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Question Paper
Financial Accounting (MB131) : July 2003
Part A : Basic Concepts (30 Points)
• This part consists of questions with serial number 1 - 30.
• Answer all questions.
• Each question carries one point.
• Maximum time for answering Part A is 30 Minutes.
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1. Which of the following is a real account?
Answer >
a. Salary account
b. Cash account
c. Outstanding rent account
d. Sundry creditors account
e. Purchases account.
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2. The balance as per bank statement of a company is Rs.12,500 (Dr.). The company deposited two
Answer >
cheques worth Rs.8,500, out of which one cheque for Rs.2,800 was dishonoured which was not
entered in the cash book. The credit balance as per cash book is
a. Rs.21,000
b. Rs.15,300
c. Rs.12,500
d. Rs. 9,700
e. Rs. 4,000.
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3. Which of the following is a current liability?
Answer >
a. Prepaid expenses
b. Trade-mark
c. Discount on issue of shares
d. Outstanding salaries
e. Fixed deposits.
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4. Purchase of fixed assets on credit is originally recorded in Answer >
a. Purchases book
b. Ledger
c. Cash book
d. Journal proper
e. Both (b) and (d) above.
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5. Which of the following concepts is not considered as basic principle of accounting? Answer >
a. Materiality concept
b. Cost concept
c. Consistency concept
d. Matching concept
e. Logical concept.
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6. In contract accounting, the percentage of completion method is an exception to the
Answer >
a. Money measurement principle
b. Going concern principle
c. Historical cost principle
d. Business entity principle
e. Revenue recognition principle.
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7. Consider the following data pertaining to M/s. Pradesh Co. for the year 2002-03:
Answer >
Cost of goods available for sale (Rs.) 1,00,000
Total sales (Rs.) 80,000
Opening stock of goods (Rs.) 20,000
Gross profit margin (%) 25
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10. During the year 2002-2003, a company paid Rs.1,20,000 as rent. If the outstanding rent as on
Answer >
March 31, 2002 and March 31, 2003 were Rs.24,000 and Rs.36,000 respectively, then the amount
of rent charged to profit and loss account during the year was
a. Rs.1,08,000
b. Rs.1,20,000
c. Rs.1,32,000
d. Rs.1,44,000
e. Rs.1,56,000.
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11. Which of the following represent(s) personal accounts in accounting parlance?
Answer >
a. Sundry creditors
b. Bank account
c. Outstanding wages
d. Prepaid insurance
e. All of the above.
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12. XL Ltd. paid wages of Rs.90,000 for construction of building. The journal entry for the transaction
is Answer >
a. First-in-First-out method
b. Last-in-First-out method
c. Weighted average cost method
d. Simple average cost method
e. Specific cost method.
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15. At the time of preparation of final accounts, bad debts recovered account will be transferred to
Answer >
a. Debtor’s account
b. Profit & loss account
c. Profit & loss adjustment account
d. Profit & loss appropriation account
e. Provision for discount on debtors account.
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16. The rate of interest payable on calls in advance is
Answer >
a. 10% p.a.
b. 9% p.a.
c. 8% p.a.
d. 7.5% p.a.
e. 6% p.a.
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17. The long term investments are accounted for in the balance sheet at
Answer >
a. Historical cost
b. Current market value
c. Net realizable value
d. Present value of future cash flows
e. Replacement cost.
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18. Which of the following appears under the head “Miscellaneous expenditure” on the assets side of a
balance sheet? Answer >
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21. According to section 78 of the Companies Act, the amount in the share premium account cannot
Answer >
be used for the purpose of
a. Rs.176
b. Rs.120
c. Rs. 56
d. Rs. 40
e. Rs. 14.
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27. A credit sale to Mr. Gupta for Rs.7,500 was recorded in purchases book as Rs.5,700 and was
Answer >
posted to the debit side of Mr. Gupta’s account as Rs.7,500. The effect of this mistake, in trail
balance is
END OF PART A
1. Mayur Ltd. has prepared the following trial balance as on March 31, 2003:
Debit Credit
Particulars Particulars
(Rs.) (Rs.)
