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RESOURCE PERSONS:

1. MR. CHANDAN KR KHAN

PGT COMMERCE
K.V. COSSIPORE

2. MR. S.K. GHOSH

PGT COMMERCE
K.V. FORT WILLIAM

Our team members and their contribution

Sl nO Name of the KV Name of the teacher Chapter
Change in profit sharing ratio and
1 Cossipore Mr Chandan Kumar Khan valuation of goodwill
2 Fort William Mr Sourabh Kumar Ghosh Financial Statement of a company

3 Bengdubi Mr Ranu Chaudhary Ratio analysis

Company Accounts- Accounting for

4 Binnaguri No.2 Mr Sumer Babu Tanwar Debentures.
5 Malda Mrs Anisha Dubey Dissolution of a Partnership Firm.

6 Gangtok Dr S.C.Pathak Admission of a Partner.

Company Accounts- Accounting for Share
7 IOC Haldia Mr P.K.Kerketta Capital.
Accounting for Partnership Firms-
8 Hasimara Mrs Umang Sharma Fundamentals
Comparative and Common size
9 Ishapore No 2 Mrs Nisha Kumari

10 Kharagpur No.2 Mr Bishnu Kumar Agarwal Retirement and Death of a partner.

11 IIM JOKA Mr Jitendra Singh Financial Statement Analysis-Theory ;

12 PANAGARH Mr D Shankar Cash Flow Statement

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 Accounting for Partnership Firms

Fundamentals

Gist of the lesson

❖ Concept- Provisions in the absence of partnership deed, minimum and maximum number of partners,
❖ Capital accounts of partners- fluctuating and fixed capital accounts.
❖ Calculation of appropriations items- preparation of P&L appropriation account.
❖ Past adjustments- salary, interest on drawings, interest on capital and commission to partner.
Guarantee of profits- guarantee given by all partners, guarantee given by a partner to the firm.

Q.No Question’s Marks

01. Read the following hypothetical situation, Answer Question No. 01 & 02 P & R are partners in 1
a clay toys making firm. Their capitals were 5,00,000 & 10,00,000 respectively the firm
allowed P to get a commission of 10% on the net profit before charging any commission and R
to get a commission of 10% on the net profit after charging all commission. Following is the
Profit and Loss Appropriation A/c for the year
ended 31st March. 2023.
Profit and Loss Appropriation A/c for the year ended 31st March. 2023
Particulars Amount Particulars Amount
To P capital A/c By Profit and Loss
(commission) 44000 A/c ….……………..
(…..X10/100) ….………..
To R capital
A/c(commission) ….…………..
To Profit transferred ….……………
to P capital A/c
R capital A/c ….………………. ….………………….

R’s Commission will be:

(a) ₹ 40,000 (b) ₹ 44,000 (c) ₹ 36,000 (d) ₹ 36,440
02. P’s share of profit will be: 1
(a) ₹ 1,80,000 (b) ₹ 1,44,000 (c) ₹ 2,16,000 (d) ₹ 1,60,000
03. In the absence of Partnership Deed, the interest is allowed on partner’s capital: 1
(a) @ 5% p.a. (b) @ 6% p.a.
(c) @ 12% p.a. (d) No interest is allowed

04. A and B are partners. According to Profit and Loss Account, the net profit for the year is 1
₹2,00,000. The total interest on partner’s drawings is ₹1,000. As salary is ₹40,000 per year and
B’s salary is ₹3,000 per month. The net profit as per Profit and Loss Appropriation Account
will be:
(a) ₹1,23,000 (b) ₹1,25,000 (c) ₹1,56,000 (d) ₹1,58,000

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 05 If a fixed amount is withdrawn by a partner in each quarter, interest on the total amount is 1
charged for ………………... months
06 A is a partner in a firm. He withdrew ₹6,000 in the beginning of each quarter during the year 1
ended 31st March, 2023. Interest on her drawings @ 10% p.a. will be:
(a) ₹900 (b) ₹1,200 (c) ₹1,500 (d) ₹600
07. Name any two-items shown in the Debit side of Profit and Loss Appropriation Account 1
08. If a partner introduces in the firm additional capital ₹50,000. In the absence of partnership 1
deed, on 31st March 2023 he will receive interest:
(a) ₹5,000 (b) Zero (c) ₹2,500 (d) ₹10000
09. A, B and C are partners. A’s capital is ₹3,00,000 and B’s capital is ₹1,00,000. C has not 1
invested any amount as capital but he alone manages the whole business. C wants Rs 30,000
p.a. as salary. Firm earned a profit of ₹1,50,000. How much will be each partner’s share of
Profit?
(A) A ₹60,000; B ₹60,000; C ₹Nil
(B) A ₹90,000; B ₹30,000; C ₹Nil
(C) A ₹40,000; B ₹40,000 and C ₹40,000
(D) A ₹50,000; B ₹50,000 and C ₹50,000
10. Net profit of a firm is ₹79,800. Manager is entitled to a commission of 5% of profits after
charging his commission. Manager’s Commission will be :
(a) Rs 4200 (b) 380 (c) Rs 3990 (d) 3800 1
11. B, C and D are partners sharing profits in the ratio of 1:1:1. As per the partnership deed salary 3
is allowed to the partners as follows:

to a salary of ₹ 16,000 p.a.

salary of ₹ 4,000 quarterly.
Calculate the amount of salary payable to the partners in the following cases:
Case 1. When there is profit of ₹ 62,000
Case 2. When there is profit of ₹ 35,000
Case 3. When there is loss ₹ 20,000
12. Manoj and Billu are equal partners. Manoj is a sleeping partner and Billu is an Active working 3
partner. Their capitals on 1st April 2021 were: Manoj ₹ 6,000 Credit and Billu (₹ 20,000)
Debit. Mr. Manoj has given a loan to the firm ₹ 10,000 on 1st April 2021 @ 10% p.a.
Partnership deed allows 10% p.a. interest on capital. Salary to every Active working partner @
3,000 p.a. but partnership deed is silent on interest on loan payable to any partner, in case any
partner provides loan to the firm. Profit for the year ending 31st March 2022 was ₹ 7,000
before providing above. Prepare Profit and Loss Appropriation Account.
13. Ram, Mohan and Sohan were partners sharing profits in the ratio of 2: 1: 1. Ram withdrew ₹ 3
3,000 every month and Mohan withdrew ₹ 4,000 every month. Interest on drawings @ 6% p.a.
was charged, whereas the partnership deed was silent about interest on drawings. Showing your
working clearly, pass the necessary adjustment

14. Mohan, Sohan and Rohan are partners in a firm. Their drawings are : 3
(1) Mohan draws ₹ 4,000 at the beginning of every month.
(2) Sohan draws ₹ 4,000 in the middle of every month.
(3) Rohan draws ₹ 4,000 at the end of every month.

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15. 3
Arun and Arora were partners in a firm sharing profits in the ratio of 5:3. Their fixed capitals
on 1.4.2019 were: Arun ₹ 60,000 and Arora ₹ 80,000. They agreed to allow interest on
capital @ 12% p.a. and to charge on drawings @15% p.a. The profit of the firm for the year
ended 31st March, 2020 before all above adjustments was ₹ 12,600. The drawings made by
Arun were₹ 2,000 and by Arora ₹ 4,000 during the year.
Prepare Profit and Loss Appropriation A/c of Arun and Arora. Show your calculations
clearly. The interest on capital will be allowed even if the firm incurs loss

16. Amay, Anmol and Rohan entered into partnership on 1st July, 2021 to share profits and losses 3
in the ratio of 3:2:1. Amay guaranteed that Rohan’s share of profit after charging interest on
capital @ 6% p.a would not be less than ₹ 36,000 p.a. Their fixed capital balances are: ₹
2,00,000, ₹ 1,00,000 and ₹ 1,00,000 respectively. Profit for the year ended 31st March, 2022
was ₹1,38,000.
Prepare Profit and Loss Appropriation A/c.
17. A, B and C were partners in a firm. On 1st April, 2020 the balance in their capital 4
accountsstood at ₹ 8,00,000, ₹ 6,00,000 and ₹ 4,00,000 respectively. As per the provisions of
the partnership deed, partners were entitled to interest on capital @ 5% p.a., salary to B ₹
3,000 per month and a commission of ₹ 12,000 to C. A’s share of profit, excluding interest on
capital, was guaranteed at ₹ 25,000 p.a. B’s share of profit, including interest on capital but
excluding salary was guaranteed at ₹ 55,000 p.a. Any deficiency arising on that account was
to be met by C. Theprofits of the firm for the year ending 31st March, 2021 amounted to ₹
2,16,000. Prepare Profit and Loss Appropriation Account for the year ending 31st March, 2021
18. Yadu, Vidu and Radhu were partners in a firm sharing profits in the ratio of 4 : 3 : 3. 4
Theirfixed capitals on 1st April, 2020 were ₹ 9,00,000, ₹ 5,00,000 and ₹ 4,00,000
respectively. On 1st November, 2020, Yadu gave a loan of ₹ 80,000 to the firm. As per the
partnership agreement:
(i) The partners were entitled to an interest on capital @ 6% p.a.
(ii) Interest on partners’ drawings was to be charged @ 8% p.a. The firm earned profits of ₹

the year amounted to Yadu : ₹ 80,000, Vidu : ₹ 70,000 and Radhu :₹ 50,000. Prepare Profit
and Loss Appropriation Account for the year ending 31st March, 2021

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19. Rajiv and Sanjeev were partners in a firm. Their partnership deed provided that the profits 4
shall be divided as follows: First ₹ 20,000 to Rajeev and the balance in the ratio of 4 : 1. The
profits for the year ended 31st March, 2022 were ₹ 60,000 which had been distributed among
the partners On 1-4-2021 their capitals were Rajeev ₹ 90,000 and Sanjeev ₹ 80,000. Interest
on capital was to be provided @ 6% p.a. While preparing the profit and loss appropriation
interest on capital was omitted. Pass necessary rectifying entry for the same. Show your
workings clearly.

20. Maanika, Bhavi and Komal are partners sharing profits in the ratio of 6:4:1. Komal is 4
guaranteed a minimum profit of ₹ 2, 00,000. The firm incurred a loss of ₹ 22, 00,000 for the
year ended 31st March, 2018.
Pass necessary journal entry regarding deficiency borne by Maanika and Bhavi and prepare
Profit and Loss Appropriation Account.

21. Ajay, Manish and Sachin were partners sharing profits in the ratio 5:3:2. Their Capitals were ₹ 4
6,00,000; ₹ 8,00,000 and ₹ 11,00,000 as on April 01, 2021. As per Partnership deed, Interest on
Capitals were to be provided @ 10% p.a. For the year ended March 31, 2022, Profits of ₹
2,00,000 were distributed without providing for Interest on Capitals.
Pass an adjustment entry and show the workings clearly.

22. Piya and Bina are partners in a firm sharing profits and losses in the ratio of 3 : 2. 4
Following was the Balance Sheet of the firm as on 31-3-2022.
Liabilities Amount Assets Amount
Capitals: Sundry Assets 120000
Piya 80,000
Bina 40,000
120000
120000 120000
The profits ₹ 30,000 for the year ended 31-3-2022 were divided between the partners without
allowing interest on capital @ 12% p.a. and salary to Piya @ ₹ 1,000 per month. During the
year Piya withdrew ₹ 8,000 and Bina withdrew ₹ 4,000. Showing
your working notes clearly, pass the necessary rectifying entry.
23. On 31st March, 2021, the balance in the capital accounts of Asha, Nisha and Disha after 6
making adjustments for profits and drawings were ₹ 1,50,000, ₹ 1,20,000 and ₹ 90,000
respectively. Subsequently, it was discovered that interest on capital and interest on drawings
had been omitted. The partners were entitled to interest on capital @ 10% p.a. Interest on
drawings was also to be charged @ 10% p.a. The drawings during the year were: Asha ₹
50,000, Nisha ₹ 60,000 and Disha ₹ 30,000. The net profit for the year ending 31st March,
2021 amounted to ₹ 1,00,000. The profit-sharing ratio was 2: 2: 1. Pass the necessary
adjustment entry. Also show your workings clearly.

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24. Jay, Vijay and Karan were partners of an architect firm sharing profits in the ratio of 2: 2: 1. 6
Their partnership deed provided the following:
I. A monthly salary of ₹ 15,000 each to Jay and Vijay.
II. Karan was guaranteed a profit of ₹ 5,00,000 and Jay guaranteed that he will earn an annual
fee of ₹ 2,00,000. Any deficiency arising because of guarantee to Karan will be borne by Jay
and Vijay in the ratio of 3: 2.
During the year ended 31st March, 2022 Jay earned fee of ₹ 1,75,000 and the profits
of the firm amounted to ₹15,00, 000 Showing your workings clearly prepare Profit and Loss
Appropriation Account.

25. Garry, Harry and Robert were partners in a firm sharing profits in the ratio of 7:4:9. Their 6
capitals on 1st April 2021 were: Garry ₹ 2,00,000; Harry ₹ 75,000 and Robert ₹ 3,50,000. Their
partnership deed provided for the following:
(i) 10% of the net profit to be transferred to the General Reserve.
(ii)Interest on capital is to be allowed @ 9% p.a.
(iii) Salary of ₹ 6,000 per month to Harry
(iv) Interest on Drawings @ 6% p.a.
Drawings made against the anticipated profits, by Garry during the year ₹ 25,000, Harry
withdrew ₹ 5,000 at the end of each quarter, Robert withdrew ₹ 25,000 on1st June 2021 for
personal use. During the year ended 31st March 2022 the firm earned profits of ₹ 1,70,000.
Prepare Profit and Loss Appropriation Account.
26. Sonu and Rajat started a partnership firm on April 1, 2021. They contributed ₹ 8,00,000 and 6
₹6,00,000 respectively as their capitals and decided to share profits and losses in the ratio of
3 : 2. The partnership deed provided that Sonu was to be paid a salary of ₹ 20,000 per month
and Rajat a commission of 5% on turnover. It also provided that interest on capital be
allowed @ 8% p.a. Sonu withdrew ₹ 20,000 on 1st December, 2021 and Rajat withdrew ₹
5,000 at the end of each month. Interest on drawings was charged @ 6% p.a. The net profit as
per Profit and Loss Account for the year ended 31st March, 2022 was ₹4,89,950. The turnover
of the firm for the year ended 31st March, 2022 amounted to ₹ 20,00,000. Pass necessary
journal entries for the above transactions in the books of Sonu and Rajat.

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27. Moli, Bhola and Raj were partners in a firm sharing profits and losses in the ratio of 3 : 3 6
:4. Their partnership deed provided for the following :
i. Interest on capital @ 5% p.a.
ii. Interest on drawing @ 12% p.a.
iii. Interest on partner’s loan @ 6% p.a.
iv. Moli was allowed an annual salary of ₹ 4,000; Bhola was allowed a commission of
10% of net profit as shown by Profit and Loss Account and Raj was guaranteed a
profit of ₹ 1,50,000 after making all the adjustments as provided in the partnership
agreement.
Their fixed capitals were Moil: ₹ 5,00,000; Bhola : ₹ 8,00,000 and Raj : ₹ 4,00,000. On 1st
April, 2021 Bhola extended a loan of ₹ 1,00,000 to the firm. The net profit of the firm for the
year ended 31st March, 2022 before interest on Bhola’s loan was ₹ 3,06,000.
Prepare Profit and Loss Appropriation Account of Moli, Bhola and Raj for the year ended
31st March, 2022 and their Current Accounts assuming that Bhola withdrew
₹ 5,000 at the end of each month, Moli withdrew ₹ 10,000 at the end of each quarter and Raj
withdrew ₹ 40,000 at the end of each half year.
28. Mudit and Uday are partners in a firm sharing profits in the ratio 2: 3. Their capital accounts 6
as on April 1, 2021 showed balances of ₹ 70,000 and ₹ 60,000 respectively. The drawings of
Mudit and Uday during the year 2021-2022 were ₹ 16,000 and ₹ 12,000 respectively. Both
the amounts were withdrawn on 1st January 2022. It was subsequently found that the
following items had been omitted while preparing the final accounts for the year ended 31 st
March 2022.
(a) Interest on capitals @ 6% p.a.;
(b) Interest on drawings @ 6% p.a.;
Mudit was entitled to a commission of ₹ 4,000 for the whole year. Showing your workings
clearly passes a rectifying entry in the books of the firm.

ANSWERS

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1. Ans. 36000.
Solution-: P’s Commission is Rs 44000, then Profit will be Rs 440000.
R’s commission will be 440000-44000=396000X10/110 = Rs 36000.
2. (a) Rs 180000
3. (d) No interest is allowed
4. (b) ₹1,25,000

Hint
Particulars Amount Particulars Amount
To A’s capital By net profit 200000
A/c (salary) 40000 By interest on
To B’s capital drawings 1000
A/c (salary) 30000
To profit tfd to
capital A/c 125000

5. 6 months
6. (c) ₹1,500
Hint
6000 X 4 X 10/100 X 7.5/12
7. Salaries of Partners, Commission to Partners , Interest to Partner`s Capitals

8. (b) Zero
9. (D) A ₹50,000; B ₹50,000 and C ₹50,000
10. (d) 3800
11. Case 1 Profit is enough to pay the salary to the partners B’s Salary will be paid ₹
24,000; C ₹ 16,000 and D ₹ 16,000 and remaining profit 6,000 will be shared equally
by all the partners
Case 2 Profit is not enough to pay salary to partners Profit will be shared in the ratio
of salary 24,000: 16,000: 16,000 i.e., 3:2:2. B will get 15,000; C ₹ 10,000 and D ₹
10,000.
Case 3 Salary will not be paid to any partner, because there is loss. Salary is not a
charge in this case, it is treated as an appropriation.

12. Interest on Capital to Manoj 6,000 and Salary to Billu 3,000 but profit is only 6,000
Profit will be shared in the ratio of appropriation:6,000:3,000=2:1
No interest on capital to Billu because his capital is showing a negative balance.

13. Ram’s capital A/c Dr. 180

Sohan’s capital A/c Dr. 630
To Mohan’s capital A/c 810

14. Interest on Mohan’s Drawings - 2600 (6.5/12)

Interest on Sohan’s Drawings - 2400 (6/12)
Interest on Rohan’s Drawings - 2200 (5.5/12)
15. Profit and Loss Appropriation Account
(for the year ended 31st March, 2020
Dr. Cr.
Particulars (₹) Particulars (₹)

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 To Interest on By Profit and Loss A/c 12,600
Capital: (Net Profit)
Arun’s Current A/c By Interest on
7,200 Drawings:
16800 Arun’s Current
Arora’s Current A/c A/c - 150 450
– 9,600 Arora’s Current
3750 A/c - 300
By Net Loss transferred
to Current A/c:
Arun - 2,344
Arora - 1,406

16,800 16,800

16. Amay 53,000, Anmol 40,000, Rohan 27,000*

*Guarantee met for 9 months.
17.
Particulars Amount Particulars Amount
To interest on By Profit and
capital loss (net profit) 216000
A- 40000
B- 30000
C- 20000 90000

To B’s capital A/c

(salary ) 36000

To c’s capital A/c

(commission) 12000

To profit
A- 26000
B- 26000
C- 26000
78000

18. Profit transferred to Yadu’s current A/c 61,200, Vidu’s current A/c 45,900,
Radhu’s current A/c 45,900

19. Rajiv’s capital A/c Dr 2760

To sanjeev’s capital A/c 2760

Working : Past Adjustment Table

Particulars Rajiv ₹ Sanjeev ₹ Total ₹
Omission of IOC 5,400 Cr. 4,800 Cr. 10,200 Dr.

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 Profit wrongly distributed 52,000 Dr. 8,000 Dr. 60,000 Cr.
Profits correctly distributed 43,840 Cr. 5,960 Cr. 49,800 Dr.
Net Effect 2,760 2,760 00,000
20.
Date Particulars L.F Dr Cr
2018 Maanika’s capital A/c Dr. -- 2,40,000
31 Bhavi’s Capital A/c Dr. 1,60,000
March To Komal’s Capital A/c
(Being the deficiency of komal meet by 4,00,000
Maanika & Bhavi)

21. Ajay’s capital A/c Dr 52000

To manish’s capital A/c 4000
To Sachin’s Capital A/c 48000

22. Bina’s capital A/c Dr 5856

To piya’s capital A/c 5856

Past Adjustment Table

Particulars Piya Bina Total
Omission of IOC 8,400 Cr. 3,840 Cr. 12,240 Dr.
Omission of Piya’s 12,000 Cr. ---------- 12,000 Dr.
salary
20,400 Cr. 3,840 Cr. 24,240 Dr.
Dr. Total divided in 14,544 Dr. 9,696 Dr. 22,240 Cr
PSR
Net Effect 5,856 Cr. 5,856 Dr. 00,000

23. Nisha’s capital A/c Dr. 2200

To Asha’s capital A/c 300
To Disha’s capital A/c 1900

24.
Particulars Amount Particulars Amount
To salary By net profit 1500000
Jay’s capital A/c 180000 By jay’s capital
Vijay’s capital A/c 180000 A/c 25000

To profit transferred to
Jay’s capital A/c
(466000- 160200) 305800
Vijay’s capital A/c

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 (466000- 106800) 359200
Karan’s capital A/c
(233000+267000) 500000

25. Distribution of Profit: Garry’s Capital A/c 9,520 , Harry’s Capital A/c 5,440, Robert’s
Capital 12,240

26. Pass journal entries.

27.
Particulars Amount Particulars Amount
To interest on capital By profit and
Moli’s current A/c 25000 loss A/c
Bhola’s current A/c 40000 (306000-6000) 300000
Raj’s current A/c By interest on
20000 85000 drawings
Moli’s current
To salary A/c 1800
Moli’s current A/c 4000 Bhola’s current
A/c 3300
To commission Raj’s current
Bhola’s current A/c 30000 A/c 2400 7500

To profit
Moli’s current A/c (56550-
37300) 19250
Bhola’s current A/c (56550-
37300) 19250
Raj’s current A/c
(75400+37300+37300 150000
)

28. Uday’s capital A/c Dr 3408

To Mudit’s Capital A/c 3408

NAME OF CHAPTER: ADMISSION OF A PARTNER

SL QUESTIONS MAR
. K
N
O.

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1 Akshita and Anurag are partners in a firm sharing profits in the ratio of 2 : 1. Akshat is admitted 1
in the firm with 1/3 share in profits. Akshat acquires2/3 of his share from Akshita and 1/3 of his
share from Anurag.
The new profit sharing ratio of Akshita, Anurag and Akshat will be :
(a) 3:2:4 (b) 4:3:2
(c) 2:1:1 (d) 4:2:3
2 On the reconstitution of a firm the value of furniture increased from Rs. 7,00,000 to Rs. 8,00,000 1
and stock reduced to Rs. 4,00,000 from Rs. 4,20,000. Gain or loss on revaluation will be :
(a) Rs. 80,000 (b) Rs. 80,000
(c) Rs. 8,00,000 (d) Rs. 1,20,000
3 For which of the following situations, the old profit sharing ratio of partners is used at the time of 1
admission of a new partner ?
(A) When new partner brings only a part of his share of goodwill.
(B) When new partner is not able to bring his share of goodwill.
(C) When, at the time of admission, goodwill already appears in the balance sheet.
(D) When new partner brings his share of goodwill in cash.
4 Mona and Tina were partners in a firm sharing profits in the ratio of 3:2. Naina was admitted 1
with 1/6th share in the profits of the firm. At the time of admission, Workmen’s Compensation
Reserve appeared in the Balance Sheet of the Balance Sheet of the firm at Rs. 32,000. The claim
on account of workmen’s compensation was determined at Rs. 40,000.Excess of claim over the
reserve will be :
(A) Credited to Revaluation Account (B) Debited to Revaluation
Account.
(C) Credited to old partner’s Capital (D) Debited to old partner’s Capital
Account Account.
5 At the time of admission of a new partner in the firm, the new partner compensates the old 1
partners for their loss of share in the _________ of the firm for which he brings in an additional
amount which is known as Premium for goodwill.
(A) Average profit (B) Normal profit
(C) Super profit (D) Actual profit
6 Avya, Divya and Kavya were equal partners. They decided to change the profit sharing ratio to 1
4:3:2. For this purpose the goodwill of the firm was valued at Rs. 90,000. The journal entry for
the treatment of Goodwill will be:
Date Particulars L.F. Dr. Amt. Cr. Amt.
Rs. Rs.
(a) Kavya’s Capital A/c Dr. 10,000
To Avya’s Capital 10,000
A/c
(b) Divya’s Capital A/c Dr. 10,000
To Avya’s Capital 10,000
A/c
(c) To Avya’s Capital A/c Dr. 90,000
To Kavya’s Capital 90,000

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 A/c
(d) To Avya’s Capital A/c Dr. 10,000
To Kavya’s Capital 10,000
A/c
7 State the ratio in which the partners share profits or losses on revaluation of assets and liabilities, 1
when there is a change in profit sharing ratio amongst partners ?
8 Kamal and Vimal were partners in a firm sharing profits in the ratio of 3 : 2. Ghosh was admitted 1
as a new partner for 1/5th share in the profits. On Ghosh’s admission the Balance Sheet of the
firm showed a credit balance of Rs.10,000 in its Profit and Loss Account which was debited by
the accountant of the firm in the accounts of Kamal and Vimal. Did the accountant give correct
treatment to the balance of Profit and Loss Account ? If ‘yes’ give the reason and if ‘No’, give
the correct treatment
9 When a new partner is admitted, the balance of ‘General Reserve’ appearing in the Balance Sheet 1
at the time of admission is credited to :
(a) Profit and Loss Appropriation Account.
(b) Capital Accounts of all the partners.
(c) Capital Accounts of old partners.
(d) Revaluation Account.
10 Revaluation account is also named as _____ 1
a) Profit and Loss a/c
b) Profit and Loss Adjustment a/c
c) Profit and Loss Appropriation a/c
d) None of these
11 Aruna and Karuna are partners in a firm. They admit Varuna on 1st April, 2023 for 1/4th share in 3
the profits of the firm. On an average, profit earned by Aruna and Karuna is Rs. 1,00,000.
Average capital employed by the firm is Rs. 8,00,000. Normal rate of return in a similar type of
business is 10%. Value of firm’s goodwill is to be determined on the basis of Capitalisation of
Super Profit.
You are required to:
(i) Calculate goodwill of the firm.
(ii) Pass the Journal entries in the books of the firm if Varuna brings her share of goodwill in
cash.
12 Raka, Seema and Mahesh were partners sharing profit and losses in the ratio of 5:3:2. With effect 3
from 1st April, 2022 they manually agreed to share profits and losses in the ratio of 2:2:1. On that
date, there was a workmen’s compensation fund of Rs. 90,000 in the books of the firm. It was
agreed that goodwill of the firm be valued at Rs. 70,000. Claim for workmen’s compensation
amounted Rs. 40,000. Profit on revaluation of assets and re-assessment amounted to Rs. 40,000.
Pass necessary journal entries for the above transaction in the book of the firm.
13 Yash and Karan were partners in an interior designer firm. Their fixed capitals were Rs. 6,00,000 3
and Rs. 4,00,000 respectively. There were credit balance in their current accounts of Rs. 4,00,000
and Rs. 5,00,000 respectively. The firm had a balance of Rs. 1,00,000 in General Reserve. The
firm did not have any liability. They admitted Radhika into partnership for 1/4 th share in the
profits of the firm. The averge profits of the firm for the last five years were Rs. 5,00,000.

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 Calculate the value of goodwill of the firm by capitalization of average profits method. The
normal rate of return in the business is 10%.
14 State the purpose of preparing Revaluation Account. 3
15 Anil and Sunil are partners sharing profits and losses in the ratio of 2 : 3. Sushil is admitted into 3
the partnership with 1/5 share in profits. On his admission, you are required to prepare a Profit
and Loss Adjustment a/c. The assets were revalued and liabilities were reassessed in the
following manner :
Old Value New Value
Machinery Rs. 50000 Found to be undervalued by Rs. 12000
Furniture Rs. 40000 To be depreciated by 5%
Creditors Rs. 17000 Rs. 2000, not likely to be claimed
Investment Rs. 15000 Taken away by Anil at a value of Rs. 14000
16 P, Q and R were partners in a firm sharing profits in the ratio of 3 : 2 : 1. They admitted S as a 3
new partner for 1/8th share in the profits which he acquired 1/16th from P and 1/16th from Q.
Calculate new profit sharing ratio of P, Q, R and S.
17 Kumar, Gupta and Kavita were partners in a firm sharing profits and losses equally.The firm was 4
engaged in the storage and distribution of canned juice and its godownswere located at three
different places in the city. Each godown was being managedindividually by Kumar, Gupta and
Kavita. Because of increase in business activities atthe godown managed by Gupta, he had to
devote more time. Gupta demanded that hisshare in the profits of the firm be increased, to which
Kumar and Kavita agreed. Thenew profit sharing ratio was agreed to be 1 : 2 : 1. For this purpose
the goodwill of thefirm was valued at two years purchase of the average profits of last five years.
Theprofits of the last five years were as follows:
Year I II III IV V
Profit (Rs) 4,00,000 4,80,000 7,33,000 (33,000) 2,20,000
You are required to :
(i) Calculate the goodwill of the firm.
(ii) Pass necessary Journal Entry for the treatment of goodwill on change in
profitsharing ratio of Kumar, Gupta and Kavita.
18 AandBarecarryingonbusinessinpartnershipsharingprofitsandlossesintheratioof1:3.Their Balance 4
Sheetasat31stMarch,2012, was :
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capitals : Cash in hand 1400
A : 60000 Sundry Debtors 11200
B : 60000 120000 Stock 17500
Creditors 24900 Furniture 25000
Building 90000
144900 144900
TheyadmitCintopartnershipwitheffectfrom1stApril,2012givinghim1/5thshareinfutureprofitsonthef
ollowingterms :
i) Stockand Furnitureare to be increased invalueby10%.
ii) Buildingis to be appreciatedby15,000

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 iii) Aprovisionof5%istobecreatedonSundryDebtorsforDoubtfuldebts.
iv) CbringsRs.60,000ashiscapitalandRs.10,000asgoodwill,whichistoremaininthebusiness.
Prepare Profitand Loss Adjustment Account.
19 Neha and Tanisha are partners in a firm sharing profits in the ratio of 2:3. They admit Sunita as a 4
partner with 1/5 in the share of profits. Sunita brings 20000 (including capital of Rs. 17000 and
remaining as her share in goodwill).
Goodwill of the firm was valued at Rs. 20000. Sunita is unable to bring the remaining portion of
her share of goodwill. The old partners withdraw half of the amount from the business.
Pass journal entries for the treatment of Goodwill on Sunita’s admission.
20 Ashish and Vikas are partners sharing profits in the ratio of 2:3. Chandan is admitted into the 4
partnership, for whom Ashish surrenders ¼ of his share and Vikas surrenders 1/5 from his share.
Calculate Chandan’s share, Sacrificing ratio and New Profit Sharing Ratio.
21 Explain any four main factors affecting the value of goodwill. 4
22 A and B are partners sharing profits in the ratio of 2:1. C is admitted into the firm for 1/5 share of 4
profits. C brings in Rs. 16,000 in respect of his capital. The capitals of old partners A and B, after
all adjustments relating to goodwill, revaluation of assets and liabilities, etc., are Rs. 40,000 and
Rs. 28,000 respectively. It is agreed that the old partners’ capitals should be adjusted according to
the new partner’s capital and their new capitals should be maintained in the new profit sharing
ratio.
Determine the new capitals of A and B and also find the amount to be withdrawn or brought in
by any of the old partners..
23 Yuv and Veer were partners in a firm sharing profits and losses in the ratio of 3 : 1. Their 6
Balance Sheet as on 31st March, 2022 was as under :
Balance Sheet of Yuv and Veer as at 31st March, 2022
Liabilities Amount Assets Amount
Rs. Rs.

