0604_FA-I_(MB131)

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Question Paper Financial Accounting - I (MB131): April 2006

• Answer all questions.

• Marks are indicated against each question.

1. In the event of conflict between the International Accounting Standards and the local standards, whichamong the following will prevail?

(a) The rule of the Company Law will prevail (b) The rule of the Securities Exchange Board of India prevails (c) The rule of the International Accounting Standards prevails (d) The rule of local standards, laws and regulations shall prevail (e) The rule of the Central Government will prevail.

(1 mark)

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2. Under which of the following conditions is a balance sheet said to be window dressed?

(a) When income is accounted for on accrual basis (b) When prepaid expenses are considered and accounted for in the preparation of final accounts (c) When an adequate provision for expenses and potential losses is not made (d) When a provision for the probable loss is made in advance of its occurrence (e) When the assets and liabilities in the Balance Sheet are reflected at Historical cost.

(1 mark)

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3. The transactions pertaining to purchase of fixed assets and investments on credit, are recorded in

(a) Simple cash book (b) Double cash book (c) Purchasebook (d) Journal proper (e) Bills payable book.

(1 mark)

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4. An asset, the value of which depends on the earning capacity of the business concern is

(a) Investments (b) Debtors (c) Fixed asset (d) Goodwill (e) Cash at Bank.

(1 mark)

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5. Rights shares are the shares

(a) Issued by a newly formed company (b) Legally issued to the public at large (c) Offered to the existing equity shareholders (d) That have a right of redemption (e) That have a right to cumulative dividends.

(1 mark)

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6. The maximum amount beyond which a company is not allowed to raise funds by issue of shares is

(a) Issued capital (b) Reserve capital (c) Authorised capital (d) Subscribed capital (e) Paid-up capital.

(1 mark)

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7. Which of the following methods of valuation of goodwill uses the present value factor?

(a) Capitalization of average profits methods (b) Capitalization of super profits method (c) Annuity method of super profits (d) Number of years’ purchase of average profits method (e) Super profits method.

(1 mark)

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8. The process of converting cost of intangible assets to expense is called

(a) Depreciation (b) Amortization (c) Depletion (d) Deterioration (e) None of the above.

(1 mark)

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9. Which of the following methods is/are followed for amortization of intangible assets?

(a) Straight-line method (b) Written down method (c) Sum of the years’ digits method (d) Annuity method (e) Both (a) and (b) above.

(1 mark)

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10.When depreciation appears in the Trial balance, in which of the following statements will it be shown?

(a) Trading Account (b) Profit and loss account (c) Profit and loss appropriation account (d) Balance Sheet (e) Notes to accounts.

(1 mark)

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11.The method of inventory valuation which enables the firm to even out the erratic movements in thepurchase prices to the best extent possible, is

(a) Last in first out method (b) First-in-first out method (c) High-in-low out method (d) Simple average method (e) Weighted Average Method.

(1 mark)

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12.Certain fundamental accounting assumptions underlie the preparation and presentation of financialstatements and hence are not specifically stated because their acceptance and use are assumed. Whichamong the following is not a fundamental accounting assumption?

(a) Going concern concept (b) Consistency (c) Accrual (d) Conservatism (e) Both (a) and (b) above.

(1 mark)

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13.The discount allowed on re-issue of forfeited shares is debited to

(a) General reserve account (b) Capital reserve account (c) Revaluation reserve account (d) Capital redemption reserve account (e) Forfeited shares account.

(1 mark)

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14.Which of the following cannot be utilized for the redemption of Preference Shares of a company?

(a) Proceeds of fresh issue of shares (b) Securities premium on fresh issue of shares (c) General reserve (d) Profit and loss account (e) Dividend equalization reserve.

(1 mark)

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15.Which of the following data is essential for calculation of value of an equity share under the intrinsicvalue method?

(a) Normal rate of return (b) Expected rate of return (c) Market value per share (d) Dividend per share (e) Net equity.

(1 mark)

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16.The cum-interest/cum-dividend quotation implies

(a) The purchaser pays a higher price than the normal price (b) The right of receiving accrued interest/dividend is retained by the seller (c) The seller charges a higher price (d) The right of receiving accrued interest/dividend is passed on to the purchaser (e) (a), (c) and (d) above.

(1 mark)

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17.The cumulative preference shareholders enjoy preferential treatment over equity shareholders withregard to

(a) Priority in payment of dividend (b) Return of capital (c) Voting rights (d) Cumulation of dividends (e) (a), (b) and (d) above.

(1 mark)

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18.The accounting based on Real capital maintenance concept (which considers the general price rise) iscalled the

(a) Current purchasing power Accounting (b) Current Cost Accounting (c) Cost accounting (d) Financial Accounting (e) Managerial Accounting.

(1 mark)

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19.Share allotment denotes a stage subsequent to

(a) Share Application (b) Share forfeiture (c) Share redemption (d) Share First call (e) Share second call.

(1 mark)

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20.The accounting entry involved, for issue of shares to promoters for the services rendered by them is

(a) Debit goodwill account and credit share capital account (b) Debit cash account and credit share capital account (c) Debit promoters’ account and credit share capital account (d) Debit share capital account and credit cash account (e) Debit goodwill account and credit calls in arrear account.

(1 mark)

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21.Premium on redemption of debentures account is

(a) A real account (b) A nominal account (c) A personal account (d) An asset (e) A capital reserve.

(1 mark)

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22.Which of the following statements is true?

(a) Going concern concept assumes that business will be carried on for a definite period (b) Time period concept facilitates the comparison of the results of one accounting period of a

business with that in the past (c) The capital losses need not be deducted to ascertain net income (d) Provision for bad and doubtful debts is created in recognition of conservatism concept (e) Materiality concept states that all business transactions are to be recorded how so ever

insignificant they may be.

(1 mark)

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23.Which of the following accounts appear(s) in the Balance Sheet of a business?

I. Stock at the end of the financial year. II. Stock at the beginning of the financial year. III. Drawings. IV. Prepaid Rent. V. Interest received but not yet earned. (a) Only (I) above (b) Only (III) above (c) Both (I) and (III) above (d) (I), (III), (IV) and (V) above (e) All (I), (II), (III), (IV) and (V) above.

(1 mark)

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24.Underwriting commission will not be paid on the amount of shares taken by

(a) Promoters (b) Directors (c) Employees (d) Directors’ friends (e) All of the above.

(1 mark)

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25.The portion of the acquisition cost of the asset yet to be allocated is known as

(a) Written down value (b) Accumulated value (c) Realisable value (d) Salvage value (e) Residual value.

(1 mark)

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26.Which of the following items is/are covered under Accounting Standard-2 with regard to accountingfor inventory?

I. Financial instruments held as stock-in-trade. II. Work in progress arising under construction contracts. III. Work in progress of service providers. IV. Work in progress of a manufacturing industry. (a) Only (I) above (b) Only (IV) above (c) Both (I) and (II) above (d) Both (III) and (IV) above (e) (II), (III) and (IV) above.

(1 mark)

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27.Which of the following statements is false?

(a) Bonus issue can be made out of share premium account (b) Bonus issue shall not be made within 12 months of any public issue (c) Bonus issue shall not be made in lieu of dividend (d) Reserves created out of revaluation of fixed assets can be used for bonus issue (e) Bonus shares should not be issued unless partly paid shares are made fully paid.

(1 mark)

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28.The money received on reissue of forfeited shares is inadvertently credited to ‘Capital Suspense’account. The adjustment entry involved in reversing the capital suspense account is

(a) Debit to Capital Suspense account (b) Credit to Share Capital account (c) Debit to Share forfeiture account (d) Both (a) and (b) above (e) (a), (b) and (c) above.

(1 mark)

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29.Which of the following assets is/are to be valued at the lower of cost and net realizable value?

