Question Paper

Financial Accounting - II (112) – July 2004

• • Answer all questions.
• • Marks are indicated against each question.

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1. On June 10, 2001, Santosh Ltd. has taken a bank loan on which interest at the rate of 8% per annum is Ans
payable on June 30 and December 31, every year. The loan is secured by a charge on the factory wer
building. The interest accrued and due as on March 31, 2004 was shown in the Balance Sheet of the >
company under the head
(a) Current liabilities (b) Secured loans
(c) Miscellaneous expenditure (d) Loans and advances
(e) Unsecured loans.
(1 mark)
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2. Which of the following statements is false? Ans
wer
(a) Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses >
(b) Capital profit realized in cash can be used for payment of dividend
(c) Reserves created by revaluation of fixed assets are not permitted to be capitalized
(d) Bonus issue cannot be made within 12 months of any right issue
(e) Dividend is payable on the calls paid in advance by shareholders.
(1 mark)
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3. Which of the following is false with regard to Economic Value Added (EVA)? Ans
wer
(a) The computation of EVA involves a complex procedure >
(b) EVA can be improved by downsizing profitable operations
(c) EVA is a residual income measure that subtracts the cost of capital from the operating profit
generated by a business
(d) EVA can be used for making day-to-day decisions as well as for strategic planning
(e) EVA is one variation of residual income with adjustments in the method of calculation.
(1 mark)
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4. If the proposed dividend appears in the balance sheet of subsidiary company, while preparing the Ans
Consolidated Balance Sheet, the share of minority shareholders should be wer
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(a) Shown under proposed dividend in the Consolidated Balance Sheet
(b) Credited to Investment account
(c) Credited to Consolidated Profit and Loss account
(d) Added to minority interest in the Consolidated Balance Sheet
(e) Credited to Goodwill account.
(1 mark)
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5. In which of the following situations, a holding company need not prepare the consolidated financial Ans
statements? wer
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I. Where the holding company is a subsidiary of another company
II. Where the control in the subsidiary company is intended to be temporary
III. Where the subsidiary company operates under severe long-term restrictions, which
significantly impair its ability to transfer funds to the parent.
(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (II) and (III) above (e) All (I), (II) and (III) above.
(1 mark)
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6. Which of the following is/are a limitation(s) of a Balance Sheet? Ans
wer
I. It does not contain certain assets and liabilities despite its claim to be the statement of all >
assets and liabilities
II. The factors, which have a vital bearing on the earnings of the organization, are not disclosed
III. Personal judgment plays a great part in determining the figures of the balance sheet.
(a) Only (I) above (b) Only (II) above (c) Only (III) above
(d) Both (II) and (III) above (e) All (I), (II) and (III) above.
(1 mark)
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7. According to the SEBI guidelines, the debenture redemption reserve to be created should be equivalent Ans
to at least wer
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(a) 10% of the debenture issue (b) 25% of the debenture issue
(c) 30% of the debenture issue (d) 50% of the debenture issue
(e) 75% of the debenture issue.
(1 mark)
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8. Which of the following should be deducted from the share capital to find out paid-up capital? Ans
wer
(a) Calls-in-advance (b) Calls-in-arrears (c) Share forfeiture >
(d) Discount on issue of shares (e) Share premium.
(1 mark)
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9. Which of the following methods of valuation of shares is/are known as intrinsic value method? Ans
wer
(a) Earning capacity method (b) Break-up value method >
(c) Fair value method (d) Asset backing method
(e) Both (b) and (d) above.
(1 mark)
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10. The maximum amount beyond which a company is not allowed to raise funds, by issue of shares is Ans
known as wer
>
(a) Issued capital (b) Reserve capital (c) Nominal capital
(d) Subscribed capital (e) Paid-up capital.
(1 mark)
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11. Dividends are usually paid on Ans
wer
(a) Authorized capital (b) Issued capital (c) Called-up capital >
(d) Paid-up capital (e) Reserve capital.
(1 mark)
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12. The document inviting offers from public to subscribe for the debentures or shares of a body corporate Ans
is a wer
>
(a) Share certificate (b) Debenture (c) Fixed deposit receipt
(d) Prospectus (e) Share Warrant.