Creditors 41,000 Plant and machinery 60,000

General Reserve 80,000 Building 40,000
Outstanding Exp. 12,000
Investments 60,000
Capitals:
Stock 50,000
Yuv 79,000
Debtors 38,000
1,27,000
Veer 48,000
Less : Prov. for
34,000
Dbt. Debts 4,000
Cash 16,000
2,60,000 2,60,000
They decided to admit Yash in the firm on 1st April, 2022 for ¼ share in profits on the following
terms :
(i) Yash will bring in proportionate capital and Rs. 4,000 as hisshare of
goodwill premium in cash.
(ii) Investments were valued at Rs. 68,000.

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 (iii) Plant and Machinery was to be depreciated by 10%.
Prepare Revaluation Accounts and Partners’ Capital Accounts.

24 TanuandKanuarepartnerssharingprofitsintheratioof2:3.On31stMarch,2012theirBalanceSheetwas 6
:
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Tanu’s Capital 30000 Goodwill 20000
Kanu’s Capital 40000 Machinery 90000
General Reserve 14000 Stock 14000
Creditors 66000 Debtors 38000
Bills Payable 15000 Cash 3000
165000 165000

TheydecidedtoadmitManuintothepartnershipforonthefollowingterms:
a) Stockistoberevalued atRs.18000.
b) Machineryistobedepreciatedby 15%.
c) ItisfoundthatthecreditorsincludedasumofRs.12,000whichwasnottobepaid.
d) OutstandingrentisRs.1,900.
e) ManuistobringinRs.36,000ashiscapitalandshareofgoodwillRs.10,000forhis1/6thshare
intheprofitsof thefirm.
PreparetheRevaluationAccount,Partners’CapitalAccountsandtheBalanceSheetofthenew firm.
25 PandRarepartnerssharingprofitsintheratioof3:2.On31stMarch,2012theirBalanceSheet was: 6
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capitals : Furniture 15000
P : 35000 Machinery 33000
R : 30000 65000 Stock 23000
Workmen’s compensation Investments 20000
fund 10000 Debtors
Creditors 36000 19000 17000
Bank Loan 9000 Less : Prov for DD 12000
2000
Cash
120000 120000

Theydecidedtoadmit Qintothepartnershipfor1/4thshare intheprofitsonthefollowingterms:

a) QbringsRs.23,450 ashisCapital.HealsobringsRs.7,000 incashashisshareofGoodwill.
b) DepreciateStockby5%andFurnitureby10%.
c) An outstandingbillforrepairsRs.1,000willbebrought inthebooks.
d) Debtorsareallgood.
e) HalfoftheinvestmentsweretobetakenoverbyPandRintheirprofitsharingratioatbookvalue.

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 f) Bankloan ispaid off.
g) Partnersagreedtosharefutureprofitsintheratioof3:3:2.
PreparetheRevaluationAccount,Partners’CapitalAccountsandtheBalanceSheetofthenew firm.
26 AandBarecarryingonbusinessinpartnershipsharingprofitsandlossesintheratioof1:3.Their Balance 6
Sheetasat31stMarch,2012, was

Sundry Creditors 24900 Cash in hand 1400

Capital A/cs : Sundry Debtors 11000
A : 60000 Stock 17500
B : 60000 120000 Furniture 25000
Building 90000
144900 144900

TheyadmitCintopartnershipwitheffectfrom1stApril,2012givinghim1/5thshareinfutureprofitsonthef
ollowingterms :
a) Stockand Furniture are to be increased in value by10%.
b) Building is to be appreciatedby15,000
c) Aprovisionof5%istobecreatedonSundryDebtorsforDoubtfuldebts.
d) CbringsRs.60,000ashiscapitalandRs.10,000asgoodwill,whichistoremaininthebusiness.
PrepareProfitandLossAdjustmentAccountandCapitalAccountsofPartners.
27 A and B are partners sharing profits in the ratio 3:2.They admitted C into the firm for 1/6th share 6
in the profit to be contributed equally by A and B.On the date of admission the Balance sheet of
A and B was as follows:-
Liabilities Amt Assets Amt
Capital Machinery 260000
A 300000 Furniture 180000
B 200000 500000 Stock 100000
Reserve Fund 40000 Debtors 80000
Bank Loan 120000 Cash 60000
Creditors 20000 Profit & Loss 4000
Workmen’s Comp Reserve 4000
684000 684000

Terms of C’s admission were as follows :

1. C will bring Rs. 250000 as his capital and necessary amount of goodwill in cash
2. Furniture is to revalued at Rs. 240000 and value of stock to be reduced by 20%
3. Provision for doubtful debt is 10%
4. Goodwill of the firm is to be valued at four year purchase of the average super profit of
the last three years’ average profit of the last three years are Rs. 210000, while the normal
profit that can be earned on the capital employed are Rs. 120000.
5. Claim on Workmen Compensation 6000
Prepare Revaluation account, Partners’ capital account after admission of C.
28 Rahul and Manish are partners sharing profits and losses in the ratio of 3:2. Sahil is admitted for 6

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 ¼ share in profits. Pass journal entries in the following cases :
1) Furniture of Rs. 66000 was found to be overvalued by 10%
2) Plant & Machinery of Rs. 72000 is found to be undervalued by 10%
3) There was a General Reserve of Rs. 6000 in the balance sheet.

ANSWER KEY

SL. MARK
NO.
1 (d) 4:2:3 1
2 1
(a) Rs. 80,000
3 (C) When, at the time of admission, goodwill already appears in the balance sheet. 1
4 (B) Debited to Revaluation Account 1
5 (C) Super Profit 1
6 (D) 1
7 In case of change in profit sharing ratio, profit or losses on revaluation of assets & 1
liabilitiesare shared in old profit sharing ratio / existing profit sharing ratio.
8 No, the accountant’s didn’t give correct treatment. 1
Reason: As credit balance in Profit and Loss Account indicates undistributed
profits. It shouldhave been credited to Kamal and Vimal’s Capital Account.
D Particulars Dr. Amt Cr. Amt
Profit & Loss A/c Dr. 10,000
To Kamal’s Capital Account 6,000
To Vimal’s Capital A/c 4,000
9 (c) Capital Accounts of old partners. 1
10 (b) Profit and Loss Adjustment a/c 1
11 (i) 3
Average Profit = Rs. 1,00,000 (Given)
Normal Profit = Rs. 8,00,000 × 10/100 = Rs. 80,000
Super Profit = Rs. 1,00,000 – Rs. 80,000 = Rs. 20,000
Firm’s Goodwill = Rs. 20,000 × 100/10 = Rs. 2,00,000
Varuna’s Share of Goodwill = Rs.2,00,000 × 1/4 = Rs.50,000.
(ii)
Date Particulars L.F. Dr. Rs. Cr. Rs.
Bank A/c Dr. 50,000
To Premium for Goodwill A/c 50,000
Premium for Goodwill A/c Dr. 50,000
To Aruna’s Capital A/c 25,000
To Karuna’s Capital A/c 25,000

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12 Date Particulars L.F. Dr. Rs. Cr. Rs. 3
Seema’s Capital A/c Dr. 7,000
To Raka’s Capital A/c 7,000
WCF A/c Dr. 90,000
To WCF Claim A/c 40,000
To Raka’s Capital A/c 25,000
To Seema’s Capital A/c 15,000
To Mahesh’s Capital A/c 10,000
Revaluation A/c Dr. 40,000
To Raka’s Capital A/c 20,000
To Seema’s Capital A/c 12,000
To Mahesh’s Capital A/c 8,000
13 Capitalised value of the firm = Average Profits × 100/NRR 3
= Rs. 5,00,000 × 100/10 = Rs. 50,00,000
Firm’s Capital = Yash’s Capital + Karan’s capital + Yash’s Current Account +
Karan’s Current Account + General reserve
=Rs. 6,00,000 + Rs. 4,00,000 + Rs. 4,00,000 + Rs. 5,00,000 + Rs. 1,00,000 = Rs.
20,00,000
Goodwill = Capitalised value of the firm – Firm’s capital
= Rs. 50,00,000 – Rs. 20,00,000 = Rs. 30,00,000
14 The purpose of preparing Revaluation account is to calculate the amount of profit or 3
loss on revaluation of assets and reassessment of liabilities by comparing the
difference in the old and the new values.
15 Revaluation profit : Rs. 11,000 Anil’s share Rs. 4400 and Sunil’s Share Rs. 6600. 3
16 Old P.S Ratio P : Q : R 3
3 : 2 : 1
P’s New Share = 3/6 – 1/16 = 21/48
Q’s New Share = 2/6 – 1/16 = 13/48
R’s Share = 1/6
S’s Share = 1/8
Therefore, New Profit Sharing Ratio =
P : Q : R: S
21/48 : 13/48 : 1/6 : 1/8
= 21 : 13 : 8 : 6
17 Calculation of Goodwill of the firm 4
Average Profit = Rs. ( 4,00,000 + 4,80,000 + 7,33,000 – 33,000 + 2,20,000 ) / 5
= Rs. 3,60,000
Goodwill of the firm = 2 x 3,60,000 = Rs. 7,20,000
D Particulars Dr. Amt Cr. Amt
Gupta’s Capital A/c Dr. 1,20,000
To Kumar’s Capital A/c 60,000
To Kavita’s Capital A/c 60,000
18 Profit and Loss Adjustment A/c 4

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 Particulars Amount Particulars Amount
(Rs.) (Rs.)
Prov. For D D 550 Stock 1750
Cap a/c (profit) : Furniture 2500
A : 4675 Building 15000
B : 14025 18700
19250 19250
19 Journal Entries : 4
Cash/Bank a/c Dr. 20000
To Sunita’s Capital a/c 17000
To Premium for Goodwill a/c 3000
Premium for Goodwill a/c Dr. 3000
Sunita’s Capital a/c Dr. 1000
To Neha’s Cap a/c 1600
To Tanisha’s Cap a/c 2400
Neha’s Cap a/c Dr. 800
Tanisha’s Cap a/c Dr. 1200
To Cash/Bank a/c 2000
20 Old Ratio Ashish : Vikash 4
2 : 3
Ashish’s sacrifice = 1/4 of 2/3 = 2/12
Ashish’s remaining share = 2/5 – 2/12= 7/30
Vikas’s sacrifice = 1/5
Vikash’s remaining share = 3/5 – 1/5 = 2/5

a) Chandan’s share of profit = 2/12 + 1/5

= 11/30
b) Sacrificing Ratio = 2/12 : 1/5
= 5 : 6
c) New profit sharing ratio = Ashish : Vikas : Chandan

7/30 : 2/5 : 11/30

= 7 : 12 : 11
21 The main factors affecting the value of goodwill are as follows: 4
1. Nature of business: A firm that produces high value added products or having a
stable demand is able to earn more profits and therefore has more goodwill.
2. Location: If the business is centrally located or is at a place having heavy
customer traffic, the goodwill tends to be high.
3. Efficiency of management: A well-managed concern usually enjoys the
advantage of high productivity and cost efficiency. This leads to higher profits and
so the value of goodwill will also be high.
4. Market situation: The monopoly condition or limited competition enables the

23/8
 concern to earn high profits which leads to higher value of goodwill.
5. Special advantages: The firm that enjoys special advantages like import
licences, low rate and assured supply of electricity, long-term contracts for supply
of materials, well-known collaborators, patents, trademarks, etc. enjoy higher value
of goodwill.
22 Old ratio A : B 4
2:1
C’s Share 1/5 and amount of C’s Capital Rs. 18000
Total Capital of the firm = 18000 x 5 = Rs. 90000
New ratio of the firm = A : B : C
8 : 4 : 3

A B C
New Capital 48000 24000 18000
Existing cap 40000 28000 -
Difference 8000 4000 18000
To be brought in To be taken Already
Rs. 8000 away Rs. 4000 brought in cash
Cash a/c Dr. 8000
To A’s Capital a/c 8000

B’s Capital a/c Dr. 4000

To Cash a/c 4000
23 Revaluation profit : Rs. 2000 (Yuv : Rs 1500 and Veer Rs. 500) 6
Capital balance : Yuv : Rs. 1,43,000 ; Veer : Rs. 69,500 and Yash : Rs. 71,000
24 Revaluation profit : Rs. 600 (Tanu Rs. 240 and Kanu Rs. 360) 6
Capital balances : Tanu : Rs. 31840 ; Kanu : Rs. 42760 and Manu : Rs. 36000
Balance Sheet Total : Rs. 181500
25 Revaluation loss : Rs. 1650 (P Rs. 990 and R Rs. 660) 6
Capital balances : P : Rs. 40310 ; R : Rs. 30040 and Q : Rs. 23450
Balance Sheet Total : Rs. 181500
26 Revaluation a/c 6
Particulars Amt Particulars Amt
Prov. For D.D. 550 Stock 1750
Cap a/c (Pt) : Furniture 2500
A 4675 Building 15000
B 14025 18700
19250 19250

Capital a/c
Particulars A B C Particulars A B C
Bal c/d 67175 81525 60000 Bal b/d 60000 60000
Prem 2500 7500

24/8
 Rev a/c 4675 14025
Cash 60000
67175 81525 60000 67175 81525 60000

27 Revaluation a/c 6
Particulars Amt Particulars Amt
Stock 20000 Furniture 60000
Prov. For D.D. 8000
Cap a/c (Pt) :
A 19200
B 12800 32000
60000 60000
Capital a/c
Particulars A B C Particulars A B C
WCR 1000 1000 Bal b/d 300000 200000
P&L 2000 2000 Res Fund 20000 20000
Bal c/d 366200 259800 250000 Prem for 30000 30000
goodwill
Cash 250000
Rev a/c 19200 12800
369200 262800 250000 369200 262800 250000
Balance Sheet
Liabilities Amt Assets Amt
A’s Cap 366200 Machinery 260000
B’s Cap 259800 Furniture 240000
C’s Cap 250000 Stock 80000
Bank Loan 120000 Debtors 72000
Creditors 20000 Cash 370000
Workmen’s Comp Liab 6000
1022000 1022000
28 Journal entries : 6
1. Revaluation a/c Dr. 6000

To Furniture a/c 6000

2. Plant & Mach a/c Dr. 8000

To Revaluation a/c 8000

3. General Reserve a/c Dr. 6000

To Rahul’s Cap a/c 3600

To Manish’s Cap a/c 2400

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 NAME OF CHAPTER: RETIREMENT AND DEATH OF A PARTNER

1 Retiring partner is compensated for parting with the firm’s future profits in favour of 1
remaining partners. The remaining partners contribute to such compensation amount
in
A) Gaining Ratio
B) Capital Ratio
C) Sacrificing Ratio
D) Profit-Sharing Ratio
2 A, B and C are partners in a firm sharing profits and losses in the ratio of 2:2:1. On 1
March, 31, 2023 C died. Accounts are closed on December 31st every year. The sales
for the year 2022 was Rs. 6,00,000 and the profits were Rs. 60,000. The sales for the
period for the period January 1, 2023 to March 31st 2023 were Rs.2,00,000. The
share of deceased Partner in the current year’s profit on the basis of sales is :
(a) Rs.20,000
(b) Rs. 8,000
(c) Rs. 3,000
(d) Rs. 4,000
3 On death of a Partner, the remaining partner(s) who have gained due to change in 1
profit sharing ratio should compensate the
(a) Deceased partner only
(b) Remaining partners (who have sacrificed) as well as deceased partner
(c) Remaining partners only (who have sacrificed)
(d) None of the above
4 A, B, and C are prtners who share profits and losses equally. B retires form business 1
and his share is purchased by A and C in the of 2:3. New profits sharing ratio
between A and C would be:
A) 01:01
B) 02:02
C) 07:08
D) 03:05
5 Kiran, umesh and Aditya were in Partnership firm. Suddenly on October 31,2018, 1
Kiran died. Amount payable to her on that date amounted to Rs. 1,05,000. Rs. 5000
was paid immediately and balance was paid in 4 equal annual instalments along with

26/8
 interest @ 12% p.a.starting from 31st October 2019. Calculate the interest due as on
31st March, 2019. Financial year was followed as accounting year by the firm.
(a) Rs. 2,500
(b) Rs.5,000
(c) Rs.4,500
(d) Rs. 3,750
6 Karan, Aman and Girish were Partners with capitals of Rs. 3,00,000; Rs.1,50,000 1
and Rs.2,00,000 respectively as on 31st March, 2018. Aman died, partners decided to
pay the entire amount to Aman’s Executor but they only had Rs.50,000 cash and rest
of the amount was to be brought in by Karan and Girish in such a way that their
future capital will be equal. Amount payable to Aman’s executor was calculated at
Rs. 2,50,000.Calculate the amount to be brought in by Karan and Girish.
(a) Rs.50,000 by Karan and Rs.1,50,000 by Girish
(b) Rs.50,000 by Girish and Rs.1,50,000 by Karan
(c) Rs.25,000 by Karan and Rs.1,25,000 by Girish
(d) Rs.25,000 by Girish and Rs.1,25,000 by Karan
7 Assertion (A):Unrecorded assets at time of death of partner is recorded on credit 1
side ofRevaluationa/c.
Reason(R):Revaluationaccountiscreditedduetoincreaseinliability.
A)BothAssertionandreasonaretrueandreasoniscorrectexplanationofassertion.
(B)Assertionandreasonbotharetruebut reasonisnotthecorrectexplanationofassertion.
(C)Assertion istrue,reasonisfalse.
( D)Assertionisfalse,reasonistrue
8 Assertion (A): When goodwill is not appearing in the books, retiring or deceased 1
partner’s capitalaccountistobecreditedwithhisshareofgoodwilland
gainingpartners’capitalaccountsaretobedebitedingainingratio.
Reason(R): Goodwillneedstobecompensatedbythe gainingpartners inthegaining
ratio.
(A)BothAssertionandreasonaretrueandreasoniscorrectexplanationofassertion.
(B)Assertionandreasonbotharetruebut reasonisnotthecorrectexplanationofassertion.
(C)Assertionistrue,reasonisfalse.
(D) Assertionisfalse,reasonistrue.
9 Assertion:Executors of deceased partnerisentitledtoInterest@10%p.a.tilltheloanispaidoff. 1
Reason: InsteadofInteresthemaytakethatshare ofprofit whichhasbeenearned
bythefirmbytheamountduetohim.
(A) BothAssertionandreasonaretrueandreasoniscorrectexplanationofassertion.
(B) Assertionandreasonbotharetruebut reasonisnotthecorrectexplanationofassertion.
(C) Assertionistrue,reasonisfalse.
(D) Assertionisfalse,reasonistrue.
10 Kamal,Kishore and Kunal are Partners in a firm sharing profits equally. Kishore 1
retires from the firm. Kamal and Kunal decide to share the profits in future in the
ratio 4:3. Calculate the gaining ratio.
11 A, B, and C are equal partners. C retires. He surrenders 3/5th of his share in favour of 3
A and 2/5th in favour of B. Calculate new ratio and gaining ratio.
12 X Y and Z are equal partners. The last year's sales and profit were Rs 25,00,000 and 3
profit was Rs 2,50,000. Z died on the April 30, 2022. Sales of the current year till the
date of Z's death amounts to Rs 12,00,000. Profit is calculated on Turnover basis on
death. Firm closes its books on December 31 every year. Pass journal entry.
13 S, T and U were partners in a firm sharing profits in the ratio of 1 : 2 : 2. On 3

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 15.2.2022, S died and the new profit-sharing ratio of T and U was 3 : 2. On S’s
death, the goodwill of the firm was valued at 60,000. Calculate the gaining ratio and
pass necessary journal entry on S’s death for the treatment of goodwill.
14 Mention the six items payable to deceased/retiring partner. 3
15 Mohan, Krishnan and Ram, who are partners in a firm share profits in the ratio of 3
3:2:1. Goodwill has been valued at Rs.1,80,000. On Krishnan’s retirement Mohan
and Ram agree to share profits equally. Pass necessary journal entry for the treatment
of Krishnan share of goodwill.
16 X, Y and Z are partners in a firm sharing profits and losses in the ratio of 5:4:1.The 3
Partnership agreement provides that the share of profit of the deceased partner will
be worked out on the basis of sales. Y died on 30th June 2023. The sales for the year
20022-23 was Rs 8,00,000 and the sales from April 1, 2023 to June 30, 2023 was Rs
1,50,000. The profit for the year ended 31st March 2023 amounted to Rs 1,00,000.
Calculate his share of profit and pass necessary journal entry
17 A and B are in partnership sharing profits and losses in the ratio of 3: 2. B died three 4
months after the date of the last Balance Sheet prepared on 31.03.2023. According to
the Partnership Deed, B’s representative is entitled to the following payments:
His capital as per the last Balance Sheet.
Interest on above capital @ 6% p.a. till the date of death.
His share of profits till the date of death calculated on the basis of last year’s profits.
B’s capital as per the last Balance Sheet was ₹ 40,000 and his drawings till the date
of death were ₹ 5,000. The last year’s profits were ₹ 30,000. Draw B’s Account to be
rendered to his legal representative.
18 P, Q and R were partners in a firm sharing profits and losses in the ratio 2:2:1. On 31 4
March 2023 their balance sheet was as follows:
Liabilit es Amt Assets Amt
Creditors 3,00,000 Fixed Assets 4,50,000
General Reserve 1,50,000 Stock 1,50,000
Capital Debtors 2,00,000
P 2,00,000 Bank 1,50,000
Q 2,00,000
R 1,00,000 5,00,000
9,50,000 9,50,000
Q died on 12.06.2023. According to the partnership deed, the legal representatives of
the deceased partner were entitled to the following:
i) balance in his capital account
ii) Interest on capital @ 12% p.a.
iii) Share of Goodwill. Goodwill of the firm on Q’s death was valued at ₹ 60,000.
iv) ) Share in the profit of the firm till date of his death, calculated on the basis of last
year’s profit. The profit of the firm for the year ended 31.03.2023 was Rs 5,00,000.
Prepare Karan’s capital account to be presented to his representatives.
19 AandBwerepartnersinafirmsharing profitsintheratio 4
of3:2.On31stMarch,2020,thebalancesheetofthe firm wasas follows:
BalanceSheet
asat31stMarch,2023

LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL: Building 2,40,000

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 A 3,00,000 Stock 75,000
B 2,00,000 5,00,000 Debtors 80,000
Creditors 1,17,000 Cash 47,000
Furniture 1,75,000
6,17,000 6,17,000

B died on 30.06.2023. According to the partnership deed, the legal representatives of

the deceased partner were entitled to the following:
i) Balance in his capital account
ii) Interest on capital @ 12% p.a.
iii) Share of Goodwill. Goodwill of the firm on B’s death was valued at ₹ 80,000.
iv) Share in the profit of the firm till date of his death, calculated on the basis of last
year’s profit.
The profit of the firm for the year ended 31.03.2023 was Rs 1,20,000.

Based on above information answer the following questions:

(i). What is the amount of share of profit of B till his death in 2023-24 based on last
year’s profit?
a)Rs.12,000 (b) Rs15,000 (c) Rs.30,000 (d) Rs.40,000

(ii) What is the value of the share of goodwill of B :

a)Rs.60,000 (b) Rs.32,000 (c) Rs.40,000 (d) Rs.30,000
(iii) What is the value of the interest on capital of B :
a)Rs.6,000 (b) Rs.12,000 (c) Rs.24000 (d) Rs.1,000

(iv) What will be final payment to B’s Executor?

(a) Rs.2,00,000 (b) Rs.2,12,000 (c) Rs.2,38,000 (d) Rs.2,50,000
20 The Balance Sheet of X, Y and Z who were sharing profits in the ratio of 5 : 3 :2 as 4
at March 31, 2023 :
Liabilities Amount Assets Amount
Creditors 70,000 Cash at Bank 40,000
Employees' 90,000 Fixed Assets 1,10,000
Provident Fund Stock 45,000
Capital A/cs : X 50,000 Sundry Debtors 78,000
Y 50,000 Less: provision 3,000 75,000
Z 40,000 30,000
3,00,000 3,00,000
X retired on March 31, 2023 on the following terms:
i) Goodwill of the firm is to be valued at Rs. 60,000.
ii) Fixed Assets are to be valued at Rs. 92,000
iii) Provision on debtors to be increased to Rs.5,000.
Pass journal entries for the above transactions including profit or loss on
revaluation.
21 Ram,Mohan and Sohan are partners sharing profits in the ratio 4:3:2. Mohan retires 4
and the goodwill is valued. Journal entry for treatment of goodwill is follows:

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 Journal Dr.(Rs) Cr.(Rs)
L.
F
Ram’s Capital A/c Dr. 6,500
Sohan’s Capital A/c Dr. 5,500
To Mohan’s Capital A/c 12,000
(For adjustment entry passed for
treatment of goodwill)

i) What is gaining ratio ?

a) 3:1 (b) 13:11 (c) 4:1 (d) None of the above
ii) What is new ratio?
a) 5:3 (b) 1:1 (c) 3:2 (d) None of the above
iii) What is the value of firm’s goodwill?
a) 80,000 (b) 20,000 (c) 60,000 (d) 90,000
iv) In the absence of any agreement at which rate interest is payable to Mohan
on his due amount?
a) 5% p.a. (b) 6% p.a. (c) 9% p.a. (d) No interest is payable
22 A,B and C are partners sharing profits in the ratio 3:1:1. A dies and the goodwill is 4
valued at Rs. 30,000 on his death. Accounts are closed on 31st March every year.
Journal entry for profit of intervening period (based on last year’s profit which was
Rs.60,000) is follows:

Journal Dr.(Rs) Cr.(Rs)

L.
F
P&L Suspense A/c Dr. 9,000
To A’s Capital A/c 9,000
(For adjustment entry passed for
treatment of profit )

i) What is gaining ratio ?

a) 3:1 (b) 1:1 (c) 4:1 (d) None of the above
ii) What is the intervening period?
a) 1 month (b) 2 months (c) 3 months (d) 2.5 months
iii) What is the value A’s share of goodwill?
a) 30,000 (b) 12,000 (c) 6,000 (d) 18,000
iv) Pass journal entry for A’s share of goodwill.
23 KEJRWAL $ SONS is a partnership business with Abhay, Bahadur and Chandan as 6
partners engaged in production and sales of electrical items and equipment. On 31
March 2023 their balance sheet was as follows:

Liabilities Amt Assets Amt

Creditors 3,00,000 Fixed Assets 8,50,000
General Reserve 2,00,000 Stock 3,50,000
P&L Acc(Profit for 3,00,000 Debtors 4,00,000
2022-23)

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 Capital Bank 2,50,000
Abhay 3,00,000 Furniture 1,50,000
Bahadur 4,00,000
12,00,000
Chandan 5,00,000
20,00,000 20,00,000

Their profit sharing ratio was of 3:1:1. As they were expanding their business in new
year, suddenly Bahadur died on 12 June 2023.
Based on the above information you are required to answer the following questions.

(i). What will be the new profit-sharing ratio of Abhay andChandan?

a) 3:1 (b) 1:1 (c) 4:1 (d) None of the above

(ii). What is the amount of share of profit of Bahadur till his death in 2023-24 based
on last year’s profit?
a) Rs.60,000 (b) Rs.12,000 (c) Rs.40,000 (d) Rs.30,000

(iii) What is the value of the share of goodwill of Bahadur if firm’s goodwill is
valued at Rs.3,00,000 ?
(a) Rs.60,000 (b) Rs.12,000 (c) Rs.40,000 (d) Rs.30,000

(iv) What will be journal entry for share of profit of Bahadur?

(v) What will be amount of Bahadur’s share of reserve:

(a) Rs.60,000 (b) Rs.12,000 (c) Rs.40,000 (d) Rs.30,000

(vi) What will be final payment to Bahadur’s Executor:

(a) Rs.4,00,000 (b) Rs.4,12,000 (c) Rs.4,60,000 (d) Rs.5,72,000

24 Raj, Kumar and Dileep were partners in a firm sharing profits in the ratio of 2: 2: 1. 6
The firm closes its books on 31st March every year. On 30th June, 2020 Kumar died.
The partnership deed provided that on the death of a partner his executors will be
entitled to the following:
a) Balance in his capital account which amounted to ₹1,25,000 and interest on
capital till date of death which amounted to ₹5,000.
b) His share in the profits of the firm till the date of his death amounted to ₹20,000.
c) His share in the goodwill of the firm. The goodwill of the firm on Kumar’s death
was valued at ₹ 1,50,000.
d) Loan to Kumar amounted ₹ 30,000. It was agreed that the amount will be paid to
his executor in three equal yearly instalments with interest @10% p.a. The first
instalment was to be paid on 30.06.2021.
Calculate the amount to be transferred to Kumar’s executors Account and prepare
the executor’s account till it is finally settled.

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25 Agrawal, Banerjee and Gupta are partners in a firm sharing profit andlosses in the 6
ratio of 1/2, 1/6 and 1/3 respectively. The Balance Sheet on March
31,2020wasasfollows:

Liabilities Amount Assets Amount(

(Rs.) Rs.)

Sundry 36,000 Freehold 80,000

Creditors Premises
Bills Payable 24,000 Machinery 60,000
General 24,000 Furniture 24,000
Reserve
Capitals: Debtors 40000
Agrawal 60,000 Less Provision
Banerjee 60,000 for (2,000) 38,000
Gupta 56,000 1,76,000 Bad debts
Stock 44,000
Cash 14,000
2,60,000 2,60,000

Gupta retires from the business and the partners agree

to the following revaluation:
(a) Freehold premises and stock are to be appreciated by
20% and 15%. respectively
(b) Machinery and furniture are to be depreciated by 10%
and 7% respectively
(c) BaddebtsreserveistobeincreasedtoRs.3,000.
(d) OnGuptaretirement,thegoodwillisvaluedatRs.42,000.
The remaining partners have decided to adjust their capitals in their new profit sharing ratio
after retirement of Gupta. Surplus/deficit, if any in their capital account will be adjusted
through cash.
Prepare the Revaluation Account and Partners’
Capital Accounts.
26 M, N and O were partners sharing profit and losses in the ratio of 1:1:1. Their 6
Balance Sheet as at 31st March 2022 was:
BALANCE SHEET as on 31st March, 2022
Liabilities ₹ Assets ₹
Capital A/c’s: Bank 38,000
M 70,000 Machinery 26,000
N 40,000 Furniture 28,000
O 40,000 1,50,000 Debtors
Bills Payable 15,000 45,000
Less: Pro.for B. D. 40,000
5000

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 Creditors 45,000 Building 1,20,000
General Reserve 33,000
Profit and Loss A/c 9,000
2,52,000 2,52,000

Nretired on 1st April, 2022. M and O decided to continue the partnership business on
the following terms:
a) Goodwill of the firm was valued at ₹ 60,000.
b) The Provision for Bad Doubtful debts to be maintained @ 10 % on
Debtors.
c) Buildings to be increased to ₹ 1,42,000.
d) Furniture to be reduced by ₹ 6,000.
e) Rent outstanding ₹ 1,500 was to be recorded.
f) The new profit-sharing ratio between M and O will be 1:1.Capital of the
new firm to be adjusted in new ratio through cash.
Prepare the Revaluation Account and Partners’ Capital Accounts .
27 A, B and C were partners in a firm sharing profits in the ratio of 4:3:3. The firm 6
closed its book on 31st March every year. On 31st December 2022 A died. The
partnership deed provided that on the death of a partner his executors will be
entitled for the following: -
a) Balance in his capital account. On 1.4.2022, there was a balance of Rs.
90,000 in A’s Capital Account.
b) Interest on Capital @ 12% p.a.
c) His share in the profits of the firm in the year of his death will be calculated
on the basis of the rate of net profit on sales of the previous year, which was 25%.
The sales of the firm till 31st December, 2022 were Rs 4, 00,000.
d) His share in the goodwill of the firm. The goodwill of the firm on A’s death
was valued at Rs. 4,50,000.
The partnership deed also provided for the following deductions from the amount
payable to the executors of the deceased partner: -
a) His drawing in the year of his death. A’s drawings till 31.12.2022 were Rs.
15,000.
b) Interest on drawing @ 12% p.a. which was calculated as Rs.1,500.
The accountant of the firm prepared A’s Capital Account to be presented to the
executors of A’s but in hurry he left it incomplete. A’s Capital Account as prepared
by the firm’s accountant is given below: -
A’s Capital Account
Dr. Cr.