Salaries 5,23,000 Share Capital 6,00,000
Discount allowed 12,000
Electricity expenses 42,000 Sundry creditors 1,00,000
Interest on loan 25,000 Loan (@ 12% p.a.) 2,50,000
Bills receivable 1,12,000 Bills payable 78,000
Cash on hand 8,000 Outstanding salaries 10,000
Cash at bank 20,000 Gross profit 7,75,000
Building 5,20,000 Discount received 10,000
Furniture & fixtures 2,80,000 Interest on investments 10,000
Plant & machinery 2,50,000 General reserve 2,50,000
Sundry debtors 1,40,000 Provision for doubtful debts 9,000
Telephone expenses 35,000
Investments (@ 12% p.a.) 1,00,000
Closing stock 25,000
20,92,000 20,92,000
The company has furnished the following additional information:
i. Provision for doubtful debts is to be made at the rate of 5% on sundry debtors. Sundry debtors
include Rs.6,000 which have become bad.
ii. Depreciation is to be provided as follows:
Plant & machinery 10%
Furniture & fixtures 5%
Building 10%
iii. Telephone bills amounting to Rs.2,000 remain unpaid.
iv. Incidental charges of Rs.200 charged by bank is not recorded in cash book
v. Sales include Rs.8,000 in respect of sale of an old furniture on April 01, 2002, the book value of the
furniture on April 01, 2002 was Rs.10,000.
You are required to prepare the profit and loss account for the year ended March 31, 2003 and the balance
sheet as on that date after considering the above information.
(13 points) < Answer >
2. On April 01, 1999, Bhavan Construction Company acquired Machine A for Rs.1,00,000 and Machine B for
Rs.1,20,000. On April 01, 2000, the company purchased Machine C for Rs.1,50,000. On April 01, 2001, Machine
A has become obsolete and a similar machine was purchased by exchanging Machine A and making a cash
payment of Rs.1,00,000. On April 01, 2002, Machine C purchased on April 01, 2000 was destroyed by fire and the
insurance company paid Rs.1,02,000 only. The company charges depreciation at the rate of 10% per annum on
written down value method.
You are required to show the Machinery account for the years 1999-2000 to 2002-2003.
(10 points) < Answer >
3. The following is the balance sheet of Sathya Steel Ltd. as on March 31, 2003:
20,00,000 20,00,000
Additional information:
On March 31, 2003 the company has revalued the assets as follows:
i. Goodwill Rs. 1,50,000
ii. Fixed Assets Rs.14,00,000
iii. Investments Rs. 4,00,000
You are required to calculate the value of each equity share of the company under intrinsic value method.
(5 points) < Answer >
4. On March 31, 2003, the bank column of cash book of Dolphin Ltd. showed a credit balance of Rs.14,370.
The following further information is available:
i. Cheques worth Rs.58,000 were deposited in the bank before March 27, 2003, but it appears
from the bank pass book that cheques worth Rs.49,000 only had been credited before March 31, 2003.
ii. A cheque of Rs.2,000 debited by the bank on March 2, 2003 was not issued by the company.
iii. Cheques for Rs.42,000 were issued during the month of March, 2003, out of which 2
cheques aggregating to Rs.7,650 were presented on April 3, 2003, the remaining have been paid in the
month of March itself.
iv. The cashier of the firm misappropriated a sum of Rs.3,500 by passing a fictitious entry as
cash deposited in bank on March 2, 2003.
v. The pass book showed that the bank had collected Rs.650 as interest on Government
securities on March 28, 2003.
vi. On March 30, 2003 the bank had charged interest of Rs.170 and bank charges of Rs.50.
