PAPER – 1: PRINCIPLES & PRACTICE OF ACCOUNTING

QUESTIONS
True and False
1. State with reasons, whether the following statements are true or false:
(i) Goods worth ` 600 taken by the proprietor for personal use should be credited to
Capital Account.
(ii) Amount paid to Management company for consultancy to reduce the working
expenses is capital expenditure if the reduced working expenses will generate long
term benefits to the entity.
(iii) The additional commission to the consignee who agrees to bear the loss on account
of bad debts is called overriding commission.
(iv) When there is no agreement among the partners, the profit or loss of the firm will be
shared in their capital ratio.
(v) When shares are forfeited, the share capital account is debited with called up
capital of shares forfeited and the share forfeiture account is credited with calls in
arrear of shares forfeited.
Theoretical Framework
2. (a) Distinguish between Money measurement concept and matching concept.
(b) Define revenue receipts and give examples. How are these receipts treated?
Explain.
Journal Entries
3. (a) Pass a journal entry in each of the following cases:
(i) A running business was purchased by Mohan with following assets and
liabilities:
Cash ` 2,000, Land ` 4,000, Furniture ` 1,000, Stock ` 2,000, Creditors
` 1,000, Bank Overdraft ` 2,000.
(ii) Goods distributed by way of free samples, ` 1,000.
(iii) Rahim became an insolvent and could pay only 50 paise in a rupee. Amount
due from him ` 600.
Capital or Revenue Expenditure
(b) Classify the following expenditures as capital or revenue expenditure:
(i) Amount spent on making a few more exists in a Cinema Hall to comply with
Government orders.

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 2 FOUNDATION EXAMINATION: NOVEMBER, 2019

(ii) Travelling expenses of the directors for trips abroad for purchase of capital
assets.
(iii) Amount spent to reduce working expenses.
(iv) Amount paid for removal of stock to a new site.
(v) Cost of repairs on second-hand car purchased to bring it into working
condition.
Cash Book
4. (a) Prepare a Petty Cash Book on the Imprest System from the following:
2019 `
April 1 Received ` 20,000 for petty cash
“ 2 Paid auto fare 500
“ 3 Paid cartage 2,500
“ 4 Paid for Postage & Telegrams 500
“ 5 Paid wages 600
“ 5 Paid for stationery 400
“ 6 Paid for the repairs to machinery 1,500
“ 6 Bus fare 100
“ 7 Cartage 400
“ 7 Postage and Telegrams 700
“ 8 Cartage 3,000
“ 9 Stationery 2,000
“ 10 Sundry expenses 5,000
Rectification of Errors
(b) The following errors were committed by the Accountant of Geete Dye-Chem.
(i) Credit sale of ` 400 to Trivedi & Co. was posted to the credit of their account.
(ii) Purchase of ` 420 from Mantri & Co. passed through Sales Day Book as ` 240
How would you rectify the errors assuming that :
(a) they are detected before preparation of Trial Balance.
(b) they are detected after preparation of Trial Balance but before preparing Final
Accounts, the difference was taken to Suspense A/c.
(c) they are detected after preparing Final Accounts.

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 3

Bank Reconciliation Statement

5. On 30th September, 2019, the bank account of Neel, according to the bank column of the
Cash- Book, was overdrawn to the extent of ` 8,124. On the same date the bank
statement showed a debit balance of ` 41,516 in favour of Neel. An examination of the
Cash Book and Bank Statement reveals the following:
1. A cheque for ` 26,28,000 deposited on 29th September, 2019 was credited by
the bank only on 3rd October, 2019
2. A payment by cheque for ` 32,000 has been entered twice in the Cash Book.
3. On 29th September, 2019, the bank credited an amount of ` 2,34,800 received
from a customer of Neel, but the advice was not received by Neel until 1st
October, 2019.
4. Bank charges amounting to ` 1,160 had not been entered in the Cash Book.
5. On 6th September, 2019, the bank credited ` 40,000 to Neel in error.
6. A bill of exchange for ` 2,80,000 was discounted by Neel with his bank. This
bill was dishonoured on 28th September, 2019 but no entry had been made in
the books of Neel.
7. Cheques issued upto 30th September, 2019 but not presented for payment
upto that date totalled ` 26,52,000.
You are required:
(a) to show the appropriate rectifications required in the Cash Book of Neel, to
arrive at the correct balance on 30th September, 2019 and
(b) to prepare a bank reconciliation statement as on that date.
Valuation of Inventories
6. Stock taking of XYZ Stores for the year ended 31st March, 2019 was completed by 10th
April, 2019, the valuation of which showed a stock figure of ` 1,67,500 at cost as on the
completion date. After the end of the accounting year and till the date of completion of
stock taking, sales for the next year were made for ` 6,875, profit margin being 33.33
percent on cost. Purchases for the next year included in the stock amounted to ` 9,000
at cost less trade discount 10 percent. During this period, goods were added to stock of
the mark-up price of ` 300 in respect of sales returns. After stock taking it was found
that there were certain very old slow moving items costing ` 1,125 which should be taken
at ` 525 to ensure disposal to an interested customer. Due to heavy floods, certain
goods costing ` 1,550 were received from the supplier beyond the delivery date of
customer. As a result, the customer refused to take delivery and net realizable value of
the goods was estimated to be ` 1,250 on 31st March, 2019.