Date Particular Rs. Date Particular Rs.

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 2016 2016
Dec 31 ...................... 15,000 April 1 ........................ 90,000
Dec31 ...................... .............. Dec 31 ...................... 8,100
Dec31 ...................... . Dec31 ........................ 40,000
.............. Dec31 ..................... 90,000
. Dec31 ..................... 90,000
3,18,100 3,18,100

28 Dhoni, Ganguly and Sachin were partners in a firm sharing profits 6

and losses in the ratio of 3:5:2. On 31stMarch, 2023, their balance sheet
was as follows:
Balance as on 31stMarch,2023
Liabilities Amount Assets Amount

Sundry Creditors 60,000 Cash 50,000

General Reserve 40,000 Stock 80,000
Capitals: Debtors 40,000
Dhoni 2,00,000 Investments 30,000
Ganguly 2,00,000 Buildings 4,00,000
Sachin1,00,000 5,00,000
6,00,000 6,00,000

Ganguly retired on the above date and it was agreed that:

(a) Goodwill of the firm be valued at Rs.3,00,000 and Ganguly’s
share be adjusted through the capital accounts of Dhoni and
Sachin.
(b) Stock was to be appreciated by 20%.
(c) Buildings were found undervalued by 20%.
(d) Investments were sold for Rs.34,000.
(e) Capital of the new firm was fixed at Rs. 5,00,000 which will
be in the new profit sharing ratio of the partners ; the necessary
adjustments for this purpose were to be made by opening
current accounts of the partners.
Prepare Revaluation Account and Partners’ Capital Accounts after
Ganguly’s retirement .

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 ANSWERS
XII RETIREMENT AND DEATH OF A PARTNER
1 A) Gaining Ratio 1
2 (d) Rs. 4,000 1
3 (b) Remaining partners (who have sacrificed) as well as deceased partner 1
4 C) 07:08 1
5 (b) Rs.5,000 1
6 (a) Rs.50,000 by Karan and Rs.1,50,000 by Girish 1
7 (C)Assertion istrue,reasonisfalse. 1
8 (A)BothAssertionandreasonaretrueandreasoniscorrectexplanationofassertion 1
9 (D) Assertionisfalse,reasonistrue. 1
10 5:2 1
11 Gaining ratio 3:2 and new ratio 8:7. 3
12 Rs.40,000 3
13 S’s share of goodwill- 12,000 3
14 Amounts of 3
a) Capital b) Share in goodwill c) Share of profit of intervening period (death) d)
Interest on capital (death) e) share of IFR f) share in WCR g) share in Reserve g)
share in P&L Account( Undistributed profit) h) share of revaluation profit. (all on
credit side)
15 Sacrifice made by Mohan = ½-3/6 =6-6/12 =0: Sacrifice made by Ram = ½-1/6
= 6-2/12 =4/12
Journal entry 3
Ram ‘s Capital A/C Dr 60,000
To Krishnan Capital A/C 60,000
16 Profit and Loss suspense a/c –Dr 7500 3
To Y’s Capital Acc 7500
(Being Y’s share of profit to his capital account)
17 B’s Executor’s A/c- 38,600 4
18 To Q’s executor A/c- 3,28,800 4
19 a) ii) b) iii) a) iv) 2,00,000+ 6,000 ( interest )+32,000 (share of 4
Goodwill)+12,000(share of profit)= d ) 2,50,000
20 Y ’s Capital A/C Dr. 18,000 4
To Z’s Capital A/c 12,000
To X’s Capital A/C 30,000 (1 mark)
Rev. A/C Dr . 18,000
To Fixed Assets A/C 18,000 ( ½ mark)

Rev.A/C Dr . 2,000
To Prov. For d.d. A/C 2,000 ( ½ mark)
X’s Capital A/C 10,000
Y’s Capital A/C 6,000
Z’s Capital A/C 4,000 (2 mark)
To Rev. A/C 20,000

21 I) B) 4
II) A)
III) C)
IV) B)

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22 i) B) 4
ii) C)
iii) D)
iv)
B’s Capital A/c Dr. 9,000
C’s Capital A/c Dr. 9,000
To A’s Capital A/c 18,000
(For adjustment entry passed for
treatment of goodwill)
23 i) a) 3:1 6
ii) (b) Rs.12,000
iii) (a) Rs.60,000
iv) P&L Suspense A/c……Dr 12,000
To Bahadur’s Capital A/c 12,000
v) (c) Rs.40,000
vi) (d) Rs.5,72,000

24 Kumar dues to be transferred to executors = 1,25,000 + 5,000 + 20,000 + 60,000 – 6

30,000 = 1,80,000.
Kumar’s Executors Loan Account
31/03/21 To Balance c/d 1,93,500 30/06/20 By Kumar’s Cap. 1,80,000
31/03/21 A/c
By Interest (9 13,500
months)
1,93,500 1,93,500
30/06/21 To Bank (I 78,000 01/04/202 By Balance b/d 1,93,500
31/03/22 Instalment) 1 By Interest (3 4,500
To Balance c/d 1,29,000 30/06/21 months)
31/03/22 By Interest (9 9,000
months)
2,07,000 2,07,000
30/06/22 To Bank (II 72,000 01/04/22 By Balance b/d 1,29,000
31/03/23 Instalment) 30/06/22 By Interest (3 3,000
To Balance c/d 64,500 31/03/23 months)
By Interest (9 4,500
months)
1,36,500 1,36,500
30/06/23 Bank (III 66,000 01/04/23 By Balance b/d 64,500
To Instalment) 30/06/23 By Interest (3 1,500
months)
66,000 66,000
25 Revaluation Account
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Provision for Bad debts 1,000 Freehold Premises 16,000
Machinery 6,000 Stock 6,600

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 Furniture 1,680
Profit transferred to
Capital Accounts:
Agrawal 6,960
Banerjee 2,320
Gupta 4,640
13,920
22,600 22,600
Dr.Capital Account Cr.

Particulars Agraw Banerj Gupta Particulars Agrawa Banerjee Gupta

al ee (Rs) l (Rs) (Rs) (Rs)
(Rs) (Rs)
Gupta’s 10,500 3,500 – Balance b/d 60,000 60,000 56,000
Capital
Gupta’s 82,640 General 12,000 4,000 8,000
Loan Reserve
Cash 30,000 Revaluation 6,960 2,320 4,640
Balance 98,460 32,820 Agrawal’s — — 10,500
c/d Capital
Banerjee’s 3,500
Capital
Cash 30,000
1,08,960 66,320 82,640 1,08,960 66,320 82,640
26 Ans- Profit on Rev-Rs. 15000. Bal C/d- Rs 79000, Rs 49000 before adjustment. Final 6
capitals were M- Rs 64,000 and N- Rs 64,000. N’s Loan- Rs 79000.

27 Dr. A’s Capital a/c Cr 6

Particular Rs. Particular Rs.

To Drawings A/c 15,000 By Balance b/d 90,000

To Interest on Drawing a/c 1,500 By Interest onCapital A/c 8,100
To A’s Executors a/c 3,01,600 By P & L SuspenseA/c 40,000
By B’s CapitalA/c 90,000
By C’s CapitalA/c 90,000
3,18,100 3,18,100
28 Revaluation profit – Rs. 1,20,000 (Capital Account before adjustment- Dhoni- Rs. 6
1,58,000 , Sachin- Rs.72,000). Final capitals Dhoni-Rs. 2,50,000 , Sachin- Rs.2,50,000
. Ganguly’s Loan Rs.4,30,000. Dhoni’s Current account 92,000(Dr.). Sachin’s current
Account Rs.1,78,000(Dr.)

37/8
DISSOLUTION OF PARTNERSHIP FIRM

Meaning of dissolution of partnership firm

Dissolution of partnership firm means that the firm closes down its business and comes to an end. On the
dissolution of partnership firm, assets of the firm are sold and liabilities are paid off and out of remaining
amount the accounts of partners are settled.
Thus, in case of dissolution of partnership, the firm may continue i.e. it does not mean the dissolution of firm.
But in case of dissolution of the firm, the partnership is automatically dissolved.
Important Point:
If realized value of Intangible Assets is not given ,then it will be taken as nil.

If realized value of Tangible Assets is not given ,then it will be taken realized at book value .

If there is nothing regarding payment of outside liabilities ,then it will be paid at book value.

Modes of dissolution of partnership firm:-

1) By mutual Agreement (Sec. 40)

2) Compulsory Dissolution (Sec. 41)
3) On Happening of an event (Sec. 42)
4) By Notice (Sec. 43)
5) By order of the Court (Sec. 44)
Difference between Realisation Account and Revaluation Account.
Realisation A/c is prepared at the time of dissolution of firm and Revaluation A/c is prepared at the time of
reconstitution of partnership i.e.Change in profit sharing Ration , admission/retirement or death of a partner
and Amalgamation of Partnership Firm .

Dr.
REALISATION ACCOUNT Cr.
Particulars Amount Particulars Amount

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To Sundry assets XXXXX By Sundry liabilities xxxxx
To Bank: XXXX By Prov. for d.debts xxxxx
(Liabilities Paid) By Bank: xxxxx
To Bank: XXXXX (sundry Assets Realized)
(Unrecorded liabilities paid) By Bank: xxxxx
To Partners cap. A/c (unrecorded assets realized)
(liab. Paid by partners) XXXX By Partners cap. A/c
To profit transferred to (Assets taken by partners) xxxxx
Partners cap. A/C: By Loss transferred to
A XX Partners cap. A/C:
B XX XXXX A XX
_______ B XX xxxxx__
Xxxx xxxxx

Journal entries:-
For closing of various asset accounts on the dissolution of partnership firm

Realization A/c Dr.

To Sundry Asset A/c (By Name)
(Except cash, bank balance and fictitious assets)

For closing various liabilities accounts on the dissolution of partnership firm

Sundry Liabilities A/c Dr (By name)

To Realisation A/c

(Except partner's loan, capital and accumulated profits)

(Only those liabilities which relate to third party are transferred to Realization A/c.)

For payment of liability (Whether recorded or unrecorded)

Realisation A/c Dr
To Cash or Bank A/c
(For liability paid)
For assuming of liability by partner (Whether recorded or unrecorded)

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 Realisation A/c Dr
To Partner capital A/c
(For liability paid)
For sale of asset (Whether recorded or unrecorded)
Cash or Bank A/c Dr
To Realisation A/c
(For cash realized from sale of asset)
For asset taken over by partner (Whether recorded or unrecorded)
Partner Capital A/c Dr
To Realisation A/c
(For cash realized from sale of asset
For payment of realization expenses by firm
Realisation A/c Dr
To Cash or Bank A/c
(For realization expenses paid)
For payment of realization expenses by Partner
Realisation A/c Dr
To Partner capital A/c
(For realization expenses paid)
For payment of partner's loan by firm
Partner's Loan A/c Dr
To Cash or Bank A/c
(For partner's loan paid)
The undistributed profits are transferred to all partners' capital account in their sharing ratio.

General Reserve A/c Dr

Profit & Loss A/c Dr

To All partners' capital account (in their ratio)
(Being undistributed profits transferred to all partners' capital accounts)
The undistributed losses are charged from all partners' in their profit sharing ratio.

40/8
 All partners' Capital A/c Dr. (in their ratio)
To profit & loss A/c
(Being undistributed losses are transferred to all partners' capital account)

Accounts prepared at the time of dissolution of partnership firm

1. Realisation A/c
2. Partner's Loan A/c
3. Partners' capital A/c
4. Cash or Bank A/c

MCQs

1 Realization account is opened when: 1

(a) All the assets of the firm are realised (b) All the liabilities are paid
(c) Both (a) & (b) (d) None of these

2 Which of the following section of Indian Partnership Act, 1932 deals with the 1
settlement of accounts when the firm is dissolved?
(a) Section 44 (b) Section 48 (c) Section 46 (d) Section 41(a)

3 Economic relationship among/between partners end at the time of: 1

(a) Admission of a partner/partners (b) Death of a partner/partners
(c) Retirement of a partner (d) Dissolution of partnership firm

4 A and B are partners sharing profits equally. The firm is going to be dissolved. 1
At that time Mrs A has given loan of ₹ 50,000 to the firm @6% interest and
simultaneously A has also given loan of ₹ 1,00,000. The assets realized ₹
10,00,000. Who will be paid first?
(a) Partner A (b) Partner B
(c) Mrs. A (d) Partner A and Partner b in their profit-sharing ratio

5 On the basis of the following data, how much final payment will be made to a 1
partner on firm’s dissolution? Credit balance of capital account of a partner was
₹ 1,00,000; share of loss of realization amounted to ₹ 20,000 firm’s liability
taken over by him was for ₹ 16,000
(a) ₹ 64,000 (b) ₹ 96,000 (c) ₹ 80,000 (d) ₹ 1,04,000

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6 On the dissolution of the firm _______ will be debited to realization Account. 1
(a) Realisation expenses paid by the partner
(b) Balance of reserve fund
(c) Amount of unrecorded assets
(d) Amount of unrecorded liabilities

7 Which of the following is not transferred to Realisation account? 1

a) Balance of cash a/c
b) Balance of reserves
c) Balance of profit and loss account
d) All of above
8 Realisation a/c is a: 1
a) Real account
b) Personal account
c) Nominal account
d) Real as well as personal account
9 There was an unrecorded asset of Rs 10,000 which was taken over by partner at 1
9000. Partner’s capital account will be debited by -----------
1. Rs 10000
2. Rs 9000
3. Rs 1000
4. Rs 19000
10 In case of dissolution of firm assets are transferred to realization Account at 1
1. Book value
2. Market value
3. Cost or market price whichever is lower
4. None of above

11 On dissolution of partnership firm debtors were Rs 17000. Out of these 500 1

became bad and rest realized 60%. Which account will be debited on receiving
the amount.
(i) Cash a/c
(ii) Realisation A/c
(iii) Partner’s capital A/c
(iv) None of the above
12 Sundry creditors were amounted to Rs 8000. These were paid at the discount of 1
5%. Realization account will be debited with the amount of ------------------
(i) Rs. 8000
(ii) Rs,7600
(iii) Rs. 8400
(iv) Rs. 8200

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13 In the event of dissolution of firm, the partner’s personal assets are first used for 1
payment of the
1. Firm’s liabilities
2. The personal liabilities
3. None of the two
4. Both 1 and 2
14 On dissolution of a firm debtor Rs 17000 were shown in the balance sheet. Out 1
of this Rs 2000 became bad. One debtor became insolvent. 70% were recovered
from him out of 5,000. Full amount was recovered from the balance debtor.
What will be loss on realization on account of this item?
(i) Rs.2000
(ii) Rs. 5000
(iii) Rs.3500
(iv) Rs.7000

15 ‘A’ one of the Partners was to bear all the Realisation Expenses for which he 1
was given a commission of 3% of net cash realised from Dissolution. Cash
realised from Assets was Rs. 25,000. Amount paid for paying off liabilities
amounted to Rs. 5,000. The amount of commission will be:-
(a) Rs. 750 (b) Rs. 150 (c) Rs. 800 (d) Rs. 600

(ANSWERS)

1 (c )Both (a) & (b)

2 (a) Section 48

3 (D)Dissolution of partnership firm

4 ( c) Mrs. A

5 (b) ₹ 96,000

6 (a) Realisation expenses paid by the partner

7 d) all of above

8 Nominal account

9 Rs 9000

10 Book value

11 (i) Cash a/c

12 (i) Rs,7600

13 The personal liabilities

14 Rs.3500

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15 (d) Rs. 600

(Competency Based ,HOT’S)

1 Explain the accounting treatment of assets and liabilities not recorded in 1
the books of accounts at the time of dissolution of firm.

2 What is the accounting treatment if firm pays dissolution expenses on 1

behalf of partner?

3 What is the treatment of goodwill if it is given in the balance sheet? 1

(Answers)

1 For assets: 1
Cash/Bank A/C Dr.
To Realization A/C
For liabilities:
Realization A/C Dr
To cash /Bank A/C
2 Partners Capital account is debited and cash/bank account is credited. 1

3 Goodwill is treated just like any other asset and is written in the debit side 1
of the Reaslisation account and whatever amount is realized , it is written in
the credit side of Realisation account . If realized value of goodwill
( intangible Assets ) is not given ,then it will be taken as nil

3 Markers

1 State any three situations in which the court may order to dissolve a 3
partnership firm.

2 Pass necessary journal entries on the dissolution of a partnership firm 3

in the following cases:

A Dissolution expenses Rs. 8,000 were paid

by the partner, M

B Q agreed take over stock worth Rs.18,000

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 C A computer previously written off fully
realized Rs. 3,900.

3 Adil and Muneer, who were sharing profits and losses in the ratio of 3
st
3:1 respectively, decides to dissolve the on 31 March,2022.
At the date, some of their balances are given below
a. Adil’s capital 50,000
b. Muneer’scapital a/c 5,000 (Debit Balance)
c. Profit and loss account 4,000 ( Debit balance)
d. Trade creditors 15,000
e. Lone from Mrs. Adil 5,000
f. Cash at bank 1,000
The assets (other than cash at bank) realized 55,000 and all
creditors including loan from MrsAdil were paid off less 5%
discount. Realisation expenses amounted to 500. Prepare the
realisation account

4 Explain Dissolution of firm by 3

1. Agreement 2. Notice

5 Differentiate between dissolution of partnership and dissolution of 3

partnership firm.

6 Pass journal entries for the following transactions on the dissolution 3

of the firm of Talat and Palak after various assets and liabilities have
been transferred to realization account:
a. Bank loan Rs.34,000 paid
b. Furniture worth Rs.70,000 was taken by partner Talat
at Rs.43,000.
c. Partner palak agreed to pay a creditor Rs. 7,500.

ANSWERS

1 A court may order to dissolve a firm on the following grounds: 3

a. When a partner is deemed to be of unsound

mind

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 b. When a partner transfers his share to third party.
c. When a partner is found guilty of misconduct in
carrying the business activities

2 3

Date PARTICULARS L. Amt(Dr) Amt

F (Cr)
a Realisation Dr 8,000
To Bank 8,000
( Being realization expenses
paid)

b Q Dr 18,000
To Realisation 18,000
( Being Q took over Stock)

C Cash 3,900
Dr
To Realisation 3,900
( Being Computer realised)

3 Memorandum Balance sheet 3

LIABILITIES AMOUN ASSETS AMO

T UNT
Adil Capital 50,000 Muneer Capital 5,000
Trade creditors 15,000 Profit and loss 4,000
Loan from Mrs. 5,000 Cash at bank 1,000
Adil Sundry assets 60,000
(Balancing
figure)

70,000 70,000

Realisation Account

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 PARTICULA AMOUNT PARTICULARS AMOU
RS NT
To Sundry 60,000 By S Liabilities
Assets Creditors
To Cash 15,000 20,000
Creditors Loan from Mrs.
14,250 Loan 19,500 Adil 5,000 55,000
from Mrs. Adil By Cash
4,750 Sundry assets
Real 55,000
4,500
expenses
By loss
500
transferred
Adil
3,375
Muneer
1,125

79,500 79,500

4 (1). Dissolution by agreement 3

A firm is dissolved when all the partners agree that it should be
dissolved. A partnership firm is the creation by an agreement;
similarly a firm can be dissolved by an agreement.
(2). Dissolution by notice
The firm may be dissolved at any time by any partner giving notice
in writing to all the other partners of his intention to dissolve the
firm.

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5 Dissolution of Dissolution of 3
partnership partnership firm
1.It means change in 1,It means closure of
business the firm and end of
2.Relations among business 2.Relationship
partners business will among partners
continue. business comes to an
3.It may or may not end.
involve dissolution of 3.It involves dissolution
firm. of partnership

6 Journal entries 3

DATE PARTICULARS L.F AMT AMT

(Dr) (Cr)

a Realisation Dr 34,000
34,000
To Bank
( Being repayment of loan)

b Talat’s capital Dr 43,000

To Realisation 43,000

( Being Talat took over

Furniture)

c Realisation Dr 7,500
To Palak,s capital 7,500
( Being Palak took over
creditors)

4 MARKERS

1 Journalise the following transactions assuming that the assets (except cash) and outside 4
liabilities are transferred to Realisation account:-
i ) X, a partner agrees to pay the loan taken from his wife Rs. 5000.
ii ) Unrecorded typewriter realized Rs. 8000.
iii ) Y, a partner agrees to take over investment at Rs. 6000.
iv ) Realisation expenses paid by partner privately.
2 What Journal Entries Would be passed for the following transactions on the dissolution of a 4
firm, after various assets (other than cash) and third parties’ liabilities have been transferred

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 to Realisation Account?
(i) A took over the Stock worth ₹ 80,000.
(ii) Firm paid ₹ 40,000 as Compensation Employees.
(iii) Sundry Creditors amounted to ₹ 36,000 which was settled at a discount of 15%.
(iv) There was an Unrecorded Bike of ₹ 40,000 which was taken over by B at ₹
30,000.
3 Lovely and Manoj were partners in a firm sharing profits in the ratio of 2:3. On 28-2-2021 4
the Firm was dissolved. After transferring assets (other than cash) and outsiders’ liabilities
to Realization account you are given the following information:
(a) A creditor for Rs 1,40,000 accepted building valued at Rs 1,80,000 and paid to the
Firm Rs 40,000.
(b) A second creditor for Rs 30,000 accepted machinery valued at Rs 28,000 in full
settlement of his claim.
(c) A third creditor amounting to Rs 70,000 accepted Rs 30,000 in cash and
investments of the book value of Rs 45,000 in full settlement of his claim.
(d) Loss on dissolution was Rs 4,000.
Pass necessary journal entries for the above transactions in the books of the firm
assuming that all payments were made by cheque.
4 Disha , Mohit and nandan are partners. They decide to resolve their firm. Pass necessary 4
journal enries for the following after various asserts (other than cash and bank) and the third
party liabilities have been transferred to Realisation account:
a) An old typewriter that has not recorded in the books was sold for Rs 2000 whereas
it excepted value was Rs 5000
b) Stock of Rs 70,000 was kept by disha at discount of 30%.
c) Total creditors of the firm were 20,000. A creditors for Rs 20,000 was untraceable
and other creditors exepted payments allowing 10% discount.
d) Mohit paid realisation expenses of Rs 18,000 out of private funds , who was to get
rumination of Rs 13,000 for completing the dissolution process and was
responsible to bear all the realisation expenses
5 A and B share profits and losses in the ratio of 3:2. They have decided to dissolve the firm. 4
Assets and external liabilities have been transferred to Realisation A/c. Pass the journal
entries to effect the following :
(1) Bank Loan of Rs. 12,000 is paid off.
(2) ‘A’ was to bear all expenses of realization for which he is given a commission of
Rs. 400.
(3) Deferred Advertisement Expenditure A/c appeared in the books at Rs.28000.
(4) Stock worth Rs. 1600 was taken over by ‘B’ at Rs.1200.
6 Shanti and Satya were partners in a firm sharing profits in the ratio of 4:1 on 31st March 4
2022, their Balance sheet was as follows:
BALANCE SHEET
LIABILITIES AMOUNT ASSETS AMOUNT

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 Creditors 45,000 Bank 55,000
Workmen 40,000 Debtors 60,000
compensation 65,000 Stock 85,000
reserve Furniture 1,00,000
Satya’s current a/c 2,00,000 Machinery 1,30,000
Capital A/Cs 1,00,000 Shanti’s current 20,000
Shanti a/c
Satya
4,50,000 4,50,000

On the above date the firm was dissolved:

a. Shanti took over 40% of the stock at 10% less than its book value and the
remaining stock was sold for Rs.40,000. Furniture realized Rs.80,000.
b. An unrecorded investment was sold for Rs.20,000. Machinery was sold at a loss
of Rs.60,000.
c. Debtors realized Rs.55,000
d. There was an outstanding bill for repairs for which Rs.19,000 was paid.
Prepare Realisation Account.

(ANSWERS)
1 i) Realisation a/c Dr. 5000
To X’s capital a/c 5000
ii) Cash a/c Dr. 8000
To Realisation a/c 8000
iii) Y’s capital a/c 6000
To Realisation a/c 6000
iv) No entry since it is paid privately

2 (i) A’s Capital A/c Dr. 80000

To Realisation A/c 80000
(ii) Realisation A/c Dr. 40000
To Bank A/c 40000
(iii) Realisation A/c Dr. 30600
To Bank a/c 30600
(iv) B’s Capital A/c Dr 30000
To Realisation A/c. 30000
3 a. Debit Bank A/c and credit Realisation A/c by Rs 40000
b. No entry
c. Debit Realisation A/c and credit Bank A/c by Rs 30,000
d. Debit L’s capital a/c by1600, Ms capital a/c by2400 and credit realisation by Rs
4000
4 a. Debit Bank A/c and credit Realisation A/c by Rs 2000
b. Debit Disha ‘s capital A/c and credit Realisation A/c by Rs 49000

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 c. Debit Realisation A/c and credit Bank A/c by Rs 16200
d. Debit Realisation A/c and credit Mohit ‘s capital A/c by Rs 13000
5 (1) Realisation a/c Dr. 12000 to bank Rs. 12000.
(2) Realisation a/c Dr. 400 to A’s capital a/c Rs. 400
(3) A’s cap. Dr. 16,800, B’s cap. Dr. 11,200 credit Deferred Advertisement Expenditure
A/c Rs. 28000.
(4) B’s cap Dr. 1200 to realization a/c 1200

6 Realisation Account

PARTICULARS AMOUNT PARTICULARS AMOUNT

To Sundry Assets By Creditors 45,000
Debtors By shanti capital A/c
60,000 Stock 30,600
Stock 85,000 30,600
Furniture 3,75,000 By Bank
1,00,000 Stock
Machinery 40,000
1,30,000 Furniture
To Bank 80,000 2,65,000
O/s Bills Investment
19,000 20,000
Creditors Machinery 98,400
45,000 70,000
64,000 Debtors
55,000
By loss transferred
Shanti
78,720
Satya
19,680

4,39,000 4,39,000

6 MARKS QUESTIONS
1 Following is the balance sheet of Ramesh and Suresh as at 28th feb. 2021: 6

liabilities Rs. Assets Rs.

Sundry creditors 20,000 Land and building 40,000
Bills payable 40,000 Furniture and fittings 28,000
Capital a/c Truck 20,000
Ramesh 30,000 Stock 10,000
Suresh 30,000 Debtors 12,000
_______ Cash 10,000
1,20,000 1,20,000

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 Prepare necessary accounts on the dissolution of firm with the following additional
information.
1) On the above date Ramesh took over the creditors and suresh took over the bills
payable.
2) Assets realized as debtors Rs. 9,000; furniture Rs. 21,000; truckRs. 32,000; stock Rs.
6,000 and land and building Rs.60,000
3) Expenses of realization paid by Ramesh were Rs. 1,200.

2 P,Q and R sharing P&L in the ratio of 5:3:2. They decided to dissolve the firm on 6
31/03/2022
Their balance sheet as on date

Liabilities Amt. Assets Amt.

creditors 19,000 bank 3,500
B/P 12,000 stock 19,800
Loan from S 7,300 Debtors 15,000 14,000
Less : provision 1,000
P capital 25,000 investment 10,000
Q capital 10,000 furniture 12,000
R capital 9,000 machinery 23,000
82,300 82,300

An unrecorded assets is taken by P at 5,000. Investment are taken by Q at 10% discount.

Other assets are realized as follows: stock 16,500 , debts 14,500 , furniture 7,800 ,
machinery 20,500.expenses on realization amounted to 500 are met by R.

Close the books of the firm giving relevant ledger.

3 Following is the Balance sheet of A and B as on 31st December, 2020: 6

Balance sheet
LIABILITIES AMOUNT ASSETS AMOUNT
Sundry Creditors 50,000 Cash in hand 2,000
Bills payable 10,000 Cash at Bank 10,000
Mrs. A’s loan 12,000 Debtors
B’s Loan 30,000 30,000 28,000
Reserve fund 16,000 Less provision 36,000
Investment fluctuation 2,000 2,000 20,000
fund 40,000 Stock in trade 30,000
A’s Capital 40,000 Investments 70,000
B’s Capital Plant 3,000
Buildings 1,000
Goodwill
Profit and loss
2,00,000 2,00,000

The firm was dissolved on this date on the following terms:

a. A agreed to pay off Mrs. A’s loan and took away half the investments
at Rs.8,000.
b. B took half the investments at 90% value.
c. Debtors realized Rs.26,000 and Stock Rs.32,000

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 d. Creditors and Bills payable were due on an average basis of two
months after 31st December, but they were paid immediately on 31st
December, at 12% discount per annum.
e. Plant realized below 10% and Building at 20% above the book value.
f. There was an old typewriter in the firm which had been written off
completely from the books. It is now estimated to realise Rs.1,000 and
A agreed to take it.
g. Realisation expenses Rs. 2,000 were met by B out of firm’s cash.
Prepare necessary ledger accounts to close the books of the firm.

4 Following is the Balance sheet of Karan and Sandeep who share profits and losses equally 6
as on 31st march 2021

Liabilities Rs Assets Rs

Capitals-- Bank 40,000

Karan 1,00,000 Debtors 25,000
Sandeep 50,000 Stock 35,000
Creditors 30,000 Machinery 60,000
Workmen 15,000 Furniture 40,000
compensation fund
Bank loan 5000
2,00,000 2,00,000

The firm was dissolved on the above date.

