Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Paper 5- Financial Accounting

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Paper 5- Financial Accounting

Full Marks : 100 Time allowed: 3 hours

Section-A

1. Answer the following questions:

(a) Multiple choice questions: [5x1=5]

(i) Provision for bad and doubtful debts is created in anticipation of actual bad debts on
the basis of:
(a) Business Entity Concept;
(b) Conservatism Concept;
(c) Accrual Concept;
(d) Full Disclosure Concept.

(ii) The out flow of funds to acquire an asset that will benefit the business for more than
one accounting period is referred to as:
(a) Miscellaneous Expenditure;
(b) Revenue Expenditure;
(c) Capital Expenditure;
(d) Deferred Revenue Expenditure.

(iii) Goods are sent to the Branch at cost plus 25%. The loading on invoice price is:
(a) 20%;
(b) 25%;
(c) 30%;
(d) None of the above.

(iv) In Hire Purchase System cash price plus interest is known as:
(a) Capital value of asset;
(b) Book value of asset;
(c) Hire Purchase price of asset;
(d) Hire purchase charges.

(v) Actuarial valuation relates to:

(a) Banking company;
(b) Electric Supply Company;
(c) Insurance Company;
(d) None of the above.

Solution:

(i) —B
(ii) —C
(iii) —A
(iv) —C
(v) —C

(b) Match the following: [5x1=5]

Column ‘A’ Column ‘B’

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 2
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

1. Non Performing Assets A Single Entry System

2. Intangible assets B Trial Balance
3. Statement of Affairs C AS-26
4. Depreciation Accounting D Banking Companies
5. Check Arithmetic Accuracy E AS-10

Solution:

1. —D
2. —C
3. —A
4. —E
5. —B

(c) State whether the following statements are true or false: [5x1=5]
(i) Goodwill is a fictitious asset.
(ii) Every banking company incorporated in India is required to transfer at least 25% of
its profit to Reserve Fund.
(iii) Wages incurred by departmental workers of a factory in installing a new
machinery is a revenue expenditure.
(iv) Royalty account is a nominal account in nature.
(v) Trial Balance would not disclose error of omission.

Solution:

(i) — False;
(ii) — True;
(iii) — False;
(iv) — True;
(v) — True.

(d) Answer the following: [5x2=10]

(i) From the following particulars, determine Closing Stock at Branch

` `
Opening Stock at Branch 30,000 Expenses:
Goods sent to Branch 90,000 Salaries 10,000
Sales (Cash) 1,20,000 Other expenses 4,000

The branch sells at cost plus 20%. The branch manager is entitled to a commission of
5% on the profits of the branch before charging such commission.

Solution:

Calculation of closing stock at branch:

Particulars `
Opening stock at branch 30,000
Goods sent to branch 90,000
1,20,000
Less: Cost of sales 1,20,000  100  20,000
 120 

(ii) Goods costing ` 6,30,000 were sent out to consignee at a profit of 20 percent on
invoice price. Consignee sold 2/3rd goods for ` 6,00,000. Consignee was entitled to
an ordinary commission of 3 per cent on sales at invoice price and overriding

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 3
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

commission of 20 percent of any surplus realized. Calculate the amount of

consignee’s commission.

Solution:

Invoice value of Goods sold =`5,25,000

 2 100 
6,30,000  3  (100  20)
 

Surplus of sales value over Invoice Value = `75,000

[ 6,00,000  5,25,000 ]

Consignee’s commission:

Ordinary (5,25,000  3 ) = `15,750

20
Overriding  75,000  20  = `15,000
 100 
 Total commission = `30,750

(iii) Safety Life Insurance Co. furnishes you the following information:

Amount
`
Life Insurance fund on 31-3-2012 1,30,00,000
Net liability on 31-3-2012 as per actuarial valuation 1,00,00,000
Interim bonus paid to policyholders during inter valuation period 7,50,000

Compute the Net Profit for the valuation period.

Solution:

Statement showing net profit for the valuation period:

Particulars Amount
`
Life Insurance Fund on 31.03.2012 1,30,00,000
(-) Net Liability as per actuarial valuation (1,00,00,000)
Surplus 30,00,000
(+) Interim Bonus paid 7,50,000
Net Profit 37,50,000

(iv) On 12th June, 2013, a fire occurred in the premises of Amit, a paper merchant. Most of
the stocks were destroyed, cost of stock salvaged being ` 20,000. Estimated value of
the stock at the date of fire is ` 1,60,000. Amit has insured his stock for ` 1,20,000.
Compute the amount of the claim.

