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Financial Accounting
Time: 3 hours APRIL 1999 Marks: 100

N.B.  (1) Question No. 1 is compulsory.

          (2) Attempt any five question from Question Nos. 2 to 9.

          (3) All working notes should form a part of your answer.

1.    1.From the following balances and information extracted from the books of E. Com. Ltd. You are required to prepare Final Accounts for the year ending 31-3-1999 complying with the disclosure requirements of Schedule VI of the Companies Act, 1956.

 A.   Balances

 

                Rs.

1.Share Capital:

 

        3,00,000 Equity Shares (fully paid)

        30,00,000

        800 8% Preference Shares (fully paid)

        80,000

        2000 10% Preference Share (fully paid)

        2,00,000

2.Share Premium A/c.

        50,000

3.Preference Share Redemption A/c

        96,000

4.Gross Block of Fixed Assets @ Cost Less Depreciation

        19,10,000

5.Net Profit for the year (before tax)

        8142,000

6.Debtors (unsecured, considered Good)

        2,60,200

7.Creditors

        50,000

8.Surplus BAF (1-4-1998)

        20,000

9.Interim Dividend Paid

        1,50,000

10.Unpaid Dividend

        1,800

11.Current Assets

        11,50,000

12.Cash and Bank Balances

        7,49,600

13.Sinking Fund Investments A/c

        3,90,000

14.Sinking Fund for Redemption of Debentures A/c (1-4-1998)

        4,50,000

15.Outstainding Expenses

        12,000

16.Income Tax paid for the year ended 31-3-1997

2,00,000

17.Provision for Taxation for the year ended 31-3-1997

        1,40,000

18.Advance Income Tax paid for the year ended 31-1-1999

        4,40,000

19.16% 5,000 Debentures redeemable at par on 31-3-1999

5,00,000

B.            B.              Additional Information:

1.  Net profit is arrived at after charging Rs.36,000 paid to managing director for his remuneration who is entitled to receive Rs.43,900 as per agreement.

2.  8% Preference Shares were redeemed on 31-3-1999 but no entries were passed to record the effect in the book except for the payment debited to Preference Share Redemption Account.

3.  Income Tax demanded for 31-3-1997 at Rs.2,50,000 however, appeals is filed against Rs.50,000 disputed Amount.

4.  Investments are in 9% securities of the nominal value of Rs.4,00,000 having market value of  Rs4,50,000.

5.  Income Tax for the current year is to be provided @ 35% on the years books profit.

6.  A scheme of reorganization is approved. by Court on 1-4-1998 pending implementation requires :-

(a) Reduction of equity Share Capital by-Rs.3 per share without changing nominal value.

(b) Creditors to be settled by issuing them 18% Debentures Redeemable after 5 years to the extent of 50% of their claim and to issue Equity Shares of Rs.10/ - each for 30% of their claim.

(c) Adjust the values of Assets included in Gross Block as under:-

            Assets

Book Value

        Adjusted Value

 

            Rs.

        Rs.

Goodwill

        10,00,000

        5,00,000

Plant & Machinery

        9,00,000

        5,00,000

Patents & Trade Marks

             10,000

To be written off to the extent possible.

7. Rs.50,000 is appropriated towards redemption of Debenture at the end of every year.

8.Provide for Dividend on Preference Shares.

9.All Investments were sold and realised Rs.25,000 for redemption of 16% debentures.

10.Give previous years figures wherever available.

2.     The following is the Balance Sheet of Honeymoon Ltd. as at 31st March 1999.

Liabilities

Rs.

Assets

Rs.

Share Capital:

 

Fixed Assets:

 

Issued, Paid up:

 

Goodwill (Net)

70,000

1000 10% Cumulative Preference Shares of Rs.100/- each

1,00,000

Land / Building (at Cost)

90,000

20,000 Equity Shares of Rs.10/- each

2,00,000

Machinery

2,50,000

Reserve / Surplus:

 

Investments (at Cost) (Market Price Rs.50,000)

20,000

Profit / Loss Account

1,00,000

Current Assets:

 

Current Liabilities:

 

Stock

1,00,000

Bank Overdraft

2,00,000

Debtors

70,000

Creditors

30,000

Bank Balance

30,000

Total

6,30,000

Total

6,30,000

You are furnished the following information :-

(i) Net Profits (after writing off goodwill each year by Rs.10,000 were as follows

1996 – 97                                          Rs.28,000

1997 – 98                                          Rs.65,000

1998 - 99 Rs.1,10,000

(ii) Preference Dividend has been paid every year and on Equity Shares it was paid @ 10% in 1997-98 only. Equity Share Capital has not increased since the last five years. Dividend has been deducted in arriving at the profits figures given above.

