rs. 75,000 and Inventory, Rs. 2,25,000), , 2018-19
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240, , Accountancy : Company Accounts and Analysis of Financial Statements, , 6. Handa Ltd. has inventory of Rs. 20,000. Total liquid assets are Rs. 1,00,000, and quick ratio is 2 : 1. Calculate current ratio., (Ans: Current Ratio 2.4 : 1), 7. Calculate debt-equity ratio from the following information:, Total Assets, Rs. 15,00,000, Current Liabilities, Rs. 6,00,000, Total Debts, Rs. 12,00,000, (Ans: Debt-Equity Ratio 2 : 1.), 8. Calculate Current Ratio if:, Inventory is Rs. 6,00,000; Liquid Assets Rs. 24,00,000; Quick Ratio 2 : 1., (Ans: Current Ratio 2.5 : 1), 9. Compute Inventory Turnover Ratio from the following information:, Net Revenue from Operations, Rs. 2,00,000, Gross Profit, Rs., 50,000, Inventory at the end, Rs., 60,000, Excess of inventory at the end over, inventory in the beginning, Rs., 20,000, (Ans: Inventory Turnover Ratio 3 times), 10. Calculate following ratios from the following information:, (i) Current ratio (ii) Liquid ratio (iii) Operating Ratio (iv) Gross profit ratio, Current Assets, Current Liabilities, Inventory, Operating Expenses, Revenue from Operations, Cost of Revenue from operation, , Rs., Rs., Rs., Rs., Rs., Rs., , 35,000, 17,500, 15,000, 20,000, 60,000, 30,000, , (Ans: Current Ratio 2 : 1; Liquid Ratio 1.14 : 1; Operating Ratio 83.3%; Gross, Profit Ratio 50%), 11. From the following information calculate:, (i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current Ratio (iv) Liquid, Ratio (v) Net Profit Ratio (vi) Working Capital Ratio:, Revenue from Operations, Net Profit, Cost of Revenue from Operations, Long-term Debts, Trade Payables, Average Inventory, Current Assets, , 2018-19, , Rs. 25,20,000, Rs., 3,60,000, Rs. 19,20,000, Rs., 9,00,000, Rs., 2,00,000, Rs., 8,00,000, Rs., 7,60,000
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Accounting Ratios, , 241, , Fixed Assets, Current Liabilities, Net Profit before Interest and Tax, , Rs. 14,40,000, Rs., 6,00,000, Rs., 8,00,000, , (Ans: Gross Profit Ratio 23.81%; Inventory Turnover Ratio 2.4 times; Current, Ratio 2.6 : 1; Liquid Ratio 1.27 : 1; Net Profit Ratio 14.21%; Working Capital, Ratio 2.625 times), 12. Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio, and Proprietary Ratio from the following information:, Paid-up Share Capital, Current Assets, Revenue from Operations, 13% Debentures, Current Liabilities, Cost of Revenue from Operations, , Rs., Rs., Rs., Rs., Rs., Rs., , 5,00,000, 4,00,000, 10,00,000, 2,00,000, 2,80,000, 6,00,000, , (Ans: Gross Profit Ratio 40%; Working Capital Ratio 8.33 times; Debt–Equity, Ratio 0.4 : 1; Proprietary Ratio 0.51 : 1), 13. Calculate Inventory Turnover Ratio if:, Inventory in the beginning is Rs. 76,250, Inventory at the end is 98,500, Gross, Revenue from Operations is Rs. 5,20,000, Sales Return is Rs. 20,000, Purchases, is Rs. 3,22,250., (Ans: Inventory Turnover Ratio 3.43 times), 14. Calculate Inventory Turnover Ratio from the data given below:, Inventory in the beginning of the year, Inventory at the end of the year, Carriage, Revenue from Operations, Purchases, , Rs. 10,000, Rs. 5,000, Rs. 2,500, Rs. 50,000, Rs. 25,000, , (Ans: Inventory Turnover Ratio 4.33 times), 15. A trading firm’s average inventory is Rs. 20,000 (cost). If the inventory turnover, ratio is 8 times and the firm sells goods at a profit of 20% on sales, ascertain, the profit of the firm., (Ans: Profit Rs. 40,000), 16. You are able to collect the following information about a company for two years:, Trade receivables on Apr. 01, Trade receivables on Mar. 31, Stock in trade on Mar. 31, Revenue from operations, (at gross profit of 25%), , 2015-16, Rs. 4,00,000, Rs. 6,00,000, Rs. 3,00,000, , 2018-19, , 2016-17, Rs. 5,00,000, Rs. 5,60,000, Rs. 9,00,000, Rs. 24,00,000
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242, , Accountancy : Company Accounts and Analysis of Financial Statements, , Calculate Inventory Turnover Ratio and Trade Receivables Turnover Ratio, (Ans: Inventory Turnover Ratio 2.4 times, Trade Receivables Turnover Ratio, 4.53 times), 17. From the following Balance Sheet and other information, calculate following, ratios:, (i) Debt-Equity Ratio (ii) Working Capital Turnover Ratio (iii) Trade Receivables, Turnover Ratio, , Balance Sheet as at March 31, 2017, Particulars, , Note, No., , 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, Fixed assets, – Tangible assets, 2. Current Assets, a) Inventories, b) Trade Receivables, c) Cash and cash equivalents, Total, , Rs., , I., , 10,00,000, 9,00,000, 12,00,000, 5,00,000, 36,00,000, , 18,00,000, 4,00,000, 9,00,000, 5,00,000, 36,00,000, , Additional Information: Revenue from Operations Rs. 18,00,000, (Ans: Debt-Equity Ratio 0.63 : 1; Working Capital Turnover Ratio 1.39 times; Trade, Receivables Turnover Ratio 2 times), 18. From the following information, calculate the following ratios:, i), , Liquid Ratio, , ii) Inventory turnover ratio, iii) Return on investment, Rs., 50,000, 60,000, , Inventory in the beginning, Inventory at the end, , 2018-19
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Accounting Ratios, , 243, , Revenue from operations, Gross Profit, Cash and Cash Equivalents, Trade Receivables, Trade Payables, Other Current Liabilities, Share Capital, Reserves and Surplus, (Balance in the Statement of Profit & Loss A/c), , 4,00,000, 1,94,000, 40,000, 1,00,000, 1,90,000, 70,000, 2,00,000, 1,40,000, , (Ans: Liquid Ratio 0.54 : 1; Inventory Turnover Ratio 3.74 times; Return on, Investment 41.17%), 19. From the following, calculate (a) Debt-Equity Ratio (b) Total Assets to Debt Ratio, (c) Proprietary Ratio., Equity Share Capital, Rs. 75,000, Preference Share Capital, Rs. 25,000, General Reserve, Rs. 45,000, Balance in the Statement of Profit & Loss, Rs. 30,000, Debentures, Rs. 75,000, Trade Payables, Rs. 40,000, Outstanding Expenses, Rs. 10,000, (Ans: Debt-Equity Ratio 0.43 : 1; Total Assets to Debt Ratio 4 : 1; Proprietary, Ratio 0.58 : 1), 20. Cost of Revenue from Operations is Rs. 1,50,000. Operating expenses are, Rs. 60,000. Revenue from Operations is Rs. 2,50,000. Calculate Operating Ratio., (Ans: Operating Ratio 84%), 21. Calculate the following ratio on the basis of following information:, (i) Gross Profit Ratio (ii) Current Ratio (iii) Acid Test Ratio (iv) Inventory Turnover, Ratio (v) Fixed Assets Turnover Ratio, Rs., Gross Profit, 50,000, Revenue from Operations, 1,00,000, Inventory, 15,000, Trade Receivables, 27,500, Cash and Cash Equivalents, 17,500, Current Liablilites, 40,000, Land & Building, 50,000, Plant & Machinery, 30,000, Furniture, 20,000, (Ans: (i) Gross Profit Ratio 50%; (ii) Current Ratio 1.5:1; (iii) Liquid Ratio 1.125 : 1,, Inventory Turnover Ratio 3.33 times; (iv) Fixed Assets Turnover Ratio 1 : 1), , 2018-19
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244, , Accountancy : Company Accounts and Analysis of Financial Statements, , 22. From the following information calculate Gross Profit Ratio, Inventory Turnover, Ratio and Trade Receivable Turnover Ratio., Revenue from Operations, Rs. 3,00,000, Cost of Revenue from Operations, Rs. 2,40,000, Inventory at the end, Rs. 62,000, Gross Profit, Rs. 60,000, Inventory in the beginning, Rs. 58,000, Trade Receivables, Rs. 32,000, (Ans: Gross Profit Ratio 20%; Inventory Turnover Ratio 4 times; Trade, Receivables Turnover Ratio 9.4 times), , Answers to Test your Understanding, Test your Understanding – I, (a) F, (b) T, (c) T, (d) F, (e) T, (F) F, Test your Understanding – II, (i) D, (ii) D, (iii) B, (iv) A, (v) B, (vi) D, Test your Understanding – III, (i) C, (ii) B, (iii) B, (iv) C, (v) C, (vi) C, , 2018-19
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6, , Cash Flow Statement, , T, , LEARNING OBJECTIVES, After studying this chapter,, you will be able to :, • state the purpose, and preparation of, statement of cash flow, statement;, • distinguish between, operating activities,, investing activities and, financing activities;, • prepare the statement, of cash flows using, direct method;, • prepare the cash, flow statement using, indirect method., , iill now you have learnt about the financial, statements being primarily inclusive of Position, Statement (showing the financial position of an, enterprise as on a particular date) and Income, Statement (showing the result of the operational, activities of an enterprise over a particular period)., There is also a third important financial statement, known as Cash flow statement, which shows inflows, and outflows of the cash and cash equivalents. This, statement is usually prepared by companies which, comes as a tool in the hands of users of financial, information to know about the sources and uses of, cash and cash equivalents of an enterprise over a, period of time from various activities of an, enterprise. It has gained substantial importance in, the last decade because of its practical utility to the, users of financial information., Accounting Standard-3 (AS-3), issued by The, Institute of Chartered Accountants of India (ICAI), in June 1981, which dealt with a statement showing, ‘Changes in Financial Position’, (Fund Flow, Statement), has been revised and now deals with the, preparation and presentation of Cash flow statement., The revised AS-3 has made it mandatory for all listed, companies to prepare and present a cash flow, statement along with other financial statements on, annual basis. Hence, it may be noted, that Fund, Flow statement is no more considered relevant in, accounting and so not discussed here., A cash flow statement provides information, about the historical changes in cash and cash, , 2018-19
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246, , Accountancy : Company Accounts and Analysis of Financial Statements, , equivalents of an enterprise by classifying cash flows into operating, investing, and financing activities. It requires that an enterprise should prepare a cash, flow statement and should present it for each accounting period for which financial, statements are presented. This chapter discusses this technique and explains, the method of preparing a cash flow statement for an accounting period., 6.1, , Objectives of Cash Flow Statement, , A Cash flow statement shows inflow and outflow of cash and cash equivalents from, various activities of a company during a specific period. The primary objective of, cash flow statement is to provide useful information about cash flows (inflows and, outflows) of an enterprise during a particular period under various heads,, i.e., operating activities, investing activities and financing activities., This information is useful in providing users of financial statements with a, basis to assess the ability of the enterprise to generate cash and cash equivalents, and the needs of the enterprise to utilise those cash flows. The economic decisions, that are taken by users require an evaluation of the ability of an enterprise to, generate cash and cash equivalents and the timing and certainty of their, generation., 6.2, , Benefits of Cash Flow Statement, , Cash flow statement provides the following benefits :, l, A cash flow statement when used along with other financial statements, provides information that enables users to evaluate changes in net assets, of an enterprise, its financial structure (including its liquidity and, solvency) and its ability to affect the amounts and timings of cash flows, in order to adapt to changing circumstances and opportunities., l, Cash flow information is useful in assessing the ability of the enterprise, to generate cash and cash equivalents and enables users to develop, models to assess and compare the present value of the future cash, flows of different enterprises., l, It also enhances the comparability of the reporting of operating, performance by different enterprises because it eliminates the effects of, using different accounting treatments for the same transactions and, events., l, It also helps in balancing its cash inflow and cash outflow, keeping in, response to changing condition. It is also helpful in checking the, accuracy of past assessments of future cash flows and in examining, the relationship between profitability and net cash flow and impact of, changing prices., , 2018-19
