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Financial Accounting

 
Time: 3 Hours March – 2005 Marks: 100
N. B. :
  • (1) Question No. one is compulsory.
    (2) Solve any five questions out of Q. Nos. 2 to 9.
    (3) All working Notes should from part of answer.
    (4) Figures to the right indicate full marks assigned to question.
    (5) Specify assumptions, if any, while solving the question.
 
Q.1. Following balances are extracted from the books of SURE SUCCESS CO. LTD. as on 31-12-2004. 20
 
  Rs.   Rs. Rs.
Freehold Factory Premises 6,00,000 2,00,000 Equity Shares of Rs. 10 each   20,00,000
Leasehold Office Premises 5,00,000 5,000 6% Debentures of Rs. 100 each   5,00,000
Bank Balance 60,500 General Reserves   75,000
Vehicles 3,15,000 Sinking Fund for Leasehold Premises   15,000
Plant & machinery 8,30,000 Profit & loss Account    
Sundry Debtors 2,40,000          Balance B/d 47,450  
Computer 30,000       + Net Profit after tax 2,90,000  
Goodwill 2,00,000   3,37,450  
Stock 1,30,000       - Debenture Interest 30,000 3,07,450
Cash in Hand 1,950 Provision for tax [Accounting Year 2003]   1,50,000
Advance Income Tax :   Provision for tax [Accounting Year 2004]   1,80,000
- [Accounting Year 2003] 1,45,000      
- [Accounting Year 2004] 1,75,000      
  32,27,450     32,27,450

ADJUSTMENTS :-

(1) During the current year Income Tax assessment for the accounting year 2003 is completed with a gross demand of Rs. 1,35,000 but no effect of the same is given in the accounts of the current year.

(2) The Board of Directors decided to provide :-

(i) 20% Bonus on the year’s salary of Rs. 1,00,000

(ii) 10% Sinking fund on leasehold premises

(iii) Rs. 5,000 as Director’s fees

(iv) 5% Dividend for the year to the shareholders

(v) Transfer Rs. 50,000 to General Reserves.

Considering the above Trial Balance and the adjustments and assuming that there will be no change in the provision for tax of the accounting year 2004 on account of changes if any, prepare Profit and Loss Account for the year ended 31-12-2004 and the Balance Sheet as on that date in a vertical form keeping in mind the prescribed formats and applicable accounting standards. Ignore previous year’s figures.

 
Q. 2. The following Trial Balance was extracted from the books of M/s. Santosh Pvt. Ltd. which had taken over business of Miss Sandhya on 1st April 2003. The company was incorporated on 1st July 2003. However, no effect of conversion was given in the books which continued thereafter :- 16
 
  Rs.   Rs.
Fixed  Assets 1,10,000 Sales 12,37,500
Current Assets [Except closing stock] 4,43,200 Capital of Miss Sandhya 5,50,000
Stock [1-4-2003] 1,10,000 Current Liabilities 2,23,750
Purchases 7,70,000    
Carriage outwards 82,500    
Office Salaries 2,20,000    
Rent 36,300    
Director’s remuneration 33,000    
Advertisement expenses 1,65,000    
Travelling expenses 41,250    
  20,11,250   20,11,250

Additional Information :

(1) Stock on 31-03-2004 was valued at Rs. 4,67,500.

(2) Purchase consideration of Rs. 6,87,500 to be paid by issue of 55,000 Equity Shares of Rs. 10 each and 13,750 – 5% Preference shares of Rs. 10 each.

(3) Gross profit percentage is fixed.

(4) Turnover is doubled in April, November and December as compared to other months.

(5) Advertisement expenses to be apportioned in Pre & Post incorporation period in the ratio of 3:2.

(6) Provide depreciation @ 10% p.a. on fixed assets.

(7) Rent on building was Rs. 2,750 p.m. upto September 2003 and thereafter it was increased by Rs. 550 pm.

