Solution for Accountancy -Part 1Solution for Accountancy -Part 2
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DO IT YOUR SELF IQuestion 1. The profit and loss account of Roy Limited is given here under Question 2. From the following information calculate net cash from operations TEST YOUR UNDERSTANDING IIQuestion 1. Choose one of the two alternatives given below and fill in the blanks in the following statements Question 2. While computing cash from operating activities, indicate whether the foltowing items witl be added or subtracted from the net profit, if not to be considered write NC. DO IT YOURSELF IIQuestion 1. From the following particulars, calculate cash flows form investing activities Question 2. From the following Information, calculate cash flow from investing and financing activities SHORT ANSWER TYPE QUESTIONSQuestion 1. What is a cash flow statement? Question 2. How the various activities are classified (as per AS-3 revised) while preparing cash flow statement? Question 3. State the uses of cash flow statement Question 4. What are the objectives of preparing cash flow statement? Question 5. Explain the terms : Cash equivalents, Cash flows. Question 6. Prepare a format of cash flow from operating activities under direct method and indirect method. Question 7. Now that you know the meaning of operating activities, state clearly what would constitute the operating activities for the following types of enterprises Question 8. “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 TYPE QUESTIONSQuestion 1. Describe the procedure to prepare cash flow statement. Question 2. Describe “Direct” and “Indirect” method of ascertaining cash flow from operating activities. Question 3. Explain the major cash inflows and outflows from investing activities. Question 4. Explain the major Cash inflows and outflows from financing activities. Typical adjustments appearing here include changes in long and short term debt (issuing and redemption), issuing of preferred stock, issuing of common stock, retirement of stock, and stock dividends paid in cash. NUMERICAL QUESTIONSQuestion 1. Anand Ltd arrived at a net income of Rs. 5,00,000 for the year ended March 31, 2007. Depreciation for the year was Rs. 2,00,000. There was a gain of Rs. 50,000 on assets sold which was credited to profit and loss account. Bills receivable increased during the year by Rs. 40,000 and bills payable also increased by Rs. 60,000. Compute the cash flow from operating activities by the indirect approach. Question 2. From the information given below, you are required to prepare the cash paid for the inventory Question 3. For each of the following transactions, calculate the resulting cash flow and state the nature of cash flow viz, operating, investing and financing. Question 4. The following is the profit and loss account of Yamuna Limited Question 5. Compute cash from operations from Question 6. From the foltowing Particulars of Bharat Gas Limited, calculate cash flows from investing activities. Also show the workings clearly preparing the ledger accounts.
Question 8. From the foltowing Batance Sheet of Tiger Super Steel Ltd, prepare Cash flow statement. Question 9. Prepare cash flow statement from the following information Question 10. From the following information, prepare cash flow statement for Yogeta Ltd. Question 11. Following is the Financial Statement of Garima Ltd. Prepare cash flow statement. Question 12. Foltowing is the Balance Sheet of Computer India Ltd TEST YOUR UNDERSTANDING I• State which of the following statements are True or False. (b) Analyses of data provided in the financial statements a is termed as financial analysis. (c) Long term creditors are concerned about the ability of a firm to discharge its obligations to pay interest and repay the principal amount of term. (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) One ratios reflect both quantitative and qualitative aspects. DO IT YOURSELF IQuestion 1. Current ratio =4.5:1,quick ratio =3:1, Inventory is Rs.36,000. Calculate the current assets and current liabilities. Question 2. Current liabilities of a company are ? 5,60,000 current ratio is 5 : 2 and quick ratio is 2 : 1. Find the value of the stock. Question 3. Current assets of a company are Rs. 5,00,000. Current ratio is 2.5 : 1 and quick ratio is 1 : 1. Calculate the value of current liabilities, liquid assets and stock. TEST YOUR UNDERSTANDING II(i) The following groups of ratios primarily measure risk (ii) The————-ratios are primarily measures of return. (iii) The…………….of a business firm is measured by its ability to satisfy (iv) ……………….ratios are a measure of the speed with which various (v) The two basic measure of liquidity are (vi) The……………is a measure of liquidity which excludes………………….., generally the least liquid asset. DO IT YOURSELF IIQuestion 1. Calculate the amount of gross profit Question 2. Calculate stock Turnover Ratio TEST YOUR UNDERSTANDING III(i) The………..is useful in evaluating credit and collection policies. (ii) The………measures the activity of a firm’s inventory. (iii) The………..ratio may indicate the firm is experiencing stock outs and lost sales. (iv) ABC Co extends credit terms of 45 days to its customer, its credit collection would be considered poor if its average collection period was (v) …………… are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm. (vi) The……………….. ratios provide the information critical to the long-run operation of the firm SHORT ANSWER TYPE QUESTIONSQuestion 1. What do you mean by Ratio Analysis? Question 2. What are various types of ratios? Question 3. What relationships will be established to study? (b)Debtor Turnover Ratio :Debtor turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. The formula for calculating Debtors turnover ratio is as follows (c)Creditors/Payables Turnover Ratio :It compares creditors with the total credit purchases. It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include both sundry creditors and bills payable. Same as debtor’s turnover ratio, creditor’s turnover ratio can be calculated in two forms, creditors’ turnover ratio and average payment period. The following formula is used to calculate the creditors Turnover Ratio (d)Working Capital Turnover Ratio Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio represents the number of times the working capital is turned over in a year and is calculated as follows Question 4. Why would the inventory turnover ratio be more important when analysing a grocery store than an insurance company? Question 5. The liquidity of a business firm is measured by its ability to satisfy its long term obligations as they become due? Comment. Debt Equity Ratio: Debt equity ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company. Following formula is used to calculate debt to equity ratio Proprietory Ratio/Total Assets to Debt Ratio: Total assets to Debt Ratio or Proprietory Ratio are a variant of the debt equity ratio. It is also known as equity ratio or net worth to total assets ratio. This ratio relates the shareholder’s funds to total assets. Proprietory / Equity ratio indicates the long-term or future solvency position of the business. Formula of Proprietory/Equity Ratio Fixed Assets to Proprietor’s Fund Ratio: Fixed assets to proprietor’s fund ratio establish a relationship between fixed assets and shareholders’ funds. The purpose of this ratio is to indicate the percentage of the owner’s funds invested in fixed assets. The formula for calculating this ratio is as follows Interest Coverage Ratio: This ratio deals only with servicing of return on loan as interest. This ratio depicts the relationship between amount of profit utilise for paying interest and amount of interest payable. A high Interest Coverage Ratio implies that the company can easily meet all its interest obligations out of its profit. Question 6. The average age