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Cash Flow Statement, , 6.3, , 247, , Cash and Cash Equivalents, , As stated earlier, cash flow statement shows inflows and outflows of cash and, cash equivalents from various activities of an enterprise during a particular, period. As per AS-3, ‘Cash’ comprises cash in hand and demand deposits with, banks, and ‘Cash equivalents’ means short-term highly liquid investments that, are readily convertible into known amounts of cash and which are subject to, an insignificant risk of changes in value. An investment normally qualifies as, cash equivalents only when it has a short maturity, of say, three months or less, from the date of acquisition. Investments in shares are excluded from cash, equivalents unless they are in substantial cash equivalents. For example,, preference shares of a company acquired shortly before their specific redemption, date, provided there is only insignificant risk of failure of the company to repay, the amount at maturity. Similarly, short-term marketable securities which can, be readily converted into cash are treated as cash equivalents and is liquidable, immediately without considerable change in value., 6.4, , Cash Flows, , ‘Cash Flows’ implies movement of cash in and out due to some non-cash items., Receipt of cash from a non-cash item is termed as cash inflow while cash payment, in respect of such items as cash outflow. For example, purchase of machinery, by paying cash is cash outflow while sale proceeds received from sale of, machinery is cash inflow. Other examples of cash flows include collection of, cash from trade receivables, payment to trade payables, payment to employees,, receipt of dividend, interest payments, etc., Cash management includes the investment of excess cash in cash equivalents., Hence, purchase of marketable securities or short-term investment which, constitutes cash equivalents is not considered while preparing cash flow, statement., 6.5, , Classification of Activities for the Preparation of Cash Flow, Statement, , You know that various activities of an enterprise result into cash flows (inflows, or receipts and outflows or payments) which is the subject matter of a cash flow, statement. As per AS-3, these activities are to be classified into three categories:, (1) operating, (2) investing, and (3) financing activities so as to show separately, the cash flows generated (or used) by (in) these activities. This helps the users of, cash flow statement to assess the impact of these activities on the financial position, of an enterprise and also on its cash and cash equivalents., , 2018-19
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248, , Accountancy : Company Accounts and Analysis of Financial Statements, , 6.5.1, , Cash from Operating Activities, , Operating activities are the activities that constitute the primary or main activities, of an enterprise. For example, for a company manufacturing garments, operating, activities are procurement of raw material, incurrence of manufacturing expenses,, sale of garments, etc. These are the principal revenue generating activities (or, the main activities) of the enterprise and these activities are not investing or, financing activities. The amount of cash from operations’ indicates the internal, solvency level of the company, and is regarded as the key indicator of the extent, to which the operations of the enterprise have generated sufficient cash flows to, maintain the operating capability of the enterprise, paying dividends, making of, new investments and repaying of loans without recourse to external source of, financing., Cash flows from operating activities are primarily derived from the main, activities of the enterprise. They generally result from the transactions and other, events that enter into the determination of net profit or loss. Examples of cash, flows from operating activities are:, Cash Inflows from operating activities, l, l, , cash receipts from sale of goods and the rendering of services., cash receipts from royalties, fees, commissions and other revenues., , Cash Outflows from operating activities, l, l, l, l, , Cash payments to suppliers for goods and services., Cash payments to and on behalf of the employees., Cash payments to an insurance enterprise for premiums and claims,, annuities, and other policy benefits., Cash payments of income taxes unless they can be specifically identified, with financing and investing activities., , The net position is shown in case of operating cash flows., An enterprise may hold securities and loans for dealing or for trading, purposes. In either case they represent Inventory specifically held for resale., Therefore, cash flows arising from the purchase and sale of dealing or trading, securities are classified as operating activities. Similarly, cash advances and, loans made by financial enterprises are usually classified as operating activities, since they relate to main activity of that enterprise., 6.5.2, , Cash from Investing Activities, , As per AS-3, investing activities are the acquisition and disposal of long-term, assets and other investments not included in cash equivalents. Investing activities, relate to purchase and sale of long-term assets or fixed assets such as machinery,, , 2018-19
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Cash Flow Statement, , 249, , furniture, land and building, etc. Transactions related to long-term investment, are also investing activities., Separate disclosure of cash flows from investing activities is important, because they represent the extent to which expenditures have been made for, resources intended to generate future income and cash flows. Examples of cash, flows arising from investing activities are:, Cash Outflows from investing activities, l, l, l, , Cash payments to acquire fixed assets including intangibles and, capitalised research and development., Cash payments to acquire shares, warrants or debt instruments of other, enterprises other than the instruments those held for trading purposes., Cash advances and loans made to third party (other than advances, and loans made by a financial enterprise wherein it is operating, activities)., , Cash Inflows from Investing Activities, l, l, l, l, l, , 6.5.3, , Cash receipt from disposal of fixed assets including intangibles., Cash receipt from the repayment of advances or loans made to third, parties (except in case of financial enterprise)., Cash receipt from disposal of shares, warrants or debt instruments of, other enterprises except those held for trading purposes., Interest received in cash from loans and advances., Dividend received from investments in other enterprises., Cash from Financing Activities, , As the name suggests, financing activities relate to long-term funds or capital of, an enterprise, e.g., cash proceeds from issue of equity shares, debentures, raising, long-term bank loans, repayment of bank loan, etc. As per AS-3, financing, activities are activities that result in changes in the size and composition of the, owners’ capital (including preference share capital in case of a company) and, borrowings of the enterprise. Separate disclosure of cash flows arising from, financing activities is important because it is useful in predicting claims on future, cash flows by providers of funds ( both capital and borrowings ) to the enterprise., Examples of financing activities are:, Cash Inflows from financing activities, l, l, , Cash proceeds from issuing shares (equity or/and preference)., Cash proceeds from issuing debentures, loans, bonds and other short/, long-term borrowings., , 2018-19
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250, , Accountancy : Company Accounts and Analysis of Financial Statements, , Cash Outflows from financing activities, l, l, l, , Cash repayments of amounts borrowed., Interest paid on debentures and long-term loans and advances., Dividends paid on equity and preference capital., , It is important to mention here that a transaction may include cash flows, that are classified differently. For example, when the instalment paid in respect, of a fixed asset acquired on deferred payment basis includes both interest and, loan, the interest element is classified under financing activities and the loan, element is classified under investing activities. Moreover, same activity may be, classified differently for different enterprises. For example, purchase of shares is, an operating activity for a share brokerage firm while it is investing activity in, case of other enterprises., Cash Inflows, , Cash Outflows, , Proceeds from sale of goods, and services to customers, Receipt from royalties,, fees, commission and, other revenues, , Payment of employee, benefit expenses, Operating, Activities, , Purchase of inventory, from suppliers, Pay operating expenses, Payment of taxes, , Sale of property, plant,, equipment, long-term, investments, , Investing, Activities, , Receipt from Interest, and dividends, Proceeds from issue of, preference or equity shares, , Proceeds from Issuance of, Debts/Bonds, , Purchase of property,, plant, equipment and, non-current investments, , Redemption of preference, shares, buy back of, own equity shares, Financing, Activities, , Procurement of loans, , Redemption of debentures, and payment of the, long-term debts, Payment of dividends, and interest, , Exhibit 6.1: Classification of Cash inflows and Cash Outflows Activities, , 2018-19
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Cash Flow Statement, , 6.5.4, , 251, , Treatment of Some Peculiar Items, , Extraordinary items, Extraordinary items are not the regular phenomenon, e.g., loss due to theft or, earthquake or flood. Extraordinary items are non-recurring in nature and hence, cash flows associated with extraordinary 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., Interest and Dividend, In case of a financial enterprise (whose main business is lending and borrowing),, interest paid, interest received and dividend received are classified as operating, activities while dividend paid is a financing activity., In case of a non-financial enterprise, as per AS-3, it is considered more, appropriate that payment of interest and dividends are classified as financing, activities whereas receipt of interest and dividends are classified as investing, activities., Taxes on Income 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 and should be classified as cash flows from operating activities unless, they can be specifically identified with financing and investing activities. This, clearly implies that:, l, tax on operating profit should be classified as operating cash flows., l, dividend tax, i.e., tax paid on dividend should be classified as financing, activity along with dividend paid., l, Capital gains tax paid on sale of fixed assets should be classified under, investing activities., Non-cash Transactions, As per AS-3, investing and financing transactions that do not require the use of, cash or cash equivalents should be excluded from a 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. 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,, assets acquired by issue of shares are not disclosed in cash flow statement due, to non-cash nature of the transaction., , 2018-19