(a) Goodwill (b) Inventories (c) Investments (d) Sundry debtors (e) Fixed Assets.

(1 mark)

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30.Which of the following statements is true?

(a) Bank charges increase debit balance shown as per bank column of the cash book (b) Bank charges increase debit balance as per bank pass book (c) A cash sale of a non-trading asset is recorded in the journal proper (d) Cash discount allowed by the business will appear on the debit side of the debtor’s account (e) Bank reconciliation statement is prepared by a bank.

(1 mark)

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31.The balances of which of the following accounts do not disappear, once they are debited/credited toTrading Account.

(a) Sales (b) Purchases (c) Inward returns (d) Closing stock (e) Outward returns.

(1 mark)

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32.On issue of shares, the application money should not be less than

(a) 2.5% of the nominal value of shares (b) 2.5% of the issue price of shares (c) 5.0% of the nominal value of shares (d) 5.0% of the issue price of shares (e) 10.0% of the nominal value of shares.

(1 mark)

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33.Which of the following methods is not a practical way of realizing revenue?

(a) Delivery method (b) Percentage-of-completion method (c) Production method (d) Installment method (e) Moving average method.

(1 mark)

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34.According to the SEBI guidelines, before the redemption of debentures having a maturity of more than18 months, the debenture redemption reserve created, should be at least equivalent to

(a) 10% of the debenture issue (b) 25% of the debenture issue (c) 30% of the debenture issue (d) 50% of the debenture issue (e) 75% of the debenture issue.

(1 mark)

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35.The periodical total of a purchase returns book is recorded to the

(a) Debit side of the purchases account (b) Debit side of the purchases returns account (c) Credit side of the purchases account (d) Credit side of the purchases returns account (e) Credit side of creditors account.

(1 mark)

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36.In Retail Inventory Method, if the markup selling price is decreased but not below the original sellingprice, it is known as

(a) Markup cancellation (b) Markdown (c) Markdown cancellation (d) Net markup (e) Net markdown.

(1 mark)

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37.According to which of the following accounting concepts, are the shareholders treated as creditors forthe amount they pay on shares?

(a) Cost concept (b) Duality concept (c) Going concern concept (d) Money measurement concept (e) Business entity concept.

(1 mark)

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38.The profit or loss on own debentures is to be accounted for at the time of

(a) Purchase of own debentures (b) Subsequent interest payment (c) Cancellation of own debentures (d) Original issue of debentures (e) Liquidation of the company.

(1 mark)

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39.The statement which helps an accountant to assess the arithmetical accuracy of the accounting processis the

(a) Balance sheet (b) Profit and loss account (c) Cash book (d) Trial balance (e) Bank reconciliation statement.

(1 mark)

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40.Which of the following is a liability of a firm?

(a) Debit balance of discount column of cash book (b) Credit balance of bank pass book (c) Debit balance of bank column of cash book (d) Debit balance of cash column of cash book (e) Credit balance of bank column of cash book.

(1 mark)

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41.Following information pertains to Nilgiri Limited for the year 2005-06:

Opening balance of provision for bad and doubtful debts account Rs. 18,000 Bad debts during the year Rs. 15,000 Closing balance of sundry debtors Rs.3,30,000

If the company has the practice of maintaining provision at the rate of 5% on sundry debtors, theamount to be debited to profit and loss account for the period ended March 31, 2006, was

(a) Rs.6,500 (b) Rs.13,500 (c) Rs.10,720 (d) Rs.20,800 (e) Rs.10,680.

(1 mark)

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42.Nalli Ltd. proposed to issue 10,000 equity shares of Rs.100 each at a premium of 150%. The minimumamount of application money to be collected per share is

(a) Rs.5.00 (b) Rs.7.50 (c) Rs.15.00 (d) Rs.10.00 (e) Rs.12.50.

(1 mark)

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43.While preparing the final accounts of the company, the accountant of Nisha Limited located thefollowing errors:

• The Returns Inward book was undercast by Rs.1,377. • A purchase of Rs.1,252 was posted to the debit of the supplier’s account as Rs.125. • Wages of Rs.500 paid for installation of a new machine was debited to wages account. • Sales returns of Rs.877 were taken into stock but no entry in respect of the transaction was passed

in the books.

The difference in Trial Balance of the company on account of the above errors is

(a) Rs.Nil (b) Rs.877 (c) Rs.1,377 (d) Rs.255 (e) Rs.4,131.

(2 marks)

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44.Consider the following data pertaining to Nupur Limited for the period 2005-2006:

Particulars Rs. Opening inventory 15,00,000 Purchases during the year 55,00,000 Sales during the year 54,00,000

A physical inventory taken on March 31, 2006 showed an ending inventory of Rs.25,75,000.Company’s gross profit on sales was constant at 25% through out the year. The management of thecompany suspects pilferage of inventory. The estimated cost of missing inventory on the last day of thefinancial year was

(a) Rs.2,00,000 (b) Rs.3,75,000 (c) Rs.1,75,000 (d) Rs.2,75,000 (e) Rs.3,25,000.

(2 marks)

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45.On April 01, 2005 the balance of 12% Debentures of Rs.100 each of Neeti Ltd. was Rs.5,00,000. Thecompany reserves the right to redeem the debentures in any year by purchase in the open market.Interest on debentures is payable on September 30, and March 31, every year.

On July 01, 2005, the company purchased 2,000 of its own 12% debentures as investment at Rs.99 cum-interest.

The company cancelled its own 2,000 debentures on March 31, 2006.

The amount of profit/loss on cancellation of own debentures on March 31, 2006 was

(a) Rs.6,000 (profit) (b) Rs.4,000 (loss) (c) Rs.4,000 (profit) (d) Rs.3,000 (loss) (e) Rs.8,000 (profit).

(2 marks)

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46.Nikhilesh Limited has an account with Century Bank Ltd. Its balance as shown in the Cash book onDecember 31, 2005 stood at Rs.2,15,270 (Credit).

The above balances were not agreeing with the balance shown by the bank statement. On scrutiny, the following discrepancies were noticed: i. Outstation cheques for Rs.78,000 deposited in the bank on December 22, 2005 were not collected

by the bank as on December 31, 2005. ii. Bank charges amounting to Rs.1,500, and Bank interest amounting to Rs.5,500 were not recorded in the

cash book. iii. Cheques amounting to Rs.15,000 issued were not presented for payment as on December 31,

2005. iv. A deposit of Rs.22,500 in Career Bank was wrongly entered in Century Bank column in the cash

book.

The bank balance as per pass book as on December 31, 2005 was

(a) Rs.2,62,770 (debit) (b) Rs.3,07,770 (credit) (c) Rs.2,78,770 (debit) (d) Rs.3,07,770 (debit) (e) Rs.2,62,770 (credit).

(2 marks)

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47.On April 01, 2005, Narendra Limited showed a balance of Rs.15,600 to the credit of Provision for badand doubtful debts. On March 31, 2006 the Sundry Debtors showed a balance of Rs.2,50,400. Out ofthe total debtors, the status of the following debtors is as follows:

Mita Rs.8,000 - identified as bad debt and is to be written off Gita Rs.7,500 - expected to realize only 80% Sita Rs.8,000 - expected to realize only 60% Rita Rs.7,500 - filed insolvency petition and the recovery chances are remote.

All other debts as on the date of finalisation of accounts are estimated to be good. The companymaintains a suitable provision for doubtful debts. The amount debited to the profit and loss account inrespect of provision for bad and doubtful debts for the year ended March 31, 2006 was


(2 marks)

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48.The following is the balance sheet of Nagendra Ltd. as on March 31, 2006:

Liabilities Rs. Assets Rs. Equity shares of Rs.10 each fully paid up 10,00,000 Sundry assets 19,50,000 12% Redeemable preference shares of Rs.100 each fully paid up 10,00,000

Investments 4,50,000

General Reserve 4,00,000 Cash at bank 4,00,000 Profit & Loss account 2,50,000 Share premium 25,000 Sundry creditors 1,25,000 28,00,000 28,00,000

The Board of Directors of the company decided to redeem the preference shares at a premium of 10%. In order to facilitate the redemption, the Board has taken the following decisions:

• To sell the investments for Rs.4,20,000. • To issue sufficient equity shares at a premium of Rs.2 per share to raise the balance need of funds. • To maintain minimum bank balance of Rs.50,000.

