CASE 1.1 MEHTA AUTOMOBILES SUMMARY HISTORY OF MEHTA AUTOMOBILES Mr Mehta is a mechanic. Due to his excellent work, professional ability, pleasing manners and sense of responsibility, he was soon promoted to the post of a chief mechanic. Because of his abilities, his friends and relatives advised him to start his own automobile repairs shop. Therefore, after consulting with his family he accepted the offers of his friends Mr Nitin and Mr Mohan Kapoor, who offered to give a rental office in a busy street of Ahmedabad and a loan of 1,00,000 respectively to start his business. CURRENT POSITION Mr Mehta’s business is well settled small-scale business. He has hired four more assistants in addition to earlier two and also two mechanics and a part-time salesman. He has a small office with necessary furniture, and he stores his goods at his home, which he uses as his small godown. He has also started a small spare parts selling section. He is also assisted by his son Mr Rajendra Mehta for the regular day- to-day activities. NEW VENTURE During his day-to-day activities, Mr Mehta came across an advertisement in a local newspaper, which was about a company, who was in search of a well-known automobile service shop owner, for a sole selling agency of their cars and spare parts in Gujarat. Mr Mehta found this proposal profitable and thus applied for the same. CONDITIONS OF CONTRACT The company specified two conditions which every applying firm in order to get the contract had to fulfil. The conditions are as under: 1
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CASE 1.1
MEHTA AUTOMOBILES
SUMMARY
HISTORY OF MEHTA AUTOMOBILESMr Mehta is a mechanic. Due to his excellent work, professional ability, pleasing manners and sense of responsibility, he was soon promoted to the post of a chief mechanic. Because of his abilities, his friends and relatives advised him to start his own automobile repairs shop. Therefore, after consulting with his family he accepted the offers of his friends Mr Nitin and Mr Mohan Kapoor, who offered to give a rental office in a busy street of Ahmedabad and a loan of 1,00,000 respectively to start his business.
CURRENT POSITIONMr Mehta’s business is well settled small-scale business. He has hired four more assistants in addition to earlier two and also two mechanics and a part-time salesman. He has a small office with necessary furniture, and he stores his goods at his home, which he uses as his small godown. He has also started a small spare parts selling section. He is also assisted by his son Mr Rajendra Mehta for the regular day-to-day activities.
NEW VENTUREDuring his day-to-day activities, Mr Mehta came across an advertisement in a local newspaper, which was about a company, who was in search of a well-known automobile service shop owner, for a sole selling agency of their cars and spare parts in Gujarat. Mr Mehta found this proposal profitable and thus applied for the same.
CONDITIONS OF CONTRACTThe company specified two conditions which every applying firm in order to get the contract had to fulfil. The conditions are as under:
(a) Every firm had to obtain from its bank, a certificate to the effect that a minimum balance of 5,00,000 was maintained in business account.
(b) Every firm had to submit a complete current financial position of the business and the results of immediate past period.
THE PROBLEMMr Mehta found the problem, which was to comply with the above, two conditions. The following were the difficulties, which Mr Mehta had to face in order to get the problem.
As Mr Mehta did not have any knowledge about how to prepare his financial accounts, he had not prepared any regular accounts.
His used to run his business in such a manner that each cash received was deposited in bank and was withdrawn at the time of payment, and as his business was not of a very large scale he was not able to maintain a minimum balance of Rs 5,00,000 in his business account.
Thus due to the above problems, he was not able to satisfy the two conditions laid down by the company.
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THE SOLUTIONIn order to get the contract, Mr Mehta must fulfil the above two conditions so for that he has to do the following things.
(a) Learn the basic things of recording of day-to-day transactions.(b) Collect necessary data for the preparation of last year’s financial statements.(c) Maintain a daily book to record all the day-to-day transactions of the business.(d) Appoint an accountant, who will prepare all the accounts and financial
statements from this daily book.
QUESTIONS AND ITS ANSWERS1. Mr Mehta mentioned that
(a) He could not have systematic accounting records because he did not possess specialized accounting skill; and
(b) Keeping such records would increase in costs, which he could not afford. How would you respond to these comments?
Solution:(a) Here, as Mr Mehta’s business is not very vast, recording of day-to-day
transactions does not require any specialised knowledge so he could just learn the basic fundamentals of accounting and start recording the day-to-day transactions in a daily book. This daily book can be recorded systematically by appointing an accountant (Mr Lal).
(b) In short term, recording of proper accounts will cost a bit to Mr Mehta but it will be equalized by the long-term benefits by maintaining proper books of accounts. In addition, appointing an accountant (Mr Lal) for such limited size firm would not cost very much as he will not have to be paid a very high amount for his services rendered.