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252, , Accountancy : Company Accounts and Analysis of Financial Statements, , With these three classifications, Cash Flow Statement is shown in Exhibit 6.2., Cash Flow Statement, (Main heads only), (A) Cash flows from operating activities, (B) Cash flows from investing activities, (C) Cash flows from financing activities, Net increase (decrease) in cash and cash, equivalents (A + B + C), + Cash and cash equivalents at the beginning, = Cash and cash equivalents at the end, , xxx, xxx, xxx, xxx, xxx, xxxx, , Exhibit 6.2 : Sharing Specimen Cash Flow Statement, Test your Understanding - I, Classify the following activities into operating activities, investing activities,, financing activities, cash equivalents., 1. Purchase of machinery., 3. Cash revenue from operations., 5. Proceeds from sale of old machinery., 7. Trading commission received., 9. Redemption of preference shares., 11. Proceeds from sale of non-current, investment., 13. Cash paid to supplier., 15. Employee benefits expenses paid., 17. Interest received on debentures held, as investments., 19. Office and administrative expenses, paid., 21. Dividend received on shares held as, investment., 23. Selling and distribution expenses paid., 25. Dividend paid on preferences shares., 27. Rent paid., 29. Bank overdraft., 30. Cash credit., 32. Marketable securities., , 6.6, , 2. Proceeds from issuance of equity share, capital., 4. Proceeds from long-term borrowings., 6. Cash receipt from trade receivables., 8. Purchase of non-current investment., 10. Cash purchases., 12. Purchase of goodwill., 14. Interim dividend paid on equity shares., 16. Proceeds from sale of patents., 18. Interest paid on long-term borrowings., 20. Manufacturing overheads paid., 22. Rent received on property held as, investment., 24. Income tax paid., 26. Under-writing commission paid., 28. Brokerage paid on purchase of noncurrent investment., 31. Short-term deposit., 33. Refund of income-tax received., , Ascertaining Cash Flow from Operating Activities, , Operating activities are the main source of revenue and expenditure in an, enterprise. Therefore, the ascertainment of cash flows from operating activities, need special attention., , 2018-19
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Cash Flow Statement, , 253, , As per AS-3, an enterprise should report cash flows from operating activities, either by using :, l, Direct method whereby major classes of gross cash receipts and gross, cash payments are disclosed;, or, l, Indirect method whereby net profit or loss is duly adjusted for the effects, of (1) transactions of a non-cash nature, (2) any deferrals or accruals of, past/future operating cash receipts, and (3) items of income or expenses, associated with investing or financing cash flows. It is important to, mention here that under indirect method, the starting point is net profit/, loss before taxation and extra ordinary items as per Statement of Profit, and Loss of the enterprise. Then this amount is for non-cash items,, etc., adjusted for ascertaining cash flows from operating activities., Accordingly, cash flow from operating activities can be determined using, either the Direct method or the Indirect method. These methods are discussed, in detail as follows., 6.6.1, , Direct Method, , As the name suggests, under direct method, major heads of cash inflows and, outflows (such as cash received from trade receivables, employee benefits, expenses paid, etc.) are considered., It is important to note here that items are recorded on accrual basis in, statement of profit and loss. Hence, certain adjustments are made to convert, them into cash basis such as the following :, 1. Cash receipts from customers = Revenue from operations + Trade, receivables in the beginning – Trade receivables in the end., 2. Cash payments to suppliers = Purchases + Trade Payables in the, beginning – Trade Payables in the end., 3. Purchases = Cost of Revenue from Operations – Opening Inventory +, Closing Inventory., 4. Cash expenses = Expenses on accrual basis + Prepaid expenses in the, beginning and Outstanding expenses in the end – Prepaid expenses in, the end and Outstanding expenses in the beginning., However, the following items are not to be considered:, 1. Non-cash items such as depreciation , discount on shares, etc., be writtenoff., 2. Items which are classified as investing or financing activities such as, interest received, dividend paid, etc., As per AS-3, under the direct method, information about major classes of, gross cash receipts and cash payments may be obtained either–, , 2018-19
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254, , Accountancy : Company Accounts and Analysis of Financial Statements, , from the accounting records of the enterprise, or, by adjusting revenue from operation, cost of revenue from operations, and other items in the statement of profit or loss for the following:, l, changes during the period in inventories and trade receivables, and payables;, l, other non-cash items; and, l, other items for which cash effects are investing or financing cash, flows., Exhibit 6.3 shows the proforma of cash flows from operating activities using, direct method., l, l, , Cash Flows from Operating Activities (Direct Method), Cash flows from operating activities:, Cash receipts from customers, (–) Cash paid to suppliers and employees, =, , xxx, , Cash generated from operations, , (–) Income tax paid, =, , (xxx), xxx, , Cash flow before extraordinary items, , +/– Extraordinary items, =, , xxx, (xxx), , xxx, xxxx, , Net cash from operating activities, , Exhibit 6.3 : Proforma of Cash Flows from Operating Activities, , Illustration 1, From the following information, calculate cash flow from operating activities, using direct method., Statement of Profit and Loss, for the year ended on March 31, 2017, Particulars, , Note, , i), ii), iii), iv), , Revenue from operations, Other Income, Total revenue (i+ii), Expenses, Cost of materials consumed, Employees benefits expenses, Depreciation, Other expenses, Insurance Premium, Total expenses, v) Profit before tax (iii-iv), Less Income tax, vi) Profit after tax, , Figures for Current, reporting period, 2,20,000, 2,20,000, 1,20,000, 30,000, 20,000, 8,000, 1,78,000, 42,000, (10,000), 32,000, , 2018-19
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Cash Flow Statement, , 255, , Additional information:, Particulars, Trade receivables, Trade payables, Inventory, Outstanding employees benefits, expenses, Prepaid insurance, Income tax outstanding, , April 01, 2016, Rs, 33,000, 17,000, 22,000, 2,000, , March 31, 2017, Rs, 36,000, 15,000, 27,000, 3,000, , 5,000, 3,000, , 5,500, 2,000, , Solution:, Cash Flows from Operating Activities, Particulars, , (Rs), , Cash receipts from customers, Cash Paid to suppliers, Cash Paid to employees, Cash Paid for Insurance premium, Cash generated from operations, Income Tax paid, Net Cash Inflow from Operations, , 2,17,000, (1,27,000), (29,000), (8,500), 52,500, (11,000), 41,500, , Working Notes:, 1., , 2., , 3., , 4., , 5., 6., 7., 8., , Cash Receipts from Customers is calculated as under :, Cash Receipts from Customers = Revenue from Operations + Trade Receivables, in the beginning – Trade Receivables in the end, = Rs 2,20,000 + Rs 33,000 – Rs 36,000, = Rs 2,17,000, Purchases, = Cost of Revenue from Operations – Opening, Inventory + Closing Inventory, = Rs 1,20,000 – Rs 22,000 + Rs 27,000, = Rs 1,25,000, Cash payment to suppliers = Purchases + Trade Payables in the beginning – Trade, Payables in the end, = Rs 1,25,000 + Rs 17,000 – Rs 15,000, = Rs 1,27,000, Cash Expenses, = Expenses on Accrual basis – Prepaid Expenses, in the beginning and Outstanding Expenses in the end + Prepaid Expenses in the, end and Outstanding Expenses in the beginning, Cash Paid to Employees, = Rs 30,000 + Rs 2,000 – Rs 3,000, = Rs 29,000, Cash Paid for Insurance Premium = Rs 8,000 – Rs 5,000 + Rs 5,500, = Rs 8,500, Income Tax Paid, = Rs 10,000+Rs 3,000 – Rs 2,000, = Rs 11,000, It is important to note here that there are no extraordinary items., , 2018-19
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256, , Accountancy : Company Accounts and Analysis of Financial Statements, , 6.6.2, , Indirect Method, , Indirect method of ascertaining cash flow from operating activities begins with, the amount of net profit/loss. This is so because statement of profit and loss, incorporates the effects of all operating activities of an enterprise. However,, Statement of Profit and Loss is prepared on accrual basis (and not on cash, basis). Moreover, it also includes certain non-operating items such as interest, paid, profit/loss on sale of fixed assets, etc.) and non-cash items (such as, depreciation, goodwill to be written-off, etc.. Therefore, it becomes necessary to, adjust the amount of net profit/loss as shown by Statement of Profit and Loss, for arriving at cash flows from operating activities. Let us look at the example :, Statement of Profit and Loss Account, for the year ended March 31, 2017, Particulars, i), ii), iii), iv), , v), , Note, , Revenue from Operations, Other Income, Total Revenues (i+ii), Expenses, Cost of Materials Consumed, Purchases of stock-in-trade, Employees Benefits Expenses, Finance Costs, Depreciation, Other Expenses, , 1, , Figures in, Rs, 1,00,000, 2,000, 1,02,000, 30,000, 10,000, 10,000, 5,000, 5,000, 12,000, 72,000, 30,000, , Profit before Tax (iii-iv), , Note: Other income includes profit on sale of land., , The above Statement of Profit and Loss shows the amount of net profit of Rs, 30,000. This has to be adjusted for arriving cash flows from operating activities., Let us take various items one by one., 1. Depreciation is a non-cash item and hence, Rs 5,000 charged as, depreciation does not result in any cash flow. Therefore, this amount, must be added back to the net profit., 2. Finance costs of Rs 5,000 is a cash outflow on account of financing, activity. Therefore, this amount must also be added back to net profit, while calculating cash flows from operating activities. This amount of, finance cost will be shown as an outflow under the head of financing, activities., 3. Other income includes profit on sale of land: It is cash inflow from, investing activity. Hence, this amount must be deducted from the, amount of net profit while calculating cash flows from operating, activities., , 2018-19