1. Karan agreed to take over 50% of the stock at 10% less on its book value, the
remaining stock was sold at a gain of 15%. Furniture and machinery realized for Rs
30,000 and 50,000 respectively.
2. There was unrecorded Investments which was sold for Rs 25,000.
3. Debtors realized Rs 31,500 (with interest) and Rs 1200 was recovered for bad debts
written off last year.
4. There was an outstanding bill for repairs which had to be paid Rs 2000.
Prepare necessary Ledger accounts to close the books of the firm

5 6
st
Following is the Balance sheet of X and Y who share profits in the ratio of 4:1 as on 31
March 2020Balance sheet

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 Liabilities Rs Assets Rs

Sundry Creditors 8,000 Bank 20,000

Debtors 17,000

Bank overdraft 6,000 Less provision 2000 15,000

X’s Brother’s loan 8,000 Stock 15,000

Y’s Loan 3,000 Investments 25,000

Investment Fluctuation fund 5,000 Building 25,000

Capitals-X-50,000

Y-40,000 90,000 Goodwill 10,000

Profit and Loss a/c 10,000

1,20,000 1,20,000

The firm was dissolved on the above date and the following was decided—

a) X agreed to pay off his brother’s loan

b) Debtors of Rs 5000 proved bad.
c) Other assets realized as follows—Investments 20% less, and Goodwill at 60%.
d) One of the creditors for Rs 5000 was paid only Rs 3000.
e) Building was auctioned for Rs 30,000 and the auctioneer’s commission
amounted to Rs 1000.
f) Y took over part of the stock at Rs 4000(being 20% less than the book
value)Balance stock realized 50%
g) Realisation expenses amounted to Rs 2000.
Prepare Realisation account, Partners capital accounts and Bank account.

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6 6
X and Y, who were sharing profits and losses in the ratio of 3:1 respectively, decided to
dissolve the firm on 31st March 2018 at which date some of the balances were:

X’s Capital Rs. 1,00,000; Y’s Capital Rs.10,000 ( Debit balance);Profit and loss a/c
Rs.8,000 ( Debit balance);Trade creditors Rs.30,000; Loan from X Rs.10,000; Cash at
bank Rs.2,000.

Assets (other than cash) realized Rs.1,10,000 and liabilities were paid at 5% discount.
Realisation expenses amounted to Rs.1,000

Prepare Realization a/c. partner’s capital account and cash account.

ANSWERS
1 Realisation Profit- Rs. 16,800 6
2 Loss on realization 6,000. Final payment to P 17,000 and R 8,300. Q brings 800. Total 6
bank a/c 63,600.
3 Realisation Profit- A’s 1,600B’s 1,600 6
Capital payment: A- Rs.52,100, B’s- Rs. 38,100
Bank A/c total-Rs1,81,000
4 Realisation Profit- Rs.11575 6
Capital payment: Karan - Rs.97537.5, Sandeep - Rs. 63287.5
Bank A/c total-Rs.197825
5 Loss on Realisation - Rs.9000 Capital payment: X’s - Rs.42,800, Y’s - Rs. 32,200 6
Bank A/c total-Rs.92,000
6 Memorandum Balance sheet 6
LIABILITIES AMOUNT ASSETS AMOUNT
Creditors 30,000 Cash 2,000
Loan from X 10,000 Y’s capital 10,000
Capitals: Profit and loss 8,000
X 1,00,000 1,00,000 Sundry assets 1,20,000
( Balancing figure)
39,450 39,450

Realisation Account
PARTICULARS AMOUNT PARTICULARS AMOUNT
To Sundry Assets 1,20,000 By S Liabilities
To Cash Creditors
Creditors 30,000 40,000
28,500 Loan from X
Loan from X 39,000 10,000
9,500 1,10,000
Real expenses By Cash
1,000 Sundry assets
1,10,000 9,000

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 By loss transferred
X
6,750
Y
2,250

1,59,000 1,59,000
PARTNER’S CAPITAL A/C
PARTICULARS X Y PARTICULARS X Y
To balance b/d -------- 10,000 By balance b/d 1,00,000 -------
To profit and loss 6,000 2,000 By cash ------- 14,250
To realization loss 6,750 2,250
To realization a/c 87,250 -------
1,00,000 14,250 1,00,000 14,250

Bank Account

PARTICULARS AMOUNT PARTICULARS AMOUNT

To balance b/d 2,000 By realization a/c 39,000

To realization a/c 1,10,000 By X’s capital 87,250
To Y’s capital 14,250
1,26,750 1,26,750

56/8
NAME OF CHAPTER: COMPANY ACCOUNTS – ACCOUNTING FOR SHARE CAPITAL

A company may be viewed as an association of persons who contribute money or money's worth to a common
inventory and use it for a common purpose. It is an artificial person having corporate legal entity distinct from
its members (shareholders) and has a common seal used for its signature. Thus, it has certain specialfeatures
which distinguish it from the other forms of organization. These are as follows:
Body Corporate: A company is formed according to the provisions of Law enforced from time to time.
Generally, in India, the companies are formed and registered under Companies Law except in the case of
Banking and Insurance companies for which a separate Law is provided for
Separate Legal Entity: A company has a separate legal entity which is distinct and separate from its members.
It can hold and deal with any type of property. It can enter into contracts and even open a bank account in
itsown name.
Limited Liability: The liability of the members of the company is limited to the extent of unpaid amount of
the shares held by them. In the case of the companies limited by guarantee, the liability of its members is
limited to the extent of the guarantee given by them in the event of the company being wound up.
Perpetual Succession: The company being an artificial person created by law continues to exist irrespective
of the changes in its membership. A company can be terminated only through law. The death or insanity or
insolvency of any member of the company in no way affects the existence of the company Members may come
and go but the company continues its operation
Common Seal: The company being an artificial person, cannot sign its name by itself. Therefore, every
company is required to have its own seal which acts as official signatures of the company Any document which
does not carry the common seal of the company is not binding on the company

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Transferability of Shares: The shares of a public limited company are freely transferable. The permission of
the company or the consent of any member of the company is not necessary for the transfer of shares. But the
Articles of the company can prescribe the manner in which the transfer of shares will be made
May Sue or be Sued: A company being a legal person can enter into contracts and can enforce the contractual
rights against others. It can sue and be sued in its name if there is a breach of contract by the company.
Kinds of Companies: Companies can be classified either on the basis of the liability of itsmembers or on the
basis of the number of members. On the basis of liability of its members the companies can be classified into
the following three categories:
(i) Companies Limited by Shares: In this case, the liability of its members is limited to the Companies
extent of the nominal value of shares held by them.
(ii) Companies Limited by Guarantee: In this case, the liability of its members is limited to the amount
theyundertake to contribute in the event of the company being wound up. Thus, the liability of the member
will arise only in the event of its winding up.
(iii) Unlimited Companies: In other words, the creditors can claim their dues from its members. Such
companies are not found in India even though permitted by the Companies Act, 1956 On the basis of
the number of members, companies can be divided into two categories as follows:
(I)Public Company: A public company means a company which:
(a) is not a private company,
(b) has minimum paid up capital of 5 lakh rupees or such higher paid-up capital, as may be prescribed
and
(c) is a company which is not a subsidiary of a private company
(II)Private Company: A private company is one which has a minimum paid up capital of 1 Lakh rupees or
suchhigher paid-up share capital as may be prescribed, and which by its articles:
(a) restricts the right to transfer its shares:
(b) limits the number of its members to fifty (excluding its employees);
(c) prohibits any invitation to the public to subscribe for any shares in or debentures of the company
(d) prohibits any invitation or acceptance of deposits from person other than its members, directors, and
relatives.
One Person Company (OPC): Sec 2(62) of the companies Act, 2013, defines OPC as a "company which Rule
3 of the Companies (incorporation) Rules, 2014 provides that:
a) Only a natural person being an Indian citizen and resident in India can form one person,
b) It cannot carry out non-banking financial investment activities.
c) Its paid up share capital is not more than Lakhs
d) Its average annual turnover of three years does not exceed 2 crores.

 Shares: According to Section 2(84) of the Companies Act, 2013, share means a share in the share
capital of a company includes stock. The capital of company is divided into a number of equal units.
Each unit is called a share. A company may divide its capital into share of Rs 100, Rs 50, Rs 10, Rs 5
or even Rs 1 each.
 Classes or Kinds of Shares
 1. Preference Shares: According to Section 43(b) of the Companies Act, 2013, preference shares are the
shares which carry the following two preferential rights: highlight to be paid either as fixed amount or
an amount calculated by a

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  (a) Preferential right of highlight to be paid either as fixed amount or an amount calculated by afixed
rate, ofthe nominal value of each share before any dividend is paid to the equity shareholders. (b) The
preferential right to the repayment of capital, on the winding up of the company to the preference share
holders before anything is paid to the equity share holders.
Types of Preference Shares:

(A)On the basis of Arrears of Dividend

(i) Cumulative Preference Shares: These are the preference shares which have the right to receive arrears of
dividend in subsequent years and before the payment of dividend to equity shareholders is made.
(ii) Non-Cumulative Preference Shares: These are the preference shares which don't have the right to receive
arrears of dividend in subsequent years.
(B) On the basis of Share in Profits
(i) Participating Preference Shares: These are the shares which are entitled to share in the surplus profit the
company which remains after payment to equity shareholders.
(ii) Non-participating Preference Shares: These are the shares which do not have a share in surplus profits and
on which only a fixed rate of dividend is paid.
(C) On the basis of Convertibility
(i) Convertible Preference Shares: Convertible preference shares are those shares which can be converted
into equity shares.
(ii) Non-convertible Preference Shares: These are the preference shares which don't have the right to be
converted into equity shares.
(D) On the basis of Redemption
(i) Redeemable Preference Shares: The preference shares which are repayable either after a fixed period or
earlier at the option of the company (as per provisions of Sec. 80) are called redeemable preference shares.

(ii) Irredeemable Preference Shares: Preference shares which don't have any maturity date are called
irredeemable preference shares. The Companies Act, 2013, does not permit issue of irredeemablepreference
shares.
2. Equity Shares: According to Section 43 (a) of The Companies Act, 2013, an equity share is a share which
is not a preference share. Equity shares are the most commonly issued class of shares which carry the
maximum 'risks and rewards of the business. The risks being losing part or all of the value of shares if the
business incurs losses, the rewards being payment of higher dividends and appreciation in the market value.
The dividend on equity shares is not fixed and it may vary from year to year depending upon the amount of
profits available for distribution.

Share Capital
Share capital means the capital raised by the company by the issue of shares.
Types of Share Capital

The term Share Capital has been used in many forms in the Companies Act, therefore, the share capital has
been divided into the following types:
(1) Authorised or Registered or Nominal Capital: It refers to the maximum capital that a company can raise
from the market. It is stated in the capital clause of Memorandum of Association of the company. A company
cannot raise more capital beyond the authorised capital.

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(2) Issued Capital: It refers to that portion of the authorised capital which is actually issued to the public for
subscription
(3) Unissued Capital: It refers to that portion of the authorised capital which has not been issued to the public
for subscription.
(4)Subscribed Capital: It refers to that portion of the issued capital which has been subscribed by the
public.Subscribed capital can be more or less than the issued capital.
(5)Allotted Capital: Capital allotted to share applicants is called as allotted capital. It shall not exceed
issuedcapital or applied capital (whichever is less)
(6)Called-up Capital: It refers to that portion of the allotted shares which has been called-up by the company
for payment.
(7)Un-called Capital: It refers to that portion of the allotted shares which has not been called up by the
company for payment.
(8)Paid-up Capital: It is that portion of the called-up capital which has actually been paid up by the
shareholders.
(9)Reserve Capital:Reserve capital refers to that portion of the subscribed capital which is not called-up for
ayment in its life time. Reserve capital is called up at the time of liquidation of a company by passing a
special resolution.

 Private placement: A private placement is a sale of share or bonds to pre-selected investors and
institution than the open market.
 Employee Stock Option plan (ESOP): An ESOP is a grant to an employee giving the right to buy a
certain number of shares in the company's stock for a set price.
 Sweat Equity: Sweat equity is ownership interest or an increase in value that is created as a direct
result of hard work by the owner. Sweat equity is a form of compensation by the owner. Sweat equity is
a form of compensation by the business to their owners and employees.
ISSUE OF SHARES:

The amount on shares issued can be gradually collected in easy instalments spread over a period of time
depending upon its growing financial requirement. The instalments are termed as application, allotment, first
call, second call and final call. However this is in no way which prevents a company from calling the full
amount on shares right at the time of application.
The important steps in the procedure of share issue are

(i) Issue of Prospectus

(ii) Receipt of applications
(iii) Allotment of Shares
Accounting treatment of Issue of shares for consideration of Cash:
a. Issue of Shares at Par: Issue of Shares at its actual price i.e., face value is known as issue of shares at par.

At the time of Application:

For receipt of application money:
(i) Bank A/cDr.
To Share Application A/c
(Being application money received on........ shares @.per share)

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(ii) For transferring application money to share capital:
Share Application A/c Dr
To Share Capital A/c
(Being application money transferred to share capital account)

Share Application A/c Dr

To Bank A/c
(Being application money returned on rejected application for...........shares)

At the time of Allotment:

(i) For making allotment due:

Share Allotment A/cDr

To Share Capital A/c
(Being allotment due on.....shares @.... per shares adjusted to the amount due on allotment)

(ii) For Adjustment of Excess Application Money: per share)

Share Application A/cDr

To Share Allotment A/c

(iii)For receipt of allotment money:

Bank A/cDr
To Share Allotment A/c
(Being allotment money received)

At the time of First Call:

(i)For making first call due:

Share First Call A/cDr
To Share capital A/c
(Being first call money due on.... shares @........ per share)
(ii)For receipt of first call:

Bank A/cDr
To Share first call A/c
(Being first call money received)

At the time of Second Call:

(i) For making second call due:

Share Second Call A/cDr

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To Share Capital A/c
(Being second call money due on ...... shares @ _____ per share)
(ii) For receipt of second call:
Bank A/cDr
To Share Second Call A/c
(Being second call money received)
b. Issue of Shares at Premium: Issue of shares at a premium implies that shares are issued at a price which is
more than their face value. For example, if a share of Rs 100 is issued at Rs 120, Rs20 will be the premium on
share. As per the requirements of the Companies Act, 2013, the amount received on the securities premium
shall be credited to Securities Premium Reserve Account. It is a capital receipt for the company. According to
Section 52(2) of the Companies Act, 2013, the amount of Securities Premium Reserve can be used only for the
following purposes:

i. To issue fully paid-up bonus shares to the shareholders.

ii. To write off preliminary expenses of the companies.
iii. To write off the commission paid or expenses on issue ofshares/debentures.
iv. To pay premium on the redemption of preference sharesor debentures of the company.
v. Buy-back of equity shares and other securities as per Section 68.
JOURNAL ENTRIES

(1) For making Allotment due with Premium:

Share Allotment A/cDr

To Share Capital A/c
To Securities Premium Reserve A/c
(Being amount due on share allotment with premium)
(2) For receipt of Allotment Money:
Bank A/c Dr
To Share allotment A/c
(Being share allotment money received)

 Under-subscription of shares:When the number of shares applied for is less than the number of shares
offered for issue, it is known as under-subscription. This is subject to the qualification that minimum
subscription has at least been received.
 Oversubscription of Shares: When the number of shares applied for is more than the number of shares
offered forissue, it is known as oversubscription.
The options available with the company to deal with money received on oversubscription are:
(i) Board of Directors can make full allotment to some applicants and totally reject the others.
(ii) They can make a pro-rata allotment. It means the proportion is determined by the ratio which
the number of shares to be allotted bear to the number of shares applied for.
(iii) They can adopt a combination of the above two alternatives.
 Calls - in - advance
A company can accept advance payment from any shareholder in respect of the shares held by them although
calls have not been made on them, if it is authorized by its articles, i.e., a shareholder may pay the

62/8
 whole or a part of the unpaid amount as calls-in-advance although it has not been called up. This is
called Calls-in-Advance and a separate account having this title is opened.
Then the calls are made, ie., due, then it is adjusted against the respective 'Calls A/C. The company
may pay interest on such ad- vance from the date of advance received up to the date when it is due
which shall not be exceeding 12% per annum.
In this regard, the following entries are made:
(1) For receipt of Calls-in-Advance:
Bank A/cDr
To Calls-in-Advance A/c
(Being amount received in advance for the ____ call)
(2) For adjustment of Calls-in-Advance:
Calls-in-Advance A/c
To Share.... Call A/c
(Being the calls in advance transferred to the _____ call)
 Calls – in- Arrears
When a shareholder defaults to pay the amount of call due within a specified period, then the unpaid amount
is called Calls-in-Arrears. It is not necessary to pass separate entry for the calls-in- arrears. But if
there is an instruction to open a calls-in-arrears account, then the following entriesshall be passed:

(1) For Amount unpaid on allotment:

Calls-in-Arrears A/cDr
To Share Allotment A/c
(Being amount not paid accrued on share allotment)
(2) For amount unpaid on calls:
Calls-in-Arrears A/cDr
To.... Share... Calls A/c
(Being amount not paid accrued on share ____ call)
(2) For receipt of arrears of allotment or calls money:
Bank A/cDr
To Calls-in-Arrears A/c
(Being amount not received on call/allotment duly received)
 Issue of shares for consideration other than cash
A company may issue shares for consideration other than cash by acquiring some assets for running
business or to the promoters for rendering services to the company. Such issue of shares is termed as issue
of shares for consideration other than cash as there is no receipt of cash for the issue of shares. Such issue
may be either at par or at premium. The number of shares to be issued is calculated as follows:

No. of shares to be issued = Amount Payable/Issued price of share

These can be issued as fully paid shares for consideration other than cash, in the following circumstances: (A)
Issue of Shares to Promoters:A company may issue shares without cash to its promoters for the services
rendered by them. The entry in this case will be:

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 Incorporation Expenses A/cDr.
To share Capital A/c
(Being fully paid shares issued to the promoters)

(B) Issue of Shares to Vendors: When a company purchases certainassets from vendor/supplier on credit, or
when it purchases a business instead of making payment to vendor in cash, the company issues fully paid
shares to the vendor. Shares may be issued to vendor at par or at premium. Following entries are passed in this
case:

(i) (a) For Purchase of Assets from Vendor:

Sundry Assets A/cDr.

To Vendor’s A/c
(Being assets purchased on credit)
(b) For Purchase of Business:

Sundry Asset A/cDr

Goodwill A/cDr
To Liabilities A/c
To Vendor's A/c
To Capital Reserve A/c
(Being business purchased)
(ii) For Issuing Shares to Vendor:

(a) At Par:

Vendor's A/cDr
To Share Capital A/c
(Being fully paid shares issued to vendor)
(b) At Premium:
Vendor's A/cDr
To Share Capital A/c
To Securities premium reserve A/c
(Being share issued to vendor at premium)
 Forfeiture of shares:
When a member fails to pay allotment or calls of the issue price of his shares within a stipulated time then has
a power to cease his membership and forfeit his shares. Statutory provisions regarding forfeiture of shares:
Following entries are passed in three alternative circumstances:
(1) Forfeiture of Shares issued at Par:

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Share Capital A/cDr(amount called up so far)
To Share Allotment A/c(amount not received on allotment)
To Share Calls A/c(amount not received on calls)
To Shares Forfeiture A/c(amount received so far)
(Being shares issued at par forfeited)

(2) Forfeiture of Shares issued at Premium:

(a) If Premium has not been received:
Share Capital A/c Dr(amount called up so far Less premium)
Securities Premium Reserves A/cDr(premium amount called up)
To Share Allotment A/c (amount not received on allotment)
To Share Calls A/c(amount not received on calls)
To Shares Forfeiture A/c(amount received so far)
(Being shares issued at premium forfeited )

(b) If Premium has been received:

Share Capital A/cDr(amount called up so far Less premium)
To Share Allotment A/c(amount not received on allotment)
To Share Calls A/c(amount not received on calls)
To Shares Forfeiture A/c(amount received so far less premium)
(Being shares issued at premium forfeited)

 The balance of Share Forfeiture Account is added to the capital under Subscribed Share Capital in the
Notes to Accounts of Share Capital, being part of Shareholders' Funds shown under Equity and
Liabilities part of the Balance Sheet

 Reissue of forfeiture shares

Forfeited shares may be re-issued at par premium or discount or cancelled as per the provisions of the
Articles of Association of the company. Normally the total amount is collected on discount. The amount of
discount on reissue should not exceed the amount already credited to Shares Forfeiture Account. Such
discount shall be debited to Shares Forfeiture Account in place of Discount on Shares Account. Any
balance in Forfeiture Shares Account, after reissue shall be transferred to Capital Reserve Account. If all
forfeited shares are not reissued, proportionate amount shall be left in Share Forfeiture Account and the
balance shall be transferred to Capital Reserve A/c.
Following journal entries are passed for reissue of forfeited shares:
(1) For re-issue of Forfeited Shares:
(a) If re-issued at par:
Bank A/c
To Share Capital A/c
(Being forfeited shares re-issued at par)
(b) If re-issued at a discount:

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 Bank A/c
Share Forfeiture A/c
To....... Share Capital A/c

(Being forfeited share re-issued at a discount)

(c) If re-issued at premium:

Bank A/c
To....Share Capital Reserve A/c
To Securities Premium Reserve A/c
(Being forfeited shares re-issued at a premium)
(2) For transfer of balance of forfeited share account to capital reserve:
Share Forfeiture A/c
To Capital Reserve A/c
(Being the balance of forfeited share transferred to the capital reserve account)

Q. MARK
NO
1 The first stage of incorporation of a company is 1
(A) Registration(B) Promotion (C) Commencement of business(D) None of the above
2 Those preference shares which do not carry theright to receive arrears of dividend: 1
(A) Non-participating Preference Shares(B) Irredeemable Preference Shares
(C) Non-convertible Preference Shares(D) Non-cumulative Preference Shares
3 ESOP offered by company will create / retain: 1
(A) A sense of belongingness in employees
(B) High calibre
(C) High Productivity
(D) All of the above Ans. Option (D) is correct.
4 Vanya Ltd. forfeited 20,000 equity shares of Rs100 each for non-payment of first and final 1
call of Rs40 per share. The maximum amount of discount at which these share can be re-
issued will be:
(A) Rs8,00,000 (C) Rs20,00,000
(B) Rs12,00,000(D) Rs20,000
5 Balance in Share Forfeiture Account is shown in the balance sheet under the head of: 1
(A) Reserves and Surplus(B) Long-term Borrowings
(C) Share Capital(D) Other Current Liabilities
6 Identify the journal entry for the issue of forfeited shares at par. 1
Particulars LF Amt (Dr) Amt (Cr)
(A) Bank A/cDr
To Share Capital A/c

(B) Bank A/cDr

Share Forfeiture A/c Dr.
To Share Capital A/c

(C) Share Forfeiture A/c Dr.

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 To Share Capital A/c

(D) (D) None of the above

7 A situation where number of shares offered to the public for subscription are less than the 1
number of shares for which applications have been received is called:
(A) Under subscription (C) Over subscription
(B) Fully subscribed(D) Both (B) and (C)
8 Raman Ltd. was registered with an authorized capital of 5,00,00,000 divided into shares of 1
Rs10 each. The company offered for subscription 4,00,000 shares. Applications were
received for 4,50,000 shares. Applications for 50,000 shares were rejected. A shareholder
holding 10,000 shares failed to pay the first and final call of Rs2 per share. The subscribed
capital of the company is:
(A) Rs5,00,00,000(B) Rs40,00,000(C) Rs45,00,000(D)Rs 39,80,000
9 Statement I: A company is formed according to theprovisions of Law enforced from time 1
to time,
Statement II: Generally, in India, the companies are formed and registered under
Companies Law except in the case of Banking and Insurance companies for which a
separate Law is provided for.
Choose the correct option from options given below:
(A) Statement I is correct and statement II is wrong
(B) Statement II is correct and statement I is wrong
(C) Both the statements are correct.
(D) Both the statements are wrong Ans. Option (C) is correct.
10 Statement I: The company being an artificial created by law continues to exist irrespective 1
of the changes in its membership.
Statement II: Members may come and go but the company continues.
Choose the correct option from options given below:
(A) Statement I is correct and statement II is
(B) Statement II is correct and statement I is wrong.
(C) Both the statements are correct.
(D) Both the statements are wrong.
11 What amount of profit on reissue will be transferred to Capital Reserve under the 3
following situations?

(i)Z Ltd. forfeited 800 equity shares of Rs. 10 each issued at a discount of 10% for the
non-payment of first and final call of Rs. 3 per share. The forfeited shares were reissued at
Rs. 12 per share as fully paid-up.

(ii)3,000 shares of Rs. 10 each of Rakesh was forfeited by crediting Rs 5,000 to Forfeited
Shares Account. Out of these, 1,800 shares were reissued to Mohan for Rs. 9 per share
fully paid-up.

(iii)Z Ltd. forfeited 20 shares of Rs 100 each 60 called-up issued at par to Shiv on which
he paid Rs. 20 per share. Out of these, 15 shares were reissued to Rajesh as Rs. 60 paid-up
for Rs. 45 per share.
12 RV Corp Ltd. issued 40,000 equity shares of Rs10 each at a premium of Rs2 payable 3
alongwith the application. All the shares were applied and duly allotted. Pass necessary
journal entries.
13 Random Ltd. took over running business of Mature Ltd. comprising of Assets of Rs45, 3

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 00,000 and Liabilities of Rs6, 40,000 for a purchase consideration of Rs36, 00,000. The
amount was settled by bank draft of Rs1,50,000 and balance by issuing 12% preference
shares of Rs100 each at 15% premium. Pass entries in the books of Random Ltd.
14 Prayag Ltd. forfeited 2,000 shares of 10 each, fully called up, on which they had received 3
only 14,000. 50 of the forfeited shares were reissued for 9 per share fully paid up. Pass the
necessary journal entries for forfeiture and re-issue of shares.
15 On 28.2.2020 the first call of Rs. 2 per share became due on 50,000 equity shares allotted 3
by Kumar Ltd. Komal, a holder of 1000 shares, did not pay the first call money. Kovil, a
holder of 750 shares paid the second and final call of & 4 per share alongwith the first
call. Pass the necessary journal entry for the amount received by opening calls - in -
arrears and calls - in - advance accountin the books of the company.
16 K Ltd. took over the assets of Rs. 15,00,000 and liabilities of Rs. 5,00,000 of P Ltd. for a 3
purchase consideration of Rs. 13,68,500. Rs. 25,500 were paid by issuing a promissory
note in favour of P Ltd. payable after two months and the balance was paid by issue of
equity shares of Rs. 100 each at a premium of 25%. Pass necessary journal entries for the
above transactions in the books of K Ltd.
17 Kumar Ltd. purchased assets of Rs6, 30,000 from Bhanu Oil Ltd. Kumar Ltd. issued 4
equity shares of Rs100 each fully paid in consideration. What journal entries will be made,
if the shares are issued (i) at par and (ii) at premium of 20%.
18 Altaur Ltd. was registered with an authorised Capital of Rs4, 00,00,000 divided in 4
25,00,000 Equity Shares of Rs10 each and 1,50,000, 9% Preference Shares ofRs 100 each.
The company issued 8,00,000 Equity Shares for public subscription at 20% premium,
payable Rs3 on application; Rs7 on allotment (including premium) and balance on call.
Public had applied for 10, 00,000 shares. Excess Applications were sent letters of regret.

All the dues on allotment received except on 15,000 shares held by Sanju. Another
shareholder Rocky paid his call dues along with allotment on his holding of 25,000 shares.
You are required to prepare the Balance Sheet of the company as per Schedule III of
Companies Act, 2013, showing Share Capital balance and also prepare Notes to Accounts.
19 To provide employment to the youth and to develop Baramulla district of Jammu and 4
Kashmir, Jyoti Power Ltd. decided to set up a power plant. For raising funds the company
decided to issue 8, 50,000 equity shares of Rs. 10 each at a premium of Rs. 3 per share.
The whole amount was payable on application. Applications for 20, 00,000 shares were
received. Applications for 3, 00,000 shares were rejected and shares were allotted to the
remaining applicants on a pro-rata basis.
Pass necessary journal entries for the above transactions in the books of the company
20 NK Ltd., a truck manufacturing company, is registered with an authorised capital of Rs. 4
1,00,00,000 divided into equity shares of Rs. 100 each. The subscribed and paid up capital
of the company is Rs. 50,00,000. The company decided to open technical schools in the
Jhalawar district of Rajasthan to train the specially abled children of the area. It is
planning to provide them employment in its various production units and industries in the
neighbourhood area. To meet the capital expenditure requirements of the project, the
company offered 20,000 shares to the public for subscription. The shares were fully
subscribed and paid.

Present the share capital in the Balance Sheet of the company as per the provisions of
Schedule III of the Companies Act, 2013.
21 Frank Ltd. issued 1,00,000 Equity shares of Rs. 10 each. The amount was duly received 4
except on 5,000 Equity shares on which Rs. 5 per share was received. These shares were
forfeited and 2,500 Equity shares were reissued for Rs. 9 each fully paid-up. You are

68/8
 required to prepare Share Forfeiture Account.
22 Disha Ltd. took over assets of Rs. 8,00,000 and liabilities of Rs. 3,00,000 from Kriti Ltd, 4
for a purchase consideration of Rs. 6,00,000. The payment was made by issue of 9%
Debentures of Rs. 100 each at 20% premium.
Pass the necessary journal entries for the above transactions in the books of Disha Ltd.
23 Pass entries for forfeiture and re-issue in both the following cases. 6
(a) Vikram Ltd. forfeited 5,000 shares of Rahul, who had applied for 6,000 shares for
non-payment of allotment money of 5 per share and first and final call of 2 per
share. Only application money of 3 was paid by him. Out of these 3,000 shares
were re-issued @ 12 per share as fully paid.
(b) Ratan Ltd. forfeited 3,000 shares of 10 each (issued at 2 premium) for non-payment of
first call of * 2 per share. Final call of * 3 per share was not yet made. Out of these 2,000
shares were re-issued at 10 per share as fully paid.
24 Royal Fans Ltd. invited applications for 1, 00,000 Equity Shares of Rs.100 each at a 6
premium of 10%. The amount was payable as follows:
On Application Rs. 50 per share
On Allotment Rs. 35 per share (including premium)
On First and Final Call Rs. 25 per share
Applications for 1, 50,000 shares were received. Applicants for 25,000 shares did not get
any allotment and their money returned. Allotment was made pro-rata to the remaining
applicants. Excess application money was adjusted towards sum due on allotment. Mr.
Hanoz who was allotted 600 shares failed to pay the amount due on allotment and call
money. The company forfeited his shares and subsequently re-issued at Rs 110 per share
fully paid-up.
You are required to pass journal entries to record the above transactions in the books of
the company.
25 Phizer Ltd. invited applications for 4,000 equity shares of Rs 100 each at a premium 30 6
per share. The amount was payable as follows:
On Application Rs. 40 (Including premium Rs 10)
On Allotment Rs. 60 (Including premium Rs 20)
On First and Final Call Rs. 40
Applications for 5,000 shares were received. Allotment was made to all the applicants on
prorata basis. Excess application money was adjusted towards sum due on allotment.
Rocky, to whom 40 shares were allotted, failed to pay allotment and call money. Ali, to
whom 90 shares were allotted, failed to pay the call money. These shares were forfeited.
The forfeited shares were re-issued @ Rs 80 per share fully paid-up.
You are required to pass journal entries to record the above transactions in the books of
the Company.
26 The Directors of Rockstar Ltd. invited applications for 2,00,000 Shares of ₹ 10 each, 6
issued at 20% premium. Share was payable as ₹ 5 on application, ₹ 4 (including premium)
on allotment and balance on call. Public had applied for 3,20,000 shares out of which
applications for 20,000 shares were rejected and remaining were alloted on pro-rata basis.
Simba, an applicant of 15,000 shares failed to pay allotment and call money. His shares
were forfeited and out of these 6,000 shares were reissued at a discount of ₹2 per share.
Journalise.
27 Shaktimaan Ltd. invited applications for issuing 1,00,000 Shares of ₹ 10 each at a 6
premium of ₹2 per share. The amount was payable as₹ 4 on application (including
premium); ₹ 5 on Allotment and balance on call. Applications were received shares for
1,80,000 of which Applications for 30,000 shares were rejected and remaining applicants
were allotted on pro-rata basis. Manthan, holding 5,000 shares failed to pay call money

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 and his shares were forfeited. Out of these 2,000 shares were re-issued at premium of ₹ 3
per share. Prepare Cash Book and pass necessary entries.
28 P Ltd. issued a prospectus inviting applications for 25000 shares of Rs. 10 each at a 6
premium of Rs. 2 per share payable as follows:
Application = Rs. 2
Allotment = Rs. 5 (including premium)
First call = Rs. 3
Final call = Rs. 2
Applications were received for 37500 shares and prorate allotment was made on
applications for 30000 shares. It was decided utilize excess application money
towards the amount due on allotment. Ramesh who applied for 600 shares failed to
pay the allotment money and on his subsequent failure to pay the first call his
shares were forfeited M the holder of 750 shares failed to pay the two calls and on
such failure his shares were forfeited. Of these shares forfeited 1000 shares were
sold to Krishnan credited as fully paid for Rs. 9 per share the whole of R’s shares
being included.