(iii) Land and Building is valued at Rs.1,00,000 and Machinery at Rs.5,00,000. Annual depreciation on these assets will increase by Rs.53,000 in future years.

(iv) Worthless stocks carried forward. Since 1995-96 are of the value of Rs.90 000. These stocks have a realisable value, of Rs.10,000 only.

  Calculate the value of each Equity Share in the following cases (Give workings).

     (a) On Intrinsic Value Basis, excluding goodwill.

     (b) Capitalised Value of maintainable profits which is agreed to be the weighted average profits of the last three years, capitalization rate being taken at 8 1/3 %.

3.       Tanu and Megy carried on business in partnership with Profit Sharing of 2:1.  They decided to covert their partnership into a limited

company from 1st October, 1998 for a total consideration of Rs. 5,00,000 to be allotted in Equity shares of Rs.10/- each.  As per their understanding the profit up to 30th September, 1998 to belong to firm and thereafter to company. Accordingly Tame Ltd. was incorporated on 1st November, 1998 with authorised capital being Rs.25,00,000 in the form of Equity Shares of Rs.10 each.  Continuing the same book the trial balance as on 31-12 1998 who extracted as under

   Dr                                                   

          Rs

Cr

Rs

Drawings:

 

Capital:

 

Tanu                     60,000

 

  Tanu                                                              

3,25,000

Megy             40,000

        100000

  Megy

      2,25,000

Debtors           

2,50,000

 Creditors

 2,00,000

Stocks (31-12-1997)

        1,60,000

 Sales  

14,00,000

Expenses         

           90,000

   

Purchases

    10,00,000

   

Bank

          50,000

   

Shares Subscribed in Tame Ltd.:

Tanu

Megy.

  50,000              

50,000

   
   
   

Advance Against Purchases

  3,00,000

   

Formation of Company Expenses

25,000

   

Fixed Assets

   75,000

   
 

21,50,000

 

    21,50,000

Additional Information:

(1) Sales upto30th September 1998 were Rs.1,00,000 p.m., in October and November, 1998 were Rs.1,50,000 p.m in December, 1998 were Rs.2,00,000.  The gross margin on sale accordingly was 20% till 30th September, 18% in October and November, and 16% in December, 1998.

(2) Of expenses Rs.48,000 are based on time and Rs.42,000 are based on turn over.

(3) Provide Depreciation @ 20% in Fixed Assets.

(4) Audit Fee Rs.6,000 to be provided for full year.

(5) No entries are passed to record:-

     (a) Discharge of Purchase Consideration

     (b) The year end stock

(6) Provision for-taxation is estimated at Rs.3l,000 and is to be allocated in the ratio of Net Profits.

(7) Formation of Company Expenses -are to be written off over a period of 5 years from the date of conversion.

(8) Amount subscribed by partners towards Share Subscription as per Memorandum and Articles of Association has been kept in Fixed Deposit with State Bank of India in the name of the company . The Fixed Deposit represents 10% Margin Money against guarantee given by State Bank on behalf of the company.

(9) Proposed Dividend is Rs.10,000.

Prepare Final Account of the company for the year ended 31-12-1998.

4          Firestone Ltd. has a shop and a godown.  Goods are transferred from, the godown to the shop every day in the morning.  The inventory in the godown is insured for Rs.25,00000 while the inventory in the shop is insured for Rs.5,00,000. On 3lst December, 1998 the inventory in the down at cost- was Rs.24,00,000 while the inventory in the shop, at cost was worth Rs.6,00,000.