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Cash Flow Statement, , 257, , The above example gives you an idea as to how various adjustments are, made in the amount of net profit/loss. Other important adjustments relate to, changes in working capital which are necessary (i.e., items of current assets and, current liabilities) to convert net profit/loss which is based on accrual basis into, cash flows from operating activities. Therefore, the increase in current assets, and decrease in current liabilities are deducted from the operating profit, and, the decrease in current assets and increase in current liabilities are added to the, operating profit so as to arrive at the exact amount of net cash flow from operating, activities., As per AS-3, under indirect method, net cash flow from operating activities is, determined by adjusting net profit or loss for the effect of :, l Non-cash items such as depreciation, goodwill written-off, provisions,, deferred taxes, etc., which are to be added back., l All other items for which the cash effects are investing or financing cash, flows. The treatment of such items depends upon their nature. All investing, and financing incomes are to be deducted from the amount of net profits, while all such expenses are to be added back. For example, finance cost, which is a financing cash outflow is to be added back while other income, such as interest received which is investing cash inflow is to be deducted, from the amount of net profit., l Changes in current assets and liabilities during the period. Increase in, current assets and decrease in current liabilities are to be deducted while, increase in current liabilities and decrease in current assets are to be, added up., Exhibit 6.4 shows the proforma of calculating cash flows from operating, activities as per indirect method., The direct method provides information which is useful in estimating future, cash flows. But such information is not available under the indirect method., However, in practice, indirect method is mostly used by the companies for arriving, at the net cash flow from operating activities., Cash Flows from Operating Activities, (Indirect Method), Net Profit/Loss before Tax and Extraordinary Items, Deductions already made in Statement of Profit and Loss on account of, Non-cash items such as Depreciation, Goodwill to be Written-off., + Deductions already made in Statement of Profit and Loss on Account of, Non-operating items such as Interest., –, Additions (incomes) made in Statement of Profit and Loss on, Account of Non-operating items such as Dividend received,, Profit on sale of Fixed Assets., Operating Profit before Working Capital changes, + Increase in Current liabilities, + Decrease in Current assets, –, Increase in Current assets, +, , 2018-19, , xxx, xxx, xxx, xxx, , xxx, xxx, xxx
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258, , Accountancy : Company Accounts and Analysis of Financial Statements, , –, Decrease in Current Liabilities, Cash Flows from Operating Activities before Tax and Extraordinary Items, –, Income Tax Paid, +/– Effects of Extraordinary Items, , xxx, xxx, xxx, xxx, , Net Cash from Operating Activities, , xxx, , Exhibit 6.4: Proforma of Cash Flows from Operating Activities (Indirect Method), , As stated earlier, while working out the cash flow from operating activities,, the starting point is the ‘Net profit before tax and extraordinary items’ and not, the ‘Net profit as per Statement of Profit and Loss’. Income tax paid is deducted, as the last item to arrive at the net cash flow from operating activities., Illustration 2, Using the data given in Illustration 1, calculate cash flows from operating activities, using indirect method., Solution:, Cash Flows from Operating Activities, Particulars, , (Rs), , (Net Profit before Taxation and Extraordinary Items (Note 1), Adjustments for–, + Depreciation, , 42,000, , =, –, –, –, –, +, , Operating Profit before working capital changes, Increase in Trade Receivables, Increase in Inventories, Increase in Prepaid Insurance, Decrease in Trade Payables, Increase in Outstanding Employees Benefits Expenses, , 62,000, (3,000), (5,000), (500), (2,000), +1,000, , =, –, , Cash generated from Operations, Income tax paid, , 52,500, (11,000), , =, , Net cash from Operating Activities, , 41,500, , 20,000, , You will notice that the amount of cash flows from operating activities are the same whether, we use direct method or indirect method for its calculation., Working Notes :, The net profit before taxation and extraordinary items has been worked out as under:, Net Profit, = Rs 32,000, + Income Tax, = Rs 10,000, = Net Profit before Tax and Extraordinary Items, , 2018-19, , =, , Rs 42,000
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Cash Flow Statement, , 259, , Illustration 3, Calculate cash flows from operating activities from the following information., Statement of Profit and Loss for the year ended March 31, 2017, Particulars, i), ii), iii), iv), , v), , Note, No., , Revenue from Operations, Other Income, Total Revenue (i+ii), Expenses, Cost of Materials Consumed, Employees Benefits Expenses, Depreciation and Amortisation, Expenses, Other Expenses, , 1, , 2, 3, , Profit before Tax (iii-iv), , Working Notes:, 1. Other Income, , =, , 2. Depreciation and Amortisation, Expenses, , =, =, =, =, , 3. Other Expenses, , =, , Amount, Rs, 50,000, 5,000, 55,000, 15,000, 10,000, 7,000, 21,000, 53,000, 2,000, , Profit on Sale of Machinery (Rs 2,000 ) +, Income Tax Refund (Rs 3,000), Rs 5,000, Depreciation (Rs 5,000) + Goodwill, Amortised (Rs 2,000), Rs 7,000, Rent (Rs 10,000) + Loss on Sale of, Equipment (Rs 3,000) + Provision for, Taxation (Rs 8,000), Rs 21,000, , Additional Information:, April 01, 2016, Rs, , March 31, 2017, Rs, , 10,000, 2,000, 21,000, 15,000, 25,000, , 13,000, 2,500, 25,000, 21,000, 22,000, , Provision for Taxation, Rent Payable, Trade Payables, Trade Receivables, Inventories, , Solution:, Cash Flows from Operating Activities, Particulars, , (Rs), , Net profit before taxation, and extraordinary items, , 7,000, , Adjustments for:, +, +, , Depreciation, Loss on sale of equipment, , 5,000, 3,000, , +, , Goodwill amortised, , 2,000, , 2018-19
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260, , Accountancy : Company Accounts and Analysis of Financial Statements, –, , Profit on sale of machinery, , (2,000), , Operating Profit before Working capital changes, , 15,000, , –, , Increase in Trade receivables, , (6,000), , +, , Decrease in Inventories, , 3,000, , +, , Increase in Trade payables, , 4,000, , +, , Increase in Rent payable, , 500, , Cash generated from operations, , 16,500, , Income Tax paid, , (5,000), , Income Tax refund, , 3,000, 14,500, , Net Cash from Operating activities, Working Notes:, 1., 2., , Net profit before taxation & extraordinary item = Rs 2,000 + Rs 8,000 – Rs 3,000, = Rs 7,000, Income tax paid during the year has been ascertained by preparing provision for, taxation account as follows:, Provision for taxation Account, , Dr., Particulars, Cash, (Income tax paid during, the year :Balancing, Figure), Balance c/d, , J.F., , Amount, (Rs), 5,000, , Particulars, Balance b/d, Profit and Loss, , J.F., , Cr., Amount, (Rs), 10,000, 8,000, , 13,000, 18,000, , 18,000, , Illustration 4, Charles Ltd., made a profit of Rs 1,00,000 after charging depreciation of Rs, 20,000 on assets and a transfer to general reserve of Rs 30,000. The goodwill, amortised was Rs 7,000 and gain on sale of machinery was Rs 3,000. Other, information available to you ( changes in the value of current assets and current, liabilities) are trade receivables showed an increase of Rs 3,000; trade payables, an increase of Rs 6,000; prepaid expenses an increase of Rs 200; and outstanding, expenses a decrease of Rs 2,000. Ascertain cash flow from operating activities., , 2018-19
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Cash Flow Statement, , 261, , Solution:, Cash Flows from Operating Activities, Particulars, , (Rs), , Net Profit before Taxation, Adjustment for Non-cash and Non-operating Items :, + Depreciation, + Goodwill amortised, – Gain on sale of machinery, , 1,30,000, 20,000, 7,000, (3,000), 1,54,000, , Operating profit before working capital, Adjustment for working capital charges :, – Increase in Trade receivables, + Increase in Trade payables, – Increase in Prepaid expenses, – Decrease in Outstanding expenses, =, , (3,000), 6,000, (200), (2,000), 1,54,800, , Net Cash from Operating Activities, , Working Notes :, Calculation of Net Profit before Taxation and Extraordinary items:, (1) Net Profit, = Rs 1,00,000, + Transfer to General reserve, = Rs 30,000, = Rs 1,30,000, , Do it Yourself, Statement of Profit and Loss, for the year ending 31 March, 2017, Particulars, i), ii), iii), iv), , v), , Note, , Revenue from Operations, Other Income, Total Revenues (i+ii), Expenses, Cost of Materials Consumed, Changes in inventories of finished, goods, Depreciation and Amortisation, expenses, Other expenses, Total expenses, Profit before Tax (iii-iv), , 2018-19, , 1, 2, , Figures in, Rs, 40,00,000, 21,00,000, 61,00,000, , 3, 4, , 20,00,000, 1,00,000, , 5, , 3,80,000, , 6, , 20,40,000, 45,20,000, 15,80,000
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262, , Accountancy : Company Accounts and Analysis of Financial Statements, Working Notes:, 1., , Rs, 8,00,000, 34,00,000, (2,00,000), 40,00,000, , Cash revenue from operations, Credit revenue from operations, Less: Returns, Net Revenue from Operations, , 2., , Trading commission, Discount received from suppliers, Other income, 3. Cost of materials consumed, paid in cash, Cost of materials consumed, bought on credit, Less: Returns, Cost of materials consumed (Net), , 20,40,000, 60,000, 21,00,000, 4,00,000, 17,00,000, (1,00,000), 20,00,000, , 4., , Changes in Inventories of finished, goods, , =, =, =, , Opening inventory – Closing inventory, Rs 2,00,000 – Rs 1,00,000, Rs 1,00,000, , 5., , Depreciation and Amortisation, expenses, , =, =, =, , Depreciation + Amortisation expenses, Rs 3,80,000 + 0, Rs 3,80,000, , 6., , Other expenses, , =, , 10,20,000 (Administrative expenses), +1,20,000 (Discount allowed to, customers) + 1,00,000 (Bad debts) +, 8,00,000 (Provision for tax), Rs 20,40,000, , =, Additional Information:, , (Rs), , (Rs), , Trade Receivables, , 20,00,000, , 40,00,000, , Trade Payables, , 20,00,000, , 10,00,000, , Other Expenses payable (administrative), , 10,000, , 20,000, , Prepaid Administrative Expenses, , 20,000, , 10,000, , Outstanding Trading Expenses, , 20,000, , 40,000, , Advance Trading Expenses, Provision for Taxation, , 40,000, , 20,000, , 10,00,000, , 12,00,000, , Ascertain Cash from Operations. Show your workings clearly., 2. From the following information calculate net cash from operations:, Particulars, , (Rs), , Operating Profit after Provision for Tax of Rs 1,53,000, , 6,28,000, , Insurance proceeds from the famine settlement, , 1,00,000, , Proposed Dividend for the current year, , 2018-19, , 72,000
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–, , Cash Flow Statement, , 263, , Depreciation, , 1,40,000, , Loss on Sale of Machinery, , 30,000, , Profit on Sale of Investment, , 20,000, , Dividend Received on Investments, , 6,000, , Decrease in Current Assets, (other than cash and cash equivalents), , 10,000, , Increase in Current Liabilities, , 1,51,000, , Increase in Current Assets other than Cash and Cash Equivalents, , 6,00,000, , Decrease in Current Liabilities, , 64,000, , Income Tax Paid, , 1,18,000, , Refund of Income Tax Received, , 3,000, , Test your Understanding – II, 1., (a), , (b), , (c), (d), (e), , (f), , 2., , Choose one of the two alternatives given below and fill in the blanks in, the following statements:, If the net profits earned during the year is Rs 50,000 and the amount of, debtors in the beginning and the end of the year is Rs 10,000 and, Rs 20,000 respectively, then the cash from operating activities will be, equal to Rs __________________ (Rs 40,000/Rs 60,000), If the net profits made during the year are Rs 50,000 and the bills receivables, have decreased by Rs 10,000 during the year then the cash flow from, operating activities will be equal to Rs ________________ (40,000/Rs 60,000), Expenses paid in advance at the end of the year are ________________ the, profit made during the year (added to/deducted from)., An increase in accrued income during the particular year is ________________, the net profit (added to/deducted from)., Goodwill amortised is ________________ the profit made during the year, for calculating the cash flow from operating activities (added to/ deducted, from)., For calculating cash flow from operating activities, provision for doubtful, debts is ________________ the profit made during the year (added to/, deducted from)., While computing cash from operating activities, indicate whether the, following items will be added or subtracted from the net profit- if not to be, considered, write NC, , Items:, , Treatment, , (a), , Increase in the value of creditors, , (b), , Increase in the value of patents, , (c), , Decrease in prepaid expenses, , (d), , Decrease in income received in advance, , (e), , Decrease in value of inventory, , 2018-19