© The Institute of Chartered Accountants of India

 4 FOUNDATION EXAMINATION: NOVEMBER, 2019

You are required to calculate the value of stock for inclusion in the final accounts for the
year ended 31st March, 2019. Closing stock is valued by XYZ Stores on generally
accepted accounting principles.
Concept and Accounting of Depreciation
7. M/s. Green Channel purchased a second-hand machine on 1st January, 2015 for
` 1,60,000. Overhauling and erection charges amounted to ` 40,000.
Another machine was purchased for ` 80,000 on 1st July, 2015.
On 1st July, 2017, the machine installed on 1st January, 2015 was sold for ` 1,00,000.
Another machine amounted to ` 30,000 was purchased and was installed on
30th September, 2017.
Under the existing practice the company provides depreciation @ 10% p.a. on original cost.
However, from the year 2018 it decided to adopt WDV method and to charge depreciation
@ 15% p.a. You are required to prepare Machinery account for the years 2015 to 2018.
Bills of Exchange
8. Mr. B accepted a bill for ` 10,000 drawn on him by Mr. A on 1 st August, 2017 for 3
months. This was for the amount which B owed to A. On the same date Mr. A got the
bill discounted at his bank for ` 9,800.
On the due date, B approached A for renewal of the bill. Mr. A agreed on con dition that
` 2,000 be paid immediately along with interest on the remaining amount at 12% p.a. for
3 months and that for the remaining balance B should accept a new bill for 3 months.
These arrangements were carried through. On 31 st December, 2017, B became
insolvent and his estate paid 40%.
You are required to prepare Journal Entries in the books of Mr. A
Consignment
9. Manoj of Noida consigned to Kiran of Jaipur, goods to be sold at invoice price which
represents 125% of cost. Kiran is entitled to a commission of 10% on sales at invoice price
and 25% of any excess realised over invoice price. The expenses on freight and insurance
incurred by Manoj were ` 15,000. The account sales received by Manoj shows that Kiran has
effected sales amounting to ` 1,50,000 in respect of 75% of the consignment. His selling
expenses to be reimbursed were ` 12,000. 10% of consignment goods of the value of
` 18,750 were destroyed in fire at the Jaipur godown. Kiran remitted the balance in favour of
Manoj.
You are required to prepare consignment account in the books of Manoj along with the
necessary calculations.

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 5

Sales of goods on approval or return basis

10. X supplied goods on sale or return basis to customers, the particulars of which are as
under:
Date of dispatch Party’s name Amount ` Remarks
10.12.2019 M/s ABC Co. 10,000 No information till 31.12.2019
12.12.2019 M/s DEF Co 15,000 Returned on 16.12.2019
15.12.2019 M/s GHI Co 12,000 Goods worth ` 2,000 returned on
20.12.2019
20.12.2019 M/s DEF Co 16,000 Goods Retained on 24.12.2019
25.12.2019 M/s ABC Co 11,000 Good Retained on 28.12.2019
30.12.2019 M/s GHI Co 13,000 No information till 31.12.2019
Goods are to be returned within 15 days from the dispatch, failing which it will be
treated as sales. The books of ‘X’ are closed on the 31 st December, 2019.
Prepare the following account in the books of ‘X’.
Goods on “sales or return, sold and returned day books”.
Goods on sales or return total account.
Average Due Date
11. Mehnaaz accepted the following bills drawn by Shehnaaz.
On 8th March, 2018 ` 4,000 for 4 months.
On 16th March, 2018 ` 5,000 for 3 months.
On 7th April, 2018 ` 6,000 for 5 months.
On 17th May, 2018 ` 5,000 for 3 months.
He wants to pay all the bills on a single day. Find out this date. Interest is ch arged @
18% p.a. and Mehnaaz wants to save ` 157 by way of interest. Calculate the date on
which he has to effect the payment to save interest of ` 157.
Account current
12. Mr. A owed ` 4,000 on 1st January, 2019 to Mr. X. The following transactions took place
between them. It is agreed between the parties that interest @ 10% p.a. is to be
calculated on all transactions.
`
15 January, 2019 Mr. X sold goods to Mr. A 2,230
29 January, 2019 Mr. X bought goods from Mr. A 1,200

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 6 FOUNDATION EXAMINATION: NOVEMBER, 2019

10 February, 2019 Mr. A paid cash to Mr. X 1,000

13 March, 2019 Mr. A accepted a bill drawn by Mr. X for one 2,000
month
They agree to settle their complete accounts by one single payment on 15th March,
2019.
Prepare Mr. A in Account Current with Mr. X and ascertain the amount to be paid. Ignore
days of grace. Assume 1 year = 366 Days.
Final accounts and Rectification of entries
13. The following are the balances as at 31st March, 2019 extracted from the books of
Mr. XYZ.
` `
Plant and Machinery 19,550 Bad debts recovered 450
Furniture and Fittings 10,250 Salaries 22,550
Bank Overdraft 80,000 Salaries payable 2,450
Capital Account 65,000 Prepaid rent 300
Drawings 8,000 Rent 4,300
Purchases 1,60,000 Carriage inward 1,125
Opening Stock 32,250 Carriage outward 1,350
Wages 12,165 Sales 2,15,300
Provision for doubtful debts 3,200 Advertisement Expenses 3,350
Provision for Discount on Printing and Stationery 1,250
debtors 1,375 Cash in hand 1,450
Sundry Debtors 1,20,000 Cash at bank 3,125
Sundry Creditors 47,500 Office Expenses 10,160
Bad debts 1,100 Interest paid on loan 3,000
Additional Information:
1. Purchases include sales return of ` 2,575 and sales include purchases return of
` 1,725.
2. Goods withdrawn by Mr. XYZ for own consumption ` 3,500 included in purchases.
3. Wages paid in the month of April for installation of plant and machinery amounting
to ` 450 were included in wages account.
4. Free samples distributed for publicity costing ` 825.