2. What information would Mr Lal require for preparing the financial statements?Solution: Mr Mehta would require three types of information for preparing the financial statements, which are as under.
(a) Information related to Trading Account(i) Purchases and sales of goods
(ii) Direct expenses(iii) Closing stock of goods
(b) Information related to Profit & Loss A/c.(i) Daily revenue expenses of the firm
(ii) Daily revenue incomes of the firm(c) Information related to Balance Sheet
(i) Information related to liabilities of firm1. Share capital2. Other liabilities which include:
Reserves & Surplus Secured loan and unsecured loans Current liability Contingent liability
(ii) Information related to Assets of the business:
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1. Fixed assets 2. Investments3. Current Assets 4. Miscellaneous expenditure
3. What items would you expect to find in the statements of financial position and profit and loss analysis relating to Mr Mehta?Solution: Following are the items which may appear in the profit and loss account of Mr Mehta:
Trading Account of Mr MehtaParticulars Amount Particulars Amount
To Opening Stock xxx By Sales xxxTo Purchase xxx By Closing Stock xxxTo Wages xxxTo Gross Profit xxx By Gross Loss xxx
Total xxxxx Total xxxxx
Profit and loss a/c of Mr MehtaParticulars Amount Particulars Amount
To Salary of Assistants xxx By sale of Assets xxxTo Electricity Expenses xxx By Discount Received xxxTo Telephone Expenses xxx By Interest on Investment xxxTo Sundry Expenses xxxTo Discount Paid xxxTo Net Profit xxx By Net Loss xxx
Total xxxxx Total xxxxx
Balance Sheet of Mr MehtaLiabilities Amount Assets Amount
Share Capital Fixed AssetsTotal ownership capital xxx Land & Building xxx
Unsecured Loan Current AssetsFriend’s Loan xxx Cash Balance xxx
Current Liability Bank Balance xxxBank Overdraft xxx Debtors xxxCreditors xxx Stock xxx
Total xxxxx Total xxxxx
4. What records would Mr Mehta require to maintain, for controlling his business activities?Solution. Mr Mehta would be required to maintain the following records, for controlling his business activities.
(1) Trading Account(a) It tells us what are the net purchase and net sales of the company.(b) It also specifies the direct expenditure, incurred by the company.(c) Information regarding trading account is helpful during time of calculating
the gross profit of the company.(d) Other benefits.
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(2) Profit and Loss Account(a) It specifies the various expenses made by the company.(b) It also specifies the various incomes earned by the company.(c) This account helps us to find out the net profit of the company.
(3) Balance Sheet(a) It tells the current financial position of the company.(b) It tells the total assets of the company.(c) It also tells about the total liabilities of the company.
Note: A detailed explanation of above statement has been mention in Question 3.
CONCLUSIONThus from the above case, we can conclude that the problem mentions in the case is one of the common problems which every unit faces if it does not prepare and maintain necessary accounts.
Mr Mehta is one of the persons who are suffering from various problems, which are mentioned in this case, and there are many other problems, which may occur due to non-maintenance of accounts.
Thus in order to keep away such problems, every firm big or small should always maintain its accounts in a systematic way.
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Case 2.1Balance Sheet as on April 12, 1946
Liabilities Amount Assets AmountCapital Fixed AssetsMrs Bevan 2,000 Land 2,500Mrs Maywoods 2,000 Add 2,000 4,500Mr Maywoods 2,000 6,000 Building 10,500Secured Loan Equipments 1,000Mortgage loan 11,500 Current Assets
Cash (6,000 – 4,500) 1,500Total 17,500 Total 17,500
Balance Sheet as on December 11, 1946Liabilities Amount Amount Assets Amount Amount
Capital Fixed AssetsMrs Bevan 2000 Land 4,500Add: 400 Less: Depreciation 44.45 4,455.55
SUMMARYIn the year 1946 three partners, Mr Bevan, Mr & Mrs Maywoods, started business contributing $2000 each. They also hire some amount of loan. The cafe was on the highway and frequently visited by truck drivers and voyagers. All of the partners have divided their duty by the mutual understanding.
Due to the friendly relationship between one of the partners, namely, Mrs Maywoods with a customer Fred Mead, she finally she run away with him. Mr Maywoods searched her a lot. After this event occurred, Mrs. Bevan decided to dissolve this partnership. Thus they started their business on 12th April 1946 and dissolve on 16th December 1946. The dissolution of business resulted into loss and all the partners equally shared it.