Solution:

Statement of claim:
Particulars Amount
`
Estimated value of stock as at date of fire 1,60,000
(-) Value of salvaged stock & damaged stock (20,000)
Estimated value of stock lost by fire 1,40,000

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 4
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Average clause is not applying here. Because estimated value of stock is higher than
Insured Stock amount.

(v) A trader purchased goods for ` 3,25,000. The opening stock of inventory prior to the
said purchase was ` 50,000. His sale was ` 4,00,000. Find out the closing stock of
inventory if the gross profit margin is 25% on cost.

Solution:

Computation of closing stock:

Gross profit = 25% on cost = 20% of sales

= `4,00,000 × 20% = `80,000

Cost of Goods sold = Sales – Gross profit

= `4,00,000 – `80,000
= `3,20,000

Closing stock = Opening stock + Purchases – Cost of goods sold

= `50,000 + 3,25,000 – 3,20,000
= `55,000.

Section B

Answer any five from the following. Each question carries 15 marks (5x15=75)

2. (a) Based on the following information prepare a Bank Reconciliation

Statement as on 31st December, 2015 and find the balance as per Pass Book:
(i) Bank overdraft as per cash book on 31-12-2015 ` 6,340.
(ii) Interest on Overdraft ` 160 is entered in pass book.
(iii) Bank charges ` 30 were debited by the bank.
(iv) Cheques issued but not presented upto 31-12-2015 ` 1,160.
(v) Cheques sent for collection to the bank but not collected upto 31-12-2015
amount to ` 2,170.
(vi) Interest on investments collected by the bank and entered in the pass book
` 1,200. [7]
Solution:

Bank Reconciliation Statement as on 31st December 2015

Particulars ` `
Overdraft balance as per Cash Book 6,340
Add:
Interest on overdraft entered in the Pass Book only 160
Bank charges entered in Pass Book only 30
Cheque sent for collection but not collected and 2,170 2,360
credited in the Pass Book
8,700
Less:
Cheques issued but not presented for payment 1,160
Interest on investments collected by the bank and 1,200 (2,360)
entered in Pass Book only
Overdraft balance as per Pass book 6,340

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 5
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

(b) The information given under has been extracted from the books of a contractor
relating to contract for ` 3,75,000

I YEAR II YEAR III YEAR

Materials 45,000 55,000 31,500
Direct Expenses 1,750 6,250 2,250
Indirect expenses 750 1,000 ---
Wages 42,500 57,500 42,500
Total work certified 87,500 2,82,500 3,75,000
Uncertified work --- 5,000 ---
Plant 5,000 --- ---

The value of plant at the end of I year was ` 4,000 at the end of II year ` 2,500 and at
the end of III year it was ` 1,000. It is customary to pay 90% in cash of the amount of
work certified. Prepare the contract Account and show how the figures would appear
in the balance sheet. [8]

Solution:

Contract Account
Dr. Cr.
Particulars I Year II Year III Year Particulars I Year II Year III Year
` ` ` ` ` `
To WIP b/d - 87,500 287500 By WIP b/d - - 31,500
To Materials 45,000 55,000 31,500 By Plant 4,000 2,500 1,000
To Direct 1,750 6,250 2,250 By WIP
Expenses
To Indirect 750 1,000 - (a) Work 87,500 2,82,500 -
Expenses Certified
To Wages 42,500 57,500 42,500 (b) Work - 5,000 -
Uncertified
To Plant 5,000 4,000 2,500 By Contractee - - 3,75,000
A/c
To Balance c/d - 78,500 - By, P/L A/c 3,500 - -
(Notional Profit)
To P/L A/c - - 41,250
95,000 2,90,000 4,07,500 95,000 2,90,000 4,07,500
To P/L A/c - 47,250 - By Balance b/d - 78,750 -
(Notional Profit)
To WIP Reserves - 31,500 -
(b/f)
- 78,750 - - 78,750 -

3. Maruti and ford are partners in a firm sharing profits and losses in the ratio of 3:2. On
31st March, 2014 their Balance Sheet stood as under:

Liabilities ` Assets `
Capital Accounts: Freehold Premises 24,000
Maruthi 40,000 Plant 4,000
Ford 20,000 60,000 Stock 33,000
General Reserve 15,000 Debtors 12,000
Creditors 10,000 Bank 7,000
Profit and Loss A/c 5,000
85,000 85,000