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 7

5. Create a provision for doubtful debts @ 5% and provision for discount on debtors
@ 2.5%.
6. Depreciation is to be provided on plant and machinery @ 15% p.a. and on furniture
and fittings @ 10% p.a.
7. Bank overdraft is secured against hypothecation of stock. Bank overdraft
outstanding as on 31.3.2019 has been considered as 80% of real value of stock
(deducting 20% as margin) and after adjusting the marginal value 80% of the same
has been allowed to draw as an overdraft.
Prepare a Trading and Profit and Loss Account for the year ended 31st March, 2019, and
a Balance Sheet as on that date. Also show the rectification entries.
Partnership Accounts
Calculation of Goodwill
14. (a) Vasudevan, Sunderarajan and Agrawal are in partnership sharing profit and losses
at the ratio of 2:5:3. The Balance Sheet of the partnership as on 31.12.2019 was as
follows:
Balance Sheet of M/s Vasudevan, Sunderarajan & Agrawal
Liabilities ` Assets `
Capital A/cs Sundry fixed assets 5,00,000
Vasudevan 85,000 Inventory 1,00,000
Sunderarajan 3,15,000 Trade receivables 50,000
Agrawal 2,25,000 Bank 5,000
Trade payables 30,000
6,55,000 6,55,000
The partnership earned profit ` 2,00,000 in 2019 and the partners withdrew
` 1,50,000 during the year. Normal rate of return 30%.
You are required to calculate the value of goodwill on the basis of 5 years' purchase
of super profit. For this purpose, calculate super profit using average capital
employed.
(b) J and K are partners in a firm. Their capitals are: J ` 3,00,000 and K ` 2,00,000.
During the year ended 31 st March, 2019 the firm earned a profit of ` 1,50,000.
Assuming that the normal rate of return is 20%, calculate the value of goodwill on
the firm:
(i) By Capitalization Method; and
(ii) By Super Profit Method if the goodwill is valued at 2 years’ purchase of Super
Profit.

© The Institute of Chartered Accountants of India

 8 FOUNDATION EXAMINATION: NOVEMBER, 2019

Death of Partner
15 The following is the Balance Sheet of M/s. LMN Bros as at 31st December, 2017, they
share profit equally:
Balance Sheet as at 31st December, 2017
Liabilities ` Assets `
Capital L 8,200 Machinery 10,000
M 8,200 Furniture 5,600
N 9,000 Fixture 4,200
General Reserve 3,000 Cash 3,000
Trade payables 4,700 Inventories 1,900
Trade receivables 9,000
Less: Provision for Doubtful 600 8,400
debts

33,100 33,100

N died on 3rd January, 2018 and the following agreement was to be put into effect.
(a) Assets were to be revalued: Machinery to ` 11,700; Furniture to ` 4,600; Inventory
to ` 1,500.
(b) Goodwill was valued at ` 6,000 and was to be credited with his share, without using
a Goodwill Account.
(c) ` 2,000 was to be paid away to the executors of the dead partner on 5th January,
2018.
(d) After death of N, L and M share profit equally.
You are required to prepare:
(i) Journal Entry for Goodwill adjustment.
(ii) Revaluation Account and Capital Accounts of the partners.
Financial Statements of Not for Profit Organizations
16. From the following data, prepare an Income and Expenditure Account for the year ended
31st December 2019, and Balance Sheet as at that date of the Jeevan Hospital:
Receipts and Payments Account for the
year ended 31 December, 2019
RECEIPTS ` PAYMENTS `
To Balance b/d By Salaries:
Cash 800 (` 7,200 for 2018) 31,200

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 9

Bank 5,200 6,000 By Hospital Equipment 17,000

To Subscriptions: By Furniture purchased 6,000
For 2018 5,100 By Additions to Building 50,000
For 2019 24,500 By Printing and 2,400
For 2020 2,400 Stationery
To Government Grant: By Diet expenses 15,600
For building 80,000 By Rent and rates
For maintenance 20,000 (` 300 for 2020) 2,000
Fees from sundry By Electricity and water
Patients 4,800 charges 2,400
To Donations (not to be 8,000 By office expenses 2,000
capitalized) By Investments 20,000
To Net collections from By Balances:
benefit shows 6,000 Cash 1,400
Bank 6,800 8,200
1,56,800 1,56,800
Additional information: `
Value of building under construction as on 31.12.2019 1,40,000
Value of hospital equipment on 31.12.2019 51,000
Building Fund as on 1.1. 2019 80,000
Subscriptions in arrears as on 31.12.2018 6,500
Investments in 8% Govt. securities were made on 1st July, 2019.

Issue of Shares
17. On 1st April, 2017, Pehal Ltd. issued 64,500 shares of ` 100 each payable as follows:
` 30 on application, ` 30 on allotment, ` 20 on 1st October, 2017; and ` 20 on
1st February, 2018.
By 20th May, 60,000 shares were applied for and all applications were accepted.
Allotment was made on 1st June. All sums due on allotment were received on 15 th July;
those on 1st call were received on 20 th October. You are required to prepare the Journal
entries to record the transactions when accounts were closed on 31 st March, 2018.
Forfeiture of Shares
18. Mr. Hello who was the holder of 4,000 preference shares of ` 100 each, on which ` 75
per share has been called up could not pay his dues on Allotment and First call each at
` 25 per share. The Directors forfeited the above shares and reissued 3,000 of such
shares to Mr. X at ` 65 per share paid-up as `75 per share.

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 10 FOUNDATION EXAMINATION: NOVEMBER, 2019

You are required to prepare journal entries to record the above forfeiture and re-issue in
the books of the company.
Issue of Debentures
19. Pihu Ltd. issued 50,00,000, 9% debentures of ` 100 each at a discount of 10%
redeemable at par at the end of 10th year. Money was payable as follows :
` 40 on application
` 50 on allotment
You are required to give necessary journal entries regarding issue of debenture.
20. Write short notes on the following:
(i) Objectives of preparing Trial Balance.
(ii) Rules of posting of journal entries into Ledger.
(iii) Importance of bank reconciliation statement to an industrial unit.
(iv) Bill of exchange and various parties to it.
(v) Fundamental Accounting Assumptions.
(vi) Accounting conventions.
(vii) Machine Hour Rate method of calculating depreciation.