As the professional approach was a lacking factor for this partnership, finally it had to be broken up and bear a loss. After briefly analysing the case, we can say that the proper planning was not present in this partnership and they did have the scarcity of funds from
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the beginning.The loss amount= (Liabilities+OE)-Asset Vaue= (Right side value-left side)/3
Cash AccountDate Particulars Amount Date Particulars Amount1 Jan., To Opening Balance b/d 13,993 By Account Payable 4,3821958 Last Year’s
To Regular Customers 1,06,478 By Drawing L. Master 12,650To Budget Plan Customers 97,798 By Drawing L. Webster 15,000To Burner Service & repair 12,714 By Fuel Purchase 1,46,260To Installation Work 4,460 By Burner Parts 5,905To Deposit Refunds 750 By Installations 2,111
By Subcontractors 314By Utilities 424By Supplies 277
(contd.)
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By New Truck 12,133By Telephone 231By Advertising 2,627By Property Taxes 972By Office & Printings 1,119By Fess Pro. Services 1,520By Liabilities Last Yr 256By Payroll Taxes C.Y 212By Rental of Uniforms 512By Vehicle Operation 2,312By Wages 9,816By Miscellaneous Exp. 1,949
31st Dec By Closing Balance 15,211Total 2,36,193 Total 2,36,193
Account Receivable (Debtors) A/cDate Particulars Amount Date Particulars Amount1 Jan., To Balance b/d 12,486 31 Dec., By Cash A/c (1,06,478 2,21,4501958 1958 + 97,798 + 12,714 +
4,460)31 Dec., To Credit Sales 2,39,776 31 Dec., By Balance c/f :1958 1958
Regular A/c 18,640Budget A/c 12,172 30,812
Total 2,52,262 Total 2,52,262
Account Payable (Creditors) A/cDate Particulars Amount Date Particulars Amount31 Dec., To Cash (4.382 + 1,58,972 1 Jan., By Balance b/d 4,3821958 1,46,260 + 5.905 + 1958
2111 + 314)31 Dec., To Balance c/f (3,962 4,400 31 Dec., By Credit Purchases 1,58,9901958 + 438) 1958
Total 1,63,372 Total 1,63,372
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Profit and loss account of the year Ended on 31/3/1982Dr. Cr.Expenses Amount Amount Income Amount AmountTo Depreciation on - 21,815 By Dividend received 1,19,000 office equipment By Bills received 20,79,000To salary 10,39,920 By Closing Stock 70,000 + Outstanding 17,500 10,57,420To office supply 3,45,450 + Outstanding 45,150 3,90,600To rent 1,70,800 + Outstanding 16,800 1,87,600To miscellaneous expenses 1,20,400
Income & Exp. A/c for the year ended on the 31st Dec. 1981Dr CrParticulars Amount Particulars AmountOpening Stock 56,250Purchase 7,50,000 Sales
of Radios 10,00,000Dep. on Furniture 10,000 of Radio Parts 50,000Prov. For Service Exp. 50,000Exp. for Services 20,000 (For the radios sold in the Previous Period)Wages & Salaries 60,000Insurance Paid 2,500Rent Paid 10,000Selling & Gen. Exp 14,850Subscription 75Net Profit 1,51,325
26,735,000 26,735,000To Depreciation To Gross Profit 6,674,000
Land & Building 2,550,000 To rent room 8,108,950Fitting & Furniture 647,250 3,197,250 To Casino Room Earning 142,500
To Bad Debts (T) 0 To golf course Earning 148,500+ Bad Debts (Adj) 19,250 To Health club earning 268,250+ B.D.R.(Adj) 0 To Pool side earning 136,400
19,250 To shopping arcade rentals 145,000– B.D.R(T) 0 19,250 To discotheque earnings 125,400
To Adventiserpent Exp. 1,254,000+ c/f next year. 202,500 1,051,500
To Repair & Maintanance 637,500+ Not Recover 28,900 666,400
To rent, Rates, Taxes 1,335,000
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To Laundry 122,500To miscellaneous Exp. 876,000To O/s debenture Int. 4,050,000To Provision for Tax 2,442,605To net profit 1,998,495
15,749,000 15,749,000
Statement showing Profit and Loss Appropriation Account of the year endedJune 30, 1982
Dr. Cr.Particulars Rs. Particulars Rs.To proposed equity By Bal b/d 6,225,000
share dividend 9,660,000 By P & L A/c 1,998,495By General reserve 146,505
9,660,000 9,660,000
Statement showing Balance Sheet as on June 30, 1982.Liabilities Rs. Rs. Assets Rs. Rs.Share capital Fixed assets 1207500 Equity share 120,750,000 Good will 75,000,000 of Rs. 100 each 75,000,000 Land & building 127,500,000750000 Preference -Dep. @ 2% 2,550,000 124,950,000
share of Rs. 100 each Furniture & Fittings 12,945,000Reserve & surplus - Dep. @ 5% 647,250 12,297,750
General reserve 30,000,000- Equity share 1,436,505 28,563,495dividend
Investment: 40,845,000Secured loan:300000 13.5% Current assets:Deb of Rs. 100 each 300,000,000 loan & advances
SUMMARYThis is the cas of Supreme Paper Company Ltd. Here list of balances is given, from that information following items should be prepared.