The Board of Directors initiated the above course of action during the month of April, 2006 andredeemed all the preference shares.

The amount to be transferred to Capital Redemption Reserve is

(a) Rs.70,000 (b) Rs.5,25,000 (c) Rs.1,25,000 (d) Rs.8,00,000 (e) Rs.7,25,000.

(3 marks)

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49.Consider the following information pertaining to Niharika Ltd. for the year 2005-2006:

Particulars 1st April 2005 31st March 2006

Inventory Rs. 52,200 Rs. 65,800 Sundry debtors Rs.1,12,000 Rs. 60,000 Sundry creditors Rs. 50,000 Rs. 48,000

Total credit sales made during the year was Rs.9,75,000. The amount of discount allowed to the sundrydebtors during the period was Rs.8,400. The cost of goods sold of the company was 80% of the sales.

Cash collected from the sundry debtors during the year was


(2 marks)

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50.Neeta Ltd. purchased furniture for Rs.6,00,000 two years ago. The current book value of the furniture isRs.3,84,000. If the company charges depreciation on furniture under written down value method, therate of depreciation charged was

(a) 35% (b) 30% (c) 25% (d) 20% (e) 15%.

(1 mark)

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51.Nitish Ltd. invited applications for 1,00,000 equity shares of Rs.10 each at a premium of Rs.2 per share. Theentire issue was underwritten by three underwriters in the following percentages:

Ram 30% Sham 40% Graham 30%

The details of marked and unmarked applications received are:

Marked applications of Ram 20,000 shares Sham 32,000 shares Graham 28,000 shares Unmarked applications 16,000 shares

The final liability of Sham in terms of number of shares is

(a) Nil (b) 9,600 (c) 3,200 (d) 16,000 (e) 8,000.

(2 marks)

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52.Consider the following data pertaining to Nikki Ltd. for the month of December 2005:

Particulars As on December 01, 2005 (Rs.) As on December 31, 2005 (Rs.) Stock 5,80,000 1,60,000 Sundry creditors 1,50,000 60,000

The company makes all purchases on credit. During the month of December 2005, the company paid asum of Rs.4,50,000 to the suppliers. The goods are sold at 25% above the cost. The sales for the monthof December 2005 were


(2 marks)

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53.Niladri Ltd. purchased a machinery on April 01, 2003 for Rs.2,40,000. It was estimated that themachinery will have a useful life of 5 years after which it will have no salvage value. If the companyfollows sum-of-the-years’-digits method of depreciation, the amount of depreciation charged during theyear 2005-2006 was


(1 mark)

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54.Narahari Ltd. issued 3,000 10% Preference shares of Rs.100 each at par, which are redeemable at apremium of 10%. For the purpose of redemption, the company issued 2,000 Equity Shares of Rs.100each at a premium of 20% per share. At the time of redemption of Preference Shares, the amount to betransferred by the company to the Capital Redemption Reserve Account is

(a) Rs.50,000 (b) Rs.40,000 (c) Rs.2,00,000 (d) Rs.1,00,000 (e) Rs.70,000.

(2 marks)

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55.The value of equity share of Naresh Ltd. as per yield method is Rs.254.50 and as per fair value methodis Rs.315.50. The value of the equity share according to intrinsic value method is


(1 mark)

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56.Naveen, a sole proprietor, maintains a three columnar cash book to record his business transactions.Consider the following data pertaining to his business for the month of December, 2005:

Particulars Rs. Opening cash on hand 25,000 Balance at bank 3,50,000 Cheque received from a customer (after allowing a discount of Rs.2,500) 50,000 Paid the supplier by cheque (discount allowed by the supplier: Rs.10,000) 1,00,000 Salaries paid to staff in cash 20,000 Received a cheque from Daulat Ram, a customer (who owed Rs.16,500 and was allowed a discount of 10%)

14,850

Paid M/s. Bharani and Co. in full settlement of their dues of Rs.28,500 26,250 Received from Rama & Bros. (as against Rs.38,900) in full and final settlement 36,200

The total amount of discount recorded on the debit side of the three columnar cash book for the monthof December 2005 was


(2 marks)

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57.On December 31, 2005, Nirlap Ltd. buys 1,000 of its own 12% Debentures of the par value of Rs.100each at Rs.97 ex-interest from the open market. The company pays debenture interest half-yearly onSeptember 30 and March 31.

The amount paid by the company in respect of the above purchase was

(a) Rs.93,000 (b) Rs.97,000 (c) Rs.1,00,000 (d) Rs.1,01,000 (e) Rs.1,04,000.

(1 mark)

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58.The following balances are extracted from the books of accounts of Nayar Ltd. as on March 31, 2006:

Particulars Rs. Particulars Rs.

Share capital account 26,88,000 Manufacturing wages 8,19,400

Preliminary expenses 2,11,000 Sales 71,08,000

Sundry creditors 11,00,600 Returns inward 55,600

15% Term- Loan 4,00,000 Salaries 27,98,400

Closing inventory as on March 31, 2006

20,52,000

Returns outward 20,600

Cash at bank 4,40,000 Discount allowed 82,000

Sundry debtors 14,30,000 Office administrative expenses 2,17,400

Bills Payable 15,55,000 Prepaid insurance 12,000

Provision for doubtful debts 20,000 Insurance 8,000

Fittings and Fixtures 7,55,400 Bad debts 72,400

Discount received 92,000 Commission received 1,12,800

Opening inventory as on April 01, 2005

10,93,600

Outstanding salaries 30,000

Purchases 30,79,800

The total of Trial Balance of the company as on March 31, 2006 was

(a) Rs.1,10,33,000 (b) Rs.1,31,27,000 (c) Rs.1,30,97,000 (d) Rs.1,31,23,000 (e) Rs.1,10,75,000.

(2 marks)

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59.Mr. Narain Singh is the proprietor of M/s. Narain Enterprises. The capital contributed by him amountedto Rs.1,90,000. On April 01, 2005, he withdrew Rs.30,000. The interest on capital and interest ondrawings is 12% per annum and 10% per annum respectively. At the time of finalization of accounts ofM/s. Narain Enterprises for the year 2005-2006, the journal entry to record interest on drawings is

Rs. Rs.

(a) Bank account Dr. 3,000

To interest on drawings account 3,000

(b) Interest on drawings account Dr. 3,600

To Capital account 3,600

(c) Interest on drawings account Dr. 2,000

To Bank account 2,000

(d) Interest on capital account Dr. 2,400

To Interest on drawings account 2,400

(e) Capital account Dr. 3,000

To Interest on drawings account 3,000.

(1 mark)

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60.The following information is extracted from the books of Nasser Limited:

i. The paid-up share capital of the company consists of 1,000, 15% preference shares of Rs.100 eachand 20,000 equity shares of Rs.10 each.

ii. The average annual profits of the company after providing for depreciation and taxation amountedto Rs.95,000. It is considered necessary to transfer Rs.15,000 to general reserve before declaring any dividend.

iii. The normal return expected by investors on equity shares in similar business is 10%.