There was no entry in the cash book for the charges and interest.
vii. As per standing instructions, an amount of Rs.2,500 was debited by the bank on March 15,
2003 for payment of insurance premium.
You are required to prepare the bank reconciliation statement as on March 31, 2003.
(11 points) < Answer >
5. Universe Ltd. invited applications for 5,000 equity shares of Rs.10 each at a premium of Rs.2 per share,
payable as under:
6. An agreed trial balance cannot be regarded as conclusive proof of the correctness of the books of account.
Explain the reasons for agreement of a trial balance despite the errors and omissions.
(6 points) < Answer >
7. The financial requirements of a company may be met by raising share capital or by going for public
borrowing in the nature of issue of debentures. Briefly explain how the shares are different from debentures.
(8 points) < Answer >
8. ‘An audited balance sheet is not free from flaws’. In this context, discuss the limitations of a balance sheet.
(6 points) < Answer >
END OF PART C
Suggested Answers
Financial Accounting (MB131) : July 2003
Part A : Basic Concepts
1. Answer : (b) <
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Reason : Real account represents assets like plant, machinery, cash etc. As on a particular date,
this account shows the worth of the assets.
Salary account and purchases account are nominal accounts. Sundry creditors account
is personal account and outstanding rent account is representative personal account.
2. Answer : (d) <
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Reason :
Particulars Rs.
Balance as per bank statement (overdraft) 12,500
Less: Cheque dishonored but not entered in the cash book 2,800
Balance as per cash book (overdraft) (credit) 9,700
3. Answer : (d) <
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Reason : Outstanding salaries are short term obligations expected to be retired during the short
period of time. So, it is a current liability. Fixed deposit is the long term obligation or long term liability.
Prepaid expenses, trade mark and discount on issue of shares are assets.
4. Answer : (d) <
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Reason : Purchase of fixed assets on credit is entered in journal proper and subsequently posted
into the ledger. Hence the correct answer is (d). It is not recorded in purchases book as only purchase of
goods will be recorded in purchases book. In cash book, only cash transactions will be recorded. As the
fixed assets were purchased on credit, this transaction will not be recorded in the cash book.
5. Answer : (e) <
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Reason : According to Generally Accepted Accounting Principles, materiality concept, cost
concept, consistency concept and matching concept are considered as basic principles of accounting.
Logical principle is not considered as basic principle of accounting.
6. Answer : (e) <
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Reason : In contract accounting, there is a reasonable certainty that the project would be
completed and the return consideration is realized. In fact, return consideration may begin as soon as the
work begins. So, revenue may be recognized at work-in-progress. This is the exception to the revenue
recognition principle. Hence the correct answer is (e). It is not an exception to money measurement
concept, going concern concept, historical cost concept and business entity concept.
7. Answer : (c) <
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Reason :
Particulars Rs.
Cost of goods available sale 1,00,000
Less: Cost of goods sold
Sales Rs.80,000
Less: Gross profit (25%) Rs.20,000 60,000
Closing stock of goods 40,000
closing stocks are valued at higher price. It will help to create more profit. Other inventory methods
stated in (b), (c), (d) and (e) do not result in higher profits during the period of rising prices.
15. Answer : (b) <
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Reason : Sometimes an amount written off as bad debts may be subsequently recovered and any
such recovery must be treated as a windfall and transferred to the profit and loss account as a gain The
journal entries passed are :
1. Cash account Dr
To Bad debts recovered account
2. Bad debts recovered account Dr
To Profit and loss account
(a) Debtor’s account is the personal account which had already been closed by way of writing it off
as bad debt during the accounting period in which the said amount was treated as non-recoverable.
(c) Profit and loss adjustment account is the account meant for affecting the necessary adjustments in
the event of detection of errors after finalization of the financial statements.
(d) Profit and loss appropriation account is the account which reflects the entries of appropriation/
allocation of profit.
(e) Provision for discount on debtors is a charge against revenue to meet a known liability (discount)
the amount of which cannot be determined with substantial accuracy.