On the same day, they admitted Sujuki as a partner and new profit sharing ratio
became 7:3:3 Goodwill of the firm was valued at ` 20,800. Sujuki was to bring required

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 6
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

premium and proportionate Capital. Capitals of Maruti and Ford as between

themselves were also to be adjusted in their profit sharing ratios.
Pass journal entries in the books of the new firm and prepare the Balance Sheet of the
reconstituted firm. [15]

Solution:

Sacrificing Ratio = Old Ratio – New ratio

Old Ratio = 3;2 New Ratio = 7;3;3

Maruthi = 3/5 Maruthi = 7/13
Ford = 3/5 Ford = 3/13
Sujuki = 3/13

Sacrificing Ratio:

Maruthi = 3 7  4
5 13 65
Ford =  3  11
2
5 13 65
= 4:11

Calculation of Adjusted Capitals:

Particulars Maruthi Ford

(`) (`)
Capital 4,000 20,000
General Reserves 9,000 6,000
Bank (Goodwill) [ [20,800  3 ] in 4:11 ratio 1,280 3,520
13
Profit and Loss A/c (loss) (3,000) (2,000)
47,280 27,520

New Ratio = 7:3

Total Adjusted Capital of Maruthi & Ford is = `74,800

 Per share = 74,800 =`7,480
10

Maruthi = (7,480 ×7) =52,360

Ford = (7,480×3) =22,440
Sujuki = (7,480×3) =22,440

Balance Sheet of Maruthi, Ford & Sujuki as on 31.03.14

Liabilities Amount Assets Amount

` `
Creditors 10,000 Freehold Premises 24,000
Capitals: Plant 4,000
Maruthi 52,360 Stock 33,000
Ford 22,440 Debtors 12,000
Sujuki 22,440 Bank 34,240
(7,000+4,800+22,440)
1,07,240 1,07,240

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 7
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

4. (a) Mr. Self-reliant maintains his books on Self-Balancing Ledger. From the following
particulars, prepare General Ledger Adjustment Accounts in (a) Bought Ledger, and (b) Sold
Ledger.

Date Particulars Amount

`
1-11-2011 Bought Ledger – Debit Balance 700
Bought Ledger – Credit Balance 30,640
Sold Ledger – Debit Balance 66,930
Sold Ledger – Credit Balance 1,865
Transactions during the month of November, 2011:
Sales 1,35,000
Credit Sales 1,16,000
Purchases – Credit 72,700
Purchase – Cash 11,800
Sales Returns (out of credit sales) 500
Provision for Bad and Doubtful Debts 270
Bad Debts written-off 1,000
Amount received against Bad Debts written-off last year. 600
Purchases Returns (out of Credit Purchase) 2,500
Cash collected from Debtors 83,000
Cash paid to Creditors 57,500
Discount Allowed 650
Discount Received 320
Interest charged to Debtors 592
Bills Receivable Received 10,000
Bills Payable accepted 8,000
Bills Receivable dishonoured 2,500
Notary Charges debited to Party’s A/c 10
Cash paid to Customers 137
30-10-2012 Sold Ledger – Debit balance 266
Bought Ledger – Debit Balance 980
[9]
Solution:

In the Books of Self reliant

In Bought Ledger
General Ledger Adjustment Account
Dr. Cr.
Date Particulars Amount(`) Date Particulars Amount(`)
1.11.11 To Balance b/d 30,640 1.11.11 By Balance b/d 700
31.10.12 To Creditors Ledger 31.10.12 By Creditors Ledger
Adjustment A/c: Adjustment A/c
Purchases 72,700 Cash 57,500
Purchase returns 2,500
Discount Received 320
Bills Payable 8,000
To Balance c/d 980 By Balance c/d 35,300
1,04,320 1,04,320
1.11.11 To Balance b/d 35,300 1.11.12 By Balance b/d 980

In Sales Ledger
General Ledger Adjustment Account
Dr. Cr.
Date Particulars Amount(`) Date Particulars Amount(`)
1.11.11 To Balance b/d 1,865 1.11.11 To Balance b/d 66,930
31.10.12 Debtors Ledger Adjustment 31.1012 Debtors Ledger Adjustment
A/c A/c

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 8
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Sales returns 500 Sales 1,16,000

Bad debts 1,000 Interest Charges 592
Cash 83,000 B/R (Dishonoured) 2,500
Discount Allowed 650 Notary Charges 10
Bills Receiveble 10,000 Carriage 137
To Balance c/d 89,420 To, Balance c/d 266
1,86,435 1,86,435
1.11.12 To Balance b/d 266 1.11.12 By Balance b/d 89,420

(b) Rohit & Rahul entered into a joint venture to take a building contract for ` 7,80,000. They
provide the following information regarding the expenditure incurred by them.