(1 mark)
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13. The reduction in the value of fixed assets of subsidiary company as on the date of acquisition by Ans
holding company must be wer
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(a) Debited to capital reserve (b) Debited to goodwill
(c) Credited to capital reserve (d) Debited to profit and loss account
(e) Debited to investment account.
(1 mark)
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14. For valuation of an equity share under the yield method, information is required regarding Ans
wer
I. Expected rate or return II. Number of equity shares >
III. Normal rate of return IV. Face value of the share
V. Paid-up value of the share.
(a) Both (I) and (II) above (b) Both (III) and (IV) above
(c) (I), (III) and (V) above (d) (I), (III) and (IV) above
(e) (II), (III) and (IV) above.
(1 mark)
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15. When should the first auditor of the company be appointed by the Board of Directors? Ans
wer
(a) In the first Annual General Meeting of the company >
(b) Within one month from the date of registration of the company
(c) Within 3 months from the date of registration of the company
(d) Within 6 months from the date of registration of the company
(e) Within 12 months from the date of registration of the company.
(1 mark)
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16. To which account should the costs in chartering a company be debited? Ans
wer
(a) Share capital (b) General administrative expenses >
(c) Preliminary expenses (d) Profit and loss appropriation account
(e) Legal expenses.
(1 mark)
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17. According to the Companies Act, the underwriting commission should not exceed Ans
wer
(a) 5% of the nominal value of shares (b) 2.5% of the nominal value of shares >
(c) 5% of the issue price of shares (d) 2.5% of the issue price of shares
(e) 2% of the nominal value of shares.
(1 mark)
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18. Who among the following is not disqualified for appointment as auditor of a company? Ans
wer
(a) A body corporate (b) Managing Director of the company >
(c) Wife of the Managing Director of the company (d) A shareholder of the company
(e) An individual who is indebted to the company for a sum exceeding Rs.1,000.
(1 mark)
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19. According to AS 23, which of the following accounting methods is adopted in accounting of an Ans
Associate in the Consolidated Financial Statements? wer
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(a) Cost method (b) Equity method (c) Amortised cost method
(d) Super profit method (e) Moving average method.
(1 mark)
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20. In the Consolidated Balance Sheet of a Holding Company, the value of minority interest consists of the Ans
proportionate share of minority shareholders in the wer
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I. Nominal value of share capital of subsidiary company
II. Reserves of the holding company
III. Reserves and profits of the subsidiary company at the time of acquisition by the holding company
IV. Income of the holding company after its acquisition
V. Income of the subsidiary company after its acquisition by the holding company.

(a) Only (I) above (b) Both (I) and (II) above (c) Both (I) and (IV) above
(d) (I), (III) and (IV) above (e) (I), (III) and (V) above.
 (1 mark)
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21. Under which of the following circumstances, is a special resolution not required to appoint an auditor Ans
of a company? wer
>
(a) Where 27% of equity share capital is held by a State Government
(b) Where 30% of preference share capital is held by a public financial institution
(c) Where 49% of equity share capital is held by the Central Government
(d) Where 78% of debentures is held by a nationalized bank
(e) Both (b) and (d) above.
(1 mark)
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22. Underwriting commission will not be paid on the amount of shares taken by Ans
wer
(a) Promoters (b) Directors (c) Employees >
(d) Directors’ friends (e) All of the above.
(1 mark)
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23. According to Accounting Standard-18, an individual is considered to have a substantial interest in an Ans
enterprise, if that individual, directly or indirectly, has wer
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(a) 20% interest in the preference share capital of the enterprise
(b) 10% or more interest in the equity share capital of the enterprise
(c) 15% or more interest in the voting power of the enterprise
(d) 20% or more interest in the voting power of the enterprise
(e) 5% or more interest in the voting power of the enterprise.
(1 mark)
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24. Value added is measured as a difference between the Ans
wer
(a) Sales revenue and the cost of material bought >
(b) Sales revenue and the cost of services bought
(c) Pre tax profit and the depreciation
(d) Sales revenue and the cost of labor, depreciation and interest
(e) Sales revenue and the cost of material and services bought.