SUGGESTED ANSWERS/HINTS

1. (i) False: Goods taken by the proprietor for personal use should be credited to
Purchases Account as less goods are left in the business for sale.
(ii) True: Amount paid to management company for consultancy to reduce the working
expenses is capital expenditure as this expenditure will generate long-term benefit
to the entity.
(iii) False: The additional commission to the consignee who agrees to bear the loss on
account of bad debts is called del credere commission.
(iv) False: According to the Indian Partnership Act, in the absence of any agreement to
the contrary, profits and losses of the firm are shared equally among partners.
(v) False: When shares are forfeited, the share capital account is debited with called
up capital of shares forfeited and the share forfeiture account is credited with
amount received on shares forfeited.
2. (a) (i) Distinction between Money measurement concept and matching concept
As per Money Measurement concept, only those transactions, which can be

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 11

measured in terms of money are recorded. Since money is the medium of

exchange and the standard of economic value, this concept requires that those
transactions alone that are capable of being measured in terms of money
should be recorded in the books of accounts. Transactions and events that
cannot be expressed in terms of money are not recorded in the business
books.
In Matching concept, all expenses matched with the revenue of that period
should only be taken into consideration. In the financial statements of the
organization if any revenue is recognized then expenses related to earn that
revenue should also be recognized.
(b) Receipts which are obtained in course of normal business activities are revenue
receipts (e.g. receipts from sale of goods or services, interest income etc.).
Revenue receipts should not be equated with the actual cash receipts. Revenue
receipts are credited to the Profit and Loss Account.
3. (a) (i)
` `
Cash A/c Dr. 2,000
Land A/c Dr. 4,000
Furniture A/c Dr. 1,000
Stock A/c Dr. 2,000
To Creditors 1,000
To Bank overdraft 2,000
To Capital A/c 6,000
(Being commencement of business by Mohan by taking over a running
business).
(ii) Advertisement Expenses A/c Dr. 1,000
To Purchases A/c 1,000

(iii) Cash A/c Dr. 300

Bad Debts A/c Dr. 300
To Rahim ` 600
(b) (i) Revenue Expenditure.
(ii) Capital Expenditure.
(iii) Revenue Expenditure.
(iv) Revenue Expenditure.

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 12 FOUNDATION EXAMINATION: NOVEMBER, 2019

(v) Capital Expenditure.

4. (a) PETTY CASH BOOK
Receipts Date V. Particulars Total Con- Cartage Statio- Postage & Wages Sundries
No. veyance nery Telegrams
` 2019 ` ` ` ` ` ` `
20,000 April1 To Cash
2 1 By Conveyance 500 500
3 2 By Cartage 2,500 2,500
4 3 By Postage and 500 500
Telegrams
5 4 By Wages 600 600
5 5 By Stationery 400 400
6 6 By Repairs to 1,500 1,500
machine
6 7 By Conveyance 100 100
7 8 By Cartage 400 400
7 9 By Postage and 700 700
Telegrams
8 10 By Cartage 3,000 3,000
9 11 By Stationery 2,000 2,000
10 12 By Sundry 5,000 5,000
Expenses
17,200 600 5,900 2,400 1,200 600 6,500
By Balance c/d 2,800
20,000 20,000
2800 To Balance b/d
17,200 11 To Cash

(b) (i) This is one sided error. Trivedi & Co. account is credited instead of debit.
Amount posted to the wrong side and therefore while rectifying the account,
double the amount (` 800) will be taken.
Before Trial Balance After Trial Balance After Final Accounts
No Entry Trivedi & Co. A/c Dr. 800 Trivedi & Co. A/c Dr. 800
Debit Trivedi A/c with To Suspense A/c 800 To Suspense A/c 800
` 800
(ii) Purchase of ` 420 is wrongly recorded through sales day book as ` 240.
Correct Entry Entry Made Wrongly
Purchase A/c Dr. 420 Mantri & Co. Dr. 240
To Mantri & Co. 420 To Sales 240

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 13

Rectification Entry
Before Trial Balance After Trial Balance After Final Accounts
Sales A/c Dr. 240 Sales A/c Dr. 240 Profit & Loss Adj. A/c Dr.660
Purchase A/c Dr. 420 Purchase A/c Dr. 420 To Mantri & Co. 660
To Mantri & Co. 660 To Mantri & Co. 660
5. (i) Cash Book (Bank Column)
Date Particulars Amount Date Particulars Amount
2019 ` 2019
Sept. Sept.
30 30
To Party A/c 32,000 By Balance b/d 8,124
To Customer A/c By Bank charges 1,160
(Direct deposit) 2,34,800 By Customer A/c 2,80,000
To Balance c/d 22,484 (B/R dishonoured)
2,89,284 2,89,284
(ii) Bank Reconciliation Statement as on 30th September, 2019
Particulars Amount
`
Overdraft as per Cash Book 22,484
Add: Cheque deposited but not collected upto 30 th Sept., 2019 26,28,000
26,50,484
Less: Cheques issued but not presented for payment upto 30 th Sept.,
2019 (26,52,000)
Credit by Bank erroneously on 6th Sept. (40,000)
Overdraft as per bank statement 41,516
Note: Bank has credited Neel by 40,000 in error on 6 th September, 2019. If this mistake
is rectified in the bank statement, then this will not be deducted in the above statement
along with ` 26,52,000 resulting in debit balance of ` 1,516 as per pass-book.
6. Statement showing the valuation of stock
as on 31 st March, 2019
`
A Value of Stock as on 10th April, 2019 1,67,500

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 14 FOUNDATION EXAMINATION: NOVEMBER, 2019

B Add: Cost of sales after 31st March, till stock taking

(` 6,875 – ` 1,719) 5,156
C Less: Purchases for the next period (net) 8,100
D Less: Cost of Sales Returns 225
E Less: Loss on revaluation of slow moving inventories 600
F Less: Reduction in value on account of default 300
G Value of Stock on 31st March, 2019 1,63,431
Note: Profit margin of 33.33 percent on cost means 25 percent on sale price.
7. Machinery Account in the books of M/s. Green Channel Co.
` `
1.1.2015 To Bank A/c 1,60,000 31.12.2015 By Depreciation A/c 24,000
To Bank A/c 40,000 (` 20,000 + ` 4,000)
(Erection charges) 31.12.2015 By Balance c/d 2,56,000
1.7.2015 To Bank A/c 80,000 (` 1,80,000 + ` 76,000) _______
2,80,000 2,80,000
1.1.2016 To Balance b/d 2,56,000 31.12.2016 By Depreciation A/c 28,000
(` 20,000 + ` 8,000)
31.12.2016 By Balance c/d 2,28,000
_______ (` 1,60,000 + ` 68,000) _______
2,56,000 2,56,000
1.1.2017 To Balance b/d 2,28,000 1.7.2017 By Bank A/c 1,00,000
30.9.2017 To Bank A/c 30,000 By Profit and Loss A/c 50,000
(Loss on Sale – W.N. 1)
31.12.2017 By Depreciation A/c 18,750
(` 10,000 + ` 8,000 + ` 750)
By Balance c/d 89,250
_______ (` 60,000 + ` 29,250) _______
2,58,000 2,58,000
1.1.2018 To Balance b/d 89,250 31.12.2018 By Depreciation A/c 13,387.5
(` 9,000 + ` 4,387.5)
By Balance c/d 75,862.5
______ (` 51,000 + ` 24,862.5) ______
89,250 89,250