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264, , Accountancy : Company Accounts and Analysis of Financial Statements, (f), , Increase in share capital, , (g), , Increase in the value of trade receivables, , (h), , Increase in the amount of outstanding expenses, , (i), , Conversion of debentures into shares, , (j), , Decrease in the value of trade payables, , (k), , Increase in the value of trade receivables, , (l), , Decrease in the amount of accrued income., , Sometimes, neither the amount of net profit is specified nor the Statement of, profit and loss is given. In such a situation, the amount of net profit can be, worked out by comparing the balances of Statement of Profit and Loss given in, the comparative balance sheets for two years. The difference is treated as the net, profit for the year; and, then, by adjusting it with the amount of provision for tax, made during the year (as worked out by comparing the provision for tax balances, of two years given in balance sheets), the amount of ‘Net Profit before tax’ can be, ascertained (see Illustration 7 and 8)., 6.7 Ascertainment of Cash Flow from Investing and Financing Activities, The details of item leading inflows and outflows from investing and financing, activities have already been outlined. While preparing the cash flow statement,, all major items of gross cash receipts, gross cash payments, and net cash flows, from investing and financing activities must be shown separately under the, headings ‘Cash Flow from Investing Activities’ and ‘Cash Flow from Financing, Activities’ respectively.’, The ascertainment of net cash flows from investing and financing activities, have been briefly dealt with in Illustrations 5 and 6., Illustration 5, Welprint Ltd. has given you the following information:, , (Rs), Machinery as on April 01, 2016, 50,000, Machinery as on March 31, 2017, 60,000, Accumulated Depreciation on April 01, 2016, 25,000, Accumulated Depreciation on March 31, 2017, 15,000, During the year, a Machine costing Rs 25,000 with Accumulated Depreciation of, Rs 15,000 was sold for Rs 13,000., , Calculate cash flow from Investing Activities on the basis of the above, information., Solution:, Cash Flows from Investing Activities, Sale of Machinery, , (Rs), 13,000, , Purchase of Machinery, , (35,000), , Net cash used in Investing Activities, , 2018-19, , (22,000)
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Cash Flow Statement, , 265, , Working Notes:, Machinery Account, , Dr., , Cr., , Particulars, , J.F., , Balance b/d, Statement of Profit and Loss, (profit on sale of machine), Cash (balancing figure:new, machinery purchased), , Amount Particulars, (Rs), 50,000 Cash (proceeds, from sale of machine), 3,000 Accumulated, Depreciation, 35,000 Balance c/d, , J.F., , Amount, (Rs), 13,000, 15,000, 60,000, , 88,000, , 88,000, , Accumulated Depreciation Account, , Dr., , Cr., , Particulars, , J.F., , Machinery, Balance c/d, , Amount Particulars, (Rs), 15,000 Balance b/d, 15,000 Statement of Profit and Loss, (Depreciation provided, during the year), , J.F., , 30,000, , Amount, (Rs), 25,000, 5,000, , 30,000, , Illustration 6, From the following information, calculate cash flows from financing activities:, April 1,, March 31,, 2016, 2017, (Rs), (Rs), Long-term Loans, 2,00,000 2,50,000, During the year, the company repaid a loan of Rs 1,00,000., Solution:, Cash flows from Financing Activities, Proceeds from long-term borrowings, , 1,50,000, , Repayment of long-term borrowings, , (1,00,000), , Net cash inflow from Financing Activities, , 50,000, , Working Notes:, Long-term Loan Account, Dr., Particulars, Cash (loan repaid), Balance c/d, , J.F., , Amount Particulars, (Rs), 1,00,000 Balance b/d, 2,50,000 Cash (new loan raised), 3,50,000, , 2018-19, , J.F., , Cr., Amount, (Rs), 2,00,000, 1,50,000, 3,50,000
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266, , Accountancy : Company Accounts and Analysis of Financial Statements, Do it Yourself, 1. From the following particulars, calculate cash flows from investing activities:, Purchased, (Rs), , Sold, (Rs), , Plant, , 4,40,000, , 50,000, , Investments, , 1,80,000, , 1,00,000, , Goodwill, Patents, , 2,00,000, 1,00,000, , Interest received on debentures held as investment Rs 60,000, Dividend received on shares held as investment Rs 10,000, A plot of land had been purchased for investment purposes and was let out for, commercial use and rent received Rs 30,000., 2., , From the following Information, calculate cash flows from investing and, financing activities:, , Particulars, , 2016, , Machine at cost, , 5,00,000, , Accumulated Depreciation, , 2017, 9,00,000, , 3,00,000, , 4,50,000, , Equity Shares Capital, , 28,00,000, , 35,00,000, , Bank Loan, , 12,50,000, , 7,50,000, , In year 2017, machine costing Rs 2,00,000 was sold at a profit of Rs 1,50,000,, Depreciation charged on machine during the year 2015 amounted to Rs 2,50,000., , 6.8, , Preparation of Cash Flow Statement, , As stated earlier cash flow statement provides information about change in the, position of Cash and Cash Equivalents of an enterprise, over an accounting, period. The activities contributing to this change are classified into operating,, investing and financing. The methology of working out the net cash flow (or use), from all the three activities for an accounting period has been explained in details, and a brief format of Cash Flow Statement has also been given in Exhibit 6.2., However, while preparing a cash flow statement, full details of inflows and, outflows are given under these heads including the net cash flow (or use). The, aggregate of the net ‘cash flows (or use) is worked out and is shown as ‘Net, Increase/Decrease in cash and Cash Equivalents’ to which the amount of ‘cash, and cash equivalent at the beginning’ is added and thus the amount of ‘cash, and cash equivalents at the end’ is arrived at as shown in Exhibit 6.2. This, figure will be the same as the total amount of cash in hand, cash at bank and, cash equivalants (if any) given in the balance sheet (see Illustrations 7 to 10)., Another point that needs to be noted is that when cash flows from operating, , 2018-19
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Cash Flow Statement, , 267, , activities are worked out by an indirect method and shown as such in the cash, flow statement, the statement itself is termed as ‘Indirect method cash flow, statement’. Thus, the Cash flow statements prepared in Illustrations 7, 8 and 9, fall under this category as the cash flows from operating activities have been, worked out by indirect method. Similarly, if the cash flows from operating, activities are worked by direct method while preparing the cash flow statement,, it will be termed as ‘direct method Cash Flow Statement’. Illustration 10 shows, both types of Cash Flow Statement. However, unless it is specified clearly as to, which method is to be used, the cash flow statement may preferably be prepared, by an indirect method as is done by most companies in practice., Illustration 7, From the following information, prepare Cash Flow Statement for Pioneer Ltd., Balance Sheet of Pioneer Ltd., as on March 31, 2017, Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus, 2. Non-current Liabilities, Long-term borrowings: Bank Loan, 3. Current Liabilities, a) Trade payables, b) Other current liabilities: outstanding rent, c) Short-term provisions, Total, II. Assets, 1. Non-current assets, a) Fixed assets, (i) Tangible assets, (ii) Intangible assets, b) Non-current investments, 2. Current assets, a) Inventories, b) Trade receivables, c) Cash and cash equivalents, Total, , 1, 2, , 3, , 4, 5, , 6, , 31st March 31st March, 2017 (Rs) 2016 (Rs), , 7,00,000, 3,50,000, , 5,00,000, 2,00,000, , 50,000, , 1,00,000, , 45,000, 7,000, 1,20,000, 12,72,000, , 50,000, 5,000, 80,000, 9,35,000, , 5,00,000, 95,000, 1,00,000, , 5,00,000, 1,00,000, -, , 1,30,000, 1,20,000, 3,27,000, 12,72,000, , 50,000, 80,000, 2,05,000, 9,35,000, , Notes to Accounts:, Particulars, , 31st March 31st March, 2017 (Rs) 2016 (Rs), , 1. Equity Share Capital, 2. Reserve and Surplus, Surplus: i.e., Balance in Statement of, Profit and Loss, , 2018-19, , 7,00,000, , 5,00,000, , 3,50,000, , 2,00,000
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268, , Accountancy : Company Accounts and Analysis of Financial Statements, , 3. Short-term Provision:, Proposed Dividend, Provision for Taxation, 4. Fixed Assets, – Tangible assets, – Equipments, – Furniture, 5. Intangible Assets, Patents, 6. Cash and cash equivalents, i) Cash, ii) Bank balance, , 70,000, 50,000, 1,20,000, , 50,000, 30,000, 80,000, , 2,30,000, 2,70,000, 5,00,000, , 2,00,000, 3,00,000, 5,00,000, , 95,000, , 1,00,000, , 27,000, 3,00,000, 3,27,000, , 5,000, 2,00,000, 2,05,000, , During the year, equipment costing Rs 80,000 was purchased., Loss on Sale of equipment amounted to Rs 5,000. Depreciation of Rs 15,000 and, 3,000 charged on equipments and furniture., , Rs, , Solution:, Cash Flow Statement, I., , Particulars, Cash flows from Operating Activities :, Net profit before taxation & extraordinary items, Provision for :, Depreciation on equipment, Depreciation on furniture, Patents written-off, Loss on sale of equipment, , (Rs), 2,70,000, 15,000, 30,000, 5,000, 5,000, , Operating Profit before Working capital Changes, – Decrease in Trade payables, + Increase in Outstanding rent, – Increase in Trade receivables, – Increase in inventories, Cash generated from Operating activities, (–) Tax paid, , 3,25,000, (5,000), 2,000, (40,000), (80,000), 2,02,000, (30,000), , A., , Cash Inflows from Operating Activities, , 1,72,000, , II., , Cash flows from Investing Activities:, Proceeds from sale of equipments, Purchase of new equipment, Purchase of Investments, , 30,000, (80,000), (1,00,000), , Cash used in Investing Activities, , (1,50,000), , B., , 2018-19
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Cash Flow Statement, III., , C., , 269, , Cash flows from Financing Activities:, Issues of equity share capital, Repayment of bank loan, Payment of dividend, , 2,00,000, (50,000), (50,000), , Cash Inflows from Financing Activities, , 1,00,000, , Net increase in Cash & Cash Equivalents (A+B+C), + Cash and Cash Equivalents in the beginning, Cash and Cash Equivalents in the end, , 1,22,000, 2,05,000, 3,27,000, , Working Notes:, (1), Equipment Account, Dr., Particulars, Balance b/d, Cash, , J.F., , Amount Particulars, (Rs), 2,00,000 Depreciation, 80,000 (balancing figure), Bank, Statement of Profit & Loss, (Loss on sale), Balance c/d, 2,80,000, , J.F., , Cr., Amount, (Rs), 15,000, 30,000, 5,000, 2,30,000, 2,80,000, , (2), , Patents of Rs 5,000 (i.e., Rs 1,00,000 – Rs 95,000) were written-off during the year,, and depreciation on furniture Rs 30,000. (Rs 3,00,000 – Rs 2,70,000), , (3), , It is assumed that dividend of Rs 50,000 and tax of Rs 30,000 provided in 20152016 has been paid during the year 2016-17. Hence, proposed dividend and provision, for tax during the year amounts to Rs 70,000 and Rs 50,000 respectively., , (4), , Profit and Loss at the end, (–) Profit and Loss in the beginning, , (Rs), 3,50,000, 2,00,000, , (5), , Net Profit during the year, + Provision for tax during the year, + Proposed dividend, , 1,50,000, 50,000, 70,000, , Net Profit before taxation & extraordinary Items, , 2018-19, , 2,70,000