(1 mark)
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25. Capital employed is equal to Ans
wer
(a) Gross fixed assets + Current assets >
(b) Gross fixed assets – Depreciation + Current assets
(c) Gross fixed assets + Current assets – Current liabilities
(d) Gross fixed assets – Depreciation + Current assets – Current liabilities
(e) Current assets – Current liabilities.
(1 mark)
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26. As per schedule VI of the Companies Act, 1956, which of the following is not shown in the Balance Ans
Sheet of a company under the head ‘Fixed Assets’? wer
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(a) Lease hold property (b) Development of property (c) Railway sidings
(d) Designs (e) Unadjusted development expenditure.
(1 mark)
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27. Which of the following statements is/are false with regard to maintenance of books of accounts by a Ans
company? wer
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(a) The books of account can be either on cash system or accrual system of accounting
(b) Companies have to compulsorily follow double entry system of accounting
(c) A set of cost accounts must be maintained in addition to the financial accounts by the companies
 that are engaged in manufacturing, processing or mining activities
(d) The books of accounts should be preserved for a period of eight years preceding the current year
(e) The books of accounts shall be open to inspection by any director during business hours.
(1 mark)
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28. The auditor of a company gives a report that the financial statements of the company reflect a true and Ans
fair view subject to certain reservations. Such a report/opinion is known as wer
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(a) Clean report (b) Qualified opinion (c) Unqualified opinion
(d) Provisional report subject to issue of final report (e) Both (a) and (c) above.
(1 mark)
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29. At the time of forfeiture of shares which were originally issued at a discount, the accounting entry Ans
involves wer
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I. A debit to Share capital account with the called-up value of shares forfeited
II. A credit to Share forfeiture account with the amount received on forfeited shares
III. A credit to Discount on issue of shares with the amount of discount allowed on forfeited shares
IV. A credit to Calls-in-arrears with the amount due but not paid on forfeited shares
V. A debit to Share capital account with the paid-up value of shares.
(a) Both (I) and (IV) above (b) Both (IV) and (V) above
(c) Both (I) and (II) above (d) (I), (II) and (III) above
(e) (I), (II), (III) and (IV) above.
(1 mark)
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30. As per Schedule VI of the Companies Act, 1956, under which of the following heads is ‘Premium on Ans
issue of debentures’ shown in the balance sheet of a company? wer
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(a) Miscellaneous expenditure (b) Debentures (c) Reserves and surplus
(d) Current liabilities and provisions (e) Current Assets.
(1 mark)
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31. The profit or loss on cancellation of own debentures is calculated at the time of Ans
wer
(a) Issue of debentures (b) Creation of sinking fund for redemption >
(c) Purchase of own debentures (d) Cancellation of own debentures
(e) Payment of interest in subsequent interval.
(1 mark)
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32. Declared dividend should be classified in the Balance Sheet as a Ans
wer
(a) Provision (b) Current liability (c) Reserve >
(d) Current asset (e) Miscellaneous expenditure.
(1 mark)
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33. Which of the following costs is not categorized as Research and Development Costs? Ans
wer
(a) Cost of materials consumed in the process of research and development >
(b) Amortization of patents and licenses related to research and development
(c) Depreciation of premises that is used for carrying the work of research
(d) Salaries and wages paid to personnel engaged in the research and development activities
(e) Promotional expenses on market research for existing products.
(1 mark)
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34. The excess price received over the par value of shares should be credited to Ans
wer
(a) Calls-in-advance account (b) Share capital account >
(c) Reserve capital account (d) Share premium account
 (e) Share allotment account.
(1 mark)
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35. The interest on calls in advance is paid for the period from the Ans
wer
(a) Date of receipt of application money to the date of appropriation >
(b) Date of receipt of allotment money to the date of appropriation
(c) Date of receipt of advance to the date of appropriation
(d) Date of appropriation to the date of dividend payment
(e) Date of appropriation to the date of receipt of final call.
(1 mark)
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36. The profits earned by a subsidiary company before acquisition by a holding company is known as Ans
wer
(a) Revenue profit (b) Capital profit (c) Super profit >
(d) Average profit (e) Future maintainable profit.