Rohit Rahul
` `
Materials 8,16,000 6,00,000
Cement 1,56,000 2,04,000
Wages -- 3,24,000
Architect’s fees 1,20,000 --
Licence fees -- 60,000
Plant -- 2,40,000

Plant was valued at ` 1,20,000 at the end of the contract and Rahul agreed to take it at
that value. Contract amount of ` 28,80,000 was received by Rohit. Profit or loss to be
shared equally.

You are asked to show:

(i) Joint Venture Account and
(ii) Rahul’s Account in the books of Rohit. [6]

Solution:

In the books of Rohit

Joint Venture Account
Dr. Cr.
Particulars Amount Amount Particulars Amount Amount
(`) (`) (`) (`)
To, Bank A/c By, Bank A/c 28,80,000
Materials 8,16,000 By, Rahul A/c (Plant) 1,20,000
Cement 1,56,000
Architect’s Fees 1,20,000 10,92,000
To, Rahul A/c
Materials 6,00,000
Cement 2,04,000
Wages 3,24,000
License 60,000
Plant 2,40,000 14,28,000
To, Rahul A/c 2,40,000
(Profit)
To, P/L A/c 2,40,000 4,80,000
(Own Share)
30,00,000 30,00,000

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 9
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Rahul Account
Dr. Cr.
Particulars Amount Amount Particulars Amount Amount
(`) (`) (`) (`)
To Joint Venture 1,20,000 By, Joint Venture 14,28,000
(Plant) (Subsidiaries)
To, Balance b/d 15,48,000 BY, Joint Venture 2,40,000
(Profit)
16,68,000 16,68,000

5. (a) Rangakarmi, an amateur theatre organisation, charges its members an annual

subscription of `200 per member. It accrues for subscription owing at the end of each
year and also adjusts for subscriptions received in advance. The organisation closes
its accounts every year at 31st December. The following particulars are available:
(1) On 1st January, 2005, 20 members owed ` 4,000 for the year 2004.
(2) On December 2004, 5 members paid `1,000 for the year 2005.
(3) During the year 2005, the organization received cash subscriptions of `85,000.
The details are:

`
For 2004 4,000
For 2005 79,000
For 2006 2,000
Total 85,000

At close of 31st December 2005, 15 members had not paid their 2005 subscriptions.
Prepare the subscriptions account. [7]
Solution:
Subscription Account
Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To, Balance b/d 4,000 By, Balance b/d 1,000
To, Income & Expenditure A/c 83,000 By, Receipts & Payments A/c 85,000
(Bal. Fig.) (Received)
To, Balance c/d 2,000 By, Balance c/d 3,000
(for the year 2006) (This year o/s)
89,000 89,000

(b) X Ltd has taken out a fire policy of ` 1,60,000 covering its stock. A fire occurred on 31st
March, 2013. The following particulars are available:
`
Stock as on 31-12-2012 60,000
Purchases to the date of fire 2,60,000
Sales to the date of fire 1,80,000
Carriage inwards 1,600
Commission on purchase to be paid @ 2%.
Gross Profit Ratio @ 50% on cost.
You are asked to ascertain
(i) total loss of stock

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 10
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

(ii) amount of claim to be made against the insurance company assuming that the
policy was subject to average clause. Stock salvage amounted to ` 41,360.
[8]
Solution:
In the books of X Ltd.

Memorandum Trading Account for the period ended 31.03.2013

Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To Opening Stock 60,000 By Sales 1,80,000
To, Purchases 2,60,000 By Closing Stock b/f 2,06,800
(+) Carriage Inward 1,600
(+) Commission 5,200 2,66,800

To Gross Profit 60,000

(50% on Cost or 31 1 on Sales)
3
3,86,800 3,86,800

Loss of Stock:
Stock at the date of fire = `2,06,800
(-) Stock Salvage (41,360)
Amount of claim applying Average clause:

Amount of claim = Amount of Policy

 Actualloss
Value of Stockat the date of fire
= 1,60,000 1,65,440  1,28,000 .
2,06,800