The value of an equity share of Nasser Ltd. is


(2 marks)

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61.Nirmal Ltd. started its operations on April 15, 2005. Consider the following data pertaining to thecompany for the year 2005-2006:

Particulars Rs. Sales (85% collected during the year 2005-2006) 16,00,000 Bad debts written off 4,000 Issue of shares for cash 10,00,000 Purchase of fixed assets for cash 8,00,000 Depreciation 80,000 Amount received by way of short-term loan 2,00,000 Short-term loan repaid 50,000 Payment towards manufacturing and administrative expenses 7,00,000 Amount paid to purchase raw materials 3,00,000 Amount deposited in bank 4,00,000

The balance of cash as on March 31, 2006 was


(2 marks)

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62.In the books of Nalini Ltd., the balance in the furniture and fixtures account as on March 31, 2005 wasRs.7,50,000. The following additional information is given:

i. Sales of the company during the year 2005-2006 include Rs.25,500 in respect of sale of an old furniture on March 31, 2006. The book value of the furniture on April 01, 2005 was Rs.38,000

ii. Depreciation @ 5% is to be provided on furniture & fixtures.

The amount at which the furniture and fixtures is shown in the balance sheet of Nalini Ltd. as onMarch 31, 2006 was


(3 marks)

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63.Nakshtra Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20%. The share amount waspayable as:

On application Rs.2 On allotment (including premium) Rs.5 On first call Rs.3 On second and final call Rs.2

Applications were received for 15,000 shares and the shares were allotted to applicants on pro-rata.Naveen, who was allotted 500 shares, failed to pay the first call. On his subsequent failure to pay thesecond and final call, all his shares were forfeited. Out of the forfeited shares, 400 shares were re-issued@ Rs.8 per share. The amount transferred to capital reserve is

(a) Rs.200 (b) Rs.1,000 (c) Rs.800 (d) Rs.1,300 (e) Rs.1,200.

(2 marks)

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64.Consider the following particulars pertaining to the sole proprietor business of Mr. Naveen:

Particulars As on April 01, 2005

Rs. As on March 31, 2006

Rs. Capital 10,50,000 ? Loan from bank 5,25,000 3,75,000 Sundry creditors 75,000 1,05,000 Fixed assets 8,25,000 7,65,000 Inventory 4,50,000 5,25,000 Sundry debtors 2,10,000 2,70,000 Cash and bank 1,65,000 2,55,000

The profit for the year 2005-2006 was


(2 marks)

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65.The balance in machinery account of Leo Ltd. as on April 01, 2005 was Rs.85,000. The followingtransactions took place during the year 2005-2006:

Date Particulars Amount (Rs.)

01-07-2005 Machinery purchased 90,000 01-10-2005 Machinery sold (book value as on April

01, 2005 is Rs.40,000) 50,000

01-01-2006 New machinery purchased 80,000

If the company charges depreciation at the rate of 10%, the balance in machinery account as on March31, 2006 was


(3 marks)

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66.The total of debit side of trial balance of a company is Rs.4,75,000 and that of the credit side isRs.5,03,000. Subsequently the following mistakes are discovered:

Particulars Correct Amount

(Rs.) Amount which appears in

trial balance (Rs.) Opening stock 30,600 40,600 Advertisement expenses 20,000 20,000 (credit side) Interest from investments 36,000 30,000 Sundry creditors 76,000 80,000

The total of the corrected trial balance is (a) Rs.4,74,900 (b) Rs.4,59,900 (c) Rs.4,85,000 (d) Rs.4,84,900 (e) Rs.4,50,000.

(2 marks)

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67.M/s.Neta Enterprises introduced the imprest system of petty cash book, the amount of imprest beingRs.2,500. The petty cash transactions during the month of June 2005 are as under:

Particulars Amount (Rs.) Stamps 265 Conveyance 270 Repairs 516 Stationery 450 Other office expenses 120

The amount of cash received on July 01, 2005 to make up the imprest balance was (a) Rs.2,500 (b) Rs.879 (c) Rs.855 (d) Rs.1,621 (e) Rs.1,000.

(1 mark)

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68.The inventory of Nikhil Ltd. as on March 31, 2005 is overvalued by Rs.24,000. The net profit for theyear 2005-2006 was

(a) Overstated by Rs.24,000 (b) Understated by Rs.24,000 (c) Overstated by Rs.48,000 (d) Understated by Rs.48,000 (e) Not affected.

(1 mark)

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69.Consider the following data pertaining to Naidu Ltd. for the month of June 2005:

Purchases Issues Balance Date Quantity

(Kg.) Rate (Rs.)

Quantity (Kg.)

Quantity (Kg.)

Rate (Rs.)

01-06-2005 1,000 22.80 02-06-2005 800 24 10-06-2005 1,200 25 25-06-2005 2,000

If the company uses weighted average method for inventory valuation, the value of inventory as onJune 30, 2005 was


(1 mark)

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Purchases Issues Balance Date Quantity

(Kg.) Rate (Rs.)

Quantity (Kg.)

Quantity (Kg.)

Rate (Rs.)

01-06-2005 1,000 22.80 02-06-2005 800 24 10-06-2005 1,200 25 25-06-2005 2,000

If the company uses FIFO Method for inventory valuation, the value of inventory as on June 30, 2005was


(1 mark)

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Purchases Issues Balance

Date Quantity (Kg.)

Rate (Rs.)

Quantity (Kg.)

Quantity (Kg.)

Rate (Rs.)

01-06-2005 1,000 22.80

02-06-2005 800 24

10-06-2005 1,200 25

25-06-2005 2,000

If the company uses LIFO for inventory valuation, the value of inventory as on June 30, 2005 was

(a) Rs.12,500 (b) Rs.25,000 (c) Rs.24,000 (d) Rs.22,800 (e) Rs.20,000

(1 mark)

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72.Nandita Ltd. issued 1,000, 10% debentures at the rate of Rs.100 each during the year 2002-03. Intereston debentures is payable half yearly on September 30 and March 31 every year. The company haspower to purchase its own 10% debentures in the open market for cancellation. The followingpurchases were made during the year 2005-2006:

On July 01, 2005 – 400 of its own 10% debentures at the rate of Rs.96 ex-interest.

On December 01, 2005 – 300 of its own 10% debentures at the rate of Rs.102 cum- interest.

The total amount debited to own debentures investment account was


(2 marks)

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73.In the year 2005- 2006, Nikhilesh Ltd. purchased a new machine and made the following payments inrelation to it:

Rs. Rs. Cost as per supplier’s list 5,20,000 Less: Agreed discount 30,000 4,90,000 Delivery charges 10,000 Erection charges 20,000 Annual maintenance charges 30,000 Additional components to increase capacity of the machine

40,000

Annual insurance premium 5,000

The cost of the machine is


(1 mark)

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74.As per the Profit and loss account of Naga Ltd. for the year ended March 31, 2006 the amount of salaryexpenditure was Rs.4,15,000. If the balance of outstanding salaries as on April 01, 2005 and March 31,2006 was Rs.64,000 and Rs.74,000 respectively, the cash paid on account of salaries during the year2005-06 was


(1 mark)

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75.The total purchases of Nagar Ltd. is Rs.50,000. If the gross profit of the company is 20% on sales andthe closing stock is more than the opening stock by Rs.10,000, the cost of goods sold will be


(1 mark)

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76.Which of the following transactions would cause a change in owner’s equity?

(a) Repayment of a bank loan (b) Amount received from a debtor (c) Amount paid to a creditor (d) Purchase of a second-hand machine (e) Sale of land on credit for a price above cost.

(1 mark)

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77.If the yield rate of return of Nirupama Ltd. is 14%, normal rate of return is 8% and nominal value of itsequity share is Rs.10, then the value of an equity share of Nirupama Ltd. is


(1 mark)

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Suggested Answers Financial Accounting - I (MB131): April 2006

1. Answer : (d)

Reason : If there is a conflict between the International Accounting Standards and the local standards or the local laws and regulations, the local standards, laws and regulations will prevail.