of inventory is viewed as the average length of time inventory is held by the firm or as the average number of day’s sales in inventory. Explain. LONG ANSWER TYPE QUESTIONSQuestion 1. Who are the users of financial ratio analysis? Explain the significance of ratio analysis to them. Question 2. What are liquidity ratios? Discuss the importance of current and liquid ratio. Current Ratio/Working Capital Ratio: This ratio establish relationship between current assets and current liabilities. The standard for this ratio is 2 : 1. It means a ratio 2 : 1 is considered favourable. It is calculated by dividing the total of the current assets by total of the current liabilities. The formula for the current ratio is as follows Importance of Current Ratio: Current Ratio 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. However, it must be interpreted carefully because window-dressing is possible by manipulating the components of current assets and current liabilities, e.g., it can be manipulated by making payment to creditors. A very high current ratio is not a good sign as it reflects under utilisation or improper utilisation of resources. Importance of Quick Ratio :It helps in determining whether a firm has sufficient funds if it has to pay all its current liabilities immediately. Because of exclusion of non-liquid current assets, it is considered better than current ratio as a measure of liquidity position of the business. Standard for liquid ratio is 1:1. Sometimes quick ratio is calculated on the basis of quick liability instead of current liabilities. Quick liabilities are calculated by ignoring bank overdraft, if any. It means to get the figure of quick liabilities from current liabilities; bank overdraft is deducted from current liabilities. Question 3. How would you study the solvency position of the firm? Debt Equity Ratio :Debt Equity Ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company. Proprietory Ratio/ Total Assets to Debt Ratio: Total assets to Debt Ratio or Proprietory Ratio are a variant of the debt equity ratio. It is also known as equity ratio or net worth to total assets ratio. This ratio relates the shareholder’s funds to total assets. Proprietory/Equity Ratio indicates the long-term or future solvency position of the business. Formula of Proprietary/Equity Ratio Fixed Assets to Proprietor’s Fund Ratio: Fixed Assets to Proprietor’s Fund Ratio establish a relationship between fixed assets and shareholders’ funds. The purpose of this ratio is to indicate the percentage of the owner’s funds invested in fixed assets. The formula for calculating this ratio is as follows Interest Coverage Ratio :This ratio deals only with servicing of return on loan as interest. This ratio depicts the relationship between amount of profit utilise for paying interest and amount of interest payable. A high Interest Coverage Ratio implies that the company can easily meet all its interest obligations out of its profit. Question 4. What are important profitability ratios? How are they worked out? ‘ Gross profit would be the difference between net sales and cost of goods sold. Cost of goods sold in the case of a trading concern would be equal to opening stock plus purchase, minus closing stock plus all direct expenses relating to purchases. In the case of manufacturing concern, it would be equal to the sum of the cost of raw materials, wages, direct expenses and all manufacturing expenses. In other words, generally the expenses charged to profit and loss account or operating expenses are excluded from the calculation of cost of goods sold. Net Profit Ratio :Net Profit Ratio is the ratio of net profit to net sales. It is expressed as percentage. The two basic components of the net profit ratio are the net profit and sales. The net profits are obtained after deducting income-tax and, generally, non-operating expenses and incomes are excluded from the net profits for calculating this ratio. Thus, incomes such as interest on investments outside the business, profit on sales of fixed assets and losses on sales of fixed assets, etc are excluded. Operating Profit Ratio :Operating Profit Ratio is the ratio of operating profit to net sales. There are many non operating expenses and incomes included in the profit and loss account which has nothing to do with the operations of the business such as loss by fire, loss by theft etc. On the other had in credit side of the P&L account, there are so many incomes Operating Ratio :Operating ratio is the ratio of cost of goods sold plus operating expenses to net sales. It is generally expressed in percentage, Operating ratio measures the cost of operations per dollar of sales. This is closely related to the ratio of operating profit to net sales. The two basic components for the calculation of operating ratio are operating cost (cost of goods sold plus operating expenses) and net sales. Operating expenses normally include (a) administrative and office expenses and (b) selling and distribution expenses. The formula for calculating the operating ratio is as follows Question 5. Financial ratio analysis are conducted by four groups of analysts : managers, equity investors, long term creditors and short term creditors. What is the primary emphasis of each of these groups in evaluating ratios? Question 6. 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. But on the other hand, in case of those firms where the stock can be easily realised or sold off consideration of stock should be avoided and to measure the liquidity of that firm Quick ratio should be calculated, e.g., the inventories of a service sector company are very liquid as there are no stocks kept for sale, so in that case liquid ratio must be followed for measuring the liquidity of the firm. NUMERICAL QUESTIONSQuestion 1. Following is the Balance Sheet of Rohit and Company as on March 31, 2006. Question 2. Following is the Balance Sheet of Title Machine Limited as on March 31, 2006. Question 3. Current Ratio is 3:5 Working Capital is Rs. 9,00,000. Calculate the amount of Current Assets and Current Liabilities. Question 4. Shine Limited has a current ratio 4.5:1 and quick ratio 3:1; if the stock is 36,000, calculate current liabilities and current assets. Question 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 stock. Question 6. Handa Limited has stock of Rs. 20,000. Total liquid assets are Rs. 1,00,000 and quick ratio is 2:1 Calculate current ratio. Question 7. Calculate debt equity ratio from the following information Question 8. Calculate Current Ratio if Stock is ? 6,00,000; Liquid Assets Rs. 24,00,000; Quick Ratio 2:1. Question 9. Compute Stock Turnover Ratio from the following information Question 10. Calculate following ratios from the following information Question 11. From the following information calculate Question 12. Compute Gross Profit Ratio, Working Capitat Turnover Ratio, Dept Equity Ratio and Proprietory Ratio from the fottowing information Question 13. Calculate Stock Turnover Ratio if Opening Stock is Rs. 76,250, Closing Stock is 98,500, Sales is Rs. 5,20,000, Sales Return is Rs.20,000, Purchase is Rs. 3,22,250. Question 14. Calculate Stock Turnover Ratio from the data given below Question 15. A trading firm’s average stock is ? 