1. The adjustment entries.2. The Profit and loss account for the year ending December 31, 1982.3. The Profit and loss appropriation account.4. The Balance Sheet as on December 31, 1982.
P&L A/c for the year ended as on Dec. 31, 1982Particulars Amount (Rs.) Particulars Amount (Rs.)To Tax on dividend 31,400 By Dividend on Investment 1,00,000To Debenture interest 84000 By Net Loss 20,53,300
Land & Building 1,00,000Plant 6,00,000Furniture 32,000Vehicles 50,000 7,82,000
To Tax 6,34,900Total 21,53,300 Total 21,53,300
Profit & Loss Appropriation A/c for the year ended on Dec. 31, 1982Particulars Amount (Rs.) Particulars Amount (Rs.)To Debenture Redemption 4,00,000 By balance b/d 32,51,700
ReserveTo General Reserve 7,00,000 By balance c/f 9,46,140To provision for dividend 7,20,000To provision for taxation 3,24,540To net loss 20,53,300
Total 41,97,840 Total 41,97,840
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Balance sheet as on 31st December 1982Liabilities Amount Assets AmountOwners’ Equity: Fixed Assets:Share capital 60,00,000 Lease hold and
& Building 16,00,000Reserves and Surplus: - Depreciation 1,00,000 15,00,000General reserve 6,00,000
March 31 Depreciation A/C Dr. 1,00,000To land & building A/C 1,00,000
(Depreciation provided on theLand & Building at the end ofthe year)
March 31 Depreciation A/C Dr. 6,00,000To plant & machinery A/C 6,00,000
(Depreciation provided on theplant & Machinery at the endof the year)
Mach 31 Depreciation A/C Dr. 50,000To vehicle A/C 50,000
(Depreciation provided on thevehicle at the end of the year)
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March 31 P & L A/C Dr. 7,82,000To Depreciation A/C 7,82,000
(Transfer of Depreciation A/Cto the Profit & Loss A/C
March 31 P & L appropriation A/C Dr. 3,24,520To provision for taxation A/C 3,24,520
(Provision made for the Taxation)March 31 P & L appropriation A/C Dr. 4,00,000
To debenture redemption reserve A/C 4,00,000(Provision made for the DebentureRedemption Reserve)
March 31 P & L appropriation A/C Dr. 7,00,000To general reserve A/C 7,00,000
(Provision made for the General Reserve)March 31 P & L appropriation A/C Dr. 7,20,000
To provision for dividend A/C 7,20,000(Provision made for the proposed12 % Dividend)
March 31 Debenture interest A/C Dr. 1,76,000To debenture A/C 1,76,000
(Outstanding Debenture Interest)March 31 P & L A/C Dr. 1,76,000
To debenture interest A/C 1,76,000(Outstanding Debenture Interest)
TOTAL 56,44,520 56,44520
CASE 4.2Monarch Trading Corporation Ltd.