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 15

Working Notes:
Book Value of machines (Straight line method)
Machine Machine Machine
I II III
` ` `
Cost 2,00,000 80,000 30,000
Depreciation for 2015 20,000 4,000
Written down value as on 31.12.2015 1,80,000 76,000
Depreciation for 2016 20,000 8,000
Written down value as on 31.12.2016 1,60,000 68,000
Depreciation for 2017 10,000 8,000 750
Written down value as on 31.12.2017 1,50,000 60,000 29,250
Sale proceeds 1,00,000
Loss on sale 50,000
8. Journal Entries in the Books of Mr. A
Date Particulars L.F. Dr. Cr.
Amount ` Amount `
2017
August 1 Bills Receivable A/c Dr. 10,000
To B 10,000
(Being the acceptance received from B to
settle his account)
August 1 Bank A/c Dr. 9,800
Discount A/c Dr. 200
To Bills Receivable 10,000
(Being the bill discounted for ` 9,800 from
bank)
November 4 B Dr. 10,000
To Bank Account 10,000
(Being the B’s acceptance is to be renewed)
November 4 B Dr. 240
To Interest Account 240
(Being the interest due from B for 3 months
i.e., 8000x3/12 12%=240)

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 16 FOUNDATION EXAMINATION: NOVEMBER, 2019

November 4 Cash A/c Dr. 2,240

Bills Receivable A/c Dr. 8,000
To B 10,240
(Being amount and acceptance of new bill
received from B)
December 31 B A/c Dr. 8,000
To Bills Receivable A/c 8,000
(Being B became insolvent)
December 31 Cash A/c Dr. 3,200
Bad debts A/c Dr. 4,800
To B 8,000
(Being the amount received and written off
on B’s insolvency)
9. Consignment to Jaipur Account in the Books of Manoj
Particulars ` Particulars `
To Goods sent on 1,87,500 By Goods sent on 37,500
Consignment A/c Consignment A/c (loading)
To Cash A/c 15,000 By Abnormal Loss 16,500
To Kiran(Expenses) 12,000 By Kiran(Sales) 1,50,000
To Kiran(Commission) 16,406 By Inventories on 30,375
Consignment A/c
To Inventories Reserve A/c 5,625 By General Profit & Loss A/c 2,156
2,36,531 2,36,531
Working Notes:
1. Calculation of value of goods sent on consignment:
Abnormal Loss at Invoice price = ` 18,750
Abnormal Loss as a percentage of total consignment = 10%.
Hence the value of goods sent on consignment = ` 18,750 X 100/ 10 = ` 1,87,500
Loading of goods sent on consignment = ` 1,87,500 X 25/125 = ` 37,500
2. Calculation of abnormal loss (10%):
Abnormal Loss at Invoice price = ` 18,750.
Abnormal Loss at cost = ` 18,750 X 100/125 = ` 15,000
Add: Proportionate expenses of Manoj (10 % of ` 15,000) = ` 1,500
` 16,500

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 17

3. Calculation of closing Inventories (15%):

Manoj’s Basic Invoice price of consignment = ` 1,87,500
Manoj’s expenses on consignment = ` 15,000
` 2,02,500
Value of closing Inventories = 15% of ` 2,02,500 = ` 30,375
Loading in closing Inventories = ` 37,500 x 15/100 = ` 5,625
Where ` 28,125 (15% of ` 1,87,500) is the basic invoice price of the goods sent on
consignment remaining unsold.
4. Calculation of commission:
Invoice price of the goods sold= 75% of ` 1,87,500 = ` 1,40,625
Excess of selling price over invoice price = ` 9,375 ( ` 1,50,000 - ` 1,40,625)
Total commission = 10% of ` 1,40,625 + 25% of ` 9,375
= ` 14,062.5 + ` 2,343.75 = ` 16,406
10. Goods on sales or return, sold and returned day book in the books of ‘X’
Date Party to whom goods L.F Amount Date Sold Returned
2019 sent ` 2019 ` `
Dec.10 M/s ABC 10,000 Dec. 25 10,000 -
Dec.12 M/s DEF 15,000 Dec. 16 - 15,000
Dec.15 M/s GHI 12,000 Dec. 20 10,000 2,000
Dec.20 M/s DEF 16,000 Dec. 24 16,000 -
Dec.25 M/s ABC 11,000 Dec. 28 11,000 -
Dec.30 M/s GHI 13,000 - _____ _____
77,000 47,000 17,000
Goods on Sales or Return Total Account
Amount Amount
2019 ` 2019 `
Dec. 31 To Returns 17,000 Dec. 31 By Goods sent
To Sales 47,000 on sales or return 77,000
To Balance c/d 13,000 _____
77,000 77,000

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 18 FOUNDATION EXAMINATION: NOVEMBER, 2019