Thus, the recovery of bad debts cannot be debited to any of the above accounts
16. Answer : (e) <
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Reason : The rate of interest payable on calls in advance is 6% per annum.
17. Answer : (a) <
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Reason : Long term investment is not accounted for in the balance sheet at current market value,
net realizable value, replacement cost or present value of future cash flows. It is done at historical cost.
Thus (a) is correct.
18. Answer : (d) <
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Reason : Discount on issue of shares appears under the head miscellaneous expenditure on the
asset side of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid
expenses and income tax paid in advance appear under current assets of the balance sheet. Directors’
remuneration will be entered in the debit side of profit and loss account. Hence (d) is correct.
19. Answer : (b) <
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Reason : Bills receivable is a part of fund and conversion of bill receivable into cash cannot be
considered as source of fund. The sale of an asset, issue of shares, borrowing from banks and operating
profits are sources of funds.
20. Answer : (e) <
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Reason :
Year Profit Weight Total (Profit x Weight) Rs.
(Rs.)
1998-1999 1,32,000 1 1,32,000
= x Rs.56 = Rs.14
27. Answer : (a) <
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Reason : An amount of Rs.7,500 ( i.e credit sale) was not recorded on credit side and Rs. 5,700
was wrongly recorded on debit side. Hence, the debit side will be more by Rs.13,200 (i.e 7,500 + 5,700)
Mr. Gupta’s account is correctly debited with Rs. 7,500 and hence will not affect the trial balance
28. Answer : (d) <
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Reason : Purchases account is a debit balance and purchase returns is a credit balance and the
total of purchase returns will be recorded to the credit side of the purchase returns account. Hence (d) is
the answer. It is not taken to debit side of purchases returns account. Hence (b) is not the answer. It is
not taken to purchases account. Hence (a) and (c) are not the answers. The creditors account will be
debited with the amount of purchase returns. Hence (e) is not the answer.
29. Answer : (b) <
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Reason : Average profit =
= = Rs.2,07,200
Average profit Rs.2,07,200
Less: Normal rate of return on capital employed
Rs.1,20,000
10% on Rs.12,00,000
Super profit Rs. 87,200
Part B : Problems
1. Mayur Ltd.
Profit & loss a/c for the year ended March 31, 2003
Dr.
Cr.
Particulars Rs. Particulars Rs.
To Salaries 5,23,000 By Gross profit 7,67,000
(Rs.7,75,000 – Rs.8,000)
To Discount allowed 12,000 By Discount received 10,000
To Electricity expenses 42,000 By Interest on investment
2.
Bhavan Construction Company
Machinery Account
Dr Cr.
Date Particulars Rs.Date Particulars Rs.
1.4.1999 To Bank : ( Machine A) 1,00,00031-3-2000 By Depreciation account 22,000
To Bank : (Machine B) 1,20,000 By Balance c/d 1,98,000
2,20,000 2,20,000
1-4-2000 To Balance b/d 1,98,00031-03-2001 By Depreciation 34,800
To Bank (Machine C) 1,50,000 By Balance c/d 3,13,200
3,48,000 3,48,000
1-4-2001 To Balance b/d 3,13,2001-4-2001 By Part exchange 81,000
To Bank (New Machine) 1,00,000 By Depreciation account
(Working 3) 41,320
To Part exchange 81,00031-03-2002 By Balance c/d 3,71,880
4,94,200 4,94,200
1-4-2002 To Balance c/d 3,71,8801-04-2002 By Bank – Insurance claim 1,02,000
By Profit and loss a/c
(Working 4) 19,500
Loss on machinery destroyed
31-03-2003 By Depreciation account 25,038
(Working 5)
By Balance c/d (Working 6) 2,25,342
3,71,880 3,71,880
Workings:
1. Depreciation of Machine A:
3.
Sathya Steel Ltd:
Value of shares
Under Intrinsic value method:
Rs. Rs.