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2. Answer : (c)

Reason : Options (a), (b), (d) and (e) are a part of the accounting principles and concepts which need to be adhered to in the preparation of Financial statements. Hence the adherence to these concepts does not result in window dressing the financial statements. However, provision for expenses and potential losses is to be made as per accounting concept of ‘conservatism’. Not providing such provision leads to window dressing since the profits get inflated.

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3. Answer : (d)

Reason : Journal proper is used to record all transactions which cannot be included in the Cash book or any other subsidiary books. Eg. Purchase or sale of fixed assets and investments on credit, adjusting entries and rectification entries.

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4. Answer : (d)

Reason : The value of investments, debtors, Fixed assets and cash at bank are not dependent on the earning capacity of the firm. Goodwill an intangible asset, depends on the earning capacity of the firm. The higher the profits or earnings expected the higher the value of goodwill.

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5. Answer : (c)

Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not issued by a newly formed company (a) They are not the shares issued to the public at large. They are issued only to the existing shareholders. (b). It does not indicate the right of redemption of shares issue (d). These are not the shares with cumulative dividend right.

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6. Answer : (c)

Reason : The maximum amount beyond which a company is not allowed to raise funds by issue of shares is called nominal capital or authorized capital. The issued capital is that part of the nominal capital issued to the public and subscribed capital is that part of the issued capital which is subscribed by the public. Paid up capital is the amount which is paid-up by the shareholders. Reserve capital is that capital which will be called-up only in case of liquidation.

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7. Answer : (c)

Reason : Annuity Method of super profits © of valuation of goodwill uses the present value factor since there is heavy loss of interest. Capitalisation of average profits method (a) is not the correct answer since there is not such method through which goodwill can be assigned a value. Capitalisation of super profits method (b) tries to find out the amount of capital needed for earning the super profit and it does not consider the present value factor and hence is not the correct answer. No. of years’ purchase of average profits method (d) is also known as simple profit method where in the goodwill is calculated with the help of the average annual profit expected to accrue in future based on past profits and the number of years of purchase as agreed by the parties and is not the correct answer. Number of years of purchase of super profits method (e) where in super profits are computed taking into account the average profits and the normal rate of return in the similar type of industry based on the capital employed in the business the difference between the average profit and the normal return is the super profit an is multiplied with the number of years’ purchase as agreed by the parties. And it is not the correct answer. Thus, alternative (c) is the correct answer.

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8. Answer : (b)

Reason : Amortization is the method of converting cost of intangible assets to expense. Intangible assets like patents, trademarks, franchises are amortized over a period of time.

The other alternatives

(a) Depreciation is the process of allocating to expense the cost of fixed assets over its useful life in a rational and systematic manner.

(c) Depletion is the process of allocating the cost of natural resources like coal petroleum etc. to expense in a rational and systematic manner.

(d) Deterioration is the physical process of wearing out.

Thus, the alternatives (a), (c), (d) and (e) are not relevant to intangible assets.

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9. Answer : (a)

Reason : Amortization of intangible assets signifies, the systematic writing down of the value of the intangible assets over its life. The method adopted is straight line method. The other alternatives written down value method, sum of the years’ digits method and Annuity method are used for depreciating the value of tangible fixed assets.

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10. Answer : (b)

Reason : When depreciation appears in the Trial balance, it is taken in the Profit and loss account only. If depreciation does not appear in the Trial balance but appears as an adjustment it appears in the Profit and loss account and is also reduced from Fixed assets to give double effect to the transaction.

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11. Answer : (e)

Reason : The advocates of this method feel that the ‘smoothing’ of purchase costs achieved by the weighted average method enable them to even out the erratic movements in the purchase prices to the best possible extent.

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12. Answer : (d)

Reason : AS -1 discusses this issue where it lists out going concern concept, consistency concept, and accrual concept as fundamental accounting assumptions. Conservatism is a concept under GAAP but its use cannot be assumed.

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13. Answer : (e)

Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It cannot be debited to general reserve account, capital reserve account, revaluation reserve account and capital redemption reserve account.

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14. Answer : (b)

Reason : Securities Premium on fresh issue of shares (b) cannot be utilized for the redemption of Preference Shares of a company. As per the Companies Act, the redemption may be done from the proceeds of fresh issue of shares or undistributed profits which would otherwise be available for dividend. Thus, proceeds of fresh issue of shares (a), General reserve (c), Profit and loss account credit balance and Dividend equalization reserve are not the correct answers since they can be utilized for redemption of preference shares.

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15. Answer : (e)

Reason : Under intrinsic value method the value per share is arrived by valuing the assets of a company and deducting there from all the liabilities and claims of preference shareholders and dividing the net assets by the number of shares. The value of net assets is nothing but the net equity.

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16. Answer : (e)

Reason : The cum-interest/cum-dividend quoting price of securities implies that interest accrued or dividend accrued is added to the value of the securities. Thus, it is more than the ex-interest price. The purchaser pays a higher price than the normal price, the seller charges a higher price and the right of receiving dividend/interest is passed on to the buyer. Thus, alternatives (a), (c) and (d) are correct. The alternative (b) the right to receive the interest/dividend is retained by the seller is false.

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17. Answer : (e)

Reason : Cumulative Preference shareholders enjoy preferential treatment with regard to priority in payment of dividend, (a) repayment of capital (b) and also in case of insufficient profits their dividends (undeclared) are cumulated (d) unlike equity shareholders. Equity shareholders enjoy voting rights (c) but not the preference shareholders. Thus, the alternatives (a), (b), and (d) are true in case of cumulative preference shareholders.

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18. Answer : (a)

Reason : The accounting based on Real capital maintenance concept (which considers the general price rise) is called the Current Purchasing Power Accounting.

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19. Answer : (a)

Reason : Only when the share applications are received and the allotment is finalized is the share allotment money called for from the shareholders to whom share allotment is made.

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20. Answer : (a)

Reason : The accounting entry involved for issue of shares to promoters for the services rendered by them is debit goodwill account and credit share capital account (a). Since in recognition of the vale of services rendered by the promoters certain number of shares are allotted to them for which no consideration is coming forth and is debited to goodwill and credited to share capital account. Since no cash is coming forth and no obligation form the promoters to pay in future the entries in alternatives (b) and (c) are incorrect. It is issue of shares in lieu of the services rendered and hence share capital account is not debited and no payment of cash is involved and cash account cannot be credited and alternative (d) is incorrect. Since no payment from the directors is expected the question of calls in arrears does not arise and the alternative (e) is incorrect.

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21. Answer : (c)

Reason : Premium on redemption of debentures account represents the additional amount payable to debenture holders at the time of redemption of debentures and is a personal account.

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22. Answer : (d)

Reason : According to the conservatism concept, ‘anticipate no profit and provide for all possible losses’. Thus, in recognition of conservatism concept, provision for bad and doubtful debts is created in anticipation of actual bad debts. The statements in other alternatives are incorrect because Going concern concept assumes that business will be carried on for a indefinite period and not for definite period (a). The capital losses are to be deducted to ascertain net income (c). Materiality concept states that insignificant events need not be recorded and the statement in alternative (e) is incorrect. Thus, the correct answer is (d).

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23. Answer : (d)

Reason : Stock at the end of the financial year is the closing stock, drawings are the amounts withdrawn by the owner of the business for personal use; and prepaid rent is the amount of rent which is paid in advance of the current financial year and interest received but not yet earned is the amount of interest received which does not pertain to the current year are the items that appear in the balance sheet of a business. Stock at the beginning of the financial year is the opening stock that appears in Trading Account of a business and not in the balance sheet. Thus,(d), the combination of all the accounts in alternatives (I), (III), (IV) and (V) is the correct answer.

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24. Answer : (e)

Reason : According to Section.76 of the Companies Act, a company is authorized to pay underwriting commission only if the shares or debentures are offered to the general public. No underwriting commission can be paid, if the issue is privately placed. The shares taken by Promoters, Directors, employees and directors’ friends cannot be considered as shares offered to the general public. As such no underwriting commission is payable on these shares.