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270, , Accountancy : Company Accounts and Analysis of Financial Statements, , Illustration 8, From the following Balance Sheets of Xerox Ltd., prepare cash flow statement., Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus (Balance in, Statement of Profit and Loss), 2. Non-current Liabilities, Long-term borrowings, 3. Current Liabilities, a) Trade payables, b) Short-term provisions, (Provision for taxation), Total, II. Assets, 1. Non-current assets, a) Fixed assets, (i) Tangible assets, (ii) Intangible assets (Goodwill), b) Non-current investment, 2. Current assets, a) Inventories, b) Trade Receivables, c) Cash and cash equivalents, Total, Notes to Accounts:, Particulars, , 1, , 31st March, 2017 (Rs), , 31st March, 2016 (Rs), , 15,00,000, 7,50,000, , 10,00,000, 6,00,000, , 1,00,000, , 2,00,000, , 1,00,000, 95,000, , 1,10,000, 80,000, , 25,45,000 19,90,000, , 2, , 3, , 10,10,000, 1,80,000, 6,00,000, , 12,00,000, 2,00,000, -, , 1,80,000, 1,00,000, 2,00,000, 1,50,000, 3,75,000, 3,40,000, 25,45,000 19,90,000, , 31st March 31st March, 2017 (Rs) 2016 (Rs), , 1. Long-term borrowings:, i) Debentures, ii) Bank loan, , 2,00,000, 1,00,000, 1,00,000, , 2. Tangible Assets, i) Land and building, ii) Plant and machinery, , 2,00,000, , 6,50,000, 8,00,000, 3,60,000, 4,00,000, 10,10,000 12,00,000, , 3. Cash and cash equivalents, i) Cash in hand, ii) Bank balance, , 70,000, 3,05,000, 3,75,000, , 50,000, 2,90,000, 3,40,000, , Additional information:, 1. Dividend proposed and paid during the year Rs 1,50,000., 2. Income tax paid during the year includes Rs 15,000 on account of dividend tax., 3. Land and building book value Rs 1,50,000 was sold at a profit of 10%., 4. The rate of depreciation on plant and machinery is 10%., , 2018-19
Page 271 :
Cash Flow Statement, , 271, , Solution:, Cash Flow Statement, Particulars, I., , II., , (Rs), , Cash flows from Operating Activities, Net Profit before Taxation and Extraordinary Items, Adjustment for –, + Depreciation, + Goodwill written-off, – Profit on Sale of Land, , 40,000, 20,000, (15,000), , = Operating Profit before working capital changes, – Decrease in Trade Payables, – Increase in Trade Receivables, – Increase in Inventories, , 4,40,000, (10,000), (50,000), (80,000), , = Cash generated from Operations, – Income Tax Paid (1), , 3,00,000, (65,000), , A. Cash Inflows from Operations, , 2,35,000, , Cash flows from Investing Activities, Proceeds from Sale of Land and Building, Purchase of Investment, , 1,65,000, (6,00,000), , B. Cash used in Investing Activities, III., , 3,95,000, , (4,35,000), , Cash flows from Financing Activities, Proceeds from issue of Equity Share Capital, Redemption of Debentures, Proceeds from raising Bank Loan, Dividend Paid, Dividend Tax Paid, , 5,00,000, (2,00,000), 1,00,000, (1,50,000), (15,000), , C. Cash flows from Financing Activities, Net Increase in cash and cash equivalents (A+B+C), + Cash and Cash Equivalents in the beginning, , 2,35,000, 35,000, 3,40,000, , Cash and Cash Equivalent at the end, , 3,75,000, , Working Notes:, (1) Total tax paid during the year, (–) Dividend tax paid (given), , Rs 80,0000, Rs (15,000), , Income tax paid for operating activities, , Rs 65,000, , (2) Net profit earned during the year after tax and dividend, = Rs 7,50,000 – 6,00,000 = Rs 1,50,000, (3) Net profit before tax, = Net profit earned during the year after tax and dividend + Provision for, tax made + Proposed Dividend, = Rs 1,50,000 + Rs 95,000 (See provision for taxation account)+, Rs 1,50,000, = Rs 3,95,000, , 2018-19
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272, , Accountancy : Company Accounts and Analysis of Financial Statements, , Equity Share Capital Account, Dr., , Cr., , Particulars, , J.F., , Balance c/d, , Amount Particulars, (Rs), , J.F., , Amount, (Rs), , 15,00,000 Balance b/d, Cash, (New capital raised), , 10,00,000, 5,00,000, , 15,00,000, , 15,00,000, , Debenture Account, Dr., , Cr., , Particulars, , J.F., , Cash (Redemption), , Amount Particulars, (Rs), 20,000 Balance b/d, , J.F., , 20,000, , Amount, (Rs), 20,000, 20,000, , Bank Account, Dr., , Cr., , Particulars, , J.F., , Balance c/d, , Amount Particulars, (Rs), 1,00,000 Cash, , J.F., , 1,00,000, , Amount, (Rs), 1,00,000, 1,00,000, , Provision for Taxation Account, Dr., Particulars, , Cr., J.F., , Cash (Tax paid:which, includes Rs 15,000 as, dividend, Balance c/d, , Amount Particulars, J.F. Amount, (Rs), (Rs), 80,000 Balance b/d, 80,000, Statement of Profit and Loss, 95,000, (Provision made during, 95,000 the year), 1,75,000, 1,75,000, , Land and Building Account, Dr., Particulars, Balance b/d, Statement of Profit and Loss, (Profit on sale), , Cr., J.F., , Amount Particulars, (Rs), 8,00,000 Cash, 15,000 Balance c/d, 8,15,000, , 2018-19, , J.F., , Amount, (Rs), 1,65,000, 6,50,000, 8,15,000
Page 273 :
Cash Flow Statement, , 273, , Proposed Dividend Account, Dr., Particulars, , Cr., J.F., , Cash, , Amount Particulars, (Rs), , J.F., , 1,50,000 Surplus, , Amount, (Rs), 1,50,000, , 1,50,000, , 1,50,000, , Plant and Machinery Account, Dr., Particulars, Balance b/d, , Cr., J.F., , Amount Particulars, (Rs), , J.F., , 4,00,000 Depreciation, Balance c/d, , Amount, (Rs), 40,000, 3,60,000, , 4,00,000, , 4,00,000, , Illustration 9, From the following information of Oswal Mills Ltd., prepare cash flow statement:, Balance Sheet of Oswal Mills, as on 31st March, 2016 and 2017, Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus (Surplus), 2. Current Liabilities, a) Short-term borrowings, b) Trade payables, Total, II. Assets, 1. Non-current assets, a) Fixed assets, b) Non-current investments, 2. Current assets, a) Inventories, b) Trade receivables, c) Cash and cash equivalents, d) Short-term loans and advances, Total, , 1, , 2, , 2018-19, , (Rupees in Lakhs), 31st March 31st March, 2017 (Rs) 2016 (Rs), , 1,300, 4,700, , 1,400, 4,000, , 200, 500, 6,700, , 600, 400, 6,400, , 2,400, 300, , 2.400, 200, , 1,200, 800, 1,200, 800, 6,700, , 1,300, 900, 800, 800, 6,400
Page 274 :
274, , Accountancy : Company Accounts and Analysis of Financial Statements, , Notes to Accounts:, Particulars, , (Rs in Lakhs), 31st March 31st March, 2017 (Rs), 2016 (Rs), , 1. Share capital, Equity share capital, 10% preference share capital, 2. Fixed assets, Tangible assets, Less: Accumlated depreciation, , 1,000, 300, 1,300, , 1,000, 400, 1,400, , 3,600, (1,200), 2,400, , 3,400, (1,000), 2,400, , Statement of Profit and Loss, for the year ended 31st March, 2017, Particulars, I., II., III., IV., , Note, No., , Revenue from operation, Other income (dividend income), Total Revenue, Expenses, Cost of material consumed, Employees benefit expenses, Finance cost (interest paid), Depreciation, Loss due to earthquake, , V. Profit before tax, VI. Tax paid, Profit after tax, , (Rupees in Lakhs), 31st March, 2017 (Rs), 2,800, 1,000, 3,800, 400, 200, 200, 200, 1,100, 2,100, 1,700, 1,000, 700, -, , Additional information:, 1. No dividend paid by the company during the current financial year., 2. Out of fixed assets, land worth Rs 1,000 Lakhs having no accumulated depreciation, was sold at no profit or no loss., , Solution:, Cash Flow Statement, Particulars, Cash Flows from Operating Activities, Net Profit before Tax and Extraordinary Items (1), Adjustment for Non-cash and Non-operating Items, + Interest paid, + Depreciation, Operating profit before working capital changes, Adjustment for :, + Decrease in Inventories, + Decrease in Trade Receivables, , 2018-19, , (Rupees in Lakhs), Rs, 2,800, 200, 200, 3,200, 100, 100
Page 275 :
Cash Flow Statement, +, , 275, , Increase in Trade Payables, , 100, , Cash generated from operations, (–) Income Tax paid, Cash Flow before Extraordinary items, (–) Loss due to earthquake, , 3,500, (1,000), 2,500, (1,100), , A., Net cash from Operating Activities, Cash flows from Investing Activities, Sale of Land, Purchase of fixed assets (2), Purchase of Investments, B., Net cash from Investing Activities, Cash flows from Financing Activities, Payment of short-term loans, Interest Paid, Redemption of 10% preference share capital, C., Net Cash used in Financing Activities, Net increase in Cash and Cash Equivalents, during the year (A+B+C), + Cash and Cash Equivalents in the, beginning of the year, =, , Cash and Cash Equivalents in the end, , 1,400, 1,000, (1,200), (100), (300), (400), (200), (100), (700), 400, 800, , 1,200, , Working Notes:, (1), , (Rs in Lakhs), Net Profit before Tax and Extraordinary Items = Rs 700 + Rs 1,100 + Rs 1,000, = Rs 2,800, , (2), , Fixed Assets Account, , Dr., Particulars, Balance b/d, Cash (Purchase of fixed, assets), , Cr., J.F., , Amount Particulars, (Rs), 3,400 Cash (Sale of land), 1,200 Balance c/d, 4,600, , 2018-19, , J.F., , Amount, (Rs), 1,000, 3,600, 4,600
Page 276 :
276, , Accountancy : Company Accounts and Analysis of Financial Statements, , Accumulated Depreciation Account, Dr., Particulars, , J.F., , Balance c/d, , Amount Particulars, (Rs), , J.F., , Cr., Amount, (Rs), , 1,200 Balance b/d, Statement of Profit and Loss, 1,200, , 1,000, 200, 1,200, , Illustration 10, From the following information of Banjara Ltd., prepare a cash flow statement:, Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus (surplus), 2. Non-current Liabilities, Long-term borrowings, (Long-term loan), 3. Current Liabilities, a) Trade payables, b) Other current liabilities, Total, II. Assets, 1. Non-current assets, a) Fixed assets, b) Non-current investments, 2. Current assets, a) Current investments (Marketable), b) Inventories, c) Trade Receivables, d) Cash and cash equivalents, e) Other current assets, (Interest receivables), Total, Notes to Accounts:, Particulars, , 1, , 2, , (Rupees in Lakhs), 31st March 31st March, 2017 (Rs) 2016 (Rs), , 1,500, 3,410, , 1,250, 1,380, , 1,110, , 1,040, , 150, 630, 6,800, , 1,890, 1,100, 6,660, , 730, 2,500, , 850, 2,500, , 670, 900, 1,700, 200, 100, , 135, 1,950, 1,200, 25, , 6,800, , 6,660, , 31st March 31st March, 2017 (Rs) 2016 (Rs), , 1. Other Current Liabilities, i) Interest payable, ii) Income tax payable, , 230, 400, 630, , 2018-19, , 100, 1,000, 1,100
Page 277 :
Cash Flow Statement, , 277, , 2. Fixed Assets:, Tangible, Less: Accumlated depreciation, , 2,180, (1,450), 730, , 1,910, (1,060), 850, , Statement of Profit and Loss for the year ended, 31 March, 2017, (Rupees in Lakhs), Particulars, , Note, No., , I., II., III., IV., , Revenue from operation, Other income, Total Revenue, Expenses, Cost of material consumed, Finance cost (interest expenses), Depreciation, Other expenses, (Admn. and selling expenses), Total expenses, Profit before tax, Less: Tax, Profit after tax, , 1, , 2017, March 31, (Rs), 30,650, 640, 31,290, 26,000, 400, 450, 910, 27,760, 3,530, , (300), 3,230, , Notes to Accounts:, Particulars, 1. Other Income during the year 2016-17, i) Interest Income, ii) Dividend Income, iii) Insurance Proceeds from earthquake disaster Settlement, , Rs, 300, 200, 140, 640, , Additional Information:, (Rs ’000), (i), , An amount of Rs 250 was raised from the issue of share capital and a, further Rs 250 was raised from long-term borrowings., , (ii), , Interest expense was Rs 400 of which Rs 170 was paid during the period., Rs 100 relating to interest expense of the prior period was also paid during, the period., , (iii), , Dividends paid were Rs 1,200., , (iv), , Tax deducted at source on dividends received (included in the tax expense, of Rs 300 for the year) amounted to Rs 40., , 2018-19
Page 278 :