ANSWERS:

Q. MARKING SCHEME MARK

NO
1 (B) Promotion 1
2 (D) Non-cumulative Preference Shares 1
3 (D) is correct. 1
The employee stock option plan is giving the shares to the employees in order to create a
sense of belongingness in employees and creates high calibre and productivity of
employees.
4 (B) is correct. 1
Explanation:
Amount forfeited at the time of forfeiture of shares
=20,000 × 60
= 12,00,000 [Maximum amount ofdiscount to be allowed]
5 Option (C) is correct. 1
Explanation: As the share forfeiture forms the share capital it is shown in the share capital
head of the Balance Sheet.
6 Option (A) is correct. 1
Explanation: The journal entry for the reissue of forfeited share will be the same as the
issue ofshares.
7 Option (C) is correct. 1
Explanation: When shares offered >share application = Under subscription
Shares offered < share application = Oversubscription
Shares offered = share application = Fully
8 Option (D) is correct. 1
Explanation: Amount received on issue of 4,50,000 shares = Rs45,00,000
Amount rejected on 50,000 shares = (Rs5,00,000)
Rs 40,00,000

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 Amount not paid on 10,000 shares (10,000 × 2) = 20,000
Amount of authorised capital = 39,80,000
9 Option (C) is correct. 1
10 Option (C) is correct. 1
11 (i)Amount to be transfered to share forfeiture A/c= 7,200(800x9) - 2,400(800x3)= Rs. 3
4,800
Amount ko be transfered to Capital Reserve A/c= 9,600(12x800) - 4,800(Amount of share
forfeiture)= Rs. 4,800

(ii)Amount to be transfered to share forfeiture A/c= Rs. 3,000(5,000 ÷ 3,000 x 1,800)

Amount to be transfered to Capital Reserve A/c= 16,200(1,800x9) - 3,000(Amount of
share forfeiture)=Rs. 13,200.

(iii)Amount to be transferred to Capital Reserve A/c= 75

12 3
JOURNAL

Date particulars LF Amt (Dr) Amt (Cr)

Bank A/c (40,000 x 12) Dr 4,80,000
To Equity share Application and 4,80,000
Allotment A/c
(Being the application money on 40,000
equity shares received @Rs 12)
Equity Share Application and Allotment 4,80,000
A/c Dr
To Equity Share Capital A/c(40,000 x 4,00,000
10)
To Securities premium Reserve (40000 x 80,000
2)
(Being the equity shares allotted to the
applicants and amount transferred to equity
share capital and securities premium
reserve account)
13 . 3
JOURNAL

Date particulars LF Amt (Dr) Amt (Cr)

(i) Assets A/c Dr 45,00,000
To Liabilities A/c 6,40,000
To Mature Ltd A/c 36,00,000
To Capital Reserve A/c 2,60,000
(Being purchased of Mathure Ltd.
Comprising of Assets and liabilities)
(ii) Mature Ltd. A/c Dr 36,00,000
To Bank A/c 1,50,000
To 12% Preference share capital A/c 30,00,000
To Securities premium A/c 4,50,000
(Being Share issued at a premium)

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14 3
In the books of Prayag Ltd.
Journal entries
Date Particulars LF Amt (Dr) Amt (Cr)
Share capital A/c Dr 20,000
To Share forfeiture A/c 14,000
To calls-in –Arrears A/c 6,000
(Being 2,000 shares of Rs 10 each forfeited
for non – payment of Rs 6,000)
Bank A/c Dr 450
Share forfeiture A/c Dr 50
To Share capital A/c 500
(Being 50 of the forfeited shares reissued for
Rs 9 per share)
Share Forfeiture A/c Dr 300
To Capital Reserve A/c 300
( Being gain on reissue of shares transferred
to capital Reserve A/c )
15 In the Books of Kumar Ltd 3

Journal Entries
For the year ended........

Date particulars LF Amt (Dr) Amt (Cr)

2020 Equity Share First Call A/cDr 1,00,000
Feb To To Equity Share Capital A/c 1,00,000
28 (being money dues on first call on 50,000
equity shares @Rs. 2 each)
Bank A/cDr 1,01,000
Calls in arrears A/c 2,000
To Equity Share First Call A/c 1,00,000
To Calls - in - Advance A/c 3,000
Being amount received on first call except
1000 shares @Rs.2 each andsecond and
final call received in advance @Rs.4 each
on 750 shares)
16 3
Journal Entries
For the year ended........

Date particulars LF Amt (Dr) Amt (Cr)

Sundry assets A/c Dr 15,00,000
Goodwill A/c (balancing fig.)Dr 3,68,500
To Sundry liabilities A/c. 5,00,000
To P Ltd. A/c. 13,68,500
(being assets and liabilities purchased from

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 P Ltd.)
P Ltd. A/cDr 13,68,500
To Equity Share Capital A/c 10,74,400
To Securities Premium A/c 1,00,000
To Bills Payable A/c 2,68,600
(being 10,744 shares issued at Rs. 100
each at a premium of Rs. 25 each and a
promissory note of 25,500)

Working Notes

Total number of equity shares:

No. of issued shares = Purchase consideration / Price of issue of shares

13,43,000

125

⇒10,744 Shares
17 Journal 4
Date Particulars LF Amt (Dr) Amt (Cr)
Sundry Assets A/c Dr 6,30,000
To Bhanu Oil Ltd 6,30,000
( Being assets purchased from Bhanu oil ltd.)
(i)When Shares are issued at par 6,30,000
Bhanu oil Ltd. A/c Dr 6,30,000
To Equity Share Capital A/c(6,300x 100)
(Being 6,300 shares issued at par to Bhanu oil
Ltd.)
(ii)When shares are issued at Premium
Bhanu oil Ltd. A/c Dr 6,30,000
To Equity Share Capital A/c(5,250x 100) 5,25,000
To Securities premium reserve 1,05,000
A/c(5,250x20)
(Being 5,250 shares are issued at 20 %
premium to Bhanu Ltd in consideration of
assets purchased)

Working notes
Number of shares to be issued = Amount payable /Face value per share

Case (i) 6,30,000/100 = 6,300 shares

Case (ii) 6,30,000/(100+20)= 5,250 shares
18 4
Books of Altaur Ltd.
Balance sheet (Extract) as at ….
Particulars Note Current years (Rs) Previous years (Rs)
no.

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 Equity and Liabilities
Shareholders’ Funds
Share Capital 1 63,25,000 Nil

Notes to Accounts
1. Share Capital Amount (Rs)
Authorised share capital
25,00,000 equity Shares @Rs 10 each 2,50,00,000
1,50,000 9% Preference Shares @ Rs 100 each 1,50,00,000
4,00,00,000
Issued Share capital
8,00,000 Equity shares @ Rs 10 each 80,00,000
Subscribed Share capital
(i) Subscribed and Fully Paid up ……….
(ii) Subscribed but not Fully Paid up
8,00,000 Equity shares @ Rs 8 each 64,00,000 63,25,000
(-) Calls in Arrears (75,000)
19 4
Journal Entries
For the year ended........

Date particulars LF Amt (Dr) Amt (Cr)

Bank A/c. 2,60,00,000

To Equity share application and allotment 2,60,00,000
A/c
(Being the net proceeds of 2,00,000 equity
shares at a price of Rs. 10 each plus a
premium of Rs. 3 each)
Share application and allotment A/c Dr. 85,00,000
To Equity share capital A/c 85,00,000
To Securities Premium A/c 25,50,000
To Bank A/c 1,49,50,000
(Being money transferred to share capital
throughout the application process, and
any excess is refunded.)
20 4
Balance sheet of NK Ltd. (Extract)
As at …. (As per revised schedule III)
Particulars Note Current years (Rs) Previous years (Rs)
no.
Equity and Liabilities
I. Shareholders’ Funds
a) Share Capital 1 70,00,000 Nil

74/8
 Notes to Accounts
1. Share Capital Amount (Rs)
Authorised share capital

1,00,000 equity shares of Rs. 100 each 1,00,00,000

Issued Share capital
70,000 Equity shares @ Rs 100 each 70,00,000
Subscribed Share capital
70,00,000
Subscribed and Fully Paid up ……….
70,000 Shares of Rs.100 each

21 4

Share Forfeiture Account

Dr Cr
Particulars Amt (Rs) Particulars Amt(Rs)
To share Capital A/c 2,500 By Share Capital A/c 25,000
To Capital Reserve A/c 10,000
To Balance C/d 12,500

25,000 25,000
22 4
In the Books of DishaLtd..
Journal Entries For the year ending......

Date particulars LF Amt (Dr) Amt (Cr)

Sundry Assets A/cDr 8,00,000
Goodwill A/cDr 1,00,000
To Sundry Liabilities A/c 3,00,000
To Kriti Ltd. A/c 6,00,000
(Assets and liabilities taken over from Kriti
Ltd.)

Kriti Ltd.'s A/cDr 6,00,000

To 9% Debentures A/c 5,00,000
To Securities Premium Reserve A/c 1,00,000
(Purchase consideration discharged issuing
9% Debentures at a premium)
23 Books of Vikram Ltd. 6
Journal entries
(i)

Date Particulars LF Amt (Dr) Amt (Cr)

(i) Share Capital A/c Dr. 50,000
To Share Forfeited A/c 18,000
To Calls in Arrears A/c 32,000
(5,000 shares forfeited for non-payment of

75/8
 allotment and call money)
(ii) Bank A/c Dr. 36,000
To Share Capital A/c 30,000
To Securities Premium A/c 6,000
(3,000 shares re-issued @ 12 per share)
(iii) Share Forfeited A/c Dr. 10,800
To Capital Reserve A/c 10,800
(Gain on re-issue of forfeited shares
transferredto capital reserve)

Books of Ratan Ltd.

Journal entries
(ii)

Date Particulars LF Amt (Dr) Amt (Cr)

(i) Share Capital A/c Dr. 21,000
To Share Forfeited A/c 15,000
To Calls in Arrears A/c 6,000
(3,000 shares forfeited for non-payment of
allotment and call money)
(ii) Bank A/c Dr. 20,000
To Share Capital A/c 30,000
(2,000 shares re-issued @ 10 per share)
(iii) Share Forfeited A/c Dr. 10,000
To Capital Reserve A/c 10,000
(Gain on re-issue of forfeited shares
transferredto capital reserve)

24 6
Journal Entries For the year ending......

Date particulars LF Amt (Dr) Amt (Cr)

Bank A/c (1,50,000 X 50) Dr 75,00,000

To Share Application A/c 75,00,000
(Application money received on 1,50,000
shares)

Share Application A/c Dr 75,00,000

To Share Capital A/c (1,00,000 X 50) 50,00,000
To Share Allotment A/c 12,50,000
To Bank A/c 12,50,000
( Amount transferred to share capital and
excess adjusted)

Share Allotment A/c Dr 35,00,000

To Share Capital A/c 25,00,000
To Securities Premium A/c 10,00,000

76/8
 (Allotment due)

Bank A/c Dr 22,36,500

To Share Allotment A/c 22,36,500
(Allotment money received)

Share First & Final Call A/c Dr 25,00,000

To Share Capital A/c 25,00,000
(Call money due)

Bank A/c(99,400 x 25) Dr 24,85,000

To Share First & Final Call A/c 24,85,000
(Call money received)

Share Capital A/c(600 x 100) Dr 60,000

Securities Premium A/c Dr 6,000
To Share Forfeiture A/c 37,500
To Share Allotment A/c 13,500
To Share First & Final Call A/c 15,000
(Shares forfeited for non-payment of
allotment & call)

Bank A/c(600 x 110) Dr 66,000

To Share Capital A/c 60,000
To Securities Premium A/c 6,000
(Shares reissued at fully paid-up)

Share Forfeiture A/c Dr 37,500

To Capital Reserve A/c 37,500
(Gain on reissued shares transferred)

Working notes:
Mr. Hanoz has been allotted 600 shares
If shares allotted were 600, shares applied for were = 1,25,000/1,00,000 x 600 = 750
shares Excess Application money received from Mr. Hanoz:
750 shares – 600 shares = 150 shares x Rs. 50 = Rs. 7,500
Amount due from Mr. Hanoz on Allotment:
600 shares x Rs. 35 = Rs. 21,000
Less:- Excess received on application from Mr. Hanoz = Rs. 7,500
Net amount due from Mr. Hanoz, not been received = Rs. 13,500
Total amount due on allotment 1,00,000 x Rs. 35= Rs. 35,00,000
Less:- Excess received on applications = Rs. 12,50,000
Less:- Amount not been received from Mr. Hanoz= Rs. 13,500
Net amount received on allotment in cash = Rs. 22,36,500

25 6
Journal Entries For the year ending......

77/8
Date particulars LF Amt (Dr) Amt (Cr)
Bank A/c (5,000 X 40) Dr 2,00,000
To Equity Share Application A/c 2,00,000
(Application money received on 5,000
shares)

2,00,000
Equity Share Application A/c Dr 1,20,000
To Equity Share Capital A/c (4,000 x 40,000
30) 40,000
To Equity Share Allotment A/c(1,000 x
40)
To Securities Premium A/c (4,000 x10)
( Amount transferred to share capital and 2,40,000
excess adjusted) 1,60,000
80,000
Equity Share Allotment A/c (4,000 x 60)
Dr
To Equity Share Capital A/c(4,000 x 40) 1,98,000
To Securities Premium A/c 1,98,000
(Allotment due)

Bank A/c Dr 1,60,000

To Equity Share Allotment A/c 1,60,000
(Allotment money received)
1,54,800
Equity Share First & Final Call A/c Dr 1,54,800
To Equity Share Capital A/c (Call money
due)
13,000
Bank A/c Dr 2,600
To Equity Share First & Final Call A/c 8,400
(Call money received) 2,000
5,200
Equity Share Capital A/c(130 x 100) Dr
Securities Premium A/c (130 x 20) Dr
To Equity Share Forfeiture A/c
To Equity Share Allotment A/c 10,400
To Equity Share First & Final Call A/c 2,600
(Shares forfeited for non-payment of 13,000
allotment & call)

Bank A/c(130 x 80) Dr 5,800

Forfeited shares A/c (130 x 20) Dr. 5,800
To Equity Share Capital A/c
(Shares reissued at Rs. 80 fully paid-up)

Share Forfeiture A/c (8,400 –2,600) Dr

To Capital Reserve A/c
(Gain on reissued shares transferred)

78/8
 Working notes:
1. Excess application money adjusted on allotment =(5,000 – 4,000) x Rs 40=Rs 40,000
2. Amount not received from defaulter shareholders:
Calculation for Rocky Shares allotted to Rocky=40
Shares applied for by Rocky=40 x 5,000/4,000=50
Application money received =50 x 40=2,000
Application money due on shares allotted =40 x 40= 1,600
Excess Application money adjusted on allotment-Rs 2,000-Rs.1,600=Rs 400
Allotment money due on shares allotted = 40 x 60=2,400
Allotment money due but not received (Calls-in-Arrears) Rs. 2,400-Rs 400=Rs 2,000
Call money due but not received = 40 x 40 = Rs 1,600
Calculation for Ali
Shares allotted to Ali = 90
Call money due but not received = 90 x 40 = Rs 3,600
3.Calculation of amount received on allotment later on:
Total allotment money due (4,000x Rs. 60) =Rs.2,40,000
Less: Excess application money adjusted (WN 1) = Rs.40,000 = 2,00,000
Less: Allotment money due but not received (WN 2) = Rs.2,000
Amount received on Allotment = Rs. 1,98,000
4.Calculation of amount received on first and final Call later on:
Total first and final Call money due (4,000 x Rs. 40) =Rs.1,60,000
Less: first and final Call money due but not received [3,600+1,600] = Rs.5,200
Amount received on first and final Call = Rs. 1,54,800

26 6

Journal
Date particulars LF Amt (Dr) Amt (Cr)
Bank A/c Dr. 16,00,000
To Share Application A/c 16,00,000
(Being Application money received)

Share Application A/c Dr. 16,00,000

To Share Capital A/c 10,00,000
To Share Allotment A/c 5,00,000
To Bank A/c 1,00,000
(Being Application money utilised)

Share Allotment A/c Dr. 8,00,000

To Share Capital A/c 4,00,000
To Securities Premium A/c 4,00,000
(Being allotment due with premium)

Bank A/c Dr. 2,85,000

Calls in Arrears A/c Dr. 15,000
To Share Allotment A/c 3,00,000
(Being allotment received except of

79/8
 Simba)
6,00,000
Share First and Final Call A/c Dr 6,00,000
To Share Capital A/c
(Being call money due)
5,70,000
Bank A/c Dr. 30,000
Calls in Arrears A/c Dr. 6,00,000
To Share First and Final Call A/c
(Being call money received except of
Simba)

1,00,000
15,000
Share Capital A/c Dr. 70,000
Securities Premium A/c Dr. 45,000
To Share Forfeited A/c
To Calls in Arrears A/c
(Being Simba’s shares forfeited) 48,000
12,000
Bank A/c Dr. 60,000
Share Forfeited A/c Dr.
To Share Capital A/c
(Being forfeited shares re-issued)
30,000
30,000
Share Forfeited A/c Dr.
To Capital Reserve A/c
(Being gain on re-issue transferred to
Capital Reserve)

27 6
Journal
Date particulars LF Amt (Dr) Amt (Cr)

Share Application A/c Dr. 6,00,000

To Share Capital A/c 2,00,000
To Securities Premium A/c 2,00,000
To Share Allotment A/c 2,00,000
(Being Application money utilised)

Share Allotment A/c Dr. 5,00,000

To Share Capital A/c 5,00,000
(Being allotment due with premium)

Share First and Final Call A/c Dr. 3,00,000

To Share Capital A/c 3,00,000
(Being call money due)

80/8
 Calls in Arrears A/c Dr. 15,000
To Share First and Final Call A/c 15,000
(Being call money received except of
Simba)
50,000
Share Capital A/c Dr. 35,000
To Share Forfeited A/c 15,000
To Calls in Arrears A/c
(Being Simba’s shares forfeited)
14,000
Share Forfeited A/c Dr. 14,000
To Capital Reserve A/c
(Being gain on re-issue transferred to
Capital Reserve)

Cash Book (with Bank Column only)

Dr Cr
Particulars Amt (Rs) Particulars Amt(Rs)
To Share Application A/c 7,20,000 By Share Application 1,20,000
To Share Allotment A/c 3,00,000 A/c
To Share First and Final 2,85,000 12,11,000
Call A/c By Balance c/d
To Share Capital A/c 20,000
To Securities Premium A/c 6,000

13,31,000 13,31,000
28 6

Journal
Date particulars LF Amt (Dr) Amt (Cr)
Bank A/c (37500 × 2) Dr. 75,000
To share application A/c 75,000

Share application A/c (37500 × 2)Dr. 75,000

To share capital A/c (25000 × 2) 50,000
To bank A/c (7500 × 2) 15000
To share allotment A/c (5000 × 2) 10,000

Share allotment (25000 × 5)Dr. 1,25,000

To share capital (25000 × 3) 75,000
To security premium (25000 × 2) 50,000

Bank A/c (125000 − 10000 − 2300)Dr. 1,12,700

To share allotment 1,12,700

Share first call (25000 × 3)Dr. 75,000

To share capital 75,000

Bank A/c (23750 × 3)Dr. 71,250

To share first call 71,250

81/8
 Share capital (500 × 8)Dr. 4,000
Security premium (500 × 2)Dr. 1,000
To share allotment (2500 − 200) 2,300
To share first call (500 × 3) 1,500
To forfeited shares (600 × 2) 1,200

Share final call (24500 × 2)Dr. 49,000

To share capital 49,000

Bank A/c (23750 × 2)Dr. 47,500

To share final call 47,500

Share capital A/c (750 × 10)Dr. 7,500

To share first call (750 × 3) 2,250
To share final call (750 × 2) 1,500
To forfeited shares A/c (750 × 5) 3,750

Bank A/c (1000 x 9)Dr. 9,000

Forfeited shares A/cDr. 1,000
To share capital A/c (1000 × 10) 10,000

Forfeited shares A/c (700 + 2000)Dr. 2,700

To capital reserve A/c 2,700

No. of shares allotted to

R = 600 × 25,000/30,000 = Rs 500

NAME OF CHAPTER: - ACCOUNTING FOR DEBENTURES.

Q. MARK
NO
1 If M ltd purchased machinery worth Rs 6,00,000 from N and agreed to issue 6,500, 10% debentures of 1

82/8
 Rs 100 each to vendor. The difference in the amount will be adjusted in which account

a. Vendor b. Goodwill c. Capital Reserve d sundry Assets

2 Raj ltd purchased assets of Rs 9,90,000 from Y ltd. Payment was made by issuing 8% debentures of Rs 1
100 at a discount of 10%. Discount on issue of debenture A/c will be debited with—
a. Rs1,10,000 b. Rs 90,000 c. Rs 99,000 d. Rs10,000
3 Interest payable on debentures is calculated at the: 1
(A) Issue price of debentures (B) Nominal value of debentures
(C) Redemption value of debentures (D) None
4 Debenture holders are: 1
(A) Owners of the Company (B) Debtors of the Company
(C) Creditors of the Company (D) Promoters of the Company
5 Read the following statements: Assertion and Reason, choose one of the correct alternative given 1
below: Assertion(A): Sarita private limited issued 15% 10000 at par @ Rs. 100 per debenture. The
company suffered a loss but still the director of company paid interest on debentures Reason

(R): Interest on debenture is a charge against profit and therefore its payment is not subject to
earning of profit

a. Both Assertion (A) and Reason (R) are true and Reason(R) is correct explanation of Assertion(A)

b. Both Assertion (A) and Reason (R) are true and Reason(R) is not the correct explanation of
Assertion (A)

c. Assertion (A) is true but Reason (R) is False

d. Assertion (A) is false but Reason (R) is true

6 Loss on issue of debentures can be written off from: 1
A. Securities Premium Reserve B. Statement of profit and loss
C. Both (A) and (B) D. None of the above

7 A company issued ₹ 1,00,000 12% debentures of ₹ 100 each. The amount of interest on debentures 1
will be:
a) ₹ 12,000 (b) ₹ 1,20,000 (c) ₹ 12,00,000 (d) None of these
8 Debentures of a Company can be issued: 1
(A) For Cash (B) For Consideration other than Cash
(C) As a Collateral Security (D) Any of the above
9 On issue of debentures as a collateral security, which account is credited? 1
(A) Debentures Account (B) Bank Loan Account
(C) Debenture Holding Account (D) Debenture Suspense Account
10 Interest on Debenture is: 1
(A) Appropriation of profit (B) Capital gain (C) Charge against profit (D) Dividend
11 Pass necessary Journal entries for the following transaction: 3
Issued 6,000 9% Debentures of Rs.75 each at a premium of Rs.25 per Debentures
12 ABC Limited took over the assets of Rs. 60,00,000 and liabilities of Rs. 10,00,000 from Swami Limited 3
for an agreed purchase consideration of Rs.45,00,000. The amount was payable by issuing 10%
debentures of Rs. 100 each at 25% premium. Pass necessary journal entries for the above
transactions in the books of Shovan Limited
13 Vinod Limited issued 60,000, 9% Debentures of Rs.100 each redeemable at a premium of 10% after 3
three years. Pass the necessary journal entries for the issue of 9%debentures.
14 Pass necessary journal entries in the books of Z Limited for the following transaction: 3
Issued 1875, 8% Debentures of Rs.100 each at a premium of Rs.10 each redeemable after three
years.

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15 On 1.4.2019 XYZ Limited issued 20,000 6% debentures of Rs.100 each at a discount of 4% redeemable 3
at a premium of 5% after 3 years. The amount was payable as follows:
On Application ……………. Rs.50 per Debenture
On Allotment ……………... Balance after discount
Record necessary journal entries for the issue of debentures.
16 Mohal Limited issued 1,000, 7% Debentures of Rs.1,00 each at a discount of 5%. 3
Pass necessary journal entries for the issue of debentures in the following cases:
(i) When the debentures were redeemable at par
(ii)When the debentures were redeemable at a premium of 6%
17 Read the passage given below and answer the following questions........ 4
Bee ltd purchased the following assets of See ltd. Land and building of Rs 75,00,000; Furniture
Rs 20,00,000; and Machinery Rs 30,00,000. The purchase consideration was Rs 1,00,00,000.
Payment of Rs 10,00,000 was made through cheque and remaining amount by issue of 9%
debentures of Rs100 each at a premium of 20% (1 X 4 = 4)
(a) According to Companies Act 2013, what is the maximum rate of premium at
which debentures can be issued?
a. 10% b. 15% c. 20% d. maximum limit not specified
(b) Amount credited to Capital Reserve A/c is
a. 25,00,000 b. 20,00,000 c.15,00,000 d. 10,00,000
(c) What is the number of debentures to be issued?
a. 65,000 b. 70,000 c. 75,000 d. 80,000
(d) Securities premium reserve A/c is to be credited with------
a. 10,00,000 b. 15,00,000 c. 20,00,000 d. 25,00,000
18 Sultan Limited invited applications for issuing 7,500, 12% Debentures of Rs.100 each at a premium of 4
Rs.35 per debentures. The full amount was payable on application.
Applications were received for 10,000 Debentures. Applications for 2,500 Debentures were rejected
and the application money was refunded. Debentures were allotted to the remaining applicants.
Pass necessary journal entries for the above transactions in the books of Sultan Limited.
19 Sohan Limited issued 5,000 7% Debentures of Rs.50 each. Pass necessary journal entries in the books 4
of the company for the issue of debentures when debentures were:
(i) Issued at Par, redeemable at 8% premium
(ii) Issued at 4% premium, redeemable at 5% premium
20 Pass necessary Journal entries for the issue of 7% Debentures in the following cases: 4
(i) 100 Debentures of Rs.100 each issued at Rs.105 each payable at Rs.100 each.
(ii) 100 Debentures of Rs.100 each issued at Rs.100 each payable at Rs.105 each.
(iii) 100 Debentures of Rs.100 each issued at Rs.105 each payable at Rs.108 each.
21 Give journal entries in each of the following cases if the face value of a debenture is 4
Rs.100:
(i) A debenture issued at Rs.100 repayable at Rs.105.
(ii) A debenture issued at Rs.105 repayable at Rs.105.
22 . XYZ Limited invited applications for issuing 3,000, 12% Debentures of Rs.100 each at a premium of 4
Rs.50 per Debenture. The full amount was payable on application.
Applications were received for 4,000 Debentures. Applications for 1,000 debentures were rejected
and application money was refunded. Debentures were allotted to the remaining applicants.
Pass necessary journal entries for the above transactions in the books of XYZ Limited.
23 On 01.04.2022 J.K. Ltd. Issued 8,000, 9% debentures of Rs. 100 each at a discount of 6%, redeemable 6
at a premium of 5% after three years. The company closes its books on 31st March every year. Interest
on 9% debentures is payable on 30th September and 31st March every year.

Pass necessary journal entries for the year ending 31.03.2023.

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24 Give journal entries for the issue of debentures in the following conditions. 6
I. Issued 2,000, 12% debentures of Rs. 100 each at par, redeemable also par.
II. Issued 2,000, 12% debentures of Rs. 100 each at a discount of 2%, redeemable at par.
III. Issued 2,000, 12% debentures of Rs. 100 each at premium of 5%, redeemable par.

25 XYZ Ltd purchased Building worth Rs. 3,00,000, Plant worth Rs. 2,80,000 and Furniture worth Rs. 6
20,000 from ABC Ltd. for a purchase consideration of Rs. 6,30,000. XYZ Ltd. paid the purchase
consideration by issuing 9% debentures of Rs. 100 each.

Pass necessary journal entries in the books of ABC Ltd. when

(a) Debentures were issued at par
(b) Debentures were issued at a premium of 25%
Debentures were issued at discount of 10%.
26 B. Ltd. issued 1,000, 12% debentures of Rs.100 each on April 01, 2020 at a discount of 5% redeemable 6
at a premium of 10%. Give journal entries relating to the issue of debentures and debentures interest
for the period ending 31st March 2021 assuming that interest is paid half yearly on September 30 and
March 31.

27 Suresh Limited purchased a running business of KK Limited on 1st April, 2021, which includes assets of 6
the value of Rs.12,00,000 and Liabilities worth Rs.1,40,000 at an agreed value of Rs.11,00,000.
Company issued 12% Debentures of Rs.100 each in full satisfaction of purchase consideration. The
Debentures were redeemable 3 years later at a premium of 5%.
Pass necessary journal entries in the books of Suresh Ltd. when
(a) Debentures were issued at par
(b) Debentures were issued at a premium of 10%

28 Tata Limited issued 5,000, 9% Debentures of Rs.500 each. Pass the necessary journal entries for the 6
issue of debentures in the books of the company in the following cases:
(i) When Debentures are issued at 10% premium and redeemable at par.
(ii)When debentures are issued at par and redeemable at 10% premium
(iii) When Debentures are issued at 5% premium and redeemable at 10% premium.

ANSWERS:
Q. MARK
NO
1 b. Goodwill 1
2 a.. Rs. 1,10,000 1
3 (B) Nominal value of debentures 1
4 (C) Creditors of the Company 1
5 a. Both Assertion (A) and Reason (R) are true and Reason(R) is correct explanation of Assertion (A) 1

6 C. Both (A) and (B) 1

7 a) ₹ 12,000 1
8 (D) Any of the above 1

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9 (A) Debentures Account 1
10 (C) Charge against profit 1
11 (a) Bank A/c Dr. 6,00,000 3

To 9 % Debentures Application and Allotment A/c 6,00,000

(Issue of Debentures )
(b) 9 % Debentures Application and Allotment A/c Dr. 6,00,000

To 9 % Debentures A/c 4,50,000

To Security Premium Reserve A/c 1,50,000

(Debentures Application money transfer to Debentures Account)

12 (a) Assets A/c Dr. 60,00,000 3

To Liabilities A/c 10,00,000

To Swami Ltd. A/c 45,00,000

To Capital Reserve A/c 5,00,000

(Business Purchase from Swami Ltd.)