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25. Answer : (a)

Reason : The portion of the acquisition cost of the asset yet to be allocated is known as written down value (a) Accumulated value (b) is the value of a thing accumulated over a period of time and not the correct answer. Realizable value (c) is the value which can be realized in the event of sale and is not correct answer. Salvage value (d) is the value of an asset that remains as scrap value after its usage over a period of time and is not the correct answer. Residual value (e) is the value remaining residue and is not the correct answer. Alternative (a) is the correct answer.

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26. Answer : (b)

Reason : The Accounting Standard-2 deals with regard to accounting for inventory. According to the statement, Work in progress of a manufacturing industry is covered. Thus, the alternative (b) is the correct answer. The items of inventory stated in other alternatives are not covered under AS-2 Financial instruments held as stock-in-trade: Work in progress arising under construction contracts and Work in progress of service providers. Hence, alternatives (a) reflecting statement (I); (c) combination of statements (I) and (II); alternative (d) combination of statements (III) and (IV) and alternative (e) combination Of statements II, III and IV are incorrect.

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27. Answer : (d)

Reason : Reserves created out of revaluation of fixed assets should not be capitalized and hence should not be used for bonus issue. Bonus issue can be made out of share premium account. Bonus issue shall not be made within 12 months of any public issue and it shall not be made in lieu of dividend. Bonus shares should not be issued unless partly paid shares are made fully paid.

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28. Answer : (e)

Reason : The adjustment entry involved in reversing ‘Capital Suspense’ account which is created, while placing the amounts received on reissue of forfeited shares at a discount is (a) Debit to Capital Suspense account (b) Credit to Share Capital account (c)Debit to Share forfeiture account and thus, the combination of alternatives (a), (b) and (c) the alternative (e) is the correct answer.

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29. Answer : (b)

Reason : Inventories (b) are to be valued at the lower of cost and net realizable value. All the other assets stated in other alternatives are valued as per the cost concept. Goodwill (a) is a fixed intangible asset and is shown at the cost of its acquisition. Investments (c) are valued at cost or market value which is ever less. Sundry debtors (d) are shown at deducting any amount of bad debts and the provision created for bad and doubtful debts. Fixed Assets are valued at Cost only. Thus, the correct answer is (b).

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30. Answer : (b)

Reason : Bank charges increase debit balance as per bank pass book (b) is the correct answer. The debit balance as per bank pass book indicates the overdraft balance and the bank charges being the expenditure increase the debit balance. The alternative (a) is incorrect because, the Bank charges decrease the debit balance shown as per bank column of the cash book and do not increase the debit balance as debit balance as per cash book signifies the favourable balance. A cash sale of a non-trading asset is recorded in the journal proper is incorrect (c) because all in transactions involving cash receipts and payments are recorded in the cash book Cash discount allowed by the business will appear on the debit side of the debtor’s account (d) is incorrect because, the cash discount allowed is a reduction in the balance of a debtor’s account which appears on the credit side. Bank reconciliation statement is prepared by a bank (e) is incorrect because bank reconciliation statement is prepared by the business and not by the bank. Thus, (b) is the correct answer.

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31. Answer : (d)

Reason : The closing stock(d) is the value of goods which remain unsold at the end of the period whose balance appears once in trading account and once in balance sheet of the business. All other accounts sales (a), purchases (b), inward returns (c) and outward returns (e) are closed once they are absorbed by the trading account. Thus, (d) is the correct answer.

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32. Answer : (c)

Reason : According to the provisions of the Companies Act, the application money should not be less than 5% of nominal value of the shares. The other options given in a, b, d and e are not correct.

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33. Answer : (e)

Reason : The following methods are the practical ways of realizing revenue applying the conservatism concept and realization concept and the (a)Delivery method in case of sale of goods, (b)Percentage-of-completion method in case of rendering of services,(c) Production method in case of agriculture produce and (d) Installment method in case of sale of goods on installments. Thus, these are the various ways of recognizing revenue and the methods adopted to recognize revenue. Moving average method (e) is the method of valuing inventory and it is not the method adopted to recognize revenue. Thus, (e) is the correct answer.

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34. Answer : (d)

Reason : According to SEBI guidelines, a debenture issue having a maturity of more than 18 months necessitates the creation of a special reserve known as debenture redemption reserve. Such debenture redemption reserve should be equivalent to at least 50% of the amount of debenture issue prior to the commencement of the redemption. Thus, (d) is the correct answer.

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35. Answer : (d)

Reason : Purchases account is a debit balance and purchase returns is a credit balance and the total of purchase returns will be recorded to the credit side of the purchase returns account.

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36. Answer : (a)

Reason : In retail inventory method, if the markup selling price is decreased but not below the original selling price, it is known as markup cancellation.

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37. Answer : (e)

Reason : Shareholders are treated as creditors for the amount they have paid on shares subscribed by them according to the business entity concept. According to cost concept, all transactions are recorded at cost. The duality concept emphasizes that assets = owner’s equity + outside liability. A business entity is assumed to carry on its operations forever under going concern concept. According to money measurement concept, only those transactions that can be expressed in monetary terms are recorded.

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38. Answer : (c)

Reason : The profit or loss on own debentures is to be calculated at the time of cancellation of own debentures and not at the time of purchase or next interest payment or original issue of debentures or liquidation of the company.

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39. Answer : (d)

Reason : The trial balance is prepared to assess the arithmetical accuracy. Hence the answer is (d). The profit and loss account is prepared to know the profit or loss of the concern. The balance sheet is prepared to know the financial position as on a particular date. The cashbook indicates the cash receipts and payments. The bank reconciliation statement is prepared to reconcile the bank balance as per cash book and pass book.

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40. Answer : (e)

Reason : Credit balance of bank column of cash book represents bank overdraft and is a liability. Hence the answer is (e). Credit balance of bank pass book, Debit balance of bank column of cash book and Debit balance of cash column of cash book represents favorable balance. The debit balance of discount column of cash book represents an expense.

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41. Answer : (b) Reason : Nilgiri Limited

Bad debts Rs.15,000

Add: Closing provision (5% on Rs.3,30,000) Rs.16,500

Rs.31,500

Less: Opening provision Rs.18,000

Amount to be debited to profit & loss account Rs.13,500

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42. Answer : (a)

Reason : The application money should not be less than 5% of the nominal value of the shares. Hence, the minimum amount of application money is Rs.5 per share. The percentage of share premium has no relevance as regard the minimum amount of application money to be collected. There are no restrictions on the percentage of premium that a company can issue its shares. Thus, the alternative (a) is the correct answer

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43. Answer : (a)

Reason : Rs.Nil The difference in one transaction got compensated by another transaction. The error of principle does not result in any difference and also the error of omission does not affect the agreement of trial balance. The undercasting of returns inward book is rectified by debiting returns inward account with Rs.1,377 and the wrong debit to the supplier’s account is to be rectified by crediting the account with Rs.1,252+Rs.125=Rs.1,377. Thus, the wrong casting in one transaction is compensated by wrong posting of wrong amount to the wrong side. It has no effect on the agreement of trial balance. Payment of wages to the debit of wrong account is an error of principle and it does not affect the trial balance. The complete omission of sales returns will not affect the trial balance totals. Thus, the difference in trial balance is Rs.nil despite the errors.

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44. Answer : (b)

Reason : Cost of goods sold during the year 2005-2006 = Rs.54,00,000 × 0.75 = Rs.40,50,000

Closing inventory = Opening inventory + Purchases during the year 2005-06 – Cost of goods sold

= Rs.15,00,000 + Rs.55,00,000 – Rs.40,50,000

= Rs.29,50,000

Actual physical inventory as on March 31, 2006 = Rs.29,50,000

Therefore, missing inventory = Rs.29,50,000 – Rs.25,75,000 = Rs.3,75,000

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45. Answer : (e)

Reason : Neeti Ltd.