Trial Balance for the Period ending on March 31, 1982Particulars Debit CreditLeasehold Land 2,000,000Buildings 77,00,000Stock (31 March 1982) Merchandize 4,80,000Cost of Merchandise sold 10,120,000Carriage inward 95,000Creditors 4,520,000Wages 8,850,000Debtors 9,405,000Bank overdraft 3,000,000Interest on Bank overdraft 240,000Advertisement expenses 328,000Premium received (Apprentice Scheme) 50,000Office administration expenses 192,000
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Discount allowed and earned 147,000 101,000Capital 10,000,000Salaries 3,553,000Electricity charges 186,000Rent and rates 215,000Retained earnings (1st April 1981) 3,188,000Commission earned 75,000Investments & interests on investment 247,500Sales 2,750,000 30,038,000Stock of stationery as at 1st April 1981 45,000Furniture and fixtures 1,710,000Salesmen’s salary and commission 1,632,000Carriage outward 218,000Purchase on stationery 180,000Accumulated depreciation 1st April 1981
Buildings 1,750,000Furniture and Fittings 450,000
Provision for bad debts as on 1st Apr-81 176,500Advance Income tax during the year 3,550,000Total 53,596,000 53,596,000
To Land A/C 100,000Wages A/c Dr. 15,000Salaries A/c Dr. 27,500
To Outstanding wages A/c 15,000To Outstanding salaries A/c 27,500
Miscellaneous Expense A/c Dr. 160,000P & L A/c Dr. 40,000
To Advertisement Expense A/c 200,000Premium of Apprentice A/c Dr. 12,500
To Prepaid Apprentice A/c 12,500Commission accured A/c Dr. 12,500
To Commission A/c 12,500P & L A/c Dr. 195,000
To Stationery A/c 195,000P & L A/c Dr. 470,250
To Provision for Bad Debts A/c 4,70,250P & L A/c Dr. 5,56,000
To Accumulated A/c 5,56,000
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Adjusted Trial Balance for the Period ending on March 31, 1982Particulars Debit CreditLeasehold Land 19,00,000Buildings 7,70,000Stock (31 March 1982) Merchandize 4,80,000Cost of Merchandize sold 10,120,000Carriage inward 95,000Creditors 4,520,000Wages 8,850,000Debtors 9,405,000Bad Debt Provision 6,46,750Bank overdraft 3,000,000Interest on Bank overdraft 240,000Advertisement expenses 128,000Miscellanius Expense (Advertisement) 160,000Premium received (Apprentice Scheme) 37,500Office administration expenses 192,000Discount allowed and earned 147,000 101,000Capital 10,000,000Salaries 3,580,000Electricity charges 186,000Rent and rates 215,000Retained earnings 3,188,000Commission earned 875,000Outstanding commission 12,500Investments & interests 247,500Sales 2,750,000 30,038,000Stock of Stationery 30,000Furniture and fixtures 1,710,000Salesmens salary and commission 1,632,000Carriage outward 218,000Accumulated DepreciationBuildings 2,135,000Furniture and Fixture 6,210,00Advance Income tax during the year 1982 3,550,000Outstanding Wages and Salaries 42000P and L A/c 1,348,750Total 54664250 54664250
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Profit and Loss Account and Retained Earning Statement for the Year endedMarch 31, 1982
Particulars Amount Amount Particulars Amount AmountTo Cost of Marchandise 1,01,20,000 By Sales 3,00,38,000To Carriage Inward 95,000 Less: Sales 27,50,000 2,72,88,000
ReturnWages 88,50,000Add: Outstanding Wages 15,000 88,65,000To P and L A/c (Gross Profit) 82,08,000
Total 2,72,88,000 Total 2,72,88,000
To Land A/c 1,00,000 By Trading A/c 82,08,000To Stationary A/c 1,95,000 By Premium of 12,500
ApprenticeTo Bad Debt Reserve 4,70,250To Interest on BOD 2,40,000 By Discount 1,01,000
EarnedTo Advertisement Expense 1,28,000 By Commission 75,000
Miscellaneous Expenses:Advertisement Expenses 2,00,000Less: Written Off 40,000 1,60,000
Total 2,43,00,750 Total 2,43,00,750
Stationery AccountDr CrParticulars Amount Particulars AmountTo Balance B/d 45,000 By P & L A/c 195,000To Bank A/c 180,000 By Closing Stock 30,000Total 225,000 Total 225,000
CASE 5.1Oliver Optics Company
Trading A/c for year ending 31 DecemberParticulars Amount Amount Particulars Amount AmountTo purchase 15,130 By Sales 35,210To gross profit 23,280 By closing stock 3,200
38,410 38,410
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P&L A/c for year ending 31 DecemberExpenditure Amt. ($) Amt.($) Particulars Amt.($) Amt.($)
To Insurance 50 By Gross profit 23,280To Interest on uncle’s loan 60To Office & admin. Exp.