(b) Swami Ltd. A/c Dr. 45,00,000

To 10% Debentures A/c 36,00,000

To Security Premium Reserve A/c 9,00,000

(Debentures issued to Swami Ltd at Premium)

13 (a) Bank A/c Dr. 60,00,000 3

To 9 % Debentures Application and Allotment A/c 60,00,000

(Issue of Debentures )
(b) 9 % Debentures Application and Allotment A/c Dr. 60,00,000

Loss on issue of Debentures A/c Dr. 6,00,000

To 9 % Debentures A/c 60,00,000

To Premium on Redemption A/c 1,50,000

(Debentures Application money transfer to Debentures Account)

14 Security Premium Reserve A/c = Rs. 18750 3
15 Loss on issue of Debentures (80,000+1,00,000) = Rs. 1,80,000 3
Premium on Redemption = Rs. 1,00,000
16 (i) Discount on issue of debenture = Rs. 5,000 3
(ii) Loss on issue of Debentures (5,000+6,000)= Rs. 11,000

Premium on Redemption = Rs. 6,000

17 (a) d. maximum limit not specified 1X4= 4
(b) a. 25,00,000
(c) c. 75,000
(d) b. 15,00,000
18 (a) Bank A/c Dr. 13,50,000 4

To 12 % Debentures Application and Allotment A/c 13,50,000

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 (12% Issue of Debentures at Premium of Rs. 35)

(b) 12% Debentures Application and Allotment A/c Dr. 13,50,000

To 9 % Debentures A/c 7,50,000

To Security Premium Reserve A/c 2,62,500

To Bank A/c 3,37,500

(Debentures Amount transfer to Debentures Account and excess money returned)

19 (i) (a) Bank A/c Dr. 2,50,000 4

To 7% Debentures Application and Allotment A/c 2,50,000

(Issue of Debentures )

(b) 7 % Debentures Application and Allotment A/c Dr. 2,50,000

Loss on issue of Debentures A/c Dr. 20,000

To 7 % Debentures A/c 2,50,000

To Premium on Redemption A/c 20,000

(Debentures Application money transfer to Debentures Account)

(ii) (a) Bank A/c Dr. 2,60,000

To 7% Debentures Application and Allotment A/c 2,60,000

(Issue of Debentures )

(b)7 % Debentures Application and Allotment A/c Dr. 2,60,000

Loss on issue of Debentures A/c Dr. 25,000

To 7 % Debentures A/c 2,50,000

To Security Premium Reserve A/c 10,000

To Premium on Redemption A/c 25,000

(Debentures Application money transfer to Debentures Account)

20 (i) Security Premium = Rs. 5 4

(ii) Loss on issue of debentures= Rs. 5 Premium on redemption = Rs.
5
(iii) Security Premium = Rs. 5
Loss on issue of debentures= Rs. 5 Premium on redemption = Rs.
5

(iv)
21 (i) Loss on issue of debentures= Rs. 5 Premium on redemption = Rs. 4
5

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 (ii) Security Premium = Rs. 5
Loss on issue of debentures= Rs. 5 Premium on redemption = Rs.
5
22 Security Premium = Rs. 1,50,000 4
Return Amount = Rs. 1,50,000

23 Date Particular L.F. Dr Amount Cr.Amount 6

2022
April 1 Bank A/c Dr. To 7,52,000
9% Debentures Application and Allotment A/c 7,52,000
(Amount received on application)

April 1 9 % Debentures Application and Allotment A/c Dr. 7,52,000

Loss on issue of Debentures A/c Dr. 88,000
8,00,000
To 9 % Debentures A/c 40,000
To Premium on Redemption A/c
(Issue of debentures at 6% discount and
redeemable at 5% discount)
Sept. 30 36,000
Interest on Debentures A/c Dr. 36,000
To Debentures Holders A/c
(Half yearly interest due on debentures)
Sept. 30 36,000
Debentures Holders A/c Dr. 36,000
To Bank A/c
2023 (Payment of interest )
March31 36,000
Interest on Debentures A/c Dr. 36,000
To Debentures Holders A/c
(Half yearly interest due on debentures)
March31 36,000
Debentures Holders A/c Dr. 36,000
To Bank A/c
(Payment of interest )
March31 1,60,000
Statement of Profit & Loss A/c Dr. 88,000
To Loss on issue of Debentures A/c 72,000
To Interest on Debentures A/c

24 Journal 6
Date Particular L.F. Dr. Cr. amount
Amount
I Bank A/c Dr. 2,00,000
To 12 % Debentures Application and Allotment A/c 2,00,000
((Amount received on application)

2,00,000
12% Debentures Application and Allotment A/c Dr. 2,00,000
To 12% Debentures A/c
(Debentures Application money transfer to

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 Debentures Account) 1,96,000
II 1,96,000

Bank A/c Dr.

To 12 % Debentures Application and Allotment A/c
((Amount received on application) 1,96,000
4,000
12% Debentures Application and Allotment A/c Dr. 2,00,000
Discount on issue of Debentures A/c Dr.

To 12% Debentures A/c

(Debentures Application money transfer to 4,000
Debentures Account) 4,000

Statement of Profit & Loss A/c Dr.

III To Discount on issue of Debentures A/c 2,10,000
(Discount on issue of Debentures written off) 2,10,000

Bank A/c Dr.

To 12 % Debentures Application and Allotment A/c 2,10,000
((Amount received on application) 2,00,000
10,000

12% Debentures Application and Allotment A/c Dr.

To 12% Debentures A/c

To Securities Premium Reserve A/c

(Debentures Application money transfer to
Debentures Account issued at a premium of 5% )

25 Date Particular L.F. Dr. Cr. amount 6

Amount
Building A/c Dr. 3,00,000
Plant A/c Dr. 2,80,000
Furniture A/c Dr. 20,000
Goodwill A/c (Balancing Figure) Dr. 30,000
To ABC Ltd. A/c 6,30,000
(Purchase of Assets from ABC Ltd.)

(a) ABC Ltd. A/c Dr. 6,30,000

To 9% Debentures A/c 6,30,000
(Issue of 6,300 debentures at par)

(b) ABC Ltd. A/c Dr. 6,30,000

To 9% Debentures A/c 5,04,000
To Securities Premium A/c 1,26,000
(Issue of 5,040 debentures of Rs. 100 each at premium
of 25%)

(c) ABC Ltd. A/c Dr. 6,30,000

Discount on issue of Debentures A/c Dr. 70,000

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 To 9% Debentures A/c 7,00,000
(Issue of 7,000 debentures of Rs. 100 each at a
discount of 10%)

Statement of Profit and Loss A/c Dr. 70,000

To Discount on issue of Debentures A/c 70,000
(Discount on issue of Debentures written off)
26 Interest on debentures = Rs. 12,000 6
Discount on issue of Debentures = Rs. 15,000
Premium on Redemption = Rs. 10,000
27 (i) No of debentures issued = 11,000 6
(ii) No of debentures issued = 10,000
28 (i) Security Premium = Rs. 2,50,000 6
(ii) Loss on issue of debentures = Rs. 2,50,000

Premium on redemption = Rs. 2,50,000

(iii) Security Premium = Rs. 1,25,000

Loss on issue of debentures = Rs. 2,50,000

Premium on redemption = Rs. 2,50,000

CHAPTER ANALYSIS OF FINANCIAL STATEMENT

Questions 1 to 10 carrying 1 Mark Each
Which of the following is not a limitation of analysis of financial statements?
A. Window Dressing
1 B. Price Level changes ignored
C. Subjectivity
D. Intra firm comparison possible
Ans. D. Intra firm comparison possible
Which of the following is a limitation of financial analysis?
A) It judges the ability of the firm to repay its debts.
B) It identifies the reasons for change in financial position
2
C) It is just a study of reports of the company.
D) It ascertains the relative importance of different components of the financial position of the
firm.
Ans. C) It is just a study of reports of the company.
The……………….. of business firm is measured by its ability to satisfy its short term obligations
3 as they become due.
(A) Debt (B) Liquidity (C) Activity (D) Profitability
Ans. (B) Liquidity

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 The . . . . . . .ratios provides the information critical to the long run operation of the firm
4
(a) Liquidity (b) Solvency (c) Profitability (d) Activity
Ans. (b) Solvency
Fill in the blanks-
5 An item is classified as current asset if it is expected to be realised within - - - - - - - - - - or if it is
held primarily for.. . . . . . . . . . . . . . . . . ..
Ans. (The operating cycle) (12 Month)
10% Debenture is shown in a company balance sheet under the sub head-
6 (A) Long Term Provisions (B) Cash Flow Statement
(C) Long Term Borrowings (D) All of these
Ans. (C). Long Term Borrowings
Calls in advance appears in a company’s balance sheet under the head-
7 (A). Current Liabilities (B). Share Capital
(C). Long term Borrowings (D). Reserve & Surplus
Ans. (A). Current Liabilities
While preparing Balance sheet of a company, securities premium reserve is shown under
8 (A) Non-Current Liabilities (B) Share Capital
(C) Long term Borrowings (D) Reserve & Surplus
Ans. (D) Reserve & Surplus
The financial statements of a company include:
9 (A) Balance Sheet (B) Cash Flow Statement
(C) Statement of Profit & Loss (D) All of these
Ans. (D) All of these
Which of the following is included in current asset
10 (A) Capital work in progress (B) Short term Loans and advances
(C) Short term Provisions (D)Intangible assets under development
Ans. (B) Short term Loans and advances

Questions 11 to 16 carrying 3 Marks Each

11 What is mean by Liquidity ratio? Explain type of Liquidity ratio.
Ans. Liquidity Ratio:-Liquidity means ability of the firm to pay its current liabilities on time. These
ratios are used to assess the short term financial position of the firm. Liquidity ratios includes two
ratios-
(I) Current Ratio= Current Asses/current Liabilities
(II) Quick Ratio = Total Liquid Assets/ Total Current Liabilities
Liquid Assets= Current Asset—Prepaid expenses—Inventories
12 Briefly explain solvency ratio?
Ans. Solvency Ratios are the various ratio used to measure the ability of a company to meet its long term
debts.
Important solvency ratio are :
Debt
(I) Debt to Equity Ratio
Equity

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 Total Asset
(II) Total Asset to Debt Ratio
Debt
Shareholders fund
(III) Proprietary Ratio
Total Asset
Net Profit before Interest and Tax
(Iv) Interest coverage Ratio
Interest on long term loan
Long Term Debts
(v) Debt to capital employed Ratio
Capital employed
13 State whether each of the following is True or False :
(a) The financial statements of a business enterprise include cash flow statement.
(b) Comparative statements are the form of vertical analysis.
(c) Common size statements and financial ratios are the two tools employed in vertical analysis
Ans. (a). True (B) False (c) True
Unsolved questions 14, 15 &16 for practice
14 Briefly explain Activity Ratio?
15 Briefly explain Profitability Ratio?
16 What are the difference between current Ratio and Quick Ratio?

Questions 17 to 22 carrying 4Mark Each

17 Under what major heading and sub-heading will you show the following items in the Balance Sheet
of the company-
i). Unclaimed dividend
ii) Loose Tools
iii) Provision for Tax
iv) Share Forfeiture
Ans.
S. No. Particular Major Heading Sub-Heading
i) Unclaimed Current Liabilities Other Current Liabilities
dividend
ii) Loose Tools Current Assets Inventories
iii) Provision for Tax Current Liabilities Short-term Provisions
iv) Share Forfeiture Share Holders a/c Share Capital ( By way of deduction
from Subscribed Capital)

18 Under what major heading and sub-heading will you show the following items in the Balance Sheet
of the company-
i). Preliminary Expenses
ii) Patents & Trade Mark
iii) Calls in arrears
iv) Motor Car

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 Ans.
S. Particular Major Heading Sub-Heading
No.
i) Preliminary Expenses Shareholder’s fund Reserve & Surplus ( as a negative
item)
ii) Patents & Trade Mark Non- current assets Fixed Asset Intangible
iii) Calls in arrears Shareholder’s fund Share Capital ( By way of deduction
from Subscribed Capital)
iv) Motor Car Non- current assets Fixed Asset Tangible

19 Under what major heading and sub-heading will you show the following items in the Balance Sheet
of the company-
i) Live stock
ii) Interest Accrued on investments
iii) Bills of Exchange
iv) Machinery
Ans.
S. No. Particular Major Heading Sub-Heading
i) Live stock Non- current assets Fixed Asset Tangible
ii) Interest Accrued on investments Current Asset Other current assets
iii) Bills of Exchange Current Asset Trade Receivable
iv) Machinery Non- current assets Fixed Asset Tangible

Unsolved questions 20,21,22 for practice

20 Under what major heading and sub-heading will you show the following items in the Balance Sheet
of the company-
i). Discount of Issue of Debenture
ii) Sundry Creditors
iii) Calls in Advance
iv) Furniture
21 Briefly explain about the Ratio Analysis.
22 What are the differences between Comparative Statements & Common Size Statements?

Questions 23 to 28 carrying 6 Marks Each

23. Explain briefly any six objectives of financial statement Analysis.
Ans. Objectives of ‘Financial Statement Analysis’:
(I) Assessing the short term and the long term solvency of the enterprise to assess the ability of the
company to repay principal amount and interest
(II) Assessing the earning capacity or profitability of the firm as a whole as well as its different
departments so as to judge the financial health of the firm.
(III) Assessing the performance of business in comparison to that of other through inter-firm comparison.
(IV) Assessing the managerial efficiency by using financial ratios to identify favourable and unfavourable
variations in managerial performance.
(V) To ascertain the relative importance of different components of the financial position of the firm.
(VI) Assessing development in future by forecasting and preparing budgets.

24. Explain briefly any six limitations of ‘Analysis of Financial Statements,’

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Ans.

(I) It ignores qualitative aspects as the quality of management, quality of staff, etc are ignored while
carrying out of the analysis of financial statements.
(II) It suffers from the limitations of financial statements as the analysis is based on the information given
in the financial statements.
(III) It is not free from bias of accountants such as method of inventory valuation, method of depreciation
etc.
(IV) It may lead to window dressing for example- showing better financial position than what actually is
by manipulating the books of accounts.
(V) It may be misleading without the knowledge of the changes in accounting procedure by a firm.
(VI) It is historical Analysis as it analysis what has happened till date. It doesn’t reflect the future.
25. State under which major headings and sub-headings will the following items be presented in the
Balance sheet of a company as per Schedule III, Part I of the Companies Act, 2013 :

(I) Prepaid Insurance (V) Capital Reserve

(II) Investment in Debentures (VI) Loose Tools
(III) Calls-in-Arrears (VII) Capital Work-in-Progress
(IV) Unpaid Dividend (VIII) Patents being developed by the company
Ans.

S No. Items Head Sub-Head

(I) Prepaid Insurance Current Assets Other Current Assets
(II) Investment in Debentures Non-current Assets Non-Current Investment
Subscribed Capital (by way of
(III) Calls-in-Arrears Shareholders Funds
deduction
(IV) Unpaid Dividend Current Liabilities Other Current Liabilities
(V) Capital Reserve Shareholders’ Funds Reserve and Surplus
(VI) Loose Tools Current Assets Inventories
(VII) Capital Work-in-Progress Non-current assets Fixed assets
Fixed Assets-Intangible Assets
(VIII) Patents being developed by the company Non-current assets
under developed

26. What are the tools/techniques available for analysis of final account? Explain briefly

The most commonly used techniques of financial analysis are as follows:

1. Comparative Statements: These are the statements showing the profitability and financial position of a firm
for different periods of time in a comparative form to give an idea about the position of two or more periods. It
usually applies to the two important financial statements, namely, Balance Sheet and Statement of Profit and
Loss prepared in a comparative form. This analysis is also known as ‘horizontal analyses.

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2. Common Size Statements: These are the statements which indicate the relationship of different items of a
financial statement with a common item by expressing each item as a percentage of that common item. The
percentage thus calculated can be easily compared with the results of corresponding percentages of the previous
year or of some other firms, as the numbers are brought to common base. Thus, common size statements are
useful, both, in intra-firm comparisons over different years and also in making inter-firm comparisons for the
same year or for several years. This analysis is also known as ‘Vertical analyses

3. Ratio Analysis: It describes the significant relationship which exists between various items of a balance sheet
and a statement of profit and loss of a firm. As a technique of financial analysis, accounting ratios measure the
comparative significance of the individual items of the income and position statements. It is possible to assess
the profitability, solvency and efficiency of an enterprise through the technique of ratio analysis.

4. Cash Flow Analysis: It refers to the analysis of actual movement of cash into and out of an organisation. The
flow of cash into the business is called as cash inflow or positive cash flow and the flow of cash out of the firm
is called as cash outflow or a negative cash flow.

Ans. Unsolved questions No. 27 & 28 for practice

27. Describe the different techniques/tools available of financial statements analysis.

28. Explain the limitations of financial statements analysis.

NAME OF CHAPTER: COMPARATIVE AND COMMON SIZE STATEMENT

Q. MCQ type Questions MARK

NO
1 Comparative Financial Statement is an example of 1
1)Horizontal analysis
2)Vertical Analysis
3)Internal Analysis
4)External analysis
2 What is the main advantage of using Common Size Statements? 1
a. They are concise
b. They provide absolute values
c. They help in comparing financial performance of companies of different sizes
d. They are only applicable to small businesses
3 In a Common Size Income Statement, each item is expressed as a percentage of: 1
a. Net income
b. Total expenses
c. Total revenue
d. Gross profit
4 What is the base year typically used in a Comparative Balance Sheet? 1
a. Current year

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 b. Previous year
c. Average of the past five years
d. It varies based on company preference
5 If net revenue from operations of a firm are ₹1,20,000; cost of revenue from operations is 1
₹66,000 and operating expenses are ₹21,600, what will be the percentage of operating
income on net revenue from operations?
(A) 55%
(B) 45%
(C) 73%
(D) 27%
6 The objective of common size Statement of Profit & Loss is not to 1
(A) Present Changes in Various items of incomes and expenses
(B) Judge the cost items
(C) Establish relationship between revenue from operations and other items of statement of
profit & loss
(D) Judge the relative financial soundness for different enterprises
7 The comparative balance sheet of XYZ Ltd. shows that its total assets increased from 1
Rs800,000 in the previous year to Rs1,000,000 in the current year. Calculate the percentage
increase in total assets.
8 What are Common Size Statements? 1
9 Which item is assumed to be 100 while preparing common size statement of profit 1
and loss?
10 Name any two tools of analysis of financial statements. 1
Short Answer Type Questions (Case Study and Others)
11 Prepare a Comparative Statement of Profit & Loss from the following : 3
Particulars 31st 31st March,2017
March,2016
Revenue from Operations 10,00,000 12,50,000
Cost of Materials Consumed 5,00,000 6,50,000
Other Expenses 50,000 60,000
12 From the following Statement of Profit and Loss prepare a Common Size Statement of Profit 3
and Loss of Jayant Ltd. for the year ended 31.3.2018:
particulars Note amount
no.
Income:
Revenue from Operations 25,38,000
Other Incomes
38,000

Total Revenue 25,76,000

expenses: 14,00,000
Cost of Materials Consumed 5,00,000
Other Expenses 19,00,000
Total Expenses
3,38,000
Tax

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13 Following is the information available from the records of AEE Ltd 3

Find out Absolute Change and Percentage Change in Revenue from Operations

14 : Prepare a Comparative Income Statement and Common Size Statement of Profit and Loss 3
from the following information :
Particulars 31st March 31st March
2014 2015
Revenue from operations
125% 140%
(% of cost of Material Concerned)
2,40,000 2,50,000
Cost of Material Consumed
10% 12%
Other expenses (% of Revenue from Operations)
15,000 20,000
Other Income
30% 30%
Tax Rate
15 Fill in the missing information in the following comparative statement of profit and loss. 3
Comparative Statement of Profit and Loss for the year ended 31st March 2014 and 2015
Note Absolute Percentage
Particulars Absolute Amounts
No. Change Change
I. Revenue from operations — — —
——
II. Add : Other Incomes 25,000 65,000 —
III. Total Revenue(I+II) — — — —
IV. Expenses:
— 6,00,000 2,00,000 —
e. Cost of Material
25,000 — — 60,000
Consumed
f. Other expenses — — — —
Total Expenses
V. Profit before tax (III-IV) — — — —
Less : Income Tax @ 30 % 60,000 75,000 — —
VI. Profit after tax — — — —
16 From the following information ,prepare comparative statement of profit and loss : 3

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17 The following data is related to Cambridge Ltd. 4

(₹ in lakhs)

Particulars 31.03.2019 31.03.2018

₹ ₹

Equity Share Capital 16 16

Preference Share Capital 2 2

Reserves and Surplus 5.4 4

Non-Current Liabilities 14.4 14

Current Liabilities 7.2 4

Non-Current Assets 30.60 28

Current Assets 14.4 12

Now, you are required to prepare a Common Size Balance Sheet.

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18 Following is the Statement of Profit & Loss of X L Limited for the year ended March 31, 2017 : 4
Note 2015−16 2016−17
to Accounts Accounts
Revenue from Operations 50,00,000 80,00,000
Expenses:
(a) Employee Benefit Expenses:10% of Revenue
from Operations 10,00,000 12,00,000
(b) Other expenses:
Tax Rate at 40%.
Prepare Comparative Statement of Profit & Loss of X L Limited

19 From the balance sheet of R Ltd, prepare a common size statement: 4

20 From the following information given below, prepare a comparative statement of profit and 4
loss.
Particulars March 31st 2008 March 31st 2009
Amt (₹) Amt(₹)
Revenue from Operations 2,00,000 3,50,000
Purchase 1,00,00 2,00,000
Cost of Revenue from 60% Revenue from 70% Revenue from
Operation operations operations
Administrative Expenses 5% on Gross Profit 7% on Gross Profit
Income tax 45% 45%

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21 From the information extracted from the Statement of Profit and Loss for the years ended 4
31st March, 2017 and 31st March, 2018, prepare a Comparative Statement of Profit and

Particulars Amt (₹) Amt (₹)

Revenue from Operations 7,00,000 8,50,000

Materials Consumed 3,30,000 4,20,000

Manufacturing and Office Expenses 2,40,000 2,60,000

Other Incomes 30,000 30,000

Loss:

Other Information
(i) Income tax is calculated @ 50%.
(ii) Manufacturing expenses are 50% of the total of that category.

22 From the information extracted from the Statement of Profit and Loss for the years ended 4
31st March, 2017 and 31st March, 2018, prepare a Comparative Statement of Profit and
Loss
particulars 2017-18 2016-17
Revenue from operations 300% of cost of material 200% of cost of material
consumed consumed
Cost of material consumed 2,40000 2,00,000

Other expenses 20% of cost of material 10% of cost of material

consumed consumed
Tax rate 50% 50%

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8
 Long Answer Type Questions (Case Study and Others)
23 What is the importance of comparative statements? Illustrate your answer with particular 6
reference to the comparative income statement.
24 X Ltd. is a manufacturing company that produces and sells widgets. The following table 6
shows the company's common size balance sheet for the years 2022 and 2023:
ITEM 2022 2023

NON-CURRENT ASSETS 60% 55%

CURRENT ASSETS 40% 45%

TOTAL ASSETS 100% 100%

NON-CURRENT LIABILITIES 10% 15%

CURRENT LIABILITIES 30% 35%

SHAREHOLDERS EQUITY 60% 50%

TOTAL LIABILITIES AND EQUITY 100% 100%

Questions: 1. Based on the common size balance sheet, what are the key trends in X Ltd.'s
financial position from 2022 to 2023?
2. What are the implications of these trends for the company's management?
3. Calculate the company's current ratio and quick ratio for 2022 and 2023. What do these
ratios tell you about the company's liquidity position?
4. Calculate the company's debt-equity ratio for 2022 and 2023. What do these ratios tell
you about the company's financial leverage?
5. Suggest two ways in which X Ltd. can improve its financial position.
25 You are given the following comparative balance sheets of two companies, A Ltd. and B 6
Ltd., as on March 31, 2023 and 2022:
PARTICULARS A LTD. B LTD.

EQUITY AND LIABILITIES

SHARE CAPITAL 10,00,000 15,00,000

RESERVES AND SURPLUS 5,00,000 10,00,000

SHAREHOLDERS FUNDS 15,00,000 25,00,000

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8
 NON CURRENT LIABILITIES

LONG TERM BORROWINGS 2,00,000 8,00,000

CURRENT LIABILITIES

TRADE PAYABLES 1,50,000 1,00,000

NON-CURRENT ASSETS

FIXED ASSETS(TANGIBLE) 4,00,000 3,00,000

CURRENT ASSETS

TRADE RECEIVABLES 2,00,000 3,00,000

Questions:
1. Prepare comparative common-size balance sheets for A Ltd. and B Ltd. for the years
2023 and 2022.
2. Based on the comparative common-size balance sheets, identify the major changes in
the financial position of the two companies between the two years.
3. Which company is in a better financial position in 2023? Explain your answer.
4. What are the implications of the changes in the financial position of the two companies
for their stakeholders?
5. Suggest some measures that A Ltd. can take to improve its financial position in the
coming year.

26 You are given the following comparative profit and loss statements of two companies, C 6
Ltd. and D Ltd., for the years 2023 and 2022:

PARTICULARS C LTD. D LTD.

REVENUE FROM OPERATIONS 10,00,000 15,00,000

COST OF GOODS SOLD 6,00,000 9,00,000

GROSS PROFIT 4,00,000 6,00,000

OPERATING EXPENSES

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 SELLING AND DISTRIBUTION 1,00,000 1,50,000
EXPENSES

ADMINISTRATIVE EXPENSES 50,000 75,000

TOTAL OPERATING EXPENSES 1,50,000 2,25,000

OPERATING PROFIT 2,50,000 3,75,000

NON- OPERATING INCOME

INTEREST INCOME 50,000 25,000

PROFIT BEFORE TAX 3,00,000 4,00,000

TAX EXPENSE 60,000 80,000

PROFIT AFTER TAX 2,40,000 3,20,000

Questions:
1. Prepare comparative common-size profit and loss statements for C Ltd. for the years
2023 and 2022.
2. Based on the comparative common-size profit and loss statements, identify the major
changes in the profitability of the C Ltd. between the two years.
3. Which company is more profitable in 2023? Explain your answer.
4. What are the implications of the changes in the profitability of the D LTD. for their
stakeholders?
5. Suggest some measures that C Ltd. can take to improve its profitability in the coming
year.

27 .You are given the following comparative profit and loss statements of two companies, C 6
Ltd. and D Ltd., for the years 2023 and 2022:
PARTICULARS C LTD. D LTD.

REVENUE FROM 10,00,000 15,00,000

OPERATIONS

COST OF GOODS SOLD 6,00,000 9,00,000

GROSS PROFIT 4,00,000 6,00,000

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8
 OPERATING EXPENSES

SELLING AND 1,00,000 1,50,000

DISTRIBUTION
EXPENSES

ADMINISTRATIVE 50,000 75,000

EXPENSES

TOTAL OPERATING 1,50,000 2,25,000

EXPENSES

OPERATING PROFIT 2,50,000 3,75,000

NON- OPERATING
INCOME

INTEREST INCOME 50,000 25,000

PROFIT BEFORE TAX 3,00,000 4,00,000

TAX EXPENSE 60,000 80,000

PROFIT AFTER TAX 2,40,000 3,20,000

Questions: 1. Prepare comparative common-size profit and loss statements for C Ltd. for
the years 2023 and 2022.

2. Based on the comparative common-size profit and loss statements, identify the major
changes in the profitability of the C Ltd. between the two years.
3. Which company is more profitable in 2023? Explain your answer.
4. What are the implications of the changes in the profitability of the D LTD. for their
stakeholders?
5. Suggest some measures that C Ltd. can take to improve its profitability in the coming year.

28 The following are the Balance Sheets of Mohan Ltd., at the end of 2004 and 2005. 6

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8
 Prepare a Comparative Balance Sheet and study the financial position of the company.

ANSWERS:

Q. ANSWER(MCQ type Questions)

NO
1 Horizontal analysis, Explanation: Comparative financial statement is an example of horizontal
analysis because it requires comparative financial statements of two or more accounting periods.
2 Ans.C) They help in comparing financial performance of companies of different sizes

3 Ans.C) Total revenue

4 Ans. B)Previous year
5 Ans. (D) 27%
6 Ans: D)Judge the relative financial soundness for different enterprises
7 Ans. The percentage increase in total assets for XYZ Ltd. Is 25%
8 Ans. Common Size Statements express all items of a financial statement as a % of some common
base such as revenue from operations for P & L statement and total assets for the balance sheet.
9 Ans. Revenue from operations are assumed to be 100 while preparing common size statement of
profit and loss.
10 Ans. Two tools of analysis of financial statements are:

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8
 (i) Ratio analysis (ii) Cash flow statement
Answer of Short Answer Type Questions (Case Study and Others)
11 COMPARATIVE STATEMENT OF PROFIT & LOSS
for the years ended 31st March, 2016 and 2017
Particulars Note 2015−16 2016-17 Absolute Percentage
No. change Change(Increase or
(Increase Decrease)
orDecrease)
A B (B-A) =C C/A×100=D
I. Revenue 10,00,000 12,50,000 2,50,000 25.00
from 30,000 30,000
Operations 10,30,000 12,80,000 2,50,000 24.27
II. Add :
Other
Incomes 5,00,000 6,50,000 1,50,000 30.00
III. Total 50,000 60,000 10,000 20.00
Revenue (I 5,50,000 7,10,000 1,60,000 29.09
+ II)
4,80,000 5,70,000 90,000 18.75
IV. Less :
Expenses
Cost of
Materials
Consumed
Other Expenses
Total Expenses
V. Profit
before tax
(III - IV)
12 Ans:

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13 Absolute Change and Percentage Change in Revenue from Operations is:
Explanation: –

Absolute Change = Current year balance – Previous year balance

Absolute Change = 1200000 – 960000 = 240000

Percentage Change % = 240000/960000 X 100

14 Common Size Statement of Profit and Loss

For the years ended on 31st March, 2014 and 2015
Percentage of Revenue from Operations
Particulars Absolute Amounts
(Net Sales)
2014 (Rs.) 2015 (Rs.) 2014% 2015%
I. Revenue from operations 3,00,000 3,50,000 100.00 100.00
II. Add : Other Incomes 15,000 20,000 5.00 5.71
III. Total Revenue(I+II) 3,15,000 3,70,0000 105.00 105.71
IV. Expenses 2,40,000 2,50,000 80.00 71.43
a. Cost of Material Consumed 30,000 42,000 10.00 12.00
b. Other expenses
Total Expenses 2,70,000 2,92,000 90.00 83.43
V. Profit before tax (III-IV) 45,000 78,000 15.00 22.28
Less : Tax @ 50% (13,500) (23,400) (4.50) (6.69)
VI. Profit after tax 31,500 54,600 10.50 15.59
15 Comparative Statement of Profit and Loss
For the years ended on 31st March, 2014 and 2015
Percentage
Note 2013-14 2014-15 Absolute Change
Particulars Change
No. (Rs.) (Rs.) (Rs.)
%
6,00,000 8,00,000 2,00,000 33.33%
I. Revenue from
25,000 90,000 65,000 260%
operations
II. Add : Other Incomes 6,25,000 8,90,000 2,65,000 42.4%
III. Total Revenue(I+II)
4,00,000 6,00,000 2,00,000 50%
IV. Expenses:
25,000 40,000 15,000 60%

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 g. Cost of Material 4,25,000 6,40,000 2,15,000 50,59%
Consumed
2,00,000 2,50,000 50,000 25%
h. Other expenses
60,000 75,000 15,000 25%
Total Expenses
V. Profit before tax (III-IV)
Less : Income Tax @ 30 % 1,40,000 1,75,000 35,000 25%
VI. Profit after tax
16

17 Solution:

CAMBRIDGE LTD.