6. The following figures are extracted from the books of the New Bank Ltd. as on 31st
March, 2013:
` (‘000)
Interest and discount received 3,695
Payment to Employees 200
Interest paid on deposits 2,032
Director’s Fees and Allowances 30
Issued and Subscribed Capital 1,000
Rent and Taxes paid 100
Statutory Reserve under Sec.17 800
Postage and Telegrams 50
Commission, Exchange & Brokerage 200
Depreciation on Bank’s Properties 30
Rent received 55
Stationery etc. 50
Profit on sale of investments 200
Advertisement and Publicity 15
Audit Fees 5
The further information is given:
(a) A customer to whom a sum of `10,00,000 has been advanced has become
insolvent and it is expected only 50% can be recovered from his Estate. Interest
due at 18% on his debt has not been provided in the Books.
(b) There were also other debts for which a provision of ` 1,50,000 was found
necessary by the auditors.
(c) Rebate on bills discounted as on 1st April, 2012 ` 16,000. Rebate on bills discount-
ed as on 31st March, 2013 ` 12,000.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 11
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

(d) Provide ` 6,50,000 for income tax.

(e) The Directors desire to declare 10% dividend.
Prepare the Profit and Loss Account in accordance with the Law. Make necessary
assumptions. [15]

Solution:
Statement Showing Profit & Loss Account of
New Bank Ltd. for the year ended 31.03.2013
Particulars Schedule Current Previous
No. Year Year
(`000) (`000)
I. Income:
Interest, Discount earned 13 3,879
Other Income 14 455
4,334
II. Expenditure:
Interest Expended 15 2,032
Operating Expenses 16 480
Provisions & Contingencies - 1,300
Total 3,812
III. Profit or Loss:
Current year (I+II) 522
Previous year profit b/f -
522
IV. Apportions:
(i) Transfer to Statutory Reserve u/s 17 131
(ii) Transfer to proposed dividend 100
(iii) Balance carried over to B/S 291
522

Working Notes:

Particulars Schedule Current Previous

No. Year Year
(`000) (`000)
Interest Earned: 13
Interest / Discount on advance/ Bills 3,879
(3,695+180+12-16)
Total 3,879
Other Income: 14
(i) Commission, exchange and brokerage 200
55
(ii) Locker rent 200
(iii) Profit on sale of Investments
Total 455
Interest Expended: 15
Interest paid on deposits 2,032
Total 2,032
Operating Expenses: 16
Payment to employees 200
Rent, Taxes, lighting 100
Printing & Stationary 50
Advt, Stationary 15
Depreciation on bank property 30
Director Fees 30
Audit Fees 5
Postage & Telegram 50

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 12
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Total 480
Provisions & Contingencies:
1. Bad Debts 500
2. Provisions for Bad Debts 150
3. Provision for tax 650
Total 1,300

7.(a) From the following information Calculate Depreciation and Advance against
Depreciation as per Regulation 21 of the Central Electricity Regulatory Commission
(Terms and Conditions of Tariff) Regulations, 2004.
• Date of Commercial Operation of COD = 1st April 2010
• Approved opening Capital cost as on 1st April 2010 = ` 1,50,000
• Weighted Average Rate of Depreciation: 3.5%
• Details of allowed Additional Capital Expenditure. Repayment of Loan and
Weighted Average Rate of Interest on Loan is as follows:

Year
1st 2nd 3rd 4th
Additional Capital Expenditure (Allowed) 10,000 3,000 2,000 2,000
Repayment of Loan 8,000 10,000 10,000 11,000
Weighted Average Rate of Interest on Loan 7.4 7.5 7.6 7.5
[8]
Solution:

1. COMPUTATION OF DEPRECIATION
Particulars 1st year 2nd year 3rd year 4th year
A. Opening Capital Cost 1,50,000 1,60,000 1,63,000 1,65,000
B. Additional Capital Cost 10,000 3,000 2,000 2,000
C. Closing Capital Cost (A + B) 1,60,000 1,63,000 1,65,000 1,67,000
D. Average Capital Cost [(A + C)/2] 1,55,000 1,61,500 1,64,000 1,66,000
E. Weighted Average Rate of Dep. 3.5% 3.5% 3.5% 3.5%
F. Annualized Depreciation (D x E) 5,425 5,652.50 5,740 5,810
G. Advance Against Depreciation (AAD) 2,575 4,347.50 4,260 5,190
H. Total Depreciation (including AAD) for
Tariff (F +G) 8,000 10,000 10,000 11,000