(8) Allocate expenses in an appropriate manner.

Prepare Trading and Profit & Loss Account for the year ended 31-03-2004 appropriating expenses and incomes between Pre and Post Incorporation period and balance – sheet as on that date.

 
Q. 3.

Enron Ltd. gave notice of its intention to redeem its outstanding Rs. 6,00,000 - 8% debentures at Rs. 103 and offered the holders the following options :-

(a) 10% Preference Shares of Rs. 20 each at Rs. 25

(b) 9% Debentures at Rs. 96

(c) To have holdings redeemed for cash.

(i) The holders of Rs. 1,80,000 debentures accepted proposal (a)

(ii) The holders of Rs. 2,40,000 debentures accepted proposal (b)

(iii) The remaining debenture holders accepted proposal (c)

Pass necessary journal entries in the books of Enron Ltd.

16
  OR  
Q. 4. Following is the Balance sheet of M/s. Siddhant Ltd. as on 31-03-2004. 16
 
Liabilities Rs. Assets Rs.
Equity Shares of Rs. 10 each 10,00,000 Fixed Assets 21,00,000
12% Cumulative Preference Shares of Rs. 100 each 7,00,000 Stock 20,00,000
10% Debentures 3,00,000 Sundry Debtors 15,00,000
Sundry Creditors 36,00,000 Bank 1,10,000
Provision for Tax 5,00,000 Preliminary Expenses 40,000
    Profit & Loss Account 3,50,000
  61,00,000   61,00,000
 
 

Note : Preference dividend for 3 years was in arrears.

Following scheme of reconstruction was approved :-

1. Write off Fixed Assets by 20%, Sundry Debtors by 15% and reduce the value of stock to 55% of its book-value.

2. Preference shareholders to Forego arrears of preference dividend.

3. Directors to give temporary loan of Rs. 5,00,000 to Company.

4. The Company settled tax liability to the extent of Rs. 5,40,000 and to meet the expenses of reconstruction amounted to Rs. 10,000.

5. Sundry Creditors to give a remission of 20% of their claims and a company to allot 11% Preference shares of Rs.100 each fully paid up in settlement of the balance amount.

6. 10% debentures to be converted into 13% Debentures of Rs. 1,60,000 in full settlement of their claim.

7. Equity shares to be reduced to Rs. 2 each fully paid up and 12% cumulative Preference shares to be reduced to Rs. 1,00,000 cumulative Preference shares of Rs. 2 each fully paid up.

8. Write off debit balance in Profit & Loss Account and Preliminary expenses.

Draft journal entries & prepare Capital Reduction Account & Balance Sheet after reconstruction.

 
     
Q. 5. The following are the Balance Sheets as on 31-12-2004 of Nisha Ltd & Usha Ltd. 16
 
Liabilities Nisha Ltd
Rs.
Usha Ltd
Rs.
Assets Nisha Ltd
Rs.
Usha Ltd
Rs.
Equity Share Capital  [Rs. 100 per share] 2,00,000 1,20,000 Land & Building 70,000 --
15% Debentures 40,000 -- Plant & Machinery 2,20,000 1,00,000
Reserve Fund 76,000 5, 000 Stock 35,000 18,000
Employee’s Provident fund 6,000 -- Debtors 25,000 16,000
Sundry Creditors 30,000 16,000 Bank 6,000 2,000
Profit & Loss A/c 4,000 -- MISC. Exp. not W/o    
      Advertisement Exp. -- 5,000
 Total 3,56,000 1,41,000  Total 3,56,000 1,41,000
 
 

The two companies agree to amalgamate and form a new company M/s. Ujala Ltd. which takes over the assets and liabilities of both the companies.

The authorized capital of Ujala Ltd. is Rs. 20,00,000 consisting of 2,00,000 Equity Shares of Rs. 10 each.

The assets of Nisha Ltd. are taken over at 90% of the book value with the exception of land and building which are accepted at book value.