11. Taking 19.6.2018 as a Base date

Transaction Date Due Date Amount Amount
8.3.2018 11.7.2018 4,000 22 88,000
16.3.2018 19.6.2018 5,000 0 0
7.4.2018 10.9.2018 6,000 83 4,98,000
17.5.2018 20.8.2018 5,000 62 3,10,000
20,000 8,96,000
Total of Product
Average Due Date = Base date 
Total of Amount
= 19.6.2018 + ` 8,96,000/`20,000
= 19.6.2018 + 44.8 days (or 45 days approximately)
= 3.8.2018
Mehnaaz wants to save interest of ` 157. The yearly interest is ` 20,000  18%
= ` 3,600.
Assume that days corresponding to interest of ` 157 are Y.
Then, 3,600  Y/365 = ` 157
or Y = 157  365/3,600 = 15.9 days or 16 days (Approx.)
Hence, if Mehnaaz wants to save ` 157 by way of interest, she should prepone the
payment of amount involved by 16 days from the Average Due Date. Hence, she
should make the payment on 18.7.2018 (3.8.2018 – 16 days).
12. Mr. A in Account Current with Mr. X
(Interest upto 15th March, 2019 @ 10% p.a.)
Dr. Cr.
Date Particulars Amount Days Product Date Particulars Amount Days Product
2019 2019
Jan. To Balance b/d 4,000 75 3,00,000 Jan. By Purchase 1,200 46 55,200
01 29 account
Jan. To Sales account 2,230 60 1,33,800 Feb. By Cash 1,000 34 34,000
15 10 account
Mar. To Red Ink product Mar. By Bills
13 (` 2,000  29) 58,000 13 Receivable
account 2,000
Mar. To Interest account Mar. By Balance of
15 15 product 4,02,600
 ` 4,02,600  10  1 
  110 By Balance
 100  366  c/d
(amount to
2,140

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 19

be paid)
6,340 4,91,800 6,340 4,91,800

13. Rectification Entries

Particulars Dr. Cr.
Amount Amount
` `
(i) Returns inward account Dr. 2,575
Sales account Dr. 1,725
To Purchases account 2,575
To Returns outward account 1,725
(Being sales return and purchases return
wrongly included in purchases and sales
respectively, now rectified)
(ii) Drawings account Dr. 3,500
To Purchases account 3,500
(Being goods withdrawn for own consumption
included in purchases, now rectified)
(iii) Plant and machinery account Dr. 450
To Wages account 450
(Being wages paid for installation of plant and
machinery wrongly debited to wages, now
rectified)
(iv) Advertisement expenses account Dr. 825
To Purchases account 825
(Being free samples distributed for publicity out
of purchases, now rectified)
Trading and Profit and Loss Account of Mr. XYZ
for the year ended 31st March, 2019
Dr. Cr.
Amount Amount
` ` ` `
To Opening stock 32,250 By Sales 2,13,575
To Purchases 1,53,100 Less: Sales 2,575 2,11,000
return
Less: Purchases 1,725 1,51,375 By Closing stock
return

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 20 FOUNDATION EXAMINATION: NOVEMBER, 2019

To Carriage inward 1,125  100 100  1,25,000

 ` 80,000   
To Wages 11,715  80 80 

To Gross profit c/d 1,39,535

3,36,000 3,36,000

To Salaries 22,550 By Gross profit b/d 1,39,535

To Rent 4,300 By Bad debts 450
recovered
To Advertisement expenses 4,175
To Printing and 1,250
stationery
To Bad debts 1,100
To Carriage outward 1,350
To Provision for doubtful debts
5% of ` 1,20,000 6,000
Less: Existing provision 3,200 2,800
To Provision for discount on
debtors
2.5% of ` 1,14,000 2,850
Less: Existing provision 1,375 1,475
To Depreciation:
Plant and machinery 3,000
Furniture and fittings 1,025 4,025
To Office expenses 10,160
To Interest on loan 3,000
To Net profit
(Transferred to capital
account) 83,800 _______
1,39,985 1,39,985

Balance Sheet of Mr. XYZ as on 31st March, 2019

Amount Amount
Liabilities ` ` Assets ` `
Capital 65,000 Plant and machinery 20,000
account
Add: Net profit 83,800 Less: Depreciation 3,000 17,000
1,48,800 Furniture and fittings 10,250
Less: 11,500 1,37,300 Less: Depreciation 1,025 9,225

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 21

Drawings
Bank overdraft 80,000 Closing stock 1,25,000
Sundry 47,500 Sundry debtors 1,20,000
creditors
Payable 2,450 Less: Provision for 6,000
salaries doubtful debts
Provision for bad
debts 2,850 1,11,150
Prepaid rent 300
Cash in hand 1,450
_______ Cash at bank 3,125
2,67,250 2,67,250

14.
Valuation of Goodwill: `
(1) Average Capital Employed
Total Assets less Trade payables as on 31.12.2019 6,25,000
Add: 1/2 of the amount withdrawn by partners 75,000
7,00,000
Less: 1/2 of the profit earned in 2019 (1,00,000)
6,00,000
(2) Super Profit :
Profit of M/s Vasudevan, Sunderarajan & Agrawal 2,00,000
Normal profit @ 30% on ` 6,00,000 1,80,000
Super Profit 20,000
(3) Value of Goodwill
5 Years' Purchase of Super profit (` 20,000 × 5) = ` 1,00,000
(b) (i) Capitalisation Method:
Total Capitalised Value of the firm
AverageProfit  100 ` 1,50,000  100
= =  ` 7,50,000
Normal Rate of Return 20
Goodwill = Total Capitalised Value of Business – Capital Employed
= ` 7,50,000 – ` 5,00,000 [i.e., ` 3,00,000 (J) + ` 2,00,000 (K)]
Goodwill = ` 2,50,000
(ii) Super Profit Method:
Normal Profit = Capital Employed x 20/100 = ` 1,00,000

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 22 FOUNDATION EXAMINATION: NOVEMBER, 2019

Average Profit = ` 1,50,000

Super Profit = Average profit – Normal Profit
=` 1,50,000 – ` 1,00,000 = ` 50,000
Goodwill = Super Profit x Number of years’ purchase
= ` 50,000 x 2 = ` 1,00,000
15. (a) (i) Journal Entry in the books of the M/s LMN
Dr. Cr.
Date Particulars ` `
Jan 3 L’s Capital A/c Dr. 1,000
2018 M’s Capital A/c Dr. 1,000
To N’s Capital A/c 2,000
(Being the required adjustment for goodwill
through partner’s capital accounts)

(ii) Revaluation Account

Dr. Cr.
Particulars ` Particulars `
To Furniture A/c 1,000 By Machinery A/c 1,700
(` 5,600 – 4,600) (` 11,700 - 10,000)
To Inventory A/c 400
(` 1,900 – 1,500)
To Partners’ Capital A/cs 300
(L - ` 100, M - ` 100, N - ` 100)
1,700 1,700