20,000 (cost). If the stock turnover ratio is 8 times and the firm setts goods at a profit of 20% on sales, ascertain the profit of the firm. Question 16. You are able to collect the following information about a company for two years Question 17. The following Balance Sheet and other information, calculate following ratios Question 18. The following is the summarised Profit and Loss account and the Balance Sheet of Nigam Limited for the year ended March 31, 2007 Question 19. From the following, Question 20. Cost of Goods Sold is 1 1,50,000 Operating expenses are Rs. 60,000. Sales is Rs. 2,60,000 and Sales Return is Rs. 10,000. Calculate Operating Ratio. Question 21. The following is the summerised transactions and Profit and Loss Account for the year ending March 31, 2007 and the Balance Sheet as on that date. Question 22. From the fotlowing information calcutate Gross Profit Ratio, Stock Turnover Ratio and Debtors Turnover Ratio. NCERT Solutions for Class 12 Accountancy Part II Chapter 4 Analysis of Financial Statements5/11/2017 TEST YOUR UNDERSTANDING I• Fill in the blanks with appropriate word(s). Question 2. Interpretation means————-data. Question 3. Comparative analysis is also known as—————Analysis. Question 4. Common size analysis is also known as————–Analysis Question 5. The analysis of actual movement of money inflow and outflow in an organisation is called———-analysis. DO IT YOURSELF IFrom the following balance sheet and income statement of Day Dreaming Co.Ltd., for the year ending 2002 and 2003, prepare the comparative statements. DO IT YOURSELF IIThe following are the Balance Sheets of Harsha Ltd. as on March 31, 2006 and March 31, 2007 TEST YOUR UNDERSTANDING – IIChoose the right answer : 2. The most commonly used tools for financial analysis are: 3. An Annual Report is issued by a company to its: 4. Balance Sheet provides information about financial position of the enterprise: 5. Comparative statement are also known as: DO IT YOURSELF IIIQuestion 1. The following data is available from the P&L Account of Deepak Limited TEST YOUR UNDERSTANDING III• State whether each of the following is true or false (a) The financial statements of a business enterprise include funds 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 total for analysing the financial statements of any enterprise. (f) Financial analysis is used only by the creditors. (g) 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. SHORT ANSWER TYPE QUESTIONSQuestion 1. List the techniques of Financial Statement Analysis. Question 3. Explain the meaning of Analysis and Interpretation. Question 4. Bring out the importance of Financial Analysis. Question 5. What are Comparative Financial Statements? The following are the two Comparative Financial Statements that are commonly prepared Question 6. What do you mean by Common Size Statements? LONG ANSWER TYPE QUESTIONSQuestion 1. Describe the different techniques of financial analysis and explain the limitations of financial analysis. Question 2. Explain the usefulness of trend percentages in interpretation of financial performance of a company. Usefulness and Importance of Trend Analysis: Question 3. What is the importance of comparative statements? Illustrate your answer with particular reference to comparative income statement. Question 4. What do you understand by analysis and interpretation of financial statements? Discuss their importance. Question 5. Explain how common size statements are prepared giving an example. NUMERICAL QUESTIONS1. From the following information of Narsimham Company Ltd., prepare a Comparative Income Statement for the years 2004-2005 Interpretation 2. The following are the Balance Sheets of Mohan Ltd., at the end of 2004 and 2005. Question 3. The following are the balance sheets of Devi Company Limited at the end of 2011 and 2012. Prepare a comparative Balance Sheet and study the financial position of the concern. Question 4. Convert the following Income Statement into Common Size Statement and interpret the changes in 2011 in the light of the conditions in 2010. Question 5. Following are the balance sheets of Reddy Limited as on 31 March, 2011 and 2012 Comments Question 7. From the following particulars extracted from P&L Account of ‘Prashanth Limited, you are required to calculate trend percentages Question 8. Calculate trend percentages from the following figures of ABC Limited, taking 2000 as base and interpret them. Question 10. Prepare comparitive statements from the following. NCERT Solutions for Class 12 Accountancy Part II Chapter 3 Financial Statements of a Company5/11/2017 TEST YOUR UNDERSTANDING I• State whether the following statements are true or false. • Fill in the blanks with appropriate word(s) TEST YOUR UNDERSTANDING IIQuestion 1. What are the items shown under heading ‘Reserve and Surplus’? Question 2. What are the items shown under heading ‘Miscellaneous Expenditure? SHORT ANSWER TYPE QUESTIONSQuestion 1. State the nature of financial statements. Question 2. Briefly explain the importance of preparing financial statements. Question 3. What are the limitations of financial statements? Question 4. Prepare the format of income statement and discuss its elements. Question 5. Prepare the format of balance sheet and discuss its elements. Elements of Balance Sheet: A brief description of various element of balance sheet is given below (ii) Reserve and Surplus: As per the Schedule VI, it consists of the following items (iii) Secured Loans: (iv) Unsecured Loans: (v) Current Liabilities: Current Liabilities are those liabilities which are liable to pay with in an operating cycle generally one year; e.g., bank overdraft creditors, bills payable, outstanding wages, short term loans, etc are called current liabilities. Description of Elements at the Liabilities Sfde of Balance Sheet LONG ANSWER TYPE QUESTIONSQuestion 1. Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking? The following are the various external parties. Question 2. Financial statements reflect a combination of recorded facts, accounting conventions and personal judgements. Discuss. Question 3. Explain the process of preparing income statement and balance sheet. The process of preparing Balance Sheet is given below NUMERICAL QUESTIONSQuestion 1. The following is the trial balance on June 30, 2011 of the Modern Manufacturing Company Ltd. Question 2. The following is the trial balance of Alfa Ltd, for the year ended June 30, 2011 3. The following balances appeared in the books of Parasuram Flour Mills Ltd., as on December 31, 2005 : Note :Pension fund is assumed to be created out of profits. Dividend ? 9,000 is considered as declared and paid in same year. 4. An unexperienced accountant prepared the following trial balance of Bang Vikas Ltd., for the year ending 31.12.2005. The cash in hand on 31.12.2005 was Rs. 750. Adjustments: (i) Stock on 31.12.2005 Rs. 95,000 and (ii) Write-off preliminary Note: Rectified trial balance need not be prepared Note: When the trial balance does not tally, it should be balanced by writing the difference amount on either side as required and then show it in balance sheet 5. The Silver Ore Co. Ltd. was formed on April 1, 2005 with an authorised capital of Rs.6,00,000 in shares of Rs. 10 each. Of these 52,000 shares had been issued and subscribed but there were calls in arrear on 100 shares @ Rs. 2.50. From the following trial balance as on March 31, 2006 prepare the trading and profit and loss account and the balance sheet: NCERT Solutions for Class 12 Accountancy Part II Chapter 2 Issue and Redemption of Debentures5/11/2017 DO IT YOURSELF I1. Amrit Company Limited purchased assets of the book value of Rs.2,20,000 fromanother 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. 2. 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. 3. 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. 4. 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 ofRs. 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. DO IT YOURSELF II2. Record necessary journal entries in each of the following cases: DO IT YOURSELF III1. Diwakar enterprises Ltd. Issued 10,00,000, 6% debentures on April 1, 2002. Interest is paid on September 30, 2002 and March 31, 2003. 