Both the companies are to receive 10% of the net valuation of their respective business as Goodwill.

The purchase consideration is to be satisfied by Ujala Ltd. in its fully paid shares at 10% premium. In return of Debentures of Nisha Ltd., Debentures of the same amount and denomination are to be issued by Ujala Ltd.

Close the books of Nishs Ltd. and Ujala Ltd. and Show the Opening Balance Sheet of Ujala Ltd. under Purchase Method.

 
Q. 6.

On 1st January 2004, 1000 – 12% Debentures of Rs. 100 each of Shiva Ltd. were held as investment by Mr. Dharmesh at a cost of Rs.91,000. Interest is payable on 31st December.

On 1st April 2004, Rs. 20,000 of such debentures were purchased by Dharmesh @ Rs. 98 cum-interest.

On 1st September 2004, Rs. 30,000 of such debentures were sold at Rs. 96 ex – interest.

On 1st December 2004, Rs. 50,000 of such debentures were sold at Rs. 99 cum-interest.

Interest is received on due date.

Prepare Investment account for 12% debentures of Shiva Ltd. In the books of Mr. Dharmesh valuing closing stock as on 31st December 2004 applying AS – 13. The debentures were quoted at Rs. 93 on 31st December 2004.

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Q. 7. The Balance sheet of Gayatri Ltd. as on 31st December, 2004 was as follows :- 16
 
Liabilities Rs. Assets Rs.
SHARE CAPITAL 90,000 Equity Shares of Rs. 10 each fully paid 4,000-10% Preference shares of Rs. 100 each fully paid 9,00,000 4,00,000 Fixed Assets Goodwill Land & Building Plant & machinery 30,000 3,00,000 6,50,000
RESERVES & SURPLUS    Capital Reserves    General Reserves 1,50,000 60,000 INVESTMENTS 6% Govt. Securities at Cost [Face value Rs. 80,000] 90,000
SECURED LOAN 8% Debentures 2,40,000 CURRENT ASSETS Stock Debtors Cash & Bank 5,00,000 4,00,000 60,000
CURRENT LIABILITES & PROVISIONS Trade Creditors Provision for Tax 2,50,000 30,000    
  20,30,000   20,30,000
 
 

The assets are revalued as follows :

Land and Building Rs. 2,00,000

Plant & Machinery Rs. 7,50,000

The normal rate of return on capital employed for the valuation of goodwill is 10%.

Goodwill should be valued on the basis of 3 years purchase of super-profits of the company. The average annual profit of the company is Rs. 1,80,000.

40% of the money invested in Building is treated as non-trading assets because Rent of Rs. 15,000 is collected annually from the building.

You are asked to compute the intrinsic value of an Equity share of the company. Ignore Taxation.

 
Q. 8.

M/s. Chetan International, an Indian exporter, sells goods to Rex and Co. of New York invoicing $ 1,45,000 on 31st December, 2003. The exchange rate of the time of invoice was Rs. 47 for one $. M/s. Chetan International received remittance of $ 1,00,000 on 1st March 2004. The rate of exchange on 1st March 2004 was Rs. 48. The local bank deducted their charges of Rs. 1,000 while crediting the amount in the account of M/s. Chetan International. The balance amount was paid by Rex & Co. on 10th April 2004 on which date the rate of exchange was Rs. 46 for one $. The local bank charges debited by bank Rs. 200.

M/s. Chetan International follows financial year as accounting year. The exchange rate on 31st March 2004 was 1$ = Rs. 46.50.

Pass journal entries to record above transactions in the books of M/s. Chetan International and also prepare Rex & Co. Account.

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Q. 9.

Write Short notes on any four of the following :-

1) Buy Back of shares
2) Contingent liabilities
3) Internal Reconstruction Vs. External Reconstruction.
4) Super Profit method of Goodwill valuation
5) Importance of accounting standards
6) Basis of allocation of expenses in pro and post incorporation period.

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