Partners’ Capital Accounts

L M N L M N
To N (Goodwill) 1,000 1,000 – By Balance b/d 8,200 8,200 9,000
To Cash A/c – – 2,000 By General Reserve 1,000 1,000 1,000
A/c
To Executors – – 10,100 By Revaluation A/c 100 100 100
A/c (Profit)
To Balance C/d 8,300 8,300 – By L (Goodwill) – – 1000
By M (Goodwill) – – 1000
9,300 9,300 12,100 9,300 9,300 12,100

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 23

Working Note:
Statement showing the Required Adjustment for Goodwill
Particulars L M N
Right of goodwill before death 1/3 1/3 1/3
Right of goodwill after death 1/2 1/2 –
Gain / (Sacrifice) (+) 1/6 (+) 1/6 (-) 1/3

16. Jeevan Hospital

Income & Expenditure Account
for the year ended 31 December, 2019
Expenditure (`) Income (`)
To Salaries 24,000 By Subscriptions 24,500
To Diet expenses 15,600 By Govt. Grants (Maintenance) 20,000
To Rent & Rates 1,700 By Fees, Sundry Patients 4,800
To Printing & Stationery 2,400 By Donations 8,000
To Electricity & Water-charges 2,400 By Benefit shows (net 6,000
collections)
To Office expenses 2,000 By Interest on Investments 800
To Excess of Income over
expenditure transferred to
Capital Fund 16,000
64,100 64,100
Balance Sheet as at 31st Dec., 2019
Liabilities ` ` Assets ` `
Capital Fund : Building :
Opening balance 49,300 Opening balance 90,000
Excess of Addition 50,000 1,40,000
Income
Over Expenditure 16,000 65,300 Hospital Equipment :
Building Fund : Opening balance 34,000
Opening balance 80,000 Addition 17,000 51,000
Add : Govt. Grant 80,000 1,60,000 Furniture 6,000
Subscriptions Investments-
received in advance 2,400 8% Govt. Securities 20,000
Subscriptions receivable 1,400
Accrued interest 800

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 24 FOUNDATION EXAMINATION: NOVEMBER, 2019

Prepaid expenses (Rent) 300

Cash at Bank 6,800
Cash in hand 1,400
2,27,700 2,27,700

Working Notes:
(1) Balance sheet as at 31st Dec., 2019
Liabilities ` Assets `
Capital Fund Building 90,000
(Balancing Figure) 49,300 Equipment 34,000
Building Fund 80,000 Subscription Receivable 6,500
Creditors for Expenses : Cash at Bank 5,200
Salaries payable 7,200 Cash in hand 800
1,36,500 1,36,500
(2) Value of Building `
Balance on 31st Dec. 2019 1,40,000
Paid during the year 50,000
Balance on 31st Dec. 2018 90,000
(3) Value of Equipment
Balance on 31st Dec. 2019 51,000
Paid during the year (17,000)
Balance on 31st Dec. 2018 34,000
(4) Subscription due for 2018
Receivable on 31st Dec. 2018 6,500
Received in 2019 5,100
Still Receivable for 2018 1,400
17. Pehal Ltd.
Journal
2017 Dr. Cr.
` `
May 20 Bank Account Dr. 18,00,000
To Share Application A/c 18,00,000
(Application money on 60,000 shares at ` 30 per
share received.)
June 1 Share Application A/c Dr. 18,00,000
To Share Capital A/c 18,00,000

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 25

(The amount transferred to Capital Account on

60,000 shares ` 30 on application. Directors’
resolution no........ dated ......)
Share Allotment A/c Dr. 18,00,000
To Share Capital A/c 18,00,000
(Being share allotment made due at ` 30 per
share. Directors’ resolution no...... dated ......)
July 15 Bank Account Dr. 18,00,000
To Share Application and Allotment A/c 18,00,000
(The sums due on allotment received.)
Oct. 1 Share First Call Account Dr. 12,00,000
To Share Capital Account 12,00,000
(Amount due from members in respect of first call-
on 60,000 shares at ` 20 as per Directors,
resolution no... dated...)
Oct. 20 Bank Account Dr. 12,00,000
To Share First Call Account 12,00,000
(Receipt of the amounts due on first call.)
2018
Feb. 1 Share Second and Final Call A/c Dr. 12,00,000
To Share Capital A/c 12,00,000
(Amount due on 60,000 share at ` 20 per share
on second and final call, as per Directors
resolution no... dated...)
March 31 Bank Account Dr. 12,00,000
To Share Second & Final Call A/c 12,00,000
(Amount received against the final call on 60,000
shares at `20 per share.)

18. In the books of Company

Journal
Particulars Dr. Cr.
` `
Preference Share Capital A/c (4,000 x `75) Dr. 3,00,000
To Preference Share Allotment A/c 1,00,000
To Preference Share First Call A/c 1,00,000
To Forfeited Share A/c 1,00,000

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 26 FOUNDATION EXAMINATION: NOVEMBER, 2019

(Being the forfeiture of 4,000 preference shares ` 75

each being called up for non-payment of allotment
and first call money as per Board’s Resolution No....
dated.....)
Bank A/c (3,000 x `65) Dr. 1,95,000
Forfeited Shares A/c (3,000 x `10) Dr. 30,000
To Preference Share Capital A/c 2,25,000
(Being re-issue of 3,000 shares at ` 65 per share
paid-up as ` 75 as per Board’s Resolution
No…..dated….)
Forfeited Shares A/c Dr. 45,000
To Capital Reserve A/c (Note 1) 45,000
(Being profit on re-issue transferred to
Capital Reserve)
Working Note:
Calculation of amount to be transferred to Capital Reserve
Forfeited amount per share =` 1,00,000/4,000 = ` 25
Loss on re-issue =` 75 – ` 65 = ` 10
Surplus per share re-issued ` 15
Transferred to capital Reserve ` 15 x 3,000 = ` 45,000.
19. Books of Pihu Ltd.
Journal