2. COMPUTATION OF ADVANCE AGAINST DEPRECIATION (AAD)

Particulars 1st year 2nd year 3rd year 4th year

A. Repayment of Loan 8,000 10,000 10,000 11,000

B. Depreciation (Excluding AAD) 5,425 5,652.5 5,740 5,810
C. Difference between A & B 2,575 4,347.50 4,260 5,190.50
D. Cumulative Repayment of Loan 8,000 18,000 28,000 39,000
E. Cumulative Depreciation (Excluding AAD) 5,425 11,077.5 16,817.50 22,627.5
F. Difference between D & E (D - E) 2,575 6,922.50 11,182.50 16,372.5
G. Advance Against Depreciation (AAD) 2,575 4,347.50 4,260 5,190
(Minimum of C & F)

(b) Rahim, for mutual accommodation, draws a bill for ` 3,000 on Ratan. Rahim discounted
it for ` 2,925. He remits ` 975 to Ratan. On the due date, Rahim is unable to remit his
dues to Ratan to enable him to meet the bill. He, however, accepts a bill for ` 3,750

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 13
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

which Ratan discounts for ` 3,625. Ratan sends ` 175 to Rahim after discounting the
above bill. Rahim becomes insolvent and a dividend of 80 paise in the rupee is
received from his estate.
Pass the necessary journal entries in the books of both the parties. [7]

Solution:

In the books of Rahim

Journal Entries
Date Particulars L.F. Dr. Cr.
(`) (`)

Bills Receivable A/c Dr. 3,000

To Ratan A/c 3,000
(Bill drawn for mutual accommodation and
accepted by Ratan)

Bank A/c Dr. 2,925

Discount A/c Dr. 75
To Bills Receivable A/c 3,000
(Bill discounted by the bank)

Ratan A/c Dr. 1,000

To Bank A/c 975
To Discount A/c 25
(1/3 Proceeds remitted to Ratan)

Ratan A/c Dr. 3,750

To Bills Payable A/c 3,750
(Bill accepted)

Bank A/c Dr. 175

Discount A/c Dr. 75
To Ratan A/c 250
(Proceeds received from Ratan including
discount charges)

Bills Payable A/c Dr. 3,750

To Ratan A/c 3,750
(Bill dishonored since e became insolvent)

Ratan A/c Dr. 2,250*

To Bank A/c 1,800
To Deficiency A/c 450
(Cash paid to Ratan @80 paise in the rupee
and balance transferred to deficiency
account)

In the books of Ratan

Journal Entries
Date Particulars L.F. Dr. Cr.
(`) (`)
Rahim A/c Dr. 3,000
To Bills Payable A/c 3,000
(Bill accepted for mutual accommodation)

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 14
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Bank A/c Dr. 975

Discount A/c Dr. 25
To Rahim A/c 1,000
(Being 1/3rd proceeds received from Rahim
including discount)

Bills Receivable A/c Dr. 3,750

To Rahim A/c 3,750
(Bill drawn and accepted by Rahim)
Bank A/c Dr. 3,625
Discount A/c Dr. 125
To Bills Receivable A/c 3,750
(Bill discounted)
Rahim A/c Dr. 250
To Bank A/c 175
To Discount A/c 75
(Proceeds remitted to Rahim including
discount)
Rahim A/c Dr. 3,750
To Bank A/c 3,750
(Bill honoured at maturity)
Bills Payable A/c Dr. 3,000
To Bank A/c 3,000
(Bill honoured at maturity)
Bank A/c Dr. 1,800
Bad Debt A/c Dr. 450
To Rahim A/c 2,250
(Amount realised from the official liquidator of
Rahim @ 80 paise in the rupee and the
balance proved bad)

Working Note:

The amount of discount to be credited to Ratan is calculated as follows:

`2,000 due to her for the first bill but not remitted on due date.
`175 received from Ratan on getting her second bill discounted.

`2,175 total amount due to Ratan. So, Proportionate Charge for discount is

Total Discount  Total Amount due

Pr oceeds of the Bill
125 2,175
  `75
3,625
Rahim is to bear = `75 of discounting charges and the balance by Ratan.