278, , Accountancy : Company Accounts and Analysis of Financial Statements, , (v), , During the period, the enterprise acquired Fixed Assets for Rs 350. The, payment was made in cash., , (vi), , Plant with original cost of Rs 80 and accumulated depreciation of Rs 60, was sold for Rs 20., , (vii), , Trade Receivables and Trade Payables include amounts relating to credit, sales and credit purchases only., , Cash Flow Statement, (Direct Method), (Rs ‘000), Particulars, , Rs,, , Cash Flows from Operating Activities, Cash Receipts from Customers, Cash Paid to Suppliers and Employees, , 30,150, (27,600), , Cash generated from Operations, Income Tax paid, , 2,550, (860), , Cash Flow before Extraordinary Item, Proceeds from earthquake disaster settlement, , 1,690, 140, , Net Cash from Operating Activities, Cash Flows from Investing Activities, Purchase of Fixed Assets, Proceeds from Sale of Equipment, Interest Received, Dividends Received, Net cash from Investing Activities, , Rs, , 1,830, (350), 20, 200, 160, 30, , Cash Flows from Financing Activities, Proceeds from issuance of Share Capital, , 250, , Proceeds from Long-term Borrowings, , 250, , Repayment of Long-term Borrowings, , (180), , Interest paid, , (270), , Dividends paid, , (1,200), (1,150), , Net cash used in Financing Activities, Net increase in Cash and Cash Equivalents, , 710, , Cash and cash equivalents at beginning of period, , 160, , Cash and cash equivalents at end of period, , 870, , 2018-19
Page 279 :
Cash Flow Statement, , 279, , Cash Flow Statement, (Indirect Method), (Rs ‘000), Particulars, , Rs, , Cash Flows from Operating Activities, Net Profit before Taxation and Extraordinary Item, , 3,390, , Adjustments for:, +, , Depreciation, , –, –, , Interest Income, Dividend Income, , (300), (200), , 450, , +, , Interest Expense, , 400, , Operating Profit before working capital changes, Increase in Trade Receivables, , 3,740, (500), , Decrease in Inventories, , 1,050, , Decrease in Trade Payables, , (1,740), , Cash generated from Operations, Income Tax paid, , 2,550, (860), , Cash flow before Extraordinary Items, , 1,690, , Proceeds from earthquake disaster settlement, Net cash from Operating Activities, Cash Flows from Investing Activities, Purchase of Fixed Assets, , 140, 1,830, (350), , Proceeds from Sale of Equipment, Interest Received, , 20, 200, , Dividends Received (net of TDS), , 160, , Net cash from Investing Activities, , 30, , Cash flows from Financing Activities, Proceeds from issuance of Share Capital, Proceeds from Long-term Borrowings, Repayment of Long-term Borrowings, Interest Paid, Dividends Paid, , 250, 250, (180), (270), (1,200), (1,150), , Net Cash used in Financing Activities, Net Increase in Cash and Cash Equivalents, , 710, , Cash and Cash Equivalents at the beginning of the period, Cash and Cash Equivalents at the end of the period, , 160, 870, , 2018-19
Page 280 :
280, , Accountancy : Company Accounts and Analysis of Financial Statements, , Working Notes:, (1) Cash and Cash Equivalents, Cash and Cash Equivalents consist of cash in hand and balances with banks, and, investments in money-market instruments. Cash and Cash Equivalents included in the, Cash Flow Statement comprise of the following balance sheet amounts., (Rs ‘000), , Cash in Hand and balances with Bank, Short-term Investments, , 2017, (Rs), 200, 670, , 2016, (Rs), 25, 135, , 870, , 160, , Cash and Cash Equivalents, (2) Cash Receipts from Customers, Sales, Add: Trade Receivables at the beginning of the year, , 30,650, 1,200, , Less : Trade Receivables at the end of the year, , 31,850, (1,700), 30,150, , (3) Cash paid to Suppliers and Employees, Cost of Revenue from operations, Administrative and Selling Expenses, , 26,000, 910, 26,910, , Add: Trade Payables at the beginning of the year, Inventories at the end of the year, , 1,890, 900, , Less : Trade Payables at the end of the year, Inventories at the beginning of the year, , 150, 1,950, , 2,790, 29,700, (2,100), 27,600, , (4) Income Tax paid (including TDS from dividends received), Income Tax expense for the year, (including tax deducted at source from dividends received), Add : Income Tax liability at the beginning of the year, , Less : Income tax payable at the end of the year, , 300, 1,000, 1,300, (400), 900, , Out of Rs 900, tax deducted at source on dividends received (amounting, to Rs 40) is included in cash flows from investing activities and the balance of Rs 860 is, included in cash flows from operating activities., , 2018-19
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Cash Flow Statement, , 281, , (5) Repayment of Long-term Borrowings, Long-term Debts at the beginning of the year, Add : Long-term Borrowings made during the year, , 1,040, 250, , Less : Long-term Borrowings at the end of the year, , 1,290, (1,110), 180, , (6) Interest paid, Interest expense for the year, Add: Interest Payable at the beginning of the year, , 400, 100, 500, (230), , Less: Interest Payable at the end of the year, , 270, , Terms Introduced in the Chapter, 1., , Cash, , 2., , Cash Equivalents, , 3., , Cash Inflows, , 4., , Cash Outflows, , 5., , Non-cash item, , 6., , Cash Flow Statement, , 7., , Operating Activities, , 8., , Investing Activities, , 9., , Financing Activities, , 10., , 11., , Extraordinary Items, , Accounting Standard-3, , Summary, Cash Flow Statement: The Cash Flow Statement helps in ascertaining the liquidity, of an enterprise. Cash Flow Statement is to be prepared and reported by Indian, companies according to AS-3 issued by The Institute of Chartered Accountants of, India. The cash flows are categorised into flows from operating, investing and, financing activities. This statement helps the users to ascertain the amount and, certainty of cash flows to be generated by company., , 2018-19
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282, , Accountancy : Company Accounts and Analysis of Financial Statements, , Questions for Practice, Short Answer Questions, 1., , What is a Cash flow statement?, , 2., , How are the various activities classified (as per AS-3 revised) while, preparing cash flow statement?, , 3., , State the uses of cash flow statement., , 4., , What are the objectives of preparing cash flow statement?, , 5., , State the meaning of the terms: (i) Cash Equivalents, (ii) Cash flows., , 6., , Prepare a format of cash flow from operating activities under indirect, method., , 7., , State clearly what would constitute the operating activities for each of, the following enterprises:, (i), (ii), , Film production house, , (iii), , Financial enterprise, , (iv), , Media enterprise, , (v), (vi), 8., , Hotel, , Steel manufacturing unit, Software development business unit., , “The nature/type of enterprise can change altogether the category into, which a particular activity may be classified.” Do you agree? Illustrate, your answer., , Long Answer Questions, 1., 2., 3., 4., , Describe the procedure to prepare Cash Flow Statement., Describe “Indirect” method of ascertaining Cash Flow from operating, activities., Explain the major Cash Inflows and outflows from investing activities., Explain the major Cash Inflows and outflows from financing activities., , Numerical Questions, 1., , Anand Ltd., arrived at a net income of Rs 5,00,000 for the year ended, March 31, 2017. Depreciation for the year was Rs 2,00,000. There was a, profit of Rs 50,000 on assets sold which was transferred to Statement of, Profit and Loss account. Trade Receivables increased during the year Rs, 40,000 and Trade Payables also increased by Rs 60,000. Compute the, cash flow from operating activities by the indirect approach., [Ans.: Rs 6,70,000], , 2018-19
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Cash Flow Statement, , 2., , 283, , From the information given below you are required to calculate the cash, paid for the inventory:, Particulars, , (Rs), , Inventory in the beginning, , 40,000, , Credit Purchases, , 1,60,000, , Inventory in the end, , 38,000, , Trade payables in the beginning, , 14,000, , Trade payables in the end, , 14,500, , [Ans.: Rs 1,59,500], 3., , For each of the following transactions, calculate the resulting cash flow, and state the nature of cash flow, viz., operating, investing and financing., (a), , Acquired machinery for Rs 2,50,000 paying 20% by cheque and, executing a bond for the balance payable., , (b), , Paid Rs 2,50,000 to acquire shares in Informa Tech. and received a, dividend of Rs 50,000 after acquisition., , (c), , Sold machinery of original cost Rs 2,00,000 with an accumulated, depreciation of Rs 1,60,000 for Rs 60,000., , [Ans.: (a) Rs (50,000) investing activity (outflow); (b) Rs (2,00,000) investing, activity (outflow); (c) Rs 60,000 investing activity (inflow)., 4., , The following is the Profit and Loss Account of Yamuna Limited:, Statement of Profit and Loss of Yamuna Ltd.,, for the Year ended March 31, 2017, Particulars, , Note, No., , i) Revenue from Operations, ii), , Amount, (Rs), 10,00,000, , Expenses, Cost of Materials Consumed, , 1, , Purchases of Stock-in-trade, Other Expenses, , 50,000, 5,00,000, , 2, , 3,00,000, 8,50,000, , Total Expenses, iii) Profit before tax (i-ii), , 1,50,000, , Additional information:, (i) Trade receivables decrease by Rs 30,000 during the year., (ii) Prepaid expenses increase by Rs 5,000 during the year., (iii) Trade payables increase by Rs 15,000 during the year., (iv) Outstanding expenses payable increased by Rs 3,000 during the year., (v) Other expenses included depreciation of Rs 25,000., , 2018-19
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284, , Accountancy : Company Accounts and Analysis of Financial Statements, , Compute net cash from operations for the year ended March 31, 2017 by the, indirect method., [Ans.: Cash from operations Rs 2,18,000]., 5., (i), (ii), , Compute cash from operations from the following figures:, Profit for the year 2016-17 is a sum of Rs 10,000 after providing for, depreciation of Rs 2,000., The current assets and current liabilities of the business for the year, ended March 31, 2016 and 2015 are as follows:, , Particulars, , March, 31, 2016, (Rs), 14,000, 1,000, 13,000, 5,000, 10,000, 1,000, 2,000, 3,000, 2,000, , Trade Receivables, Provision for Doubtful Debts, Trade Payables, Inventories, Other Current Assets, Expenses payable, Prepaid Expenses, Accrued Income, Income received in advance, , March, 31, 2017, (Rs), 15,000, 1,200, 15,000, 8,000, 12,000, 1,500, 1,000, 4,000, 1,000, , [Ans.: Cash from operations: Rs 7,700]., 6., , From the following particulars of Bharat Gas Limited, calculate Cash, Flows from Investing Activities. Also show the workings clearly preparing, the ledger accounts:, , Balance Sheet of Bharat Gas Ltd., as on 31 March, 2016 and 31 March 2017, Particulars, , II) Assets, 1. Non-current Assets, a) Fixed assets, i) Tangible assets, ii) Intangible assets, b) Non-current investments, , Note, No., , Figures as, the end of, 2017 (Rs), , Figures as at, the end of, reporting, 2016 (Rs), , 1, 2, 3, , 12,40,000, 4,60,000, 3,60,000, , 10,20,000, 3,80,000, 2,60,000, , Figures of, current year, , Figures of, previous year, , 12,40,000, , 10,20,000, , 3,00,000, 1,60,000, 4,60,000, , 1,00,000, 2,80,000, 3,80,000, , Notes: 1 Tangible assets = Machinery, 2 Intangible assets = Patents, Notes to accounts:, , 1. Tangible Assets, Machinery, 2. Intangible Assets, Goodwill, Patents, , 2018-19