The amount of profit transferred on cancellation of debentures is Rs.8,000.

Journal Entries

Date Particulars Dr.

(Rs.) Cr.

(Rs.)

July 01, 2005 Own Debenture A/c. Dr. 1,92,000 Interest on Debenture A/c. Dr. 6,000 To Bank A/c. 1,98,000 (Being the purchase of 2000 own debentures at the rate of

Rs.99 cum interest. Interest for 3 months from April 1,2005 to June 30, 2005 is Rs.6,000)

March 31, 2006 12% Debentures A/c. Dr. 2,00,000 To Own debenture A/c. 1,92,000 To Capital reserve A/c. 8,000 (Being the profit on redemption of debentures transferred to

capital reserve A/c.)

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46. Answer : (d)

Reason : Bank Reconciliation statement as on December 31,2005

Particulars Rs. Rs.

Credit (Overdraft) balance as per cash book 2,15,270

Add:

i. Outstation cheque deposited, not yet collected by the bank as on December 31, 2005.

78,000

ii. Bank charges 1,500

iii. Bank interest (obviously on OD) not recorded in the cash book 5,500

iv. A deposit in Career Bank wrongly entered in Century in the cash book

22,500 1,07,500

3,22,770

Less:

v. Cheque amounting , not presented for payment as on December 31, 2005

15,000

Overdraft balance as per bank pass book (DEBIT BAL ) 3,07,770

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47. Answer : (c)

Reason : The amount debited to profit and loss account in respect of provision for doubtful debts is Rs.4,600

Dr. Provision for bad and doubtful debts Cr.

Particulars Rs. Particulars Rs.

To Bad debts (Mita) 8,000 By balance b/f 15,600

To Provision c/f 12,200 By Profit and loss account 4,600

20,200 20,200

Computation of suitable provision for the year ending March 31,2006

Particulars Rs. Gita Rs. 7,500 Expected to realize only 80% hence doubt full part 1,500 Rita Rs.8,000 Expected to realize only 60%. 3,200 Sita Rs.7,500 Filed Insolvency petition and the recovery chances are remote 7,500

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48. Answer : (e)

Reason : Nagendra Ltd.

Workings:

Note 1 Bank Account

Rs. Rs.

To Balance 4,00,000

To Investments Account 4,20,000

By Preference share holders (Rs.10,00,000 × Rs.1.10)

11,00,000

To Equity shares By Balance account. 50,000

27,500 shares × Rs.10 Rs.2,75,000

Premium of Rs.2 per share Rs. 55,000 3,30,000

9,30,000 11,50,000

Amount transferred to capital redemption reserve account.

Face value of preference shares Rs.10,00,000

Less: Face value of shares– 27,500 × 10 (funds available by way of fresh equity issue)

Rs.2,75,000

Rs7,25,000

Where redemption of preference shares in effected without corresponding issue of shares if implies it is mode out of distributce profits, the gap created to the extent is transferred the cap. Red res.

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49. Answer : (a)

Reason :

Particulars Rs. Opening balance of sundry debtors 1,12,000 Add: Credit sales 9,75,000 10,87,000 Less: Closing balance of Sundry debtors 60,000 10,27,000 Less: Discount allowed 8,400 Cash collected from sundry debtors 10,18,600

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50. Answer : (d)

Reason : Rate of depreciation = 1 – n

S

C

= 1 –2

3, 84, 000

6, 00, 000

= 1 – 0.80 = 20%.

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51. Answer : (a)

Reason : (No. of shares)

Particulars Ram Sham Graham Total Liability 30,000 40,000 30,000 1,00,000 Less: Unmarked applications in the ratio of 3:4:3 4,800 6,400 4,800 16,000

25,200 33,600 25,200 85,200 Less: Marked (Stamped) applications 20,000 32,000 28,000 80,000

5,200 1,600 (2,800) 4,000 Less Credit of surplus of Gram to Ram and Sham in the ratio of 3: 4

1,200

1,600

2,800

–

Final liability of each underwriter 4,000 Nil Nil 10,000

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52. Answer : (b)

Reason : Books of Nikki Ltd

Stock Account

Dr. Cr.

Date Particulars Rs. Date Particulars Rs. Dec.01, 05 To Opening balance 5,80,000 Dec.31, 05 By Cost of goods

sold (bal. Fig) 7,80,000

To Purchases 3,60,000 By Closing balance

1,60,000

9,40,000 9,40,000

Sundry creditors Account

Dr. Cr.

Date Particulars Rs. Date Particulars Rs. Dec.31, 05 To Cash paid 4,50,000 Dec.01, 05 By Opening balance 1,50,000 To Closing balance 60,000 By Purchases

(balancing figure) 3,60,000

5,10,000 5,10,000

Sales = Rs.7,80,000 + 25% (Rs.7,80,000) = Rs.9,75,000.

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53. Answer : (b)

Reason : Depreciation under sum-of-the-years’ digits method for the year 2005-06, being the third

=

3x 2, 40, 000

1 2 3 4 5+ + + + = Rs.48,000

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54. Answer : (d)

Reason :

Particulars (Rs.) Face value of shares to be redeemed (3,000 × Rs.100) 3,00,000 Less: Proceeds from fresh issue (2,000 × Rs.100) 2,00,000 Balance to be utilized from profit & loss a/c. Hence, amount to be transferred to capital redemption reserve 1,00,000

The premium received on fresh issue of shares should not be used for redemption of preference shares. However, the same can be used for the premium payable on redemption of preference shares.

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55. Answer : (e)

Reason : Value as per fair value method is

(value as per intrinsic value method + value as per yield method)/2

∴ Value as per intrinsic value method is (2 × Rs.315.50) – Rs.254.50 = Rs.376.50

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56. Answer : (c)

Reason : Discount recorded on debit side of cash book represents the discount allowed to the customers.

Rs.

= Cheque received and allowed discount 2,500

+ Discount allowed to Rama & Bros

(Rs.38,900 – Rs.36,200) 2,700

+ Cheque received from Daulat Ram

discount allowed 10% of 16,500 1,650

Rs.6,850.

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57. Answer : (c)

Reason : Ex Interest

The nominal value of debentures Rs.1,00,000 of each Rs.100 at the rate of Rs.97 ex interest will be of value Rs.97,000 and the amount of interest at the rate of 12% from 1.10.2005 to 31.12.2005 for 3 months will be Rs.3,000 and the total price paid is Rs.1,00,000.

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58. Answer : (b)

Reason : Trial Balance of Nayar Ltd. as on March 31, 2006

Particulars Amount

Debit Particulars

Amount Credit

Preliminary expenses 2,11,000

Share capital account 26,88,000

Closing stock 20,52,000 Sundry creditors 11,00,600 Cash at bank 4,40,000 15% Loan 4,00,000 Sundry debtors 14,30,000 Provision for doubtful debts 20,000 Bad debts 72,400 Sales 71,08,000 Fittings and Fixtures 7,55,400 Commission received 1,12,800 Insurance premium 8,000 Outstanding salaries 30,000 Opening inventory as on April 1, 2005 10,93,600

Returns outward 20,600

Purchases 30,79,800 Discount received 92,000 Manufacturing wages 8,19,400 Bills payable 15,55,000 Returns inward 55,600 Salaries 27,98,400 Office Administrative expenses 2,17,400

Prepaid Insurance 12,000 Discount allowed 82000

TOTAL 131,27,000 TOTAL 131,27,000

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59. Answer : (e)

Reason : The interest on drawings is an income to the business. Hence the interest on drawings account is to be credited. As charging the interest on drawings will reduce the capital, capital account is to be debited. The entry to record interest on drawings is

Capital account Dr. Rs.3,000

To Interest on drawings account Rs.3,000

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60. Answer : (a)

Reason : Average annual profit Rs.95,000

Less: Preference dividend :

15% on Rs.100 x 1000 Rs.15,000

Rs.80,000

Less: Transfer to general reserve Rs.15,000

Profit for equity shareholders Rs.65,000

Equity share capital = 20,000 × Rs.10 = Rs.2,00,000

Return on equity =

Pr ofit for equity shareholders

Outs tan ding balance of equity share capital =

100000,00,2.