8. (a) A Calcutta trading firm has a branch at Patna to which goods are charged out at cost
plus 25%. Branch keeps its own sales ledger and remits daily all cash received to the
Head office. All expenses are paid from the Head Office. The transactions for the
branch for the year, 2013 are given below.
`
Stock on 1-1-2013 55,000
Sundry Debtors on 1-1-2013 550
Petty Cash balance on 1-1-2013 450
Cash Sales 13,250

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 15
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Goods sent to Branch 1,00,000

Collections on Ledger Accounts 1,05,000
Goods returned to Head Office 1,500
Bad Debts 1,500
Allowances to customers 1,250
Returns Inward 2,500
Cheques sent t o Branch:
for Rent 2,500
for Wages 1,500
for Salary and other expenses 4,500
Stock on 31-12-2013 60,000
Sundry Debtors on 31-12-2013 15,000
Petty cash on 31-12-2013 (including miscellaneous
income ` 50 not remitted within the year) 500
Prepare the Branch Account and Branch Trading and Profit & Loss Account for the
year, 2013 in the Head Office books. [9]

Solution:
In the books of Head Office
Patna Branch Account
Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To Balance b/f By Stock Reserve 11,000
Stock – 55,000 (Load on opening stock)
Debtors – 550
Petty Cash – 450 56,000
To Goods sent to Branch 1,00,000 By Bank (Remittances)
Cash sales – 13,250
Collection from
Debtors – 1,05,000 1,18,250
To Bank: By Goods Sent to Branch 1,500
Rent – 2,500 (Return from branch)
Wages – 1,500
Salary – 4,500 8,500
To Goods sent to Branch 300 By Goods sent to Branch 20,000
(Load on Return) (Load on goods sent)
To Stock Reserves A/c 12,000 By Balance c/f:
(Load on closing stock) Stock – 60,000
Debtors – 15,000
Petty Cash – 500 75,500
To Profit & Loss A/c 49,450
(Profit)
2,26,250 2,26,250

In the books of Head Office

Patna Branch Account
Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 16
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

To Opening Stock (At Cost) 44,000 By Sales:

To Goods sent to Branch 78,800 Cash – 13,250
(80,000 – Return 1,200) Credit – 1,24,700
To Gross Profit c/d 60,650 1,37,950
(-) Returns (2,500) 1,35,450

By Closing Stock 48,000

1,83,450 1,83,450
To Rent 2,500 By Gross Profit b/d 60,650
To Wages 1,500 By Miscellaneous Income 50
To Salary & Other Exp 4,500
To Bad Debts 1,500
To Allowances 1,250
60,700 60,700

Memorandum Branch Debtors Account

Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 550 By Bank [Collection] 1,05,000
To Credit Sales (B/F) 1,24,750 By Bad debts 1,500
By Allowances 1,250
By Return inwards 2,500
By Balance c/d 15,000
1,25,250 1,25,250

(b) Rectifying the following errors by way of journal entries and work out their effect on
profit or loss of the concern:
(i) Return inward book was cast short by ` 500.
(ii) ` 300 received from Ram has been debited to Mr. Shyam.
(iii) Wages paid for the installation of a machine debited to wages account for
` 1,000.
(iv) A purchase made for ` 1,000 was posted to purchase account as ` 100.
(v) Purchase of furniture amounting to ` 3,000 debited to purchase account.
(vi) Goods purchased for proprietor’s use for ` 1,000 debited to purchase account.
[6]

Solution:

Journal Proper
Date Particulars L.F. Debit (`) Credit (`)
(a) Return Inwards A/c Dr. 500
To Suspense A/c 500
(Being undercasting of return inward book
now rectified)
(b) Suspense A/c Dr. 600
To Ram A/c 300
To Shyam A/c 300
(Being cash received from Ram wrongly
debited to Mr. Shaym now rectified)
(c) Machinery A/c Dr. 1,000
To Wages A/c 1,000
(Being wages paid for the installation of a

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 17
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

machine debited to Wages A/c, rectified)

(d) Purchase A/c Dr. 900
To Suspense A/c 900
(Being Purchases A/c short by 900, now
rectified)
(e) Furniture A/c Dr. 3,000
To Purchases A/c 3,000
(being furniture purchased wrongly debited
Purchases A/c , now rectified)
(f) Drawings A/c Dr. 1,000
To, Purchases A/c 1,000
(Being goods purchased for properties use
wrongly debited to Purchases A/c, now
rectified)

Items Particulars Increase Decrease

(a) Decrease in Profit - 500
(b) No effect on Profit - -
(c) Increase in Profit 1,000 -
(d) Decrease in Profit - 900
(e) Increase in Profit 3,000 -
(f) Increase in Profit 1,000 -
Total 5,000 1,400
Increase in Profit - 3,600
5,000 5,000

9. Write short notes on any three of the following: [3x5=15]

(a) Slip System of Posting;
(b) Register of Claims;
(c) Capital and Revenue Expenditure;
(d) Objectives of providing depreciation.