Salary to Miss Schultz 800Salary to Oliver 1,200 2,000
To Selling Exp. (Shop salaries) 11,900 (3,500 + 3,200 + 4,800 + 400)To Rent 2,000To Office supply used 200To Electricity 430To Travel and Advertising Exp. 2,670To Bad debts 310To B.D.R. 103To Depreciation on equipment 800To Prov. for loss by rejection 208To Net profit 2,429
23,280 23,280
Balance Sheet As On 31 DecemberLiabilities Amount Amount Assets Amount Amount
+ Net profit 2,429 7,429 Less Dep. (W.N-5) 800 4,200Provision for loss 208 Debtor’s 10,250 by rejectionUncle’s Loan 2,000 Less B.D.R. 103 10,147Creditors for 3,000 Insurance paid in advance 150 Equip. (W.N-4)Creditors 5,130 Interest paid in advance 20
Stock of office supply 50Closing stock 3,200
17,767 17,767
WORKING NOTE NO. 1 (W.N.-1)Particulars Amount Particulars Amount
To Interest on uncle’s loan 80 By Capital 5,000To Interest on equipments 120 By uncle’s loan 2,000To Installment and down payment 2,000 By Debtor’s 24,650To Salaries paid 13,900To rent paid 2,000To Suppliers (Creditors) 10,000To Office supply 250To Electricity and etc. 430To Travel and Advertisement Exp. 2,670To Insurance paid 200
31,650 31,650
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Working Note No. 2 (W.N.-2)Debtor’s A/c
Particulars Amount ($) Particulars Amount ($)
To Sales 35,210 By Cash (Cash a/c) 24,650By Bad Debts 310By Balance (Cash sales) 10,250
ted with the Munici-pal corporation, Gov-ernment, etc. against building
7 Stock of stores and 25,63,410 B/Ssupplies-Dec. 31, 1982 1,02,26,770 B/S
9 Value of uncompletedcontracts (based onarchitect certificateand valued at contractprice for work done
13 Interest accured on 22,510 B/S
Total 7,52,98,420 7,52,98,420
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Profit and Loss Account for the year 31st Dec. 1982Particulars Amount Particulars Amount
2 Audit fees 5,500 16 Rental received from 47,510employees providedwith quarters
4 Entertainment expenses 84,720 32 Interest and dividends 88,480received on investment
6 Remuneration paid to 3,52,000 * Contract account profitmanaging director
10 Loss on sales of assets 2,15012 Depreciation (for the 11,12,280 Net Loss 2,05,83,115
year ended Dec31, 1982)
14 Interest paid on loans 3,68,300during the year
18 Miscellaneous 2,75,370establishment expense
20 Traveling expense 1,82,25022 Insurance expenses for 1,15,420
machinery at work site24 Salaries, wages, bonus, 38,91,640
etc26 Repairs to machinery 3,74,860
and building28 Power and fuel 11,22,76030 Freight and transpora- 31,88,320
tion expenses34 Stores and materials 1,05,69,720
consumedLess: Adj. 2 99,66,220less: 6,03,500Adj. 2: Loss on transit 2,41,400Adj. 3: Loss on invest 1,75,000ments:Adj. 4: Provision for bad 856debts
Total 2,14,59,046 Total 2,14,59,046
Profit and Loss Appropriation A/cParticulars Amount Particulars AmountLoss b/d 2,05,83,115 Retained earning (Jan. 1, 1982) 43,57,430Proposed dividend 2,77,000 General reserve 2,77,000
Balance c/d 1,62,25,685
Total 2,08,60,115 Total 2,08,60,115
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Balance Sheet as on 31st Dec. 1982Liabilities Amount Assets Amount Amount
Share Capital : 1 Paid up capital 2770000 31 Fixed Assets 14209400
Reserve and Surplus: 8 Less: Accumulated 8061490 6147910General reserve InvestmentsAdj.5: Transfer to P&L 4379440 29 Investments in shares 988170Approx. A/c debenturesSecured Loan Adj.3: Less loss 17500 813170
with the Municipalcorporation, Govern-ment, etc. againstbuilding contracts
Total 62003569 Total 62003569
Adjustment
Adj 1: Contingent liability of Rs. 380000
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Adj 2: Loss in transit included in cost of material consumed603500 60% B/S 362100
40% P/L 241400Adj 3: 250000 Market value decreased due to liquidation 30 paise realizable
i.e. 75000therefore loss on investment 175000
Adj 4: Provision of bad debts on Government contract 2%Assuming Debtor to be of Government contract
Adj 5: Last year unpaid dividend decided to be paidNo effect
Adj 6: Future contract of next accounting year estimatedNo entries
Working note:
Contract profit (profit margin) greater than 50% of contract
Profit margin is to be taken as 2/3rd of total contract profitIf less than 50% 1/3rd of total contract profit is realized.Here, 11971450 / 22198220 = 53%
Therefore, 5% of 22198220 = 1109911 * 2/3 = 749441 profit margin for current year.
CASE No. 5.3Consumer Product International Ltd.
Manufacturing & Trading A/c for the year ended April 30, 1982Dr. Cr.
Particulars Amount Particulars AmountTo, Opening Stock By Closing Stock:
Raw Material 75544017 WIP-Fin. Goods. 63331296WIP- Fin. Goods. 61855426 Raw Material 52830817
Raw Material Purchase 427169870Processing Charge 1107096Power & Fuel 1107096Freight & Forwarding Ch. 16032535 Cost of Goods 476575039
592731752 592737152Cost of Goods 476575039 Sales 885342435Purchase of finished 2666275 Goods Destroyed by fire 55862 GoodsGross Profit 406156983
885398297 885398297
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Profit & Loss A/c for the year ended April 30, 1982.Dr. Cr.