000,65.x

Rs

Rs

= 32.50%

Normal rate of return = 10%

Value of equity share = Rs.10 × %10

%50.32

= Rs.32.50

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61. Answer : (e)

Reason :

Particulars Rs. Cash Sales (16,00,000 × 85%) 13,60,000 Issue of shares 10,00,000 Amount received by way of short-term loan 2,00,000 25,60,000 Less: Purchase of fixed assets 8,00,000

Short tem loan repaid 50,000 Payment towards expenses 7,00,000 Amount paid to purchase raw materials 3,00,000 Amount deposited in bank 4,00,000

Cash balance as on March 31, 2006 3,10,000

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62. Answer : (b)

Reason :

Dr. Furniture and fixtures account Cr.

Particulars Rs. Particulars Rs. To Opening balance 7,50,000 By Bank (sale) 25,500

By profit and loss account 10,600 By depreciation (Rs.7,50,000 x 5%)

37,500

By closing balance 6,76,400 7,50,000 7,50,000

Particulars Rs.

Written down value of machinery sold as on April 01, 2005 38,000

Less: Depreciation (Rs.38,000 x 5%) 1,900

Value of machine on March 31, 2006 36,100

Less: Sale consideration 25,500

Loss on sale of machine 10,600

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63. Answer : (e)

Reason : Amount transferred to capital reserve is Rs.1,200

Working Note:

Particulars Rs. Amount received on 400 shares on forfeiture (400 x Rs.5) 2,000 Less: Amount of discount allowed on 400 shares which were reissued (400 x Re. 2.) 800

Amount to be transferred to Capital Reserve 1,200

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64. Answer : (c)

Reason : According to the basic accounting equation, assets = liabilities + owners equity. Hence owners equity = assets – liabilities.

Capital = Rs.7,65,000 + Rs.5,25,000 + Rs.2,70,000 + Rs.2,55,000 – (Rs.3,75,000 + Rs.1,05,000)

= Rs.18,15,000 – Rs.4,80,000 = Rs.13,35,000

Profit for the year 2005-2006 = Capital as on March 31, 2006 – Capital as on April 01, 2005

= Rs.13,35,000 – Rs.10,50,000 = Rs.2,85,000.

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65. Answer : (e)

Reason : Dr. Machinery account Cr.

Date Particulars Rs. Particulars Rs. 1-4-05 To opening balance 85,000 1-10-05 By bank (sale) 50,000 1-7-05 To bank 90,000 31-3-06 By depreciation 15,250 1-10-05 To profit and loss a/c

(profit on sale of machine)

12,000 31-3-06 By closing balance 2,01,750

1-1-06 To bank 80,000 2,67,000 2,67,000

Depreciation calculation:

Particulars Rs.

On machinery purchased on 1-7-05 (Rs.90,000 x 10% x 9/12) 6,750

On machinery sold (40,000 x 10% x 6/12) 2,000

On machinery purchased on 1-1-06 (Rs.80,000 x 10% x 3/12 ) 2,000

On balance machinery (85,000 – 40,000) x 10% 4,500

15,250

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66. Answer : (c)

Reason :

Particulars Rs.

Total of debit side of trial balance 4,75,000

Add: Advertisement expenses 20,000

Less: Opening stock (excess taken) 10,000

Total of trial balance (Debit side) 4,85,000

Particulars Rs.

Total of credit side of trial balance 5,03,000

Add: Interest on investments (less taken) 6,000

Less: Sundry creditors (excess taken) 4,000

Less: Advertisement expenses (wrongly taken) 20,000

Total of trial balance (credit side) 4,85,000

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67. Answer : (d)

Reason :

Particulars Amount

(Rs.) Amount

(Rs.) Petty cash 2,500 Less: Stamps 265 Conveyance 270 Repairs 516 Stationery 450 Other office expenses 120 1621 879 Amount reimbursed 1621 2500

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68. Answer : (b)

Reason : The stock as on March 31, 2005 is overvalued. Hence the opening stock for the year 2005-2006 is overvalued. Hence the profit for the year 2005-2006 is understated by Rs.24,000

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69. Answer : (c)

Reason :

Purchases Issues Balance

Date Quantity

(Kg) Rate per kg. (Rs.)

Amount

(Rs.)

Quantity


Amount

(Rs.)

Quantity


Amount

(Rs.)

1-6-05 1,000 22.80 22,800

2-6-05 800 24 19,200 1,800 23.33 42,000

10-6-05 1,200 25 30,000 3,000 24.00 72,000

25-06-05 2,000 24 48,000 1,000 24.00 24,000

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70. Answer : (b)

Reason : When FIFO method of inventory valuation is used, the closing inventory on June 30, 2005 comprises of latest purchased units. Since the latest purchases were purchased @ Rs.25, the value of closing inventory is Rs.25,000.

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71. Answer : (d)

Reason : When the LIFO method of inventory valuation is used, the latest stock of inventory is issued first and hence the closing inventory comprises of units which were purchased first or otherwise, those which existed on the opening day. In the above case since 1000 units existed on the opening day, the closing stock of 1000 units are opening stock units @ 22.80, hence the closing stock is Rs.22,800.

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72. Answer : (b)

Reason :

01.07.2005

400 × Rs.96 ex. interest Rs.38,400

01.12.2005

300 × Rs.102 cum. Interest = Rs.30,600 – Rs.500

(Interest for 2 months 30,000 ×

2 10

12 100×

= Rs.500)

Rs.30,100

Rs.68,500

Amount debited to own debenture investment account is Rs.68,500.

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73. Answer : (d)

Reason : Costs that improve the revenue earning capability of an asset should be capatilised as part of the cost of the asset (for example, Rs.40,000 paid for additional component for increasing the earning capacity). However, costs that maintain the revenue earning capability (such as the maintenance charges and the replacement parts) should be treated as revenue expenses and they are to be charged to the Profit and Loss Account. The correct figure for depreciation calculation is therefore, as under:

Particulars Rs. Rs.

Cost less discount 4,90,000

Delivery charges 10,000

Erection charges 20,000

Additional component to increase the capacity 40,000 5,60,000

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74. Answer : (a)

Reason : Salary as per income statement Rs.4,15,000

Add: Outstanding salary as on April 01, 2005 Rs.64,000

Rs.4,79,000 Less: Outstanding salary as on March 31, 2006 Rs.74,000

Cash paid for salary during the year Rs.4,05,000

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75. Answer : (c)

Reason : Cost of goods sold = Purchases + Opening stock – Closing stock = Purchases – (Closing stock – Opening stock) = Rs.50,000 – (Rs.10,000)* = Rs.40,000

Since, the closing stock has been increased by Rs.10,000

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76. Answer : (e)

Reason : Repayment of a bank loan and amount paid to creditor reduces the liabilities and assets by the same amount. Amount received from debtors and purchase of second hand machine changes only the composition of the assets and does not affect the ttal assets figure. Hence, (a), (b), (c) and (d) will not change owners’ equity. But, sale of land has been made at a price above cost. It means that there is a profit on sale of land. That profit is owned by the owners of the company. Therefore, profit or loss on sale of asset will change the owner’s equity. Hence, (e) is correct.

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77. Answer : (a)

Reason : Value of equity share =

No min al valueof shares

Normal ratesof return × Yield rate of return.

=

Rs.10

8% × 14% = Rs.17.50

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0604_FA-I_(MB131)

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