Solution:

(a) Slip System of Posting:

In this system, posting is made from slips prepared inside the organization itself or from slips
filled in by its customers. So entries are not made in the books of original entry of
subsidiary books, but posting of entries in done from slips. In banking company the main
slips are pay-in-slips; withdrawal slips and cheques; and all these slips are filled by clients
of the bank. These slips serve the basis of entry.

Advantages:

1. The bank saves a lot of clerical labour as most of the slips are filled by its customers.
2. Subsidiary books are avoided as posting is done from slips.
3. It ensures smooth flow of accounting work.
4. Entries can be recorded with minimum delay as slips can early pass from hand to
hand among clerks concerned.

Disadvantages:

1. Slips may be lost, destroyed or misappropriated as these are loose.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 18
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

2. Books cann’t be verified if subsidiary books are not kept.

(b) Register of Claims:

The Insurance Act, 1938 and the rules framed there under have an important bearing
on the prerations of accounts by insurance companies.
The Insurer must maintain a register of claims. It contains the details of claims made such
as date of claim, the name and address of the claimant and the date on which the
claim was discharged.
If the claim was rejected, the date of rejection and the reasons therefore.

(c) Capital and Revenue Expenditure:

The proper distinction between capital and revenue as regard to expenditure,

payment, profits, receipts and losses is one of the fundamental principles of correct
accounting. Failure or neglect to discriminate between the two will falsify the whole of
the result of accounting.

It consists of expenditure the benefit of which is not fully consumed in one period but
spread over several periods. It is non-recurring in nature. It means an expenditure which
is incurred for the purpose of long term advantages. It is the money which is spent on the
purchase of permanent fixed assets for the use in the business and not for immediate
resale. It is the money spent on the permanent improvement or addition or substitution or
extension of an asset to increase the earning capacity of the business.

There are 3 types of capital expenditure

(i) Tangible Assets such as plant and machineries, furniture.
(ii) Intangible Assets like Goodwill, Patents, trademarks, copy rights etc.
(iii) Investment in shares and debentures of other company for long duration.

Expenditure incurred in connection with the purchase, receipt or erection of a fixed

asset e.g. the carriage and cartage charges paid to bring the machinery to the factory,
repairs to the second hand machinery purchased, installation charges etc. are added to
the respective cost of the asset. Similarly, the cost of financing of fixed asset is added to
its cost only for the period up to the asset is put to use.

Revenue Expenditure:
An expenditure that arises out of and in the course of operations of business
enterprises is called as revenue expenditure. It consists of expenditure incurred in one
accounting period, the full benefit of which is consumed in that period. The following are
the example of revenue expenditure.

(i) Expenses incurred in normal course of running the business. E.g. Administration
expenses, selling expenses, manufacturing cost, printing and stationary charges,
depreciation charges etc.
(ii) Expenses incurred to maintain the business. E.g. money spent on repairs, cost of
stores consumed etc.
(iii) Cost of goods purchased for resale.

(d) Objectives of providing depreciation:

Fixed assets are used for business purposes and with the passage of time and the
constant use of an asset, the value of asset declines. Thus deprecation is the gradual
and permanent decrease in the value of an asset due to wear and tear, efflux of time,
obsolescence or any other cause.

Objectives of providing depreciation:

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 19
 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

(i) To ascertain correct profit or loss:

The businessman calculates the profit of an enterprise when all costs of earning
revenue are charged against them, fall in the value of an asset is the cost of earning
revenue from the use of an asset and charged against revenue, otherwise, true profit
cann’t be ascertained.

(ii) To ascertain the correct financial position:

Unless depreciation is charged the depreciable assets cann’t be correctly valued

and presented in the Balance Sheet. The assets are shown in the Balance Sheet at its
actual value , otherwise the Balance Sheet will fail to provide true state of affairs.

(iii) To provide funds for replacement of assets:

The businessman uses the assets for productive purposes and with constant use, the
asset requires replacement at the end of its useful life. The provisions of depreciation
by the method of sinking fund provides dual advantage of depreciation of an asset
and accumulating necessary funds for replacement of an asset.

(iv) To keep proper account of cost of production:

Depreciation is part of cost of production. If depreciation is not recorded, the true

cost of production cann’t be ascertained.

(v) Incidental benefits:

The amount of depreciation is a deductible expense for tax purpose. Thus, it reduces
tax liability. Similarly, the amount of depreciation reduces the profit after
depreciation. As a result less dividend needs to be distributed which saves the cash
resource of an enterprise.

(vi) Compliance with legal requirements:

Depreciation has to be charged to comply with the relevant provisions of the

Companies Act.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 20