Net Assets
Goodwill 1,50,000
Fixed assets 14,00,000
Investments 4,00,000
Current assets 3,70,000
23,20,000
Less Liabilities:
10% Debentures 2,00,000
Fixed deposits 1,00,000
Current liabilities & provisions 3,80,000
10% Preference shares 3,00,000 9,80,000
Funds available for equity shareholders 13,40,000
Intrinsic value of equity shares =
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4. Dolphin Ltd.
Bank Reconciliation Statement as on March 31, 2003.
Add:
iv. Amount misappropriated and wrongly shown as deposited at Bank 3,500
ii. Cheques wrongly debited in pass book. 2,000
vi. Bank overdraft interest charged only in bank pass book. 170
Bank charges debited in the bank pass book 50
i. Cheques deposited but not presented for payment 9,000
vii. Insurance premium directly debited by bank 2,500 17,220
31,590
Less :
iii. Cheques issued but not presented for payment 7,650
v. Interest on government securities directly credited in the bank pass 650 8,300
book
Workings:
Calculation of Profit on re-issue of 300 shares.
Amount forfeited on 300 shares = 300 × Rs.4 (excluding premium amount) Rs.1200
Lees: Amount applied for re-issue = 300 × Rs.2 Rs. 600
Profit on re-issue of shares Rs. 600
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tally.
g. Omission/mistake of extension and carry forward: When an item is omitted or wrong figure is
taken while carrying forward to the next pages trial balance will not tally
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7. Differences between Shares and Debentures:
a. Share is an ownership security. A shareholder is, to the extent of his holding, the owner of the
company.
A debenture is a creditorshift security which makes the debentureholder a creditor of the company.
b. Share can be issued at a discount subject to the specifications of section 79 of the Companies Act,
1956.
Debentures on the other hand do not have any such limitations and can be issued at a discount.
c. The return to a shareholder is in the nature of dividends which are subject to the company earning
profits during the relevant accounting period. Further, a company cannot be forced to pay dividends as the
directors may retain the divisible profits for potential investment opportunities.
The return to the debentureholder is in the form of interest payments which is a compulsory
obligation which will have to be honored even in the face of losses.
d. Shares convertible into debentures cannot be issued while debentures
(PCD - partly convertible debentures or FCD - fully convertible debentures) which can be
converted into shares at the option of the debentureholders can be issued.
e. In the event of dissolution of the company payment to the debentureholders takes precedence over
the amount payable to the shareholders.
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8. The following limitations in respect of the position statement i.e. the balance sheet are worth noting:
i. Though the balance sheet is claimed to be the statement of all assets and liabilities, still it does not
contain certain assets and liabilities.
Example: The Efficient Management force is a Human Asset available to the organization and so
far no efforts are made to show the human assets under the asset side of the Balance Sheet. Similarly
Dissatisfied labor force is a liability to the organization.
ii. An investor who wishes to analyze the balance sheet is more concerned with the present and
future whereas the balance sheet pertains to a point of time relating to past and therefore may not be quite
helpful.
iii. Personal judgment plays a great part in determining the figures for the balance sheet. Example:
Provision for depreciation, stock valuation, provision for bad debts are more based on the personal judgment
and are therefore not free from the bias.
iv. Even the audited balance sheets also cannot give a complete seal of accuracy. Deliberate
manipulations in the profits, current assets and closing stocks make the balance sheets unreliable.
v. The factors which are having vital bearing on the earnings of the organization such as changes in
the managerial personnel, cessation of agreements, loss of markets are not disclosed by the balance sheet.
vi. Financial statements are based on accounting policies which vary from enterprise to enterprise
both within the country and among the countries. The users of financial statements cannot understand them
clearly and have comparisons unless the significant accounting policies which have been adopted in preparing
the financial statements are disclosed very clearly.
vii. Balance sheet is prepared on a particular date and hence there is every possibility of `Window dressing’.
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