2. Laser India Ltd. Issued 7,00,000, 8% debentures of Rs. 100 each at par.Company deducts income tax from the interest of these debentures at source. Interest is to be paid on these debentures half-yearly on September 30 andMarch 31, every year. Amount of income tax deducted half-yearly iRs. 2,80,000. DO IT YOURSELF IV 1. X Ltd. Issued 2,000, 10% debentures of Rs.100 each at a discount of 8% on1 Jan, 1992 which are redeemable at par by annual drawings in 4 yearscommencing from 31st March 1993 as per the following redemption plan:Ist Draw 10%, 2nd Draw 20%, 3rd Draw 30%, and 4th Draw 40%. Calculate theamount of discount to be written-off each year assuming that X Ltd. followscalendar year as its accounting year. 2. Z Ltd. issued 15,00,000, 10% debenture 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 calledand duly received. Record necessary entries when premium money is included: 3. Z Ltd. issued 5,000, 10% debentures of Rs.100 each at a discount of 10% on 1.1.2005. The debentures are to be redeemed every year draw of lots – 1,000 debenture to be redeemed every year starting on 31.12.2005. Record the necessary journal entries including the payment of interest and writing off the discount on issue of debentures. The interest is payable on 30th June and 31st December. Z Ltd. Closes its books of accounts on 31st December. 4. M Ltd. issued 10,000, 8% debentures of Rs.100 each at a premium of 10% on 1.1.2004. It purchased sundry assets of the value of Rs,2,50,000 and took over the liabilities of Rs,1,90,000 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 31.12.2004. Ignore interest. 5. On 1.1.2005 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. 6. D Ltd. Purchased machinery worth Rs.2,00,000 from E Ltd. on 1.1.2001. 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. TEST YOUR UNDERSTANDING I• State whether the following statements are True (T) or Fasle (F) Question 2. Debenture is a part of owned capital. Question 3. The payment of interest on debentures is a charge on the profits of the company. Question 4. The debentures cannot be issued at a discount of more than 10% of the face value. Question 6. Perpetual debentures are also known as irredeemable debentures. Question 7. Debentures cannot be converted into shares. Question 8. Debentures cannot be issued at a premium. Question 10. Debentures cannot be issued at a premium and redeemable at par. Question 11. Loss on issue of debentures account is a revenue loss. Question 12. Premium on redemption of debentures account is shown under the ‘Securities Premium’ in the Balance Sheet. DO IT YOURSELF V1. X Ltd. decides to redeem 8,000, 10% debentures of Rs.100 each on January 1, 2004 at a premium of 5%. The company has a balance of Rs.9, 00,000 at the credit of its profit and loss account. The company closes its books on December 31 every year. What journal entries the company will be recorded to redeem the above debentures. 2. G Ltd. issued 5,00,000, 12 % debenture of Rs.100 each on April 1, 2002 redeemable at par on July 1, 2003. The company received applications for 6,00,000 debentures and the allotment was made to all the applicants on pro-rata basis. The debenture 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. TEST YOUR UNDERSTANDING II Select the correct answer for the following multiple choice questions: Question 3. X Co Ltd purchased assets worth ? 28,80,000. It issued debentures of ? 100 each at a discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued to vendor is Question 4. Convertible debentures cannot be issued at a discount if 1 (a) they are to be immediately converted Question 5. Discount on issue of debentures is shown under the following head in the Balance Sheet Answer (b) Miscellaneous expenditure Question 6. When debentures are issued at par and are redeemable at a premium, the loss on such an issue debited to Question 7. Excess value of net assets over purchase consideration at the time of purchase of business is credited to Question 8. When all the debentures are redeemed, balance in the debentures redemption fund account is transferred to Question 9. The nominal and book values of debenture redemption fund investments account are respectively ? 1,00,000 and ? 96,000. Question 10. Own debentures are those debentures of the company which Question 11. Profit on cancellation of own debentures is transferred to Question 12. When debentures are redeemed out of profits, an equal amount is transferred to Question 13. Profit on sale of debenture redemption fund investments in the first instance is credited to Question 14. The balance of sinking fund investment account after the realisation of investments is transferred to Question 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 TEST YOUR UNDERSTANDING III• Indicate in the column below, the account to be debited in case of the following transactions. • Indicate in the column below, the account to be credited in case of the following transactions DO IT YOURSELF VI1. G Ltd. has 800 lakhs, 10% debentures of Rs.100 each due for redemption on March 31, 2003. 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 debenture. 2. R Ltd. issued 88,00,000, 8 % debenture of Rs. 50 each at a premium of 5 % on July 1, 2000 redeemable at par by conversion of debenture into shares of Rs.20 each at a premium of Rs.2 per share on June 30, 2003. Record necessary entries for redemption of debenture. 3. C Ltd. has outstanding 11,00,000, 10% debentures of Rs.200 each, on April 1, 2003. The Board of Directors have decided to purchase 20% of own debenture for cancellation at Rs.200 each. Record necessary entries for the same. 4. Record necessary journal entries in the books of the Company in following case for redemption of 1,000, 12% Debentures of Rs.10 each issued at par: 5. On 31.1.2005 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. 6. Anirudh Ltd. has 4,000, 8% debentures of Rs.100 each due for redemption on March 31, 2005. The company has a debenture redemption reserve of Rs.1,50,000 on that date. Assuming that no interest is due record the necessary journal entries at the time of redemption of debentures. Working Note Debenture forRs.4,00,000 were to be redeemed. As per SEBI guidelines, 50% debenture redemption reserve is to be maintained. For Rs.14,00,000 it comes to Rs.2,00,000. Debenture redemption reserve already in books of account was Rs.1,50,000. Hence, entry for balance Rs. 50,000 was passed in this solution. SHORT ANSWER TYPE QUESTIONS Question 1. What is meant by a Debenture? Question 2. What does a Bearer Debenture mean? Question 3. State the meaning of ‘Debentures issued as a Collateral Security’. Question 4. What is meant by Issue of debentures for consideration other than Cash’? Question 5. What is meant by ‘Issue of debentures at discount and redeemable at premium? Question 6 What is ‘Capital Reserve’? A capital reserve can be utilised for meeting the future capital losses. Here it is to be remembered that capital reserve cannot be used for distributing dividend to the share holders but bonus shares can be issued out of the capital reserve. Question 7 What is meant by a ‘Irredeemable Debenture? Question 8. What is a ‘Convertible Debenture? Question 9. What is meant by ‘Mortgaged Debentures? Question 10. What is discount on issue of debentures? Question 11. What is meant by ‘Premium on Redemption of Debentures’? Question 12. How debentures are different from shares? Give two points. Dividend or Interest :Dividend on shares is paid only when there are profits in Ownership Equity share holders are the owners of the company on the other hand debenture holders are the creditors of the company. Question 13. Name the head under which ‘Discount on Issue of Debentures’ appears in the Balance Sheet of a company. Question 14. What is meant by redemption of debentures ? Question 15. Can the company purchase its own debentures? Question 16. What is meant by redemption of debentures by conversion? Question 17. How would you deal with ‘Premium on Redemption of Debentures? Question 18. What is meant by ‘Redemption out of Capital’? In other words when debentures are redeemed out of capital and no profits are utilised for redemption, then such redemption is termed as redemption out of capital. A company cannot redeem its debentures purely out of capital. At least 50% of debentures issued must be redeemed out of profits by creating a ‘Debenture Redemption Reserve’ and the balance of debentures issued may be redeemed out of profits or out of capital. According to the Companies Act, 1956 when debentures are to be redeemed an adequate amount of profits is required to be transferred to ‘Debenture Redemption Reserve’ every year before the redemption begins. It is to be noted that the Companies Act, 1956 does not spell out at to what is the adequate amount. For this one can refer to SEBI Guidelines which stipulates that an amount equal to 50% of the debentures issue should be transferred to ‘Debenture Redemption Reserve’ before the redemption begins. Question 19. What is meant by redemption of debentures by ‘Purchase in the Open Market? Question 20. Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet. LONG ANSWER TYPE QUESTIONSQuestion 1. What is meant by a debenture? Explain the different types of debentures? In case of mortgage debentures, a company may prefer to appoint trustees who will hold the property given by way of security in trust for the benefits of debentures holders. (ii) From Permanence Point of View From Permanence point of view the debentures may be Redeemable or Irredeemable debentures. The company has the option of cancelling its liability to the debenture holders at any time by giving due notice to them. (iii) From Priority Point of View :From this point of view the debentures may be First and Second debentures. Question 2. Distinguish between a debenture and a share. Why debenture is known as loan capital? Explain. Question 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? If the Company makes a default, the bank may either keep the debenture and become debenture-holder or sell them and realise money. This type of issue by the Company is called Issue of Debenture as Collateral Security. When debentures are issued by the company, they are not really alive and no accounting entry is made in the books of the Company for it. Only a note is given in the balance sheet for it as under If accounting record for these debentures is to be made Debentures Suspense A/c is debited and deoentures A/c credited, debentures are shown in the liability side and balance of debentures Suspense A/c is shown in the assets side of the Balance Sheet. When debt is paid off by the Company, Debentures A/c is debited and Debentures Suspense A/c is credited. Question 4. How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘Discount on issue of debentures’ when the debentures are to be redeemed in instalments? The loss on the issue of debenture is shown on the Assets side of the Balance Sheet under the heading of Miscellaneous Expenditures. Accounting Treatment for Discount on Issue of Debentures: e.g., if a company has issued 10% debentures of Rs. 12,00,000 at 5% discount redeemable annually by Rs. 2,40,000 each year. The total amount of discount on Rs.12,00,000 debentures @ 5% is Rs. 60,000, i.e., (12,00,000 x 5/100 =Rs. 60,000). The amount of discount to be written off every year is calculated as Hence, the amount of the total discount of’ 60,000 will be written off in the ratio of ,5 : 4 : 3 : 2 :1 i.e.,’ 20,000,’ 16,000,’ 12,000,’ 8,000 and 4,000 respectively. Question 5. Explain the different terms for the issue of debentures with reference to their redemption. Question 6. Differentiate between redemption of debentures out of capital and out of profits. SEBI mandates transferring amount equal to 50% of debentures issued to DRR before redeeming debentures. As transfer of amount (profits) to the DRR from Profit and Loss Appropriation Account reduces the amount of profit available for distribution of dividend, so this redemption process is known as redemption out of profit. DRR is shown under the head of Reserves and Surpluses on the Liabilities side of the Balance Sheet. DRR account is closed by transferring it to General Reserve only when all the debentures are redeemed. Question 7. Explain the guidelines of SEBI for creating Debenture Redemption Reserve. SEBI guidelines would not apply under the following situations: Question 8. Describe the steps for creating Sinking Fund for redemption of debentures. Question 9. Can a company purchase its own debentures in the open market? Explain. When a company purchase its own debenture,in the open market it can happen in either of the two ways first debentures may be purchased at premium for cancellation and debenture may be purchase at discount for cancellation. The following will be the accounting treatment in both the situation (i) If Debentures are Purchased at Discount for Cancellation :When the company purchase its own debentures at discount for cancellation, then the following Journal entries are recorded. Question 10. What is meant by conversion of debentures? Describe the method of such a conversion. NUMERICAL PROBLEMS1. G.Ltd. issued 75,00,000, 6% Debenture 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 debenture. 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: 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: 6. T. Ltd. offered 2,00,000, 8% Debenture of Rs.500 each on June 30, 2002 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 debenture 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 debenture. 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, 5,000 only 40% and the remaining 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% Debenture 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%Debenture 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. 11. X.Ltd. purchased a Machinery from Y for an agreed purchase consideration of 12. X.Ltd. issued 15,000, 10% debentures of Rs.100 each. Give journal entries and the Balance Sheet in each of the following cases:
13. Journalise the following: 14. A.Ltd. issued 50,00,000, 8% Debenture of Rs.100 at a discount of 6% on April 01, 15. A company issues the following debentures: 16. A company issued debentures of the face value of Rs,5,00,000 at a discount of 6% on January 01, 2001. These debentures are redeemable by annual drawings of Rs,1,00,000 made on December 31 each year. The directors decided to write off discount based on the debentures outstanding each year. 17. A company issued 10% Debentures of the face value of Rs,1,20,000 at a discount of 6% on January 01, 2001. The debentures are payable by annual drawings of Rs.40,000 commencing from the end of third year. 18. B.Ltd. issued debentures at 94% for Rs.4,00,000 on April 01, 2000 repayable by five equal drawings of Rs.80,000 each. The company prepares its final accounts on December 31 every year. 19. B. Ltd. issued 1,000, 12% debentures of Rs.100 each on January 01, 2005 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 December 31, 2005 assuming that interest is paid half yearly on June 30 and December 31 and tax deducted at source is 10%. B.Ltd. follows calendar year as its accounting year. 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 that at par; and (c) when debentures were issued at discount with a condition to redeem them at premium? 21. On January 01, 1998, 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 December 31, 2000 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.
22. On January 01, 2003 a company issued 15% debentures of Rs.10,00,000 at par. The debentures were redeemable at par after three years on December 31, 2003. 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 23. On January 01, 2004 the following balances appeared in the books of Z. Ltd.: The investments consisted of 4% Government securities of the face value of Rs.90,000. The annual instalment was Rs.16,400. On December 31, 2004, 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.