COMMON SIZE BALANCE SHEET

As at 31.3.2018 and 31.3.2019

(₹ in lakhs

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Particulars Note Absolute % of Balance Sheet
No. Amounts Total

2018 2019 2018 2019

₹ ₹ % %

EQUITY AND
LIABILITIES:

Shareholders’ Funds

Share Capital 18 18 45 (i) 40 (iv)

Reserves and Surplus 4 5.4 10 (ii) 12 (v)

Non-Current Liabilities 14 14.4 35 (iii) 32 (vi)

Current Liabilities 4 7.2 10 16

TOTAL 40 45 100 100

ASSETS

Non-Current Assets 28 30.6 70 68

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 Current Assets 12 14.4 30 32

TOTAL 40 45 100 100

18 X L Limited COMPARATIVE STATEMENT OF PROFIT & LOSS

for the year ended March 31, 2016 and 2017
Note 2015−16 2016−17 Absolute % age
to Accounts Accounts change
change
1. Revenue from Operations 50,00,000 80,00,000 30,00,000 60.00
2. Expenses :
3. Employee Benefit Expenses :
10% of Revenue from Operations
Other Expenses 5,000,00 8,00,000 3,00,000 60.00
Total Expenses 10,00,000 12,00,000 2,00,000 20.00
III Net Profit before Tax (I-II) 15,00,000 20,00,000 5,00,000 33.33
IV Less : Tax (40%) 35,00,000 60,00,000 25,00,000 71.43
III Net Profit after Tax (III - IV) 14,00,000 24,00,000 10,00,000 71.43
21,00,000 36,00,000 15,00,000 71.43

19 Ans.

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20
Ans

21

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 Ans:

22 Ans:

Answer of Long Answer Type Questions (Case Study and Others)

23 Comparative statements have the following importance:

1. It presents financial data in a simple form, with year-wise data being presented in a side-by-side
fashion, making the presentation neat and enabling intra and inter-firm comparisons more
conclusive.

2. Presentation is very effective for drawing insights quickly and easily

3. It assists the management in drafting future plans and forecast trends which is achieved by
analysing the profitability and operating efficiency of a business over time.

4. Comparative analysis helps the easy detection of problems. Early detection helps take corrective
measures and align the business to meet the desired target.

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 Any suitable examples.

24 Answer
1.The key trends in X Ltd.'s financial position from 2022 to 2023 are:
• Decrease in non-current assets: Non- current assets decreased from 60% to 55% of total assets.
This suggests that the company has sold some of its long- term assets, such as property, plant, and
equipment.
Increase in current assets: Current assets increased from 40% to 45% of total assets. This suggests
that the company has invested more in short- term assets, such as cash, accounts receivable, and
inventory.
• Decrease in non-current liabilities: Non-current liabilities decreased from 10% to 15% of total
liabilities and equity. This suggests that the company has paid down some of its long-term debt.
Increase in current liabilities: Current liabilities increased from 30% to 35% of total liabilities and
equity. This suggests that the company has taken on more short-term debt, such as trade payables
and overdrafts.
• Decrease in shareholders' equity: Shareholders' equity decreased from 60% to 50% of total
liabilities and equity. This is due to the decrease in non-current assets and the increase in both non-
current and current liabilities.
2. What are the implications of these trends for the company's management?
The implications of these trends for the company's management are as follows:
The decrease in non-current assets could be a sign that the company is selling off some of its long-
term assets in order to raise cash. This could be due to a number of factors, such as the need to
invest in new growth opportunities, to reduce costs, or to improve its financial position.
• The increase in current assets could be a sign that the company is preparing for growth or that it is
facing some financial challenges. If the company is preparing for growth, then the increase in current
assets may be necessary to finance the expansion. However, if the company is facing financial
challenges, then the increase in current assets may be a sign that it is having difficulty meeting its
short-term obligations.

The decrease in non-current liabilities is a positive development for the company. This suggests that
the company is reducing its long-term debt burden, which will improve its financial flexibility and
reduce its interest costs
The increase in current liabilities is a negative development for the company. This suggests that the
company is taking on more short-term debt, which could increase its financial risk and make it more
difficult to meet its short-term obligations
The decrease in shareholders' equity is a negative development for the company. This suggests that
the company is becoming less well-capitalised, which could make it more difficult to attract investors
or raise additional capital.
3. Calculate the company's current ratio and quick ratio for 2022 and 2023. What do these ratios tell
you about the company's liquidity position?
RATIO 2022 2023

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 CURRENT RATIO 1.33 1.30

QUICK RATIO 1.03 1.00

4. Calculate the company's debt-equity ratio for 2022 and 2023. What do these ratios tell you about
the company's financial leverage?
Debt-equity ratio for 2022: 10% / 60% = 0.17
Debt-equity ratio for 2023: 15% / 50% = 0.30
The debt-equity ratio is a measure of a company's financial leverage. It indicates how much debt the
company is using to finance its operations. A higher debt-equity ratio indicates that the company is
more leveraged.
Based on the debt-equity ratios, X Ltd.'s financial leverage has increased from 2022 to 2023. This
means that the company is using more debt to finance its operations.
5.Suggest two ways in which X Ltd. can improve its financial position.
1. Reduce costs. X Ltd. can reduce costs by streamlining its operations, eliminating unnecessary
expenses, and negotiating better deals with suppliers. For example, the company could review its
headcount and overhead expenses to see if there are any areas where costs can be reduced. The
company could also try to negotiate better terms with its suppliers, such as longer payment terms or
lower prices.
2. Increase sales. X Ltd. can increase sales by expanding into new markets, developing new products
or services, and increasing its marketing efforts. For example, the company could try to expand into
new geographic markets or launch new products or services that meet the needs of its customer
base. The company could also increase its marketing efforts to generate more leads and sales.

25 1. Based on the common-size statement of profit and loss, what are the key trends in Y Ltd.'s financial
performance from 2022 to 2023?
The key trends in Y Ltd.'s financial performance from 2022 to 2023, based on the common-size
statement of profit and loss, are as follows:
Increase in gross profit margin: The gross profit margin increased from 40% to 45%. This suggests that
the company is becoming more efficient at producing and selling its goods or services.
Decrease in operating profit margin: The operating profit margin decreased from 30% to 27%. This
suggests that the company's operating expenses are increasing faster than its revenue.
Increase in net profit margin: The net profit margin increased from 25% to 27%. This is because the
company's interest expense decreased from 5% to 3%.
2. What are the implications of these trends for the company's management?
The implications of these trends for the company's management are as follows:
The increase in gross profit margin is a positive development for the company. This suggests that the
company is becoming more efficient at producing and selling its goods or services. Management
should focus on maintaining this trend by continuing to improve the company's operational
efficiency.
The decrease in operating profit margin is a negative development for the company. This suggests
that the company's operating expenses are increasing faster than its revenue. Management should
investigate the reasons for this increase and take steps to reduce operating expenses where possible.
The increase in net profit margin is a positive development for the company. This is because the

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 company's interest expense decreased. Management should focus on maintaining this trend by
continuing to reduce the company's debt levels.
3. Calculate the company's gross profit margin, operating profit margin, and net profit margin for
2022 and 2023. What do these ratios tell you about the company's profitability?
RATIO 2022 2023

GROSS PROFIT 40% 45%

MARGIN

OPERATING PROFIT 30% 27%

MARGIN

NET PROFIT MARGIN 25% 27%

4. Calculate the company's return on assets (ROA) and return on equity (ROE) for 2022 and 2023.
RATIO 2022 2023

ROA 20% 22%

ROE 33% 36%

5. Suggest two ways in which Y Ltd. can improve its financial performance.
Managing its cash flow more effectively. This includes ensuring that the company has enough cash on
hand to meet its short-term obligations and that it is collecting payments from customers promptly.
Investing in new growth opportunities. This could involve expanding into new markets, developing
new products or services, or acquiring other companies.

26 . Prepare comparative common-size balance sheets for A Ltd. and B Ltd. for the years 2023 and 2022.
ASSET/ A LTD. A LTD. B LTD. B LTD.

LIABILITY& 2023 2022 2023 2022

EQUITY

ASSETS

NON- CURRENT 60% 65% 55% 50%

ASSETS

CURRENT ASSETS 40% 35% 45% 50%

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 TOTAL ASSETS 100% 100% 100% 100%

LIABILITY &
EQUITY

NON- CURRENT 10% 15% 15% 20%

LIABILITIES

CURRENT 30% 25% 35% 30%

LIABILITIES

SHAREHOLDERS 60% 60% 50% 50%

FUNDS

TOTAL LIABILITY 100% 100% 100% 100%

& EQUITY

Based on the comparative common-size balance sheets, the following are the major changes in the
financial position of the two companies between the two years:
A Ltd.
Decrease in non-current assets: Non-current assets decreased from 65% to 60% of total assets. This
suggests that A Ltd. may have sold some of its long-term assets, such as property, plant, and
equipment.
Increase in current assets: Current assets increased from 35% to 40% of total assets. This suggests
that A Ltd. may have invested in more short-term assets, such as cash, accounts receivable, and
inventory.
B Ltd. Decrease in non-current assets: Non-current assets decreased from 50% to 55% of total
assets. This suggests that B Ltd. may have also sold some of its long-term assets.
Increase in current assets: Current assets increased from 50% to 45% of total assets. This suggests
that B Ltd. may have also invested in more short-term assets.
3. Which company is in a better financial position in 2023? Explain your answer.
A Ltd. has a lower debt-to-equity ratio than B Ltd., suggesting that A Ltd. is less financially leveraged.
This means that A Ltd. is better able to withstand economic downturns and financial shocks.
4.The implications of the changes in the financial position of the two companies for their
stakeholders are as follows:

A Ltd .Investors: Investors in A Ltd. should be pleased with the company's improving financial
position. The company has paid down some of its debt and become less financially leveraged. This
suggests that the company is becoming more financially prudent and is better able to withstand
economic downturns.
Creditors: Creditors of A Ltd. should also be comfortable with the company's financial position. The
company has a healthy debt-to-equity ratio and is generating sufficient cash flow to meet its debt
obligations.
Employees: Employees of A Ltd. should be optimistic about the company's future prospects. The

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company is financially sound and is investing in its business. This suggests that there will be
opportunities for advancement and salary increases in the future.
B Ltd.
Investors: Investors in B Ltd. should be aware that the company is becoming more financially
leveraged. This means that the company is more vulnerable to economic downturns and financial
shocks. However, investors should also be encouraged by the company's strong revenue growth. This
suggests that the company is investing in its business and is well-positioned for future growth.
Creditors: Creditors of B Ltd. should be aware that the company is taking on more debt. This could
increase the risk of default in the event of an economic downturn. However, creditors should also be
reassured by the company's strong financial performance and its commitment to growth.

Employees: Employees of B Ltd. should be optimistic about the company's future prospects. The
company is growing rapidly and investing in its business. This suggests that there will be
opportunities for advancement and salary increases in the future.
5.Suggest some measures that A Ltd. can take to improve its financial position in the coming year.
A Ltd. can take the following measures to improve its financial position in the coming year:
Increase revenue. A Ltd. can increase revenue by expanding into new markets, developing new
products or services, or increasing its marketing efforts. For example, the company could try to
expand into new geographic markets or launch new products or services that meet the needs of its
customer base. The company could also increase its marketing efforts to generate more leads and
sales.
Reduce costs. A Ltd. can reduce costs by streamlining its operations, eliminating unnecessary
expenses, and negotiating better deals with suppliers. For example, the company could review its
headcount and overhead expenses to see if there are any areas where costs can be reduced. The
company could also try to negotiate better terms with its suppliers, such as longer payment terms or
lower prices.

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27

2.Based on the comparative common-size profit and loss statements, the major changes in the
profitability of C Ltd. between the two years are as follows:
Non-operating income margin increased by 100.00%
This is the most significant change in C Ltd.'s profitability between the two years. It is possible that
this increase in non-operating income is due to factors such as one-time gains, interest income from
investments, or dividend income from subsidiaries.

Profit after tax margin increased by 4.97%

This increase in profit after tax margin is likely due to the increase in non-operating income margin.
However, it is also possible that C Ltd. was able to reduce its operating expenses or taxes in 2023.
3.C Ltd. has a higher profit after tax margin (64.33%) than D Ltd. (60.33%). This means that C Ltd. is
able to generate more profit after taxes for every dollar of revenue it earns.
4.Shareholders: D Ltd.'s shareholders may be disappointed by the company's unchanged profitability
in 2023. The company may not be able to pay higher dividends or repurchase shares. However, the
company's shareholders may still benefit from the company's long-term growth prospects.
Employees: D Ltd.'s employees may also be disappointed by the company's unchanged profitability in
2023. The company may not be able to offer higher salaries, bonuses, or other benefits.

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Customers: D Ltd.'s customers may not see any immediate benefits from the company's unchanged
profitability. However, the company may still be able to offer competitive prices and high-quality
products or services.
Suppliers: D Ltd.'s suppliers may also not see any immediate benefits from the company's unchanged
profitability. However, the company may still be a reliable customer.
Community: D Ltd.'s community may also not see any immediate benefits from the company's
unchanged profitability. However, the company may still be a major employer and taxpayer in the
community.
5.Here are some measures that C Ltd. can take to improve its profitability in the coming year:
Increase sales. C Ltd. can increase its sales by expanding into new markets, launching new products
or services, or increasing its marketing and sales efforts.
Reduce costs. C Ltd. can reduce its costs by streamlining its operations, negotiating better prices with
suppliers, or eliminating unnecessary expenses.
Improve efficiency. C Ltd. can improve its efficiency by investing in new technologies, training its
employees, or improving its business processes.
Increase customer satisfaction. C Ltd. can increase customer satisfaction by providing excellent
customer service, offering high-quality products or services, and resolving customer complaints
quickly and efficiently.
Develop new competitive advantages. C Ltd. can develop new competitive advantages by investing in
research and development, acquiring complementary businesses, or entering into strategic
partnerships.

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28

Comments
(i) Decrease in current Liabilities is more than decrease in current assets which indicates that the
current ratio has improved.
(ii) Decrease in cash and bank may result in delay in payments.
(iii) Fixed Assets have increased along with share capital. It indicates that such asset has been
purchased using Long term sources of finance.
(iv) Increase in reserve and surplus is a healthy indicator.

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 MLL IN ACCOUNTANCY (RATIO ANALYSIS)
CLASS 12 - ACCOUNTANCY
1 Current ratio of Elpis Pvt. Ltd. is 3 : 2. Accountant wants to maintain it at 2 : 1. Following options [1]
are available:
1. He can repay bills payable
2. He can purchase goods on credit
3. He can take short - term loan
Choose the correct option:
a) Only (i) and (iii) are correct.
b) Only (ii) and (iii) are correct.
c) Only (i) is correct.
d) Only (ii) is correct.

2 Match the followings:Current asset 2,00,000; Current Liability 1,00,000. Current ratio will be: [1]

a) (a) - (ii), (b) - (iv), (c) - (i), (d) - (iii)

b) (a) - (iv), (b) - (i), (c) - (ii), (d) - (iii)
c) (a) - (ii), (b) - (iii), (c) - (iv), (d) - (i)
d) (a) - (iv), (b) - (iii), (c) - (i), (d) - (ii)

3 Net Profit after Interest and Tax of X Ltd. was 1,20,000. Its Current Assets were 6,00,000 and [1]
Current Liabilities were 2,00,000. Tax rate was 40%. Its Total Assets were 12,00,000 and 10%
Long term Debt was 4,00,000. Return on Investment will be:
a) 24%
b) 15%
c) 60%
d) 34%

4 Share Capital 8,00,000; Reserve and Surplus 4,00,000; General Reserve 1,00,000 and Total [1]
Assets 20,00,000. Proprietary Ratio will be:
a) 0.55 : 1

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 b) 0.6 : 1
c) 0.65 : 1
d) 0.4 : 1

5 Opening inventory 10,000; Closing inventory 20,000; Inventory turnover ratio 5 times; Selling price [1]
1/3rd above cost. Gross profit ratio will be:
a) 16.67%
b) 50%
c) 33.33%
d) 25%

6 A firm’s current assets are 1,60,000, current ratio is 2 : 1, cost of revenue from operations is [1]
2,40,000, its working capital turnover ratio will be:
a) 3 times
b) 4 times
c) 2 times
d) 8 times

7 Which ratio is not a part of Solvency Ratio? [1]

a) Total Assets to Debt Ratio
b) Current Ratio
c) Proprietary Ratio
d) Debt to Equity Ratio

8 Low ‘Working Capital Turnover Ratio’ indicates: [1]

a) Under - utilization of working capital
b) Over - utilization of working capital
c) There is no working capital
d) No use of working capital

9 Non - Current Assets 5,00,000; Current Assets 3,00,000; Equity Share Capital 4,00,000. [1]
Reserve 2,00,000; Long - term Debts 40,000. Proprietary Ratio will be:
a) 75%
b) 133%
c) 80%
d) 125%

10 Total Debt 30,00,000; Shareholder’s Funds 18,00,000; Reserve & Surplus 6,00,000; Current Assets [1]
15,00,000; Working Capital 9,00,000. Total asset to debt ratio will be:

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 a) 2 : 1
b) 1 : 2
c) 2.5 : 1
d) 1.6 : 1

11 OM Ltd. has a current ratio of 3.5: 1 and a quick ratio of 2: 1. If the excess of current assets over [3]
quick assets as represented by inventory is Rs. 1,50,000, calculate current assets and current
liabilities.
12 The Gross Profit Ratio of a company is 25%. State giving reason, which of the following transactions [3]
will (a) increase; (b) decrease; or (c) not change the Gross Profit Ratio:

4. Purchase of Stock - in - Trade 50,000.

5. Purchases Return 15,000.

6. Revenue from Operations on sale of Stock - in - Trade 85,000.

7. Stock - in - Trade costing 20,000 withdrawn for personal use.

8. Stock - in - Trade costing 10,000 distributed as free samples.

13 Following information is given to you: [3]

9. Inventory Turnover Ratio 5 Times

10. Inventory at the end is 5,000 more than the inventory in the beginning.

11. Revenue from Operations (all credit) 2,00,000

12. Gross Profit Ratio 1/4 on cost.

13. Current Liabilities 60,000

14. Quick Ratio 0.75.
Calculate (i) Cost of Revenue from Operations, (ii) Opening Inventory and Closing inventory, and
(iii) Quick Assets and Current Assets.

14 From the given information, calculate the inventory turnover ratio:Revenue from Operations (Sales) : [3]
2,00,000; GP : 25% on cost; Opening Inventory was of the value of Closing Inventory. Closing
Inventory was 30% of Revenue from Operations.
15 A company earns Gross Profit of 25% on cost. For the year ended 31st March, 2017 its Gross Profit [3]
was 5,00,000; Equity Share Capital of the company was 10,00,000; Reserves and Surplus
2,00,000; Long - term Loan 3,00,000 and Non - current Assets were 10,00,000. Compute the
Working Capital Turnover Ratio of the company.
Question No. 16 to 18 are based on the given text. Read the text carefully and answer the [3]
questions:

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16 Operating Ratio for the year 31st March 2021 is:
a) 55.05%
b) 55%
c) 52%
d) 54.85%

17 Net profit ratio for the year 31st March 2020 is:
a) 26.25%
b) 26.50%
c) 26%
d) 28.25%

18 If the operating ratio is 50%, which of the following will lead to increase in ratio?
a) Purchase return 200

b) Payment to creditors 500

c) Office expenses paid 5000

d) Building sold for 2,00,000

19 15. From the following information, compute ’debt equity ratio’. [4]

16. The current ratio of X Ltd is 2 : 1. State with reason which of the following transaction would
increase, decrease or not change the ratio
a. Included in the trade payables was a bills payable of Rs. 9,000 which was met on
maturity.
b. Company issued 1,00,000 equity shares of Rs. 10 each to the vendors of machinery
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 purchased.

20 17. From the following information, compute ‘Total Assets to Debt Ratio’: Shareholders’ Funds [4]
Rs. 1,60,000; Total Debt Rs. 3,60,000, Current Liabilities Rs. 40,000.
18. The ratio of Current Assets (Rs. 6,00,000) to Current Liabilities (Rs. 4,00,000) is 1: 5: 1. The
accountant of this firm is interested in maintaining a current ratio of 2: 1 by paying some part
of Current Liabilities. Suggest the amount of Current Liabilities which he must pay for this
purpose.

21 Following particulars are given to you: [4]

Calculate
19. Debt Equity Ratio
20. Total Assets to Debt Ratio and
21. Proprietary Ratio

22 From the given information, calculate the following; [4]

22. Cost of revenue from operations
23. Opening and closing inventory
24. Quick assets
25. Current assets

23 From the following information, calculate Debt Equity Ratio, Total Assets to Debt Ratio, Proprietory [4]
Ratio, and Debt to Capital Employed Ratio:
Balance Sheet as on March 31, 2017

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 Question No. 24 to 27 are based on the given text. Read and answer the questions: [4]

24 How much is Credit Revenue from Operations?

a) 3,00,000

b) 1,50,000

c) 75,000

d) 3,75,000

25 Find Average Collection Period?

a) 3 months
b) 4 months
c) 3.5months
d) 2 months

26 Find Trade Payable Turnover Ratio?

a) 6.5 times
b) 5.5 times
c) 5 times

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 d) 5.25 times

27 Calculate Average Payable Period?

a) 73 days
b) 66 days
c) 69 days
d) 56 days

28 State with reason, whether the Proprietary Ratio will improve, decline or will not change because of [6]
the following transactions if Proprietary Ratio is 0.8 : 1:

26. Obtained a loan of 5,00,000 from State Bank of India payable after five years.

27. Purchased machinery of 2,00,000 by cheque.

28. Redeemed 7% Redeemable Preference Shares 3,00,000.

29. Issued equity shares to the vendor of building purchased for 7,00,000.

30. Redeemed 10% redeemable debentures of 6,00,000.

Solution

MLLINACCOUNTANCY(RATIOANALYSIS)

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Class 12 – Accountancy

1.

(c) Only (i) is correct.

Explanation: In order to increase the Current ratio, the current liabilities needs to be decreased, thus, he
can only replay Bills Payable. If he purchases goods on credit or takes short-term loans it will increase the
current liabilities.
2.

(b) (a) - (iv), (b) - (i), (c) - (ii), (d) - (iii)

Explanation: (a) - (iv), (b) - (i), (c) - (ii), (d) - (iii)

3. (a) 24%

Explanation: Return on Investment = Net Profit before Interest and Tax × 100

Capital Employed

Rs.
100
ProfitbeforeTax=1,20,000× 2,00,000
6
0
Add:InterestonLongtermDebts 40,000
ProfitbeforeInterestandTax 2,40,000

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Capital Employed = Total Assets - Current Liabilities

= 12,00,000 - 2,00,000 = Rs. 10,00,000

Therefore, Return on Investment =2,40,000 x 100 = 24 %

10,00,000

4.(b) 0.6 : 1
Explanation: General Reserve will be ignored since these are already included in Reserve & Surplus.

5.

(d) 25%

Explanation: Inventory Turnover Ratio = Cost of Revenue from operations/Average Inventory 5 = Cost of
revenue from operation/(10,000 + 20,000)/2

Cost of revenue from operations = 75,000 Gross profit = 1/3 x 75,000 = 25,000

Revenue from operation = 75,000 + 25,000 = 1,00,000 Gross profit Ratio = 25,000/1,00,000 x 100 = 25 %

6.(a) 3 times

Explanation: Working Capital Turnover Ratio

= Cost of Revenue from Operations

Working Capital

Current Ratio = Current Assets

Current Liabilities

⇒2 = 1,60,000

1 Current Liabilities

Current Liabilities = Rs. 80,000

Working Capital = Current Assets - Current Liabilities 1,60,000 - 80,000 = Rs. 80,000

Working capital turnover ratio = 2,40,000= 3 times

80,000

7.

(b) Current Ratio

Explanation: Current Ratio is a Liquidity Ratio

8. (a) Under-utilization of working capital

130
Explanation: Low working capital turnover ratio indicates that the working capital of business is under-
utilized. It means firm is investing in too many account receivable and inventory to support its sales.

9. (a) 75%

Explanation: Proprietary Ratio = Shareholders’ Fund / Total Assets Shareholders’ Fund = 4,00,000 + 2,00,000
= 6,00,000

Total Assets = Non current Assets + Current Assets = 5,00,000 + 3,00,000 = 8,00,000 Proprietary Ratio =
6,00,000 / 8,00,000 = 0.75:1 or 75 %

10. (a) 2 : 1

Explanation: Total Assets = Total Debt + Shareholders' Fund = 30,00,000 + 18,00,000 = 48,00,000 Current
Liabilities = Current Assets - Working Capital = 15,00,000 - 9,00,000 = 6,00,000

Long Term Debt = 30,00,000 - 6,00,000 = 24,00,000

Total Assets to Debt Ratio = 48,00,000 / 24,00,000 = 2:1

11. Let Current Liabilities = x So, Quick Assets = 2x And Current Assets = 3.5x

Inventory = Current Assets - Quick Assets 1,50,000 = 3.5x - 2x

1,50,000 = 1.5x

1,50,000 = x

1.5

x = Rs. 1,00,000

Current Liabilities = Rs. 1,00,000

Current Assets = 3.5 x 1,00,000 = Rs 3,50,000
12.
Effect
onGros
S.No. sProfit Reasonofeffectongrossprofitratioofcompany
Ratio

BothPurchasesandClosingInventorywillincreasebythesameamount,therefore,CostofRevenuefromoperati
(i) NoChange
onswillremainunchanged.

BothPurchasesandClosingInventorywilldecreasebythesameamount,therefore,CostofRevenuefromOperationsw
(ii) NoChange
illremainunchanged.
RevenuefromOperationswillincreasebutClosingInventorywilldecreasebythesamepercentage(Notbysame
(iii) NoChange amount). As a result, Cost of Revenue from Operations will increase by the same percentage as
theRevenuefromOperationsincreases.

BothPurchasesandClosingInventorywilldecreasebythesameamount,therefore,CostofRevenuefromOperationsw
(iv) NoChange
illnotchange.
(v) NoChange CostofRevenuefromOperationsincreasesaswellasdecreasesbythesameamount.

131
13. Gross Profit is 1/4th of cost.
Therefore, goods costing Rs. 100 is sold for Rs. 125. Cost is 100 × 2, 00, 000 = Rs. 1,60,000
125

Average Inventory = Cost of Revenue from Operations = Rs. 1,60,000 = Rs. 32,000
Inventory Turnover Ratio 5

Opening Inventory = Rs. 29,500

Closing Inventory = = Rs. 34,500
Current Liabilities are Rs. 60,000 and Quick Ratio is .75, therefore, Quick Assets = Rs. 60,000 × .75 = Rs.
45,000
Current Assets = Quick Assets + Closing Inventory
= Rs. 45,000 + Rs. 34,500 = Rs. 79,500

14. Gross Profit is 25% on cost. Therefor goods costing Rs. 100 is sold for Rs. 125. Hence, if Revenue from
Operations (Sales) are Rs. 125,
Cost of Revenue from Operations = Rs. 100 If Revenue from Operations = Rs. 2,00,000,
Cost of Revenue from Operations = = Rs. 1,60,000
Closing Inventory is 30% of Sales
Closing Inventory = 30 × 2,00,000 = Rs. 60,000
100

Opening Inventory = = Rs. 20,000

Inventory turnover ratio=4 times

15. Working Capital Turnover Ratio= Revenue from Operation/Working Capital

Gross Profit = 25% on Cost
Let Cost of Goods sold be Rs. 100. Gross Profit = Rs. 25
Revenue from Operations = Rs. (100 + 25) = Rs. 125
When Gross profit is Rs. 25, revenue from operations is = Rs. 125
And, if Gross profit is Rs. 5,00,000 then revenue from operations will be = Rs.(5,00,000 × 125/25) =
Rs.25,00,000 Capital Employed = Shareholder’s Funds + Non-Current Liabilities
= Rs.(10,00,000 + 2,00,000 + 3,00,000) = Rs.15,00,000
Also, Capital Employed = Non Current Assets + Working Capital
Hence, Working Capital Turnover Ratio = 25,00,000 = 5 Times
5,00,000
16.(b) 55%
Explanation: 55%
17.(a) 26.25%
Explanation: 26.25%
18.(c) Office expenses paid Rs. 5000
Explanation: Office expenses paid Rs. 5000
19.1. Debt equity ratio: establishes the relationship between external debts and internal equities of the
enterprise. Debt Equity Ratio = long term debt / equity(shareholders fund)

132
= 3,00,000 = 3 : 1
1,00,000
Working note 1:
Long-term Debt = Long-term Borrowings + Long-term Provisions
= 2,00,000 + 1,00,000
= Rs. 3,00,000
Working note 2:
Shareholders' Funds = Total Assets - Total Liabilities
= 4,50,000 - 3,50,000 = Rs. 1,00,000
Total Assets = Non-current Assets + Current Assets
= 3,60,000 + 90,000 = Rs. 4,50,000
Total Liabilities = Long-term Borrowings + Long-term Provisions + Current Liabilities
= 2,00,000 + 1,00,000 + 50,000 = Rs. 3,50,000
2. (a)Increase: Current assets and also current liabilities have decreased by equal amount, therefore, the ratio
will increase. (b)No change: Issue of shares for machinery purchased do not affect either current assets or
current liabilities, therefore, the current ratio will not be affected.

20.Total debt to total assets is a leverage ratio that defines the total amount of debt relative to assets.
a. Total Assets = Total Debt + Shareholder’s Funds
= Rs.3,60,000 + Rs.1,60,000
= Rs.5,20,000
Long-term Debt = Total Debt - Current Liabilities
= Rs.3,60,000 - Rs.40,000
= Rs.3,20,000
Total Assets to Debt Ratio = Total Asset
Debt
= 5,20,000 = 1.625: 1
3,20,000
The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those
due within one year.
a. Let the amount of Current Liabilities to be paid = X
2 =6,00,000−X
1 4,00,000−X
Rs 8,00,000 – 2X = Rs.6,00,000 - 2X + X = Rs.8,00,000 - Rs. 6,00,00 X = Rs.2,00,000
Current Liabilities of Rs. 2,00,000 should be paid off to obtain ratio of 2: 1.