Particulars L.F. Debit Credit

(` ) (` )
Bank A/c Dr. 20,00,00,000
To Debenture Application A/c 20,00,00,000
(Debenture application money received)
Debenture Application A/c Dr. 20,00,00,000
To 9% Debentures A/c 20,00,00,000
(Application money transferred to 9% debentures
account consequent upon allotment)
Debenture allotment A/c Dr. 25,00,00,000
Discount on issue of debentures A/c Dr. 5,00,00,000

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 27

To 9% Debentures A/c 30,00,00,000

(Amount due on allotment)
Bank A/c Dr. 25,00,00,000
To Debenture Allotment A/c 25,00,00,000
(Money received consequent upon allotment)

20. (i) Preparation of trial balance serves the following objectives:

1 Checking of the arithmetical accuracy of the accounting entries: Trial
Balance enables one to establish whether the posting and other accounting
processes have been carried out without committing arithmetical errors. In
other words, the trial balance helps to establish the arithmetical accuracy of
the books.
2. Basis for preparation of financial statements: Trial Balance forms the basis
for preparing financial statements such as the Income Statement and the
Balance Sheet. The Trial Balance represents all transactions relating to
different accounts in a summarized form for a particular period. In case, the
Trial Balance is not prepared, it will be almost impossible to prepare the
financial statements to know the profit or loss made by the business during a
particular period or its financial position on a particular date.
3. Summarized ledger: Trial Balance contains the ledger balances on a
particular position of a particular account can be judged simply by looking at
the Trial Balance. The ledger may be seen only when details regarding the
accounts are required.
(ii) Rules regarding posting of entries into ledger
1. Separate account is opened in ledger book for each account and entries from
journal are posted to respective account accordingly.
2. It is a practice to use words ‘To’ and ‘By’ while posting transactions in the
ledger.
3. The concerned account debited in the journal should also be debited in the
ledger but reference should be of the respective credit account.
(iii) Banks are essential to modern society, but for an industrial unit, it serves as a
necessary instrument in the commercial world. Most of the transactions of the
business are done through bank whether it is a receipt or payment. Rather, it is
legally necessary to operate the transactions through bank after a certain limit. All
the transactions, which have been operated through bank, if not verified properly,
the industrial unit may not be sure about its liquidity position in the bank on a
particular date. There may be some cheques which have been issued, but not
presented for payment, as well as there may be some deposits which has been

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 28 FOUNDATION EXAMINATION: NOVEMBER, 2019

deposited in the bank, but not collected or credited so far. Some expenses might
have been debited or bills might have been dishonoured. It is not known to the
industrial unit in time, it may lead to wrong conclusions. The errors committed by
bank may not be known without preparing bank reconciliation statement.
Preparation of bank reconciliation statement prevents the chances of
embezzlement. Hence, bank reconciliation statement is very important and is a
necessity of an industrial unit as it plays a key role in the liquidity control of the
industry.
(iv) A bill of exchange is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of money to or
to the order of certain person or to the bearer of the instrument. When such an
order is accepted by the drawee on the face of the order itself, it bec omes a valid
bill of exchange.
There are three parties to a bill of exchange:
(i) The drawer, who draws the bill, that is, the creditor to whom the money is
owing;
(ii) The drawee, the person to whom the bill is addressed or on whom it is drawn
and who accepts the bill that is, the debtor; and
(iii) The payee, the person who is to receive the payment. The drawer in many
cases is also the payee.
(v) Fundamental Accounting Assumptions: Fundamental accounting assumptions
underlie the preparation and presentation of financial statements. They are usually
not specifically stated because their acceptance and use are assumed. Disclosure
is necessary if they are not followed. The Institute of Chartered Accountants of India
issued Accounting Standard (AS) 1 on ‘Disclosure of Accounting Policies’ according
to which the following have been generally accepted as fundamental accounting
assumptions:
1. Going concern: The enterprise is normally viewed as a going concern, i.e. as
continuing operations for the foreseeable future. It is assumed that the
enterprise has neither the intention nor the necessity of liquidation or of
curtailing materially the scale of the operations.
2. Consistency: It is assumed that accounting policies are consistent from one
period to another.
3. Accrual: Guidance Note on ‘Terms used in Financial Statements’ defines
accrual basis of accounting as “the method of recording transactions by which
revenue, costs, assets and liabilities are reflected in the accounts in the period
in which they accrue.” The accrual ‘basis of accounting’ includes
considerations relating to deferrals, allocations, depreciation and amortization.
Financial statements prepared on the accrual basis inform users not only of

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 29

past events involving the payment and receipt of cash but also of obligations to
pay cash in future and of resources that represent cash to be received in the
future. Hence, they provide the type of information about past transactions and
other events that is most useful to users in making economic decisions.
Accrual basis is also referred to as mercantile basis of accounting.
(vi) Accounting conventions emerge out of accounting practices, commonly known as
accounting principles, adopted by various organizations over a period of time.
These conventions are derived by usage and practice. The accountancy bodies of
the world may change any of the convention to improve the quality of accounting
information. Accounting conventions need not have universal application.
(vii) Machine Hour Rate method of calculating depreciation: Where it is practicable
to keep a record of the actual running hours of each machine, depreciation may be
calculated on the basis of hours that the concerned machinery worked for. Under
machine hour rate method of calculating depreciation, the life of a machine is not
estimated in years but in hours. Thus depreciation is calculated after estimating the
total number of hours that machine would work during its whole life; however, it may
have to be varied from time to time, on a consideration of the changes in the
economic and technological conditions which might take place, to ensure that the
amount provided for depreciation corresponds to that considered appropriate in the
changed circumstances. Proper records are maintained for running hours of the
machine and depreciation is computed accordingly. For example, the cost of a
machine is `10,00,000 and life of the machine is estimated at 50,000 hours. The
hourly depreciation will be calculated as follows:
Total cost of Machine
Hourly Depreciation 
Estimated life of Machine
`10,00,000
= = ` 20 per hour
50,000 hours
If the machine runs for say, 2,000 hours in a particular period, depreciation for the
period will be 2,000 hours  ` 20 = ` 40,000.

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