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Cash Flow Statement, , 285, , 3. Non-current Investments, 10% long term investments, Investment in land, Shares of Amartex Ltd., , 1,60,000, 1,00,000, 1,00,000, 3,60,000, , 60,000, 1,00,000, 1,00,000, 2,60,000, , Additional Information:, (a) Patents were written-off to the extent of Rs 40,000 and some Patents, were sold at a profit of Rs 20,000., (b) A Machine costing Rs 1,40,000 (Depreciation provided thereon, Rs 60,000) was sold for Rs 50,000. Depreciation charged during the year, was Rs 1,40,000., (c) On March 31, 2016, 10% Investments were purchased for Rs 1,80,000, and some Investments were sold at a profit of Rs 20,000. Interest on, Investment was received on March 31, 2017., (d) Amartax Ltd., paid Dividend @ 10% on its shares., (e) A plot of Land had been purchased for investment purposes and let out, for commercial use and rent received Rs 30,000., [Ans.: Rs 5,24,000]., 7., , From the following Balance Sheet of Mohan Ltd., prepare cash flow, Statement:, Balance Sheet of Mohan Ltd.,, as at 31st March 2016 and 31st March 2017, , Particulars, I), , Note, No., , March 31,, 2017 (Rs), , March 31,, 2016 (Rs), , 3,00,000, 2,00,000, , 2,00,000, 1,60,000, , 1, , 80,000, , 1,00,000, , 2, , 1,20,000, 70,000, 7,70,000, , 1,40,000, 60,000, 6,60,000, , 3, , 5,00,000, , 3,20,000, , 4, 5, , 1,50,000, 90,000, 30,000, 7,70,000, , 1,30,000, 1,20,000, 90,000, 6,60,000, , Equity and Liabilities, 1. Shareholders’ Funds, a) Equity share capital, b) Reserves and surplus, , 2. Non-current liabilities, a) Long-term borrowings, 3. Current liabilities, Trade payables, Short-term provisions, Total, II) Assets, 1. Non-current assets, Fixed assets, 2. Current assets, a) Inventories, b) Trade receivables, c) Cash and cash equivalents, Total, , 2018-19
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286, , Accountancy : Company Accounts and Analysis of Financial Statements, , Notes to accounts:, 1. Long-term borrowings, Bank Loan, 2. Short-term provision, Proposed dividend, 3. Fixed assets, Less: Accumulated Depreciation, (Net) Fixed Assets, 4. Trade receivables, Debtors, Bills receivables, 5. Cash and cash equivalents, Bank, , 2017, , 2016, , 80,000, , 1,00,000, , 70,000, 6,00,000, 1,00,000, 5,00,000, , 60,000, 4,00,000, 80,000, 3,20,000, , 60,000, 30,000, 90,000, , 1,00,000, 20,000, 1,20,000, , 30,000, , 90,000, , Additional Information:, Machine Costing Rs 80,000 on which accumulated depreciation was Rs,, 50,000 was sold for Rs 20,000., Rs, [Ans.: Cash flow from Operating Activities 1,80,000, Cash flow from Investing Activities (2,60,000), Cash flow from Financing Activities, 20,000., 8., , From the following Balance Sheets of Tiger Super Steel Ltd., prepare Cash, Flow Statement:, Balance Sheet of Tiger Super Steel Ltd., as at 31st March 2014 and 31st March 2017, , Particulars, I), , Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserves and surplus, 2. Current Liabilities, a) Trade payables, b) Other current liabilities, c) Short-term provisions, , II) Assets, 1. Non-Current Assets, a) Fixed assets, i) Tangible assets, ii) Intangible assets, b) Non-current investments, 2. Current Assets, a) Inventories, b) Trade receivables, c) Cash and Cash Equivalents, , Note, No., , March 31,, 2017 (Rs), , March 31,, 2016 (Rs), , 1, 2, , 1,40,000, 22,800, , 1,20,000, 15,200, , 3, 4, 5, , 21,200, 2,400, 28,400, 2,14,800, , 14,000, 3,200, 22,400, 1,74,800, , 6, , 96,400, 18,800, 14,000, , 76,000, 24,000, 4,000, , 31,200, 43,200, 11,200, 2,14,800, , 34,000, 30,000, 6,800, 1,74,800, , 2018-19
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Cash Flow Statement, , 287, , Notes to accounts:, 1. Share Capital, Equity share capital, 10% Preference share capital, , 2017, , 2016, , 1,20,000, 20,000, 1,40,000, , 80,000, 40,000, 1,20,000, , 12,000, 10,800, , 8,000, 7,200, , 22,800, , 15,200, , 21,200, , 14,000, , 2,400, , 3,200, , 12,800, 15,600, 28,400, , 11,200, 11,200, 22,400, , 20,000, 76,400, 96,400, , 40,000, 36,000, 76,000, , 2. Reserves and surplus, General reserve, Balance in statement of, profit and loss, 3. Trade payables, Bills payable, 4. Other current liabilities, Outstanding expenses, 5. Short-term provisions, Provision for taxation, Proposed dividend, 6. Tangible assets, Land and building, Plant, , Additional Information:, Depreciation Charge on Land & Building Rs 20,000, and Plant Rs 10,000, during the year., [Ans.: Cash flow from Operating Activities, Cash flow from Investing Activities, Cash flow from Financing Activities, 9., , Rs 56,000, Rs (60,400), Rs 8,800]., , From the following information, prepare cash flow statement:, , Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus, 2. Non-current Liabilities, (8% Debentures), 3. Current Liabilities, Trade payables, Total, , 2018-19, , 31st March, 2015 (Rs), , 31st March, 2014 (Rs), , 7,00,000, 4,70,000, , 5,00,000, 2,50,000, , 4,00,000, , 6,00,000, , 9,00,000, 24,70,000, , 6,00,000, 19,50,000
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–, , 288, , Accountancy : Company Accounts and Analysis of Financial Statements, , II. Assets, 1. Non-current assets, Fixed assets, i) Tangible, ii) Intangible–Goodwill, 2. Current assets, a) Inventories, b) Trade Receivables, c) Cash and cash equivalents, Total, , 7,00,000, 1,70,000, , 5,00,000, 2,50,000, , 6,00,000, 6,00,000, 4,00,000, 24,70,000, , 5,00,000, 4,00,000, 3,00,000, 19,50,000, , Additional Information:, Depreciation Charge on Plant amount to Rs 80,000., Rs, [Ans.: Cash inflow from Operating Activities, Cash inflow from Investing Activities, Cash inflow from Financing Activities, , 4,28,000, (2,80,000), (48,000)., , 10. From the following Balance Sheet of Yogeta Ltd., prepare cash flow, statement:, Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus (Surplus), 2. Non-current Liabilities, Long-term borrowings, 3. Current Liabilities, a) Short-term borrowings, (Bank overdraft), b) Trade payables, c) Short-term provision, (Provision for taxation), Total, II. Assets, 1. Non-current assets, Fixed assets, Tangible, 2. Current assets, a) Inventories, b) Trade Receivables, c) Cash and cash equivalents, Total, , 31st March, 2017 (Rs), , 31st March, 2016 (Rs), , 1, , 4,00,000, 2,00,000, , 2,00,000, 1,00,000, , 2, , 1,50,000, , 2,20,000, , 1,00,000, 70,000, 50,000, , 50,000, 30,000, , 9,70,000, , 6,00,000, , 7,00,000, , 4,00,000, , 1,70,000, 1,00,000, , 1,00,000, 50,000, 50,000, 6,00,000, , 9,70,000, , 2018-19
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Cash Flow Statement, , 289, , Notes to Accounts:, Particulars, 1. Share capital, a) Equity share capital, b) Preference share capital, 2. Long-term borrowings, Long-term loan, Loan from Rahul, , 31st March, 2017 (Rs), , 31st March, 2016 (Rs), , 3,00,000, 1,00,000, 4,00,000, , 2,00,000, 2,00,000, , 1,50,000, 1,50,000, , 2,00,000, 20,000, 2,20,000, , Additional Information:, Net Profit for the year after charging Rs 50,000 as Depreciation was Rs, 1,50,000. Dividend paid on Share was Rs 50,000, Tax Provision created, during the year amounted to Rs 60,000., Rs, [Ans.: Cash from Operating Activities, , 1,20,000, , Cash from Investing Activities, , (3,50,000), , Cash from Financing Activities, , 80,000, , 11. Following is the Financial Statement of Garima Ltd., prepare cash flow, statement., Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus (Surplus), 2. Current Liabilities, a) Trade payables, b) Short-term provisions, (Provision for taxation), Total, II. Assets, 1. Non-current assets, Fixed assets, Tangible, 2. Current assets, a) Inventories, b) Trade receivables, c) Cash and cash equivalents, d) Other current assets, Total, , 1, 2, , 2018-19, , 31st March, 2017 (Rs), , 31st March, 2016 (Rs), , 4,40,000, 40,000, , 2,80,000, 28,000, , 1,56,000, 12,000, , 56,000, 4,000, , 6,48,000, , 3,68,000, , 3,64,000, , 2,00,000, , 1,60,000, 80,000, 28,000, 16,000, 6,48,000, , 60,000, 20,000, 80,000, 8,000, 3.68,000
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290, , Accountancy : Company Accounts and Analysis of Financial Statements, Notes to Accounts:, Particulars, , 31st March, 2017 (Rs), , 31st March, 2016 (Rs), , 3,00,000, 1,40,000, 4,40,000, , 2,00,000, 80,000, 2,80,000, , 1. Share capital, a) Equity share capital, b) Preference share capital, 2. Reserve and surplus, Surplus in statement of profit and loss, at the beginning of the year, Add: Profit of the year, Less: Dividend, , 28,000, 16,000, 4,000, 40,000, , Profit at the end of the year, , Additional Information:, 1., 2., 3., , Interest paid on Debenture Rs 600, Dividend paid during the year Rs 4,000, Depreciation charged during the year Rs 32,000, Rs, , [Ans.: Cash flow from Operating Activities, , (11,400), , Cash flow from Investing Activities, , (1,96,000), , Cash flow from Financing Activities, , 1,55,400., , 12. From the following Balance Sheet of Computer India Ltd., prepare cash, flow statement., (Rs in ‘000), Particulars, , Note, No., , I. Equity and Liabilities, 1. Shareholders’ Funds, a) Share capital, b) Reserve and surplus–Surplus, 2. Non-Current Liabilities, 10% Debentures, 3. Current liabilities, a) Short-term borrowings, b) Trade payables, c) Short-term provisions, Total, II. Assets, 1. Non-current assets, a) Fixed assets, 2. Current assets, a) Inventories, b) Trade receivables, c) Cash and cash equivalents–cash, d) Other current assets–prepaid exp., Total, , 2018-19, , 1, , 2, 3, , 4, , 31st March, 2017 (Rs), , 31st March, 2016 (Rs), , 50,000, 3,700, , 40,000, 3,000, , 6,500, , 6,000, , 6,800, 11,000, 10,000, 88,000, , 12,500, 12,000, 8,000, 81,500, , 25,000, , 30,000, , 35,000, 24,000, 3,500, 500, 88,000, , 30,000, 20,000, 1,200, 300, 81,500
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–, , Cash Flow Statement, , 291, , Notes to Accounts:, Particulars, , 31st March, 2017 (Rs), , 31st March, 2016 (Rs), , 1,200, 2,500, 3,700, , 1,000, 2,000, 3,000, , 6,800, , 12,500, , 4,200, 5,800, 10,000, , 3,000, 5,000, 8,000, , 40,000, (15,000), 25,000, , 41,000, (11,000), 30,000, , 1. Reserve and surplus, i) Balance in statement of profit and loss, ii) General reserve, 2. Short-term borrowings, Bank overdraft, 3. Short-term provisions, i) Provision for taxation, ii) Proposed dividend, 4. Fixed Assets:, Fixed Assets, Less Accumulated Depreciation, , Additional Information:, Interest paid on Debenture Rs 600, [Ans.: Net Cash from Operating Activities, , Rs 2,100, , Net Cash from Investing Activities, , Rs 1,000, , Net Cash from Financing Activities, , Rs 4,900, , Project Work, 1., , Read and analyse the cash flow statements as given in the Annual Report, of any three listed companies and ascertain:, (i) which method (direct or indirect) is used for the purpose of calculating, cash flows from operating activities;, (ii) the treatment of special items such as dividend tax, profit/loss on sale of, fixed assets, depreciation extraordinary items, etc., (iii) Whether all companies follow the same proforma of cash flow statement, or different ones., (iv) As to whether you think that companies properly highlight cash flow, statement in their Annual Reports., , 2., , “Why companies must necessarily prepare and present a statement of cash, flows”. Discuss it in the classroom. Comment., , 3., , You analyse the cash flow statement for the past 3 years for a company, chosen by you and find out(i), (ii), , Whether the net increase in cash and cash equivalents over the years, is noticed., If net cash flow from operating activities have been negative throughout,, what may be the possible reasons for the situation. What would be the, possible reasons for your perception about the functioning of the company?, , 2018-19
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292, , Accountancy : Company Accounts and Analysis of Financial Statements, , Answers to Test your Understanding, Test your Understanding – I, Answer :, , a) Operating activities - 3, 6, 7, 10, 13, 15, 19, 20, 23, 24, 27;, b) Investing activities - 1, 5, 8, 11, 12, 16, 17, 21, 22, c) Financing activities - 2, 4, 9, 14, 18, 25, 26, 28, 29;, d) Cash equivalents - 30, 31, 32, 33., , Test your Understanding – II, Answers:, , (a) 40,000, (b) 60,000, (c) deducted from,, (d) deducted from, (e) added to, (f) added to, , Answers:, , 1. +, 2. NC, 3. +, 4. –, 5. +, 6. NC, 7. –, 8 +, 9. NC, 10 –, 11 –, 12 +, , 2018-19
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Cash Flow Statement, , 293, , N OTE, , 2018-19
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294, , Accountancy : Company Accounts and Analysis of Financial Statements, , N OTE, , 2018-19