24. The following balances appeared in the books of A.Ltd. on January 01, 2004 25. The following balances appeared in the books of Z.Ltd. on January 01, 2004 26.What entries for the redemption of debentures will be done when : (a) debentures 27. A. Ltd. Company issued Rs,5,00,000 Debentures at a discount of 5% repayable at
28. X.Ltd. issued 5,000, 15% debentures of Rs.100 each on January 01, 2004 at a 29. Z.Ltd. issued 2,000, 14% debentures of Rs.100 each on January 01, 2005 at a
30. A.Ltd. purchased its own debentures of the face value of Rs.2,00,000 from the
32. A.Ltd. redeemed 8,000, 12% debentures of Rs.100 each which were issued at a discount of 5%, by converting them into equity shares of Rs.10 each at par.
33. Y.Ltd. redeemed 4,800, 12% debentures of Rs.100 each which were issued at par, at 110 per cent by converting them into equity shares of Rs.10 each issued at a discount of 4%. Journalise. 34. Z.Ltd. redeemed 2,000, 12% debentures of Rs.100 each which were issued at a discount of 5%, by converting them into equity shares of Rs.10 each issued at a premium of 25%. Journalise.
• State which of the following statements are true Do it Yourself IQuestion 1. On January 01, 2006, 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 Do it Yourself II1. A company issued 20,000 equity shares of Rs.10 each payable at Rs.3 on 2. Alfa company Ltd. issued 10,000 shares of Rs.10 each for cash payable at Rs.3 Test your Understanding – IIChoose the Correct Answer. (b) Nominal share capital is : Answer (iv) the amount actually paid by the shareholders. (c) Interest on calls-in-arrears is charged according to “Table A” at : (d) Money received in advance from shareholders before it is actually called-up by the directors is : (e) Shares can be forfeited (f) The balance of share forfeited account after the reissue of forfeited shares is transferred to (g) Balance of share forfeiture account is shown in the balance sheet under the item : Do it Yourself III 2. A company forfeited 800 equity shares of Rs.10 each issued at a discount of 10% for non-payment of two calls of Rs.2 each. Calculate the amount forfeited by the company and pass the journal entry for forefeiture of the shares. Do it Yourself IV Excell Company Limited made an issue of 1,00,000 Equity Shares of Rs.10 each, Test your Understanding – III(a) If a Share of Rs. 10 on which Rs. 8 is called-up and Rs. 6 is paid is forfeited. State with what amount the Share Capital account will be debited. Answer Do it Yourself VJournalise the following : Short Answer Type QuestionsQuestion 1. What is public company? Question 2. What is private limited company? Question 3. Define Government Company. Question 4. What do you mean by a listed company? Question 5. What are the uses of securities premium? Question 6. What is buy-back of shares? Sources for Buy-back of Share Question 7. Write a brief note on ‘Minimum Subscription’ Long Answer Type Questions Question 1. What is meant by the word ‘Company’? Describe i characteristics. In general, a company is an artificial person, created by law that has separate legal entity, perpetual succession, and common seal and t limited liability. It is a voluntary association of person who together contribu in the capital of the company to do business. Generally, the capital of a company is divided into small parts known shares, the ownership of which is transferable subject to certain terms s conditions. Question 2. Explain in brief the main categories in which the share capital of a company is divided. Question 3. What do you mean by the term ‘share? Discuss the type of shares, which can be issued under the Companies Act, 1956 as amended to date. Question 4. Discuss the process for the allotment of shares of a company in case of over subscription. In practice, generally excess application money receive on these shares is adjusted towards the amount due on allotment or call. For this purpose the entry is made as follows Question 5. What is a ‘Preference Share’? Describe the different types of preference shares. Question 6. Describe the provisions of law relating to ‘Calls-in- Arrears’ and ‘Calls in Advance’ Question 7. Explain the terms ‘Over-subscription’ and ‘Under-subscription’. How are they dealt with in accounting records? Under-Subscription: In case when share are issued by the company and the number of shares applied by the public is lesser than the number of shares issued this is called the situation of under-subscription. Question 8. Describe the purposes for which a company can use ‘Securities Premium Account. Question 9. State clearly the conditions under which a company can issue shares at a discount. Question 10. Explain the term ‘Forfeiture of Shares’ and give the accounting treatment on forfeiture. Accounting Treatment for Forfeiture of Shares NUMERICAL QUESTIONS1. 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 Adersh 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 3. Software solution India Ltd inviting application for 20,000 equity share 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. 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 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 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. 7. Eastern Company Limited, having an authorised capital of Rs.10,00,000 in shares of Rs.10 each, issued 50,000 shares at a premium of Rs.3 per share payable as follows : 8. Sumit Machine Ltd issued 50,000 shares of Rs.100 each at discount of 5%. The shares were payable Rs.25 on application, Rs. 40 on allotment and Rs.30 on first and final call. The issue were fully subscribed and money were duly 9. Kumar Ltd purchases 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 share are issued, (a) at par, (b) at discount of 10 % 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 share of the face value of Rs. 100 each fully paid at an issue 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 duly received except Anubha, who holding 200 shares did not pay allotment 12. Kishna Ltd issued 15,000 shares of Rs.100 each at a premium of Rs.10 per share, payable as follows: 13. Arushi Computers Ltd issued 10,000 equity shares of Rs.100 each at 10% discount. The net amount payable as follows: 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: 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 : 16. Prince Limited issued a prospectus inviting applications for 2,00,000 equity shares of Rs.10 each at a premium of Rs.3 per share payable as follows : 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. 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 19.Alfa Limited invited applications for 4,00,000 of its equity shares of Rs.10 each on the following terms : 20. Ashoka Limited Company which had issued equity shares of Rs.20 each at a discount of Rs. 4 per share, forfeited 1,000 shares for non-payment of final call of Rs.4 per share. 400 of the forfeited shares are reissued at Rs.14 per share 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. 22. Ajanta Company Limited having a normal 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 23. Journalise the following transaction in the books Bhushan Oil Ltd:
24. Amisha Ltd inviting application for 40,000 shares of Rs.100 each at a premium of Rs.20 per share payable; on application Rs.40 ; on allotment Rs.40 (Including premium): on first call Rs.25 and Second and final call Rs.15. Question 1. Dissolution of a partnership is different from dissolution of a firm. Question 2. A partnership is dissolved when there is a death of a partner. Question 3. A firm is dissolved when all partners give consent to it. Question 4: A firm is compulsorily dissolved when a partner decide to retire. Question 5. Dissolution of a firm necessarily involves dissolution of partnership. Question 6. A firm is compulsorily dissolved when all partners or when all except one partner become involvent. Question 7. Court can order a firm to be dissolved when a partner becomes insane. Question 8. Dissolution of partnership can not take place without intervention of the court. TEST YOUR UNDERSTANDING -II• Tick the correct answer Answer (c) Realisation account Question 2. On dissolution of a firm, partner’s loan account is transferred to Question 3. After transferring liabilities like creditors and bills payables in the realisation account, in the absence of any information regarding then payment, such liabilities are treated as Question 5. Unrecorded assets when taken over by a partner are shown in Question 6. Unrecorded liabilities when paid are shown in Question 7. The accumulated profits reserves are transferred to Question 8. On dissolution of the firm, partner’s capital accounts are closed through TEST YOUR UNDERSTANDING – III• Fill in the correct word(s) 2. All ————— (internal/external) liabilities are transferred to the ————— (Debit/Credit) side of ——————acccount (Bank/Realisation). 3. Accumulated losses are transferred to ————— (Current/Capital Accounts) in —————— (equal ratio/profit sharing ratio). 4. If a liability is assumed by a partner, such Partner’s Capital Account is ––––––– ——— (debited/credited).. 5. If a partner takes over an asset, such (Partner’s Capital Account) is ———————— (debited/credited). 6. No entry is required when a ——————— (partner/creditor) accepts a fixed asset in payment of his dues. 7. When creditor accepts an asset whose value is more than the amount due to him, he will ———————— (pay/not pay) the excess amount which will be credited ———————— Account. 8. When the firm has agreed to pay the partner a fixed amount for realisation work irrespective of the actual amount spent, such fixed amount is debited to (Realisation/Capital) Account and Credited to (Capital/Bank) Account. 9. Partner’s loan is —————— (recorded/not recorded) in the (Realisation Account). 10. Partner’s current accounts are transferred to respective ———————— Partners’ (Loan/Capital) Accounts. DO IT YOURSELFQuestion 1. For closure of assets accounts. Question 2. For closure of liabilities accounts. Question 3. For sale of assets. Question 4. For settlement of a creditor by transfer of fixed assets to him. Question 5. For expenses of realisation when actual expenses are paid by the partner on behalf of the firm. Question 6. When a partner discharges the liability of the firm. Question 7. For payment of partner’s loan. Question 8. For settlement of capital accounts. SHORT ANSWER TYPE QUESTIONSQuestion 1. State the difference between dissolution of Partnership and Dissolution of Partnership firm. Question 2. State the accounting treatment for (b) When the unrecorded liability is taken over by a partner. The following Journal Entry will be there Question 3. On dissolution, how will you deal with partner’s loan if it appears on the Question 4. Distinguish between Firm’s Debts and Partner’s Private Debts. Question 5. State the order of settlement of accounts on dissolution. (ii) Application of Assets The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order Question 6. On what account Realisation Account differs from Revaluation Account? LONG ANSWER TYPE QUESTIONSQuestion 1. Explain the process of dissolution of partnership firm. (i) Dissolution by Agreement As a firm is formed with the consent of all partners with a mutual agreement. Dissolution can also be there with Question 2. What is a Realisation Account? The format for realisation account is as follows Question 3. Reproduce the format of Realisation Account. Question 4. How deficiency of creditors is paid off? NUMERICAL QUESTIONS1. Journalise the following transactions regarding realisation expenses : 2. Record necessary journal entries in the following cases: 3. There was an old computer which was written-off in the books of accounts in the pervious year. The same has been taken over by a partner Nitin for Rs.3,000. 4. What journal entries will be recorded for the following transactions on the dissolution of a firm: 5. Give journal entries for the following transactions : 6. How will you deal with the realisation expenses of the firm of Rashim and Bindiya in the following cases: 7. The book value of assets (other than cash and bank) transferred to Realisation Account is Rs. 1,00,000. 50% of the assets are taken over by a partner Atul, at a discount of 20%; 40% of the remaining assets are sold at a profit of 30% on cost; 5% of the balance being obsolete, realised nothing and remaining assets 8. Record necessary journal entries to record the following unrecorded assets and liabilities in the books of Paras and Priya: 9. All partners wishes to dissolve the firm. Yastin, a partner wants that her loan of Rs. 2,00,000 must be paid off before the payment of capitals to the partners. But, Amart, another partner wants that the capitals must be paid before the payment of Yastin’s loan. You are required to settle the conflict giving reasons. 10. What journal entries would be recorded for the following transactions on the dissolution of a firm after various assets (other than cash) on the third party liabilities have been transferred to Reliasation account. 11. Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March 31, 2006 was as follows: 12. Shilpa, Meena and Nanda decided to dissolve their partnership on March 31,2006. Their profit sharing ratio was 3:2:1 and their Balance Sheet was as under: 13. Surjit and Rahi were sharing profits (losses) in the ratio of 3:2, their Balance Sheet as on March 31, 2004 is as follows: 14.Rita, Geeta and Ashish were partners in a firm sharing profits/losses in the ratio of 3:2:1. On March 31, 2006 their balance sheet was as follows: 15. Anup and Sumit are equal partners in a firm. They decided to dissolve the parntership on December 31, 2006. When the balance sheet is as under : 16. Ashu and Harish are partners sharing profit and losses as 3:2. They decided to dissolve the firm on December 31, 2006. Their balance sheet on the above date was: Question 1. Anita, Jaya and Nisha are partners sharing profits and losses in the ratio of 1:1:1 Jaya retires from the firm. Anita and Nisha decided to share the profit in future in the ratio 4 :3. Calculate the gaining ratio. Question 2. Azad, Vijay and Amit are partners sharing profits and losses in the proportion of 1/4,1/8,10/16 and Calculate the new profit sharing ratio between continuing partners if (a) Azad retires; (b) Vijay retires; (c) Amit retires. Question 3. Calculate the gaining ratio in each of the above situations. Question 4.Anu, Prabha and Milli are partners. Anu retires. Calculate the future profit sharing ratio of continuing partners and gaining ratio if they agree to acquire her share : (a) in the ratio of 5:3; (b) equally. Question 5. Rahul, Robin and Rajesh are partners sharing profits in the ratio of 3 : 2 : 1. Calculate the new profit sharing ratio of the remaining partners if (i) Rahul retires; (ii) Robin retires; (iii) Rajesh retires. Question 6.Puja, Priya, Pratistha are partners sharing profits and losses in the ratio of 5 : 3 : 2. Priya retires. Her share is taken by Priya and Pratistha in the ratio of 2 : 1. Calculate the new profit sharing ratio. Question 7.Ashok, Anil and Ajay are partners sharing profits and losses in the ratio of 1/2, 3/10 and 1/5. . Anil retires from the