Particulars Amount Amount Particulars Amount AmountTo, By,Employee R & B. 37213329 Gross Profit 406156983Con. of Stores 1652486 Duty draw back 216567Rent, Rates, Taxes 5732667 Other income 3963465 - Prepaid 19662 5713005Insurance 1407567Advt. 31749447 - 50 % 1592737 30156710Repair & Maint. 1805062+ Un Recorded 29650 1834712Commission 103130Interest 773772Mis. Exp. 16403391Depri. 2005610+ Extra 221175 2226785Excise Duty 135740481Tax. 129844757Bad Debt. 265382Salaries 2305680Loss by Fire 10512Net Profit? 44685316
410337015 410337015
Profit & Loss A/c for the year ended April 30, 1982. Dr. Cr.
+ I 3062203 + Depri. (wrongly) 64363 1846167+ II 7713328 53804243 Auto & truck 985282
P & L A/C 5122535 - Depri. 64363 920919Secured Loan: Investment:Unsecured Loan: C.A. & Loan, Adv.Loan from Foreign 29770426 Current Asset:
Store and Spare 1818373Liability: WIP 743916Acceptance 45950454 Finished goods 62135880Creditor 7156668 Debtor 50731705Unclaimed Div. 408510 - Bad Debt. 265382 50466323Adv. From Cust. 614318 Cash in hand 23712Un paid Salary 2305680 Bank Balance 39848499Proposed Div. 1965000 Insu. Claim 45350Un Recorded Main 29650 Prepaid Rent 19662
Consolidated Steels Limited manufactures iron and steel products, steel castings (including alloy steel castings) and various types of Industrial Machinery; e.g. Ball Mills, E.O.T. Cranes, Copper converters, etc.
From the following trial balance and adjustments, prepare the Profit and Loss account, the Profit and Loss Appropriation account and the Balance sheet.
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Trial Balance as on December 31, 1982Account Heads Dr. (Rs.) Cr. (Rs.)
Share Capital 60,558,000Reserves and surplus 21,955,000Deferred Payment Liability 113,637,000Unsecured Loans 35,949,000Land and Roads 3,360,000Buildings 34,243,500Plant and Machinery 117,989,250Furniture and Fixtures 7,305,750Vehicles 1,455,000Accumulated Depreciation
- On Building 14,362,500- On Plant and Machinery 76,370,250- On Furniture and Fixtures 2,381,250- On Vehicles 905,250
Capital Work-in-Progress 2,289,000Investments 4,119,750Loose Tools (Stock on 31.12.1982) 507,000Stores (Stock on 31.12.1982) 53,382,000Raw Materials (Stock on 31.12.1982) 45,777,750Debtors 53,014,500Cash and Bank Balances 3,388,500Loans and Advances 41,090,250Creditors 57,501,000Advance received against orders 24,370,500Unclaimed Dividends 71,250Sales 497,322,750Cash subsidy 5,730,000Raw Materials Consumed 158,803,500Interest 10,689,750Depreciation 9,591,750Stores and Spares Consumed 126,394,500Power and Fuel 42,966,000Subcontracting 31,426,500Rent, Rates and Taxes 1,378,500Insurance 988,500Advertisements 446,250Repairs and Maintenance 1,895,250Freight and Carriage 3,060,000Bad debts and Advances Written off 744,000Miscellaneous Expenses 10,664,250Excise Duty 6,731,250Salaries, Wages, etc. 67,650,000Staff Welfare 5,049,000
911,474,250 911,474,250
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Additional Information:(1) The Board of Directors resolved that Rs. 528,000 included in the interest, relating to buying
of an imported plant, be capitalized(2) A provision of doubtful debts amounting to Rs. 468,000 to be made.(3) The income-tax liability for the current year was Rs. 14,000.(4) Company XYZ Limited, to which the company has given a loan of Rs. 326,400 went into
liquidation. The liquidator informed that all the unsecured creditors would get a 20% dividend.
(5) Slow moving stock of the following items had to be written off:Raw Materials – Rs. 430,200Loose Tools – Rs. 89,500Stores – Rs. 689,400
(6) A pilferage of Rs. 5,500 was reported from the cash box. This had been included in the cash balance in the Trial balance.
(7) Due to shift in the export policy, the company was to receive an additional cash subsidy of Rs. 732,000
(8) Interest accrued and due on the loans taken – Rs. 759,650(9) Dividend (proposed) of Rs. 60,55,550 is to be provided.