21. i. Debt Equity Ratio = Debt

Equity
or
Long term Debt = Debt
Equity / Shareholder's Funds

Long Term Debt = Long term borrowings + Long term provisions

= Rs. 7,00,000 + Rs. 2,25,000 = Rs. 9,25,000
Shareholder's Funds = Non-Current Assets + Working Capital - Non-Current Liabilities Working Capital =
Current Assets - Current Liabilities
= Rs. 5,40,000 - Rs. 1,40,000 = Rs. 4,00,000
133
Long term Debts refer to Non Current Liabilities Shareholder's Funds = Rs. 12,00,000 + Rs. 4,00,000 - Rs.
9,25,000
= Rs. 6,75,000
Debt Equity Ratio = Rs.9,25,000= 1.37 : 1
Rs.6,75,000

ii.Total Assets to Debt Ratio = Total Assets / Debts

Total Assets = Non Current Assets + Current Assets
= Rs. 12,00,000 + Rs. 5,40,000 = Rs. 17,40,000
Total Assets to Debt Ratio = Rs. 17,40,000 / Rs. 9,25,000 = 1.88 : 1

iii.Proprietary Ratio = Proprietar's Funds /total Assets

= Rs. 6,75,000 / Rs. 17,40,000×100=38.79%

22. Gross profit = 25% on cost or 20% on sales

Revenue from operations (all credits)i.e credit sales = 2,40,000 Gross profit = 20% of 2,40,000 = 48,000
i. Cost of revenue from operations = Revenue from operations - Gross profit = 2,40,000 - 48,000= 192,000
Let opening inventory be = x
Closing inventory be = x + 6,000
Average Inventory = x+x+6,000/2 = 2x+6,000 /2= x + 3,000
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory

23.
6 = 1,92,000
x+3,000
6x + 18,000 = 1,92,000
6x = 1,92,000 - 18,000

v. Current Assets = Quick Assets + Inventory = 64,000 + 35,000 Current assets = Rs. 99,000
i. Debt-Equity Ratio = Debts /Equity
Debt = Long-term borrowings = Rs. 1,50,000
Equity = Share capital + Reserves and surplus= Rs. 4,00,000 + Rs. 1,00,000 = Rs. 5,00,000
Debt-Equity Ratio = Rs. 1,50,000/Rs. 5,00,000 = 0.3 : 1

ii.Total Assets to Debt Ratio = Total assets /Long-term debts

Total Assets = Fixed assets + Non-current investments + Current assets
= Rs. 4,00,000 + Rs. 1,00,000 + Rs. 2,00,000 = Rs. 7,00,000
Long-term Debt = Rs. 1,50,000

Total Asset to Debt Ratio = Rs. 7,00,000/Rs.1,50,000= 4.67 : 1

iii. Proprietary Ratio = or Shareholders' Funds /Total Assets

= Rs. 5,00,000/Rs. 7,00,000= 0.71 : 1

iv.Debt to Capital Employed Ratio = Long-term debts/Capital Employed

Capital Employed = Shareholders’ Funds + Long-term borrowings

134
= Rs. 5,00,000 + Rs. 1,50,000 = Rs. 6,50,000
Debt to Capital Employed Ratio = Long-term debts/Capital Employed
= Rs. 1,50,000/Rs. 6,50,000

24.(a) Rs. 3,00,000

Explanation: Rs. 3,00,000
25.(a) 3 months
Explanation: 3 months
26. (c) 5 times
Explanation: 5 times
27. (a) 73 days
Explanation: 73 days
28.
Transaction Impactoftransactionsonproprietaryratio

Obtained a loan of Rs.

5,00,000fromStateBankofIndiap Totalassetsincreaseby5,00,000(ascashincreases).However,sinceshareholders'fundsremainuncha
ayableafterfiveyears. nged,thereforeproprietaryratiowilldecrease.

Totalassetsareincreasinganddecreasingby2,00,000simultaneously(ascashdecreasesandmachiner
PurchasedmachineryofRs. y increases). Thus, both numerator and denominator remain unchanged and
2,00,000bycheque. soproprietaryratiowillnotchange.

Redeemed 7% Bothshareholders'fundsandtotalassetsdecreaseby3,00,000simultaneouslyandsoproprietaryratio
RedeemablePreferenceSharesRs. willdecrease.
3,00,000.
Issuedequitysharestothevendorof
building purchased for Rs. Bothshareholders'fundsandtotalassetsincreaseby7,00,000simultaneouslyandsoproprietaryratio
7,00,000. willimprove.

Redeemed10%redeemabledebentu Totalassetsdecreaseby6,00,000(ascashisgoingout).However,sinceshareholders'fundsremainunc
resofRs. 6,00,000 hanged,thereforeproprietaryratiowillimprove.

Q.NO QUESTION MARK

S
1 Statement I:- Sale of Marketable Securities will result in no flow of Cash. 1 1
Statement II:- Debentures issued as collateral security will result in inflow of
cash.
A. Both Statements are correct.
B. Both Statements are incorrect.
C. Statement I is correct and Statement II is incorrect.
D. Statement I is incorrect and Statement I is correct.
2 What will be the effect of issue of Bonus shares on Cash Flow Statement? 1
A. No effect
B. Inflow in Financing Activity
C. Inflow in Operating activity
135
 D. Inflow in Investing Activity
3 Aditya Sunrise Ltd. provides you the following information: 1
Particulars 31.3.2023(₹) 31.3.2022(₹)
10% Bank Loan Nil 1,00,000
Additional Information:
1. Equity Share Capital raised during the year ₹3,00,000;
2. 10% Bank Loan was repaid on 01.04.2022.
3. Dividend received during the year was ₹20,000.
4. Dividend Proposed for the year 2021-22 was ₹50,000 but only ₹20,000 was
approved by the Shareholders.
Find out the cash flow from Financing Activities.
a) ₹ 1,50,000
b) ₹ 2,00,000
c) ₹ 1,70,000
d) ₹ 1,80,000
4 1) An investment normally qualifies as cash-equivalent only when from the 1
date of acquisition it has a short maturity period of :
a) One month or less
b) Three months or less
c) Three months or more
d) One year or less

5 Insurance Claim received by Albert Co. Ltd. of ₹ 5,00,000 for Loss of 1

Machinery due to theft will be recorded in Cash Flow Statement in which of the
following manner?

a) Added under Operating Activities as Extraordinary Item and Subtracted

from Operating Activities also.

b) Subtracted under Operating Activities as Extraordinary Item and Added to

Operating Activities also.

c) Added under Operating Activities as Extraordinary Item and Outflow under

Investing Activity also.

d) Subtracted under Operating Activities as Extraordinary Item and Inflow

under Investing Activities also.
6 A company issued 20,000; 9% Debentures of ₹ 100 each at 10% Discount. 1
These debentures were to be redeemed at 15% Premium at the end of 5 years.
The balance in Securities Premium Account as on the date of Issue was ₹
3,70,000.

How this transaction will be reflected in Cash Flow Statement?

a) Added ₹ 1,30,000 under Operating Activities as Loss on Issue of Debentures
written off and Inflow of ₹ 20,00,000 under Financing Activities.
136
 b) Added ₹ 5,00,000 under Operating Activities as Loss on Issue of Debentures
written off and Inflow of ₹ 18,00,000 under Financing Activities.

c) Added ₹ 1,30,000 under Operating Activities as Loss on Issue of Debentures

written off and Inflow of ₹ 18,00,000 under Financing Activities.

d) Added ₹ 5,00,000 under Operating Activities as Loss on Issue of Debentures

written off and Inflow of ₹ 20,00,000 under Financing Activities.
7 From the following information find out the inflow of Cash by sale of Office 1
equipment
31st March, 2022 31st March,
2021
Office Equipment ₹ 2,00,000 ₹ 3,00,000

Additional Information:
1.Depreciation for the year 2021-22 was Rs. 40,000
2.Purchase of Office Equipment purchased during the year Rs. 30,000 Part of
Office Equipment sold at a profit of Rs. 12,000

a) ₹ 1,00,000 b) ₹ 1,02,000
c) ₹ 90,000 d) ₹ 1,12,000

8 Balance Sheet (Extract) 1

Equity and liabilities 31-3-2019 31-3-2020
12% Debentures 2,00,000 1,60,000
Additional Information:
Interest on debentures is paid on half yearly basis on 30th September and 31st
March each year.
Debentures were redeemed on 30th September 2019.
How much amount (related to above information) will be shown in Financing
Activity for Cash Flow Statement prepared on 31st March 2020?
A. Outflow `40,000.
B. Inflow `42,600.
C. Outflow `61,600.
D. Outflow `64,000
9 Which of the following is not an investing cash flow? 1
A. Purchase of marketable securities for `25,000 cash.
B. Sale of land for Rs. 1,00,000
C. Sale of 2,500 shares (held as investment) for `15 each.
D. Purchase of equipment for `500 cash.
10 Which among the following is true about a cash flow statement? 1
A. It is prepared by a company
B. it is prepared to show cash used or generated by a company during a
financial year
C. It is prepared as per AS-3
D. All of the above
11 State any 3 objectives of cash flow statement 3
12 State whether following transactions results in outflow or inflow of cash and 3
cash equivalents
1. Issue of bonus shares
2. Investment in marketable securities
3. Redemption of debentures
137
13 Welprint Ltd. has given you the following information: 3
Rs.
Machinery as on April 01, 2016 50,000
Machinery as on March 31, 2017 60,000
Accumulated Depreciation on April 01, 2016 25,000
Accumulated Depreciation on March 31, 2017 15,000

During the year, a Machine costing Rs. 25,000 with Accumulated Depreciation
of Rs. 15,000 was sold for Rs. 13,000.
Calculate cash flow from Investing Activities on the basis of the above
information
14. From the following information, calculate cash flows from financing activities: 3

April 1, March 31,

2016 2017
Rs. Rs.
Long-term Loans 2,00,000 2,50,000

During the year, the company repaid a loan of Rs. 1,00,000.

15 For each of the following transactions, calculate the resulting cash flow and 3
state the nature of cash flow, viz., operating, investing and financing.
(a) Acquired machinery for Rs. 2,50,000 paying 20% by cheque and executing
a bond for the balance payable.

(b) Paid Rs. 2,50,000 to acquire shares in Informa Tech. and received a
dividend of Rs. 50,000 after acquisition.

(c) Sold machinery of original cost Rs. 2,00,000 with an accumulated

depreciation of Rs. 1,60,000 for Rs. 60,000.
16 Anand Ltd., arrived at a net income of Rs. 5,00,000 for the year ended March 3
31, 2017. Depreciation for the year was Rs. 2,00,000.
There was a profit of Rs. 50,000 on assets sold which was transferred to
Statement of Profit and Loss account.
Trade Receivables increased during the year Rs. 40,000 and Trade Payables
also increased by Rs. 60,000.

Compute the cash flow from operating activities by the indirect approach.
17 State the Benefits of preparing Cash flow statement 4
18 Calculate cash flows from operating activities from the following information. 4
Statement of Profit and Loss for the year ended March 31, 2020
Particulars Note Amount
No.

i) Revenue from Operations 60,000

ii) Other Income 1 5,000
iii) Total Revenue (i+ii iv) --------
65,000
iv). Expenses
Cost of materials consumed 15,000
Employees benefits expenses 10,000
Depreciation and Amortisation expenses 2 7,000
Other expenses 3 13,000
______

138
 45,000

v.) Profit before tax (iii-iv) 20,000

vi) Provision for taxation 8,000
12,000
vii) Profit after tax (v-vi)

Notes to Accounts
Note 1: Other Income

Particulars
Amount (Rs.)
Profit on Sale of Machinery
2,000
Income Tax Refund
3,000

______
Total
5,000

______
Note 2: Depreciation and Amortization
expenses

Particulars Amount (Rs.)

Depreciation 5,000
Goodwill Amortised 2,000

_______
Total
7,000

_______

Note 3: Other expenses

Particulars Amount (Rs.)

Rent 10,000
Loss on sale of equipment 3,000
______
Total 13,000
_______

139
 Additional Information
March 31, 2019
March 31, 2020
Provision for taxation 10,000
13,000
Rent payable 2,000
2,500
Trade payable 21,000
25,000
Trade receivables 15,000
21,000
Inventories 25,000
22,000
19 Charles Ltd.,made a profit of Rs. 1,00,000 after charging depreciation of Rs. 4
20,000 on assets and a transfer to general reserve of Rs. 30,000. The goodwill
amortised was Rs. 7,000 and gain on sale of machinery was Rs. 3,000. Other
information available to you (changes in the value of current assets and current
liabilities) are trade receivables showed an increase of Rs. 3,000; trade payables
an increase of Rs. 6,000; prepaid expenses an increase of Rs. 200; and
outstanding expenses a decrease of Rs. 2,000. Ascertain cash flow from
operating activities.

Additional Information: March 31, 2017 March

31, 2016
(Rs.)
(Rs.)
Trade Receivables 20,00,000
40,00,000
Trade Payables 20,00,000
10,00,000
Other Expenses payable (administrative) 10,000
20,000
Prepaid Administrative Expenses 20,000
10,000
Outstanding Trading Expenses 20,000
40,000
Advance Trading Expenses 40,000
20,000
Provision for Taxation 10,00,000
12,00,000

Ascertain Cash from Operations. Show your workings clearly.

20 from the following information, calculate cash flow from operating activities: 4
(2016)

31st March- 31st March-

Particulars 2015 2014
Rs. Rs.

140
 Surplus (i.e. balance in the statement of 71,000 89,000
Profit and Loss) 12,000 4,000
Inventory 58,000 45,000
Trade receivables 14,600 10,000
Outstanding expenses 57,000 27,000
Goodwill 9,000 12,000
Cash in hand 82,000 56,000
Machinery
(i) A piece of machinery costing Rs.50,000 on which depreciation
of Rs.20,000 had been charged was sold for Rs.10,000.
Depreciation charged during the year was Rs.18,000.
(ii) Income tax Rs.23,000 was paid during the year.
(iii) Dividend paid during the year was Rs.36,000.

21 Calculate Cash flow from Investing Activities from the following Information: 4
(2017)
Particulars 31/03/2015 31/03/2014
Investment in Shares of M 1800000 800000
Ltd.
12% Long Term Investments 150000 500000
Plant and Machinery 600000 400000
Goodwill 120000 40000
(i) 9% dividend was received from Miko Ltd
(ii) A machine costing Rs.50000 (depreciation provided thereon Rs
15000) was sold for Rs 40000. Depreciation charged during the year
was Rs 55000

22 From the following balance sheet of R.S. Ltd. as at 31st March, 2017, calculate 4
cash from operating activities (2018)
Balance Sheet of R.S. Ltd. as at 31-03-2017
31-03-
Note 31-03-2016
Particulars 2017
No. Rs.
Rs.
I. Equity and Liabilities :
1. Shareholder’s funds
a) Share Capital
b) Reserve and Surplus
2. Non-current Liabilities 9,00,000 7,00,000
1 2,50,000 1,00,000
Long term borrowings
3. Current Liabilities
2 4,50,000 3,50,000

a) Short term 3 1,50,000 75,000

borrowings 4 2,00,000 1,25,000
b) Short term
provisions
19,50,00
Total 13,50,000
0
II. Assets
141
1. Non-current Assets
a) Fixed Assets 5
i. Tangible 6 14,65,00 9,15,000
ii. Intangible 0 1,50,000
b) Non-current 1,00,000 1,00,000
Investment 1,50,000
2. Current Assets 7 70,000
a) Current Investments 40,000 72,000
b) Inventories 1,22,000 43,000
c) Cash and Cash 73,000
Equivalent
19,50,00
Total 13,50,000
0

Notes to Accounts:

Note Particulars 31-03- 31-03-

No. 2017 2016
Rs. Rs.
Reserves and
Surplus
Surplus i.e. balance in
(1)
statement of profit and 2,50,000 1,00,000
loss
2,50,000 1,00,000

Long term
borrowings -12% 4,50,000 3,50,000
(2)
debentures
4,50,000 3,50,000
(3) Short term Borrowings
Bank Over Draft
150000
75000
Short term
provisions- Proposed 2,00,000 1,25,000
(4)
Taxation
2,00,000 1,25,000

Tangible Assets
Machinery 16,75,00
10,55,000
0
(5) Accumulated (2,10,00
(1,40,000)
Depreciation 0)
14,65,00
9,15,000
0

Intangible Assets -
1,00,000 1,50,000
(6) Goodwill
1,00,000 1,50,000

142
 Inventories
(7) Stock in trade 1,22,000 72,000
1,22,000 72,000

Additional information:
(1) Rs.1,00,000, 12% debentures were issued on 31st March 2017.
(2) During the year a piece of machinery costing Rs.80,000, on which
accumulated depreciation was Rs.40,000, was sold at a loss of
Rs.10,000.

23 From the following Balance Sheet of Kiero Ltd. and the additional information 6
as on 31-3-2018, prepare a Cash Flow Statement: (CBSE Delhi 2019)

143
 Additional Information:
12% debentures were issued on 1st September, 2017.

24 The Balance Sheet was given as below: 6

Balance Sheet of S. Ltd. as at 31-03-2019

31-03-
Note 31-03-
Particulars 2019
No. 2018 Rs.
Rs.
I Equity and Liabilities :
A . Shareholder’s funds
I Share Capital
18,00,00
ii Reserve and Surplus 10,00,000
0
40,000
B Non-current Liabilities 1 50,000
Long term borrowings 2
4,00,000
1,00,000
Current Liabilities
3
3,60,000
2,50,000
Short term provisions
22,00,00
Total 18,00,000
0
144
 II.Assets
Non-current Assets
Fixed Assets
Tangible
14,00,00
4 10,00,000
Intangible 0
5 70,000
1,80,000
Current Assets
1,90,000
Current Investments 30,000
3,10,,000
2,90,,000
2,30,000
Trade receivable 3,00,000
Cash and Cash Equivalent
22,00,00
Total 18,00,000
0

Notes to Accounts:

Note Particulars 31-03-2017 31-03-2016

No. Rs. Rs.
Reserves and
Surplus
Surplus i.e. balance
(1)
in statement of 50,000 40,000
profit and loss
50,000 40,000

Long term
borrowings– 1,00,000 4,00,000
(2)
8% debentures
1,00,000 4,00,000

Tangible Assets
Machinery 15,20,,000 10,90,000
(5) Accumulated
(1,20,,000) (90,000)
Depreciation
14,00,000 10,00,000

Intangible Assets -
1,80,000 70,000
(6) Goodwill
1,80,000 70,000

Additional information:
a. During the year a piece of machinery costing Rs.40,000, on
which accumulated depreciation was Rs.12,000, was sold at a
loss of Rs.6,000.
b. 8% debentures were redeemed on 1st July 2018.

Prepare a cash flow statement

145
25 From the following Balance Sheet of Dreams Converge Ltd as at 6
31.3.2018 and 31.3.2017; Calculate Cash from operating activities.
Showing your workings clearly
NOTE 31st Marc 31st Marc
PARTICULARS
NO. h 2018 h 2017
I. EQUITY AND LIABILITY:
1. Shareholder’s Fund:
a. Share Capital
7,00,000 5,00,000
b. Reserve and Surplus
3,50,000 2,00,000
2. Non-Current Liabilities:
Long Term Borrowings
50,000 1,00,000
3. Current Liabilities:
a. Trade Payables
1,22,000 1,05,000
b. Short term Provisions
50,000 30,000
(Provision for tax)
Total 12,72,000 9,35,000
II. ASSETS:
1. Non-Current Assets:
a. Fixed Assets:
i. Tangible Assets 5,00,000 5,00,000
ii. Intangible Assets 95,000 1,00,000
b. Non-current Investments 1,00,000 Nil
2. Current Assets:
a. Inventory 1,30,000 55,000
b. Trade Receivable 1,47,000 80,000
c. Cash and Cash Equivalents 3,00,000 2,00,000
Total 12,72,000 9,35,000
NOTES
NOTE
Particulars 31.3.2018 31.3.2017
Number
1. Tangible Assets:
Machinery 2,80,000 2,00,000
Accumulated depreciation (1,00,000) (80,000)
1,80,000 1,20,000
Equipment 3,20,000 3,80,000
2. Intangible Assets :
Goodwill 95,000 1,00,000
Additional Information:
Machinery of the book value of 80,000 (accumulated depreciation 20,000)
was sold at a loss of 18,000

146
26 Classify the following into Cash Flows from- 6
Operating Activities; Investing Activities; Financing Activities.
i. Cash sale of goods in cash
ii. Cash payment to acquire fixed assets
iii. Cash payments from issuing shares at a premium
iv. Payment of dividend
v. Interest received on Investment
vi. Interest Paid on debentures

27 1. Give any 6 transactions belong to operating and investing activiti 6

28 From the following information, calculate cash flow from operating 6

activities using direct method.

147
Q.NO ANSWER MAR
KS
1 c) Statement I is correct, and Statement II is incorrect 1
2 A. No effect 1
3 d) ₹ 1,80,000 1
4 B). Three months or less 1

5 d) Subtracted under Operating Activities as Extraordinary Item and Inflow 1

under Investing Activities also
6 c) Added ₹ 1,30,000 under Operating Activities as Loss on Issue of Debentures 1
written off and Inflow of ₹ 18,00,000 under Financing Activities.
7 b) ₹ 1,02,000 1
8 C. Outflow `61,600. 1
9 A. Purchase of marketable securities for `25,000 cash. 1
10 D. All of the above 1
11. 1. To find out cash inflow or outflow from operating actuivities 3
2. To find out cash inflow or outflow from financing actuivities
3. To find out cash inflow or outflow from investing actuivities

12 1. No flow, as bonus shares are issued out of accumulated profits /existing 3

reserves
2. No flow, as both cash/bank and marketable securities are part of cash and
cash equivalents
3. Outflow of cash, as redemption of debentures means repayment of debenture
loan
13 Cash Flows from Investing Activities Rs. 3
Sale of Machinery 13,000
Purchase of Machinery (35,000)

Net cash used in Investing Activities (22,000)

Working Notes:
Machinery Account
Dr.
Cr.
Particulars J.F. Amount (Rs.) Particulars J.F.
Amount

To Balance b/d 50,000 By Cash

13,000
To statement of P&L 3,000 By Accumulated depreciation
15,000
To cash (Bal.figure/ By Balance c/d
60,000
Purchase of new machine) 35,000

----------
-----------

148
 88,000
88,000
----------
------------

Accumulated Depreciation Account

Dr
Cr.

Particulars J.F. Amount (Rs.) Particulars J.F.

Amount
To Machinery 15,000 By Balance b/d
25,000
To Balance c/d 15,000 By Statement of Profit and
Loss 5,000
(Depreciation provided )

-----------
----------
30,000
30,000
--------------
-----------

14 Solution: 3
Cash flows from Financing Activities

Proceeds from long-term borrowings

1,50,000
Repayment of long-term borrowings
(1,00,000)

____________
Net cash inflow from Financing Activities
50,000

_____________
Working Notes:
Long-term Loan Account
Dr.
Cr
Particulars J.F. Amount Particulars J.F.
Amount
(Rs.)
(Rs.)
TO Cash (loan repaid) 1,00,000 By Balance b/d
2,00,000
TO Balance c/d 2,50,000 By Cash (new loan raised)
1,50,000
-------------
-------------
3,50,000
3,50,000
149
 -------------
-------------

15 (a) Rs. 50,000 investing activity (outflow); 3

(b) Rs. 2,00,000 investing activity (outflow);
(c) Rs. 60,000 investing activity (inflow)]
16 Ans.: Rs. 6,70,000 3
17 Cash flow statement provides the following benefits : 4
1. A cash flow statement when used along with other financial statements
provides information that enables users to evaluate changes in net assets of an
enterprise, its financial structure (including its liquidity and solvency) and its
ability to affect the amounts and timings of cash flows in order to adapt to
changing circumstances and opportunities.
2.Cash flow information is useful in assessing the ability of the enterprise to
generate cash and cash equivalents and enables users to develop models to
assess and compare the present value of the future cash flows of different
enterprises.

3. It also enhances the comparability of the reporting of operating

performance by different enterprises because it eliminates the effects of using
different accounting treatments for the same transactions and events.
4. It also helps in balancing its cash inflow and cash outflow, keeping in
response to changing condition.

5. It is also helpful in checking the accuracy of past assessments of future cash

flows and in examining the relationship between profitability and net cash flow
and impact of changing prices.
18 Cash Flow from Operating Activities 4
Particulars
Amount (Rs.)
Net Profit before Taxation and Extraordinary items 17,000
Adjustment for Non Cash and Non Operating items:
Depreciation
5,000
Goodwill amortised
2,000
Loss on Sale of Equipment
3,000
--
-------

27,000
Less-Profit on Sale of Machinery
(2,000)

_______
Operating Profit before Working Capital Changes 25,000
Adjustment for Working Capital Charges
Decrease in Inventories
3,000
Decrease in Rent Payable
500
Increase in Trade Payable
150
 4,000

____________

32,500
Less-Increase in Trade Receivable
(6,000)

____________
Cash generation from Operation 26,500
Income Tax Paid
(5,000)
Income Tax Refund
3,000

________
Net Cash Inflow from Operating Activities
24,500

1. Working Notes:
Net Profit before Tax and Extraordinary items:
Net Profit after Tax 12,000
Provision for Taxation made 8,000
______
20,000
Less-Income tax refund (3,000)
________
17,000
_________

2. Income tax paid during the year has been ascertained by preparing provision
for Taxation accout as follows:
Provision for Taxation Account
Dr.
Cr
Particulars J.F . Amount Particulars J.F
Amount
(Rs.)
(Rs.)
TO Bank By Balance b/d
10,000
(Income Tax paid 5,000 By Statement of Profit
8,000
during the year ) and loss
TO Banalce c/d 13,000
______
________
18,000
18,000
_______
_________
19 Cash Flows from Operating Activities
Particulars
151
(Rs.)

Net Profit before Taxation

1,30,000
Adjustment for Non-cash and Non-operating Items :
+ Depreciation
20,000
+ Goodwill amortised
7,000
– Gain on sale of machinery
(3,000)

___________

Operating profit before working capital

1,54,000
Adjustment for working capital changes :
– Increase in Trade receivables
(3,000)
+ Increase in Trade payables
6,000
– Increase in Prepaid expenses
(200)
– Decrease in Outstanding expenses
(2,000)

_________

= Net Cash from Operating Activities

1,54,800

__________

Notes to Accounts
Note 1: Revenue from Operations

Particulars Amount (Rs.)

Cash Revenue from operations 8,00,000
Credit Revenue from operation 34,00,000
__________

42,00,000
Less returns (2,00,000)
_________

Revenue from operations (Net) 40,00,000

__________

Note 2: Other Income

Particulars Amount (Rs.)
Trading commission 20,40,000
152
 Discount received from suppliers 60,000
__________

21,00,000
Note 3:
Cost of Material Consumed
Particulars Amount (Rs.)
Cost of Material consumed paid in cash 4,00,000
Cost of Material consumed paid in credit 17,00,000
__________
21,00,000
Less:- Returns (1,00,000)
__________
20,00,000
Note 4:
Changes in Inventories of Finished Goods
Particulars Amount (Rs.)
Opening Inventories of finished goods 2,00,000
Less-closing inventories of finished goods (1,00,000)
____________
1,00,000
Note 5:
Depreciation and Amortization Expenses
Particulars Amount (Rs.)
Depreciation 3,20,000
Goodwill Amortised 60,000
3,80,000
Note 6: Other Expenses
Particulars Amount (Rs.)
Administrative expenses 10,20,000
Discount allowed to customers 1,20,000
Bad debts 1,00,000
12,40,000
20 1. Operating profit before working capital changes: 79000 4
2. Cash generated from operating activities before tax: 62,600
3. Cash flow from operating Activities after Tax: 39,600

21 Net Cash used in Investing Activities (848000) 4

22 Net cash generated from Operating Activities : 3,87,000 4

23 CASH FLOW STATEMENT 6

153
 A . CASH FLOW FROM OPERATING
ACTIVITIES 260000
Net profit as per Statement of Profit and 80000
Loss 118000
Add : Transfer to General Reserve 458000
Provision for Tax ( Current Year) 5000
Net Profit before tax and Extra Ordinary 50000
Items 513000
Add : Depreciation NIL
Interest on Debentures
Operating Profit before working Capital (290000
Change )
Add: decrease in CA and Increase in CL 223000
Less: Increase in CA and decrease in CL (46000) 177000
Increase in Trade Receivable
Cash generated from operation
Less Tax paid (350000
NET CASH FLOW FROM ) (448000)
OPERATING ACTIVITIES: (98000)
B. CASH FLOW FROM INVESTING
ACTIVITIES
Purchase of Plant and Machinery 73000
Purchase of Goodwill 210000
NET CASH USED IN INVESTING 200000 433000
ACTIVITIES (50000) 162000
C. CASH FLOW FROM FINANCING 133000
ACTIVITIES 195000
Bank Overdraft
Issue of share Capital
Issue of Debentures
Payment of Interest on Debentures
NET CASH FLOW FROM FINANCING
ACTIVITIES
NET INCREASE IN CASH AND CASH
EQUIVALENT (A+B+C)
ADD: Opening Cash and Cash Equivalent
(63000+70000)
Closing Cash and cash Equivalent
(155000+140000)
24 Cash Flow Statement for the year ended 31/03/2019 6
A Cash Flow From Operating
Activities (18000)
Net cash used in Operating
Activities 34000
B, Cash Flow From Investing (482000
Activities: )
Sale of Plant and Machinery (110000 (558000
Purchase of Plant and Machinery ) )
Purchase of Goodwill
Net Cash Used in Investing
Activities 800000
C, Cash Flow from Financing (300000
Activities ) 486000
Issue of Share Capital (14000) (90000)
154
 Redemption of Debenture 420000
Interest Paid on Debentures 330000
Net Cash flow from Financing
activities
Net decrease in Cash and Cash
Equivalent
Add: Cash and Cash equivalent in
the beginning
Cash and Cash equivalent at the end

1 Calculation of Interst on Debentures;

On Rs 400000 @ 8% p.a for 3 Months : 8000
On Rs 100000 @ 8% p/a for 9 Months : 6000
2 Machinery Account

Particulars Amount Particulars Amount

To balance 10,90,00 By Bank A/c 34,000
b/d 0 By statement of P&L 6,000
To cash A/c 4,82,000 (Loss) 12,000
(Bal. fig) By accumulated Dep. 15,20,000
(Purchase) A/c
15,72,00 By balance c/d 15,72,000
0
25 Particulars Amount Amount 6
I Cash from Operating Activity
Net Profit Before Tax Profit during the year 1,50,000
Add transfer to Reserve 50,000
2,00,000
Add: Non Cash Non-Operating Expenses

Depreciation provided 40,000

Loss on Sale of Assets 18,000
Goodwill Amortized 5,000
Less 63,000
2,63,000

Non-Operating Income NIL NIL

Operating Profit before Working Capital 2,63,000
Add :Increase in Trade Payable 17,000 17,000
Less : Increase in Inventory 2,80,000
Increase in Trade Receivable (75,000)
(67,000) (1,42,000)
Cash From Operating Activities before Tax 1,38,000
Less :Tax Paid (30,000)
Cash From Operating Activities After tax 1,08,000

Working notes:

Machinery Account
Particulars AmountParticulars Amount
By Accumulated Depreciation 20,000
To Balance b/d
2,00,000By Loss on sale of Fixed Asset 18,000
To Bank A/c
1,60,000By Bank A/c 42,000
(Purchases)
By Balance c/d 2,80,000
155
 3,60,000 3,60,000

Accumulated Depreciation
Particulars AmountParticulars Amount
To Machinery A/c 20,000By balance b/d 80,000
To Balance c/d 1,00,000By Statement of Profit and loss account 40,000
1,20,000 1,20,000

26 6
1 Cash sale of goods Operating

2 Cash payment for acquire fixed assets Investing

3 Issuing shares at a premium Financing

4 Payment of dividend Financing

5 Interest received on Investment Investing

6 Interest Paid on debentures Financing

27 i. Transactions belong to operating activities are : 6
a. Cash received against Revenue from services rendered.
b. Cash sale of goods.
c. commission received.
d. Income Tax paid.
e. cash paid to creditors.
ii. Transactions belong to Investing activities are :
a. Cash proceeds from sale of fixed assets.
b. Receipts from Repayments of advances and loans made to third party.
c. Debentures purchased.
d. Purchase of patents.
e. Loan advanced.

28 Net cash from operations: 41,500.

156