firm. Ashok and Ajay decide to share future profits and losses in the ratio of 3 : 2. Calculate the gaining ratio. TEST YOUR UNDERSTANDING I Question 2. The old profit sharing ratio among Rajender, Satish and Tejpal were 2:2:1. The new profit sharing ratio after Satish’s retirement is 3:2. The gaining ratio is Question 3. Anand, Bahadur and Chander are partners. Sharing Profit equally on Chander’s retirement, his share is acquired by Anand and Bahadur in the ratio of 3 : 2. The new profit sharing ratio between Anand and Bahadur will be Question 4. In the absence of any information regarding the acquisition of share in profit of the retiring/deceased partner by the remaining partners, it is assumed that they acquire his/her share TEST YOUR UNDERSTANDING II • Choose the correct option in the following questions Question 2. Gobind, Hari and Pratap are partners. On retirement of Gobind, the goodwill already appears in the Balance Sheet at T 24,000. The goodwill will be written off Question 3.Chaman, Raman and Suman are partners sharing profits in the ratio of 5:3:2. Raman retires, the new profit sharing ratio between Chaman and Suman will be 1:1. The goodwill of the firm is valued at Rs. 1,00,000 Raman’s share of goodwill will be adjusted Question 4. On retirement/death of a partner, the remaining partner(s) who have gained Answer (b) Remaining partners (who have sacrificed) as well as partners DO IT YOURSELF II On the date of retirement, the following adjustments were to be made
Do it yourself IIIQuestion 1. The Balance Sheet of A, B and C who were sharing the profits in proportion to their capitals stood as on March 31, 2007. B retired on the date of Balance Sheet and the following adjustments were to be made Question 2. R, S and M were carrying on business in partnership Shyam retired on the above mentioned date on the following terms Do it Yourself IV The partnership deed provides that the profit be shared in the ratio of 2:1:1 and that in the event of death of a partner, his executors be entitled to be paid out Rakesh died on April 1, 2007. He had withdrawn Rs. 5,000 to the date of his death. The investment were sold at par and R’s Executors were paid off. Prepare Rakesh’s Capital Account that of his executors. Short Answer Type Questions Question 1. What are the different ways in which a partner can retire from the firm? Question 2. Write the various matters that need adjustments at the time of retirement of partners. Question 3. Distinguish between sacrificing ratio and gaining ratio. Question 4. Why do firm revaluate assets and reassess their liabilities on retirement or on the event of death of a partner? Question 5. Why a retiring/deceased partner is entitled to a share of goodwill of the firm? Long Answer Type Questions (ii) Opening the Loan Account Sometimes the amount due to the retiring partner is paid in instalments then the balancing figure of his/her capital account is transferred to his/her loan account, in this case, the retiring partner receives equal instalments along with the interest on the amount outstanding. In that case the following journal entries will be passed for transferring the amount paid to him/her in retiring partner’s loan account. (iii)Some Payment in Cash and Some in Instalment Sometimes the amount due to the retiring partner is paid partly in cash and partly in equal instalments in that case a certain amount is paid in cash to the retiring partner and the rest amount due to him/her is transferred to his/her loan account. The following necessary journal entry is to be passed. Question 2. How will you compute the amount payable to a deceased partner? Note: In the above capital account, the legal executor will be entitled for the balancing Question 3. Explain the treatment of goodwill at the time of retirement or on the event of death of a partner. Step 2 Adjusting Goodwill Through Partners’ Capital Account Question 4. Discuss the various methods of computing the share in profits in the event of death of a partner. Example A, B, C and D are equal partners. The profit of the firm for the years 2009, 2010 and 2011 are ? 5,00,000, ? 7,00.000 and <9,00,000 respectively. C dies on June 30, 2012. The share of C in the firm’s profit will be calculated on the basis of average profit of last three years. Firm closes its books every year on December 31. (ii) On the Basis of Sale Example A, B and C are equal partners. The last year’s sales and profit were ? 40,00,000 and ? 4,00,000. C died on June, 2012. Sales of the current year till the date of C’s death amounts to ? 15,00,000. Firm closes its books on December 31 every year. Numerical Questions Question 1. Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3 : 2 :1. Manisha retires and goodwill of the firm is valued at Rs. 1,80,000. Aparna and Sonia decided to share future profits in the ratio of 3 : 2. Pass necessary journal entries. Question 2. Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2 : 3 : 5. Goodwill is appearing in the books at a value of Rs. 60,000. Sangeeta retires and goodwill is valued at Rs. 90,000. Saroj and Shanti decided to share future profits equally. Record necessary journal entries. Question 3. Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3 : 2 :1 On March 31, 2007, Naman retires. The various assets and liabilities of the firm on the date were as follows Cash Rs.10,000, Building Rs. 1,00,000, Plant and Machinery Rs. 40,000, Stock Rs. 20,000, Debtors Rs. 20,000 and Investments Rs. 30,000. Question 4. Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following : General Reserves Rs.36,000 and Profit and Loss Account (Dr) Rs. 15,000. Question 5. Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2 : 2 : L Their Balance Sheet as on March 31, 2007 was as follows 6. Radha, Sheela and Meena were in partnership sharing profits and losses in 7. Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3 : 2 : 8. Puneet, Pankaj and Pammy are partners in a business sharing profits and Question 9. Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2007. 10. Narang, Suri and Bajaj are partners in a firm sharing profits and losses in 11. The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in 12. Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2002. 13. Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 14. Nithya, Sathya and Mithya were partners sharing profits and losses in the NUMERICAL PROBLEMS 10.Singh, Gupta and Khan are partners in a firm sharing profits in 3:2:3 ratio. They admitted Jain as a new partner. Singh surrendered 1/3 of his share in favour of Jain: Gupta surrendered 1/4 of his share in favour of Jain and Khan surrendered 1/5 in favour of Jain. Calculate new profit sharing ratio? 11.Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratio. They admit C into the firm and the new profit sharing ratio was agreed at 4:2:1. Calculate the sacrificing ratio? 13.Compute the value of goodwill on the basis of four years’ purchase of the average profits based on the last five years? The profits for the last five years were as follows: 14.Capital employed in a business is Rs. 2,00,000. The normal rate of return on capital employed is 15%. During the year 2002 the firm earned a profit of Rs. 48,000. Calculate goodwill on the basis of 3 years purchase of super profit? 34.Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2:1. Chintan is admitted into the firm with 1/4 share in profits. Chintan will bring in Rs. 30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on December 31, 2006 (before Chintan’s admission) was as follows:
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