The following transactions took place during the periods mentioned:-

 

January1999

Rs

February 1999     Rs

March 1999

               Rs

April 1 to 15, 1999 Rs

Purchases

15,00,000

18,00,000

14,00,000

5,00,000

Returns to Suppliers

2,00,000

     

Transfer to Shop

17,00,000

20,00,000

25,00,0,00

7,00,000

Return from Shop

75,000

1,00,000

25,000

50,000

Sales in Shop at Gross Profit of 12%

8,00,000

9,00,000

10,00,000

4,00,000

Shop at Gross Profit of 8%

10,00,000

12,00,000

14,00,000

4,00,000

Fire occurred in the Godown at midnight of 15thApril @ 16th April, 1999 and the entire stock Goods costing Rs.10,000 could be salvaged intact and the balance goods in on. Expenses of fire fighting operations/salvage amounted to Rs.5,000. The good in spoilt condition could be sold at 30% of cost price. Lodge the claim with the insurance company.

5.     The Balance Sheet of Baroda Chemicals Ltd. as at 31st October, 1998 was as under:

Liabilities       

  RS.

         Assets

Rs.

Share Capital:

 

Fixed Assets:

 

1,50,000 Equity Shares of Rs.10/-each fully paid  

15,00,000

Gross Block              20,00,000

Less: Depreciation   15,00,000

5,00,000

5,000 11% Preference Share of Rs.10/- each fully paid                

5,00,000

 

Secured Loans:

11% Debentures    5,00,000

Interest due on

Debentures             1,10,000

6,10,000

Current Assets:

 

Stock and Stores

6,00,000

Receivables

14,50,000

 Other Current Assets

2,00,000

Bank Overdraft

6,30,000

Profit and Loss A/c.:

16,40,000

Unsecured Loans   5,00,000

     

Add : Interest Due 1,50,000

6,50,000

   

Current Liabilities

5,00,000

   

                              Total:

43,90,000

                                        Total:

43,90,000

A scheme of reconstruction has been agreed amongst the shareholders and the creditors as Follows:-

(a)   Interest due on unsecured loans is waived.

(b)   50% Interest due on debentures is waived.

(c)     11% Preference Shareholders rights are to be reduced to 50% and then converted into 15% Debentures of Rs.100 each.

(d)   Current liabilities would be reduced by Rs.50,000.

(e)     The Bank agreed to the arrangement and to increase cash credit or overdraft limits by Rs.1,00,000 upon the shareholder's agreeing to bring in a like amount by way of new equity.

(f)      Besides additional subscription as above, the equity shareholders agree to convert the existing equity shares into new ten rupees shares of total value of Rs.5,00,000.

(g)     The debit balance in Profit and Loss A/c. is to be written off totally, Rs.2,60,000 should be provided for doubtful debts and the value of Fixed Assets be increased by Rs.4,00,000.

You are required to prepare

(a)   Capital Reduction Account

(b)   Balance Sheet after reconstruction.

6.        The following is the Balance Sheet of Set-up Ltd. as on 31st March, 1998. 

Liabilities

        Rs.

Assets                                                          

Rs.

5,000 Equity Shares of Rs.100/- each

  5,00,000

Goodwill

1,25,000

Reserve Fund

1,50,000

Land/Buildings at Cost 1,80,000

Less: Depreciation           36,000

1,44,000

Workmen Compensation Fund

25,000

Workmen Profit Sharing Fund        

45,000

Plant and Machinery

at Cost                           2,40,000

Less: Depreciation           40,000

2,00,000

Profit and Loss Account

1,50,000

Creditors

2,30,000       

Investments (To Provide replacement of Plant and Machinery)

l,00,000

Other Liabilities

1,00,000

Books Debts                   3,60,000

Less: Provision                 30,000

3,30,000

   
   

Stock

2,00,000

   

Cash at U.T. I. Bank

75,000

   

Preliminary Expenses   

26,000

                                      Total:

12,00,000

                                            Total:

12,00,000

Further Information:

(1)   The Profits earned by the company for the last three years were as follows

Year ended 31st March, 1996                                               Rs.3,10,000

Year ended 31st March, 1997                                               Rs.2,73,000

Year ended 31st March, 1998                                               Rs.2,90,000

The profits are before tax, which was @ 50% throughout.

(2) Set-up Ltd. had been carrying on business for several years. The company is to be taken over by Upset Ltd. and for this purpose; you are required to calculate Goodwill by "Capitalization of Future Maintenance Profits Method."