(1 mark)
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37. The cum-interest/cum-dividend quotation implies Ans
wer
(a) The purchaser pays a higher price than the normal price >
(b) The right of receiving accrued interest/dividend is retained by the seller
(c) The seller charges a higher price
(d) The right of receiving accrued interest/dividend is passed on to the purchaser
(e) (a), (c) and (d) above.
(1 mark)
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38. If forfeited shares (which were originally issued at discount) are reissued at a premium, the amount of Ans
such premium will be credited to wer
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(a) Share forfeiture account (b) Share premium account
(c) Capital reserve account (d) Discount on issue of shares account
(e) Share capital account.
(1 mark)
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39. Which of the following statements is true? Ans
wer
(a) Brokerage can be paid in respect of promoters’ quota >
(b) Brokerage can be paid when applications are made by institutions/ banks against their
underwriting commitments
(c) The mailing cost and out-of-pocket expenses for canvassing public issues, etc., incurred by a
broker will be reimbursed by the company
(d) Brokerage must be paid only to a person carrying on the business of broker but not to a private
person
(e) Brokerage need not be disclosed in the prospectus or statement in lieu of prospectus.
(1 mark)
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40. Tax deducted at source on the payments made by a company, appears in the Balance Sheet on the Ans
(a) Liabilities side under current liabilities wer
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(b) Liabilities side under provisions
(c) Assets side under current assets
(d) Assets side under loans and advances
(e) Assets side under miscellaneous expenditure.
(1 mark)
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41. On April 01, 2004, the balance in debenture redemption fund account of Navya Ltd. was Rs.40,000. This An
fund was invested in the following securities: sw
er
 Rs.20,000, 12% Government loan Rs.17,000 >
Rs.13,000, 10% Debentures Rs.11,000
100 Equity shares of Rs.100 each Rs.12,000
On June 01, 2004, the Government loan was sold at par, 10% debentures were sold at 95% and the equity
shares were sold at Rs.150 per share. The amount transferred from debenture redemption fund investment
account to debenture redemption fund account of the company was
(a) Rs.7,350 (b) Rs.4,350 (c) Rs.5,450 (d) Rs.40,000 (e) Rs.10,350.
(2 marks)
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•The profits of Gayatri Company for the past 5 years are as under: An
sw
Year Rs. er
1999-2000 8,500 >
2000-2001 27,000
2001-2002 40,500
2002-2003 46,000
2003-2004 64,250
On October 01, 2001, repair expenses of
Rs.2,000 of machinery were capitalized. Gayatri Company provides depreciation at the rate of 10% on
straight-line method. The profit for the year 2003-2004 includes the profit on sale of plant of Rs.2,250.
The weighted average profit of Gayatri Company is
(a) Rs.44,800 (b) Rs.44,940 (c) Rs.44,933 (d) Rs.45,200 (e) Rs.45,950.
(2 marks)
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43. Divya Ltd. issued 5,000 equity shares of Rs.20 each at a premium of 20% payable Rs.8 on application An
(including premium), Rs.10 on allotment and the balance on first and final call. The company received sw
applications for 7,500 shares and allotment was made pro-rata. Sujana, to whom 1,500 shares were er
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allotted, failed to pay the amount due on allotment. All her shares were forfeited after the call was made.
The forfeited shares were reissued to Nandita at par. Assuming that no other bank transactions took place,
the bank balance of the company after affecting the above transactions is
(a) Rs.1,14,000 (b) Rs.1,32,000 (c) Rs.1,20,000 (d) Rs.1,00,000 (e) Rs.1,26,000.
(2 marks)
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44. Kavya Ltd. issued 7,500 shares of Rs.100 each at par payable Rs.20 on application, Rs.40 on allotment An
and Rs.40 on call. Applications were received for 7,500 shares and all applicants were allotted in full. sw
Raman, who was allotted 500 shares, paid Rs.25,000 at the time of allotment indicating that the excess er
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amount to be adjusted against call money. Subsequently, when the directors made the call, Raman paid
the balance amount. The entry to record the receipt