(10) Closing stock (as on 31.12.82) of the Work-in-progress and Finished goods was:Work-in-progress Rs. 57,836,250.Finished goods Rs. 21,807,000.
Consolidated Steels Ltd.P&L Account for the year ending on 31st Dec. 1982
Answer 4:Mr John would prefer Method A, as profitibility of Method A is higher than
profitibility of Method B.
CASE NO. 6.2GOLDEN GATE HOLIDAY RESORT LTD.
Ans 1.1. Copntribution from members (fees) can be capitalised. And revenue generating
from that would be reserve for the period.2. Identification of Real value of contribution for 99 years and then amortisation of
that fees.Ans 2.
Effect of on Accounts:1.* Contribution on liability side.* Only return will be shown in the P&L Account.2.* Revenue Income (Amrtised value) = Proporturate Revenue Regonition
Real value of contribution/99 years.* If instalment system is followed then proporturate division of EMI will be treated
as revenue and will be shown in P&L credit side.Ans 3.
Second option is preferable because it reflects the revenue of primary business.
CASE NO. 7.3CALCUTTA MOTORS PVT. LTD.
1. If there is no estimate for future warranty of repair cost, then current year’s financial statement will show higher profit and results into outflow of current tax and return to stake holders.
2. Mr Bannarji should make estimate for outstanding warranty expenditure on the basis of some reasonable percentage on sale made.
3. Adding 2% warranty on expenditure (As per Income Tax Act in India) in Profit & Loss account and then profit should be found. The second effect will be on the provision side of Balance Sheet.
CASE NO. 7.4VAT IN DAT
As per AS 2, Inventory should be valued net of MODVAT e.g.Purchase Price × × × ×MODVAT × × ×
Net value of Inventory × × × × MODVAT has been replaced by SENVAT in the year 2004.
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CASE NO. 8.1CONTROL DATA CORPORATION
Solution 1As manufacturing cost of product is 50% of the selling piece of the listed selling price, it can be possible to spend on maintenance of computer to increase the life of the product. If possible, life of computer can be increased by 2 more years. Given figures of cost of specification of computer it is always possible to increase the life of product.Solution 2Yes, CDC should change the department policy. Simple WDV would be more preferable for six years. Depreciation rate will end up around 16.677, which will give stability in cost and profit. As depending on nature of business, depreciation shares 317 of the total cost which is considerable. Written Down Value (WDV) method will give constitency in cost structure in long run..
CASE No. 8.2National Pharma Ltd
Solution 1. Managerial factors :*To sustain goodwill of the organisation or net profit is negative with present policy.*To identify appropriate policy for depreciation that suits to the company.*Present performance of the company will not show sound and rosy picture of the
organisation so far reporting to shareholders and other external associates some adjustments in financial statement is required.
*To sustain dividend policy. For dividend policy decision led to reconsider the policy.Operational Factors :
*Profit will turn from negative to positive. It will save the doubts of operational efficiency of business.
*To identify appropriate policy for depreciation, in terms of accounting of usage of fund since the doubts are raised by the secretary which will demand another thought about companies policy.
*Reduction of Net profit ratio from 4% (app.) to – 127. (app.) the strong factor to think over operational issues. Depreciation policy is one of them.Financial
*To have an ideal Dividend Policy decision for the current year. And use this experience in future to divide such situation.
*Interest exp. is increased by more than five times. It will give considerable effect on financial statement as interest are paid to long term loans which are taken for long-term assets in general.
*To get an advantage of current amendment of financial policies of government for example revised depreciation rates.
Solution 2Suggested changes in accounting policy for depreciation is valid for the current year. Because profit with suggested policy is getting increased by Rs. 54,89,000. So far the current year, it is better to change the policy. Another reason, This action will reduce
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current assets (by reducing inventory) of increase in Fixed Assets which is positive move for the better financial reporting.Solution 3No. change in the depreciation policy is not the permanent solution. This proposed change will differentiate the financial statement from the financial statement reported policy then their would be serious question mark for the past performance. Because it can be taken as c past attempt to create the secrete reserve.Solution 4Impect of taxation wound be as per the current rate. This action will increase tax.
CASE NO. 9.3RAINBOW PAINTS LTD.
No Accounting standard for R&D.(A) Amalgumation of Nature of Purchase.
Balance SheetCapital-Liabilities AssetsShare capital FA (3000 + 200) 3200
(B) The company can show the same as the Amalgamation of Nature of merger in which all Assets and Liabilities will merge with acquiring company and Net impact of change will be given to reserve and surplus. Investment (60) will be eliminated from investments.