      For this purpose the following additional information is supplied to you -

(a)    (a)     Up-Set Ltd. expects of carry on business with its own Board of Directors, without any addition. The Directors' fees paid by Set-up Ltd. amounted to Rs.9,000 p.a.

(b)   (b)     Up-Set Ltd. expects a large increase in volume of business and therefore, will have to take an additional floor for which it will have to pay extra refit of Rs.1,000 per month.

(c)    (c)     On 31st March, 1998 Land and Buildings were worth Rs.3,00,000.  Plant and Machinery were worth Rs.1,80,000.  There is sufficient provision for doubtful debts.  There is no fluctuation in the values of Investments and Stock.

        (d)   Liability for Workmen Compensation Fund was Rs.5,000 only.

(3) The expected rate of return on similar business may be taken @ 12%.

     Consider Average Capital employed the same as Closing Capital employed for your calculations. Give all your workings.

7.           The following balances appeared in the books of Sidney Potier Ltd. as at 30th September, 1998.                                                                                                                                                                                  

 

Rs.

7% Second Mortgage Debentures

4,00,000

Income received on Sinking Fund Investments

14,500

Discount on Issue of Debentures

25,000

Sinking Fund Account

3,65,000

Sinking Fund Investments:

(a)   Rs.80,000 - 5% State Development Loans                                                                            

76,000

(b)   Rs.90,000 - 6% National Defence Bonds                                                                             

1,00,000

(c)   Rs.70,000 - 7% IXth Plan Progress Loans                                                                             

70,000

(d)   Rs.1,80,000 - 7 ½% Central Govt. Securities                                                                      

1,85,000

On the same day the Investments were sold as follows

(a)     5% State Development Loans at Rs.90

(b)   6%,National Defense Bonds at par.

(c)   7% IXth Plan Progress, Loans at Rs.115.

(d)   7 ½% Central Govt. Securities at Rs.120.

On 1st October,1998 the Debentures of Rs.3,00,000 were redeemed at a premium of 2 ½%.

On the same day 8% Mars Landing Loans of Rs.1,00,000 were purchased at 3% premium. Annual Contribution for redemption was Rs.50,000.  Ignore interest.

Prepare:-

(a)   Debentures Account

(b)   Sinking Fund Account

(c)   Sinking Fund Investments Account

(d)   General Reserve Account.

8.           VIP Traders Ltd. has the Head Office at Churchgate and branch at Virar.  The branch is Authorised to have independent transactions.  It maintains complete set of books of accounts.
Trial Balance of Virar Branch as at 3lst March, 1999 was as follows:-

 

      Debit

 (Rs.)

Credit

 (Rs.)

Sales

            -

3,60,000

Purchases

1,30,000

-

Goods from Head Office

1,24,000

-

Stock

60,000

-

Wages

66,000

-

Carriage

25,200

-

Salaries

18,000

-

Rent

9,600

-

Office Expenses

9,200

-

Cash in Box

4,000

-

Debtors/Creditors

32,000

24,000

Head Office

            -

94,000

 

4,78,000

4,78,000

On31st March, 1999 Stock was valued at Rs.98,000.  The Head Office revealed Debit Balance in Branch Account Rs.1,08,000

 The analysis revealed:-

(a)    (a)     Rs.8,000 remitted by Virar Branch on 29th March, 1999 was received by Head Office on 2nd April, 1999.

(b)   (b)     Goods worth Rs.6,000 sent by Head Office on 28th March, 1999 was received by Virar Branch on 3rd April, 1999.

You are required to: -

(i)    Pass Journal Entries incorporating Branch Accounts. -

(ii)    Prepare Virar Branch Account in the books of Churchgate Head Office.

(iii)   Prepare Branch Trading/Profit and Loss Account for the year ended 31st March, 1999.

(iv)   Branch Balance Sheet as at 31st March, 1999.

9.     Write explanatory notes on any four of the following

(i) Fair Value of Equity Shares

(ii) Purpose and operation of Debenture Redemption Reserve Fund

(iii) Average Clause in Fire Insurance Policy

(iv) Redemption of Redeemable Preference Shares

(v) Super Profit Method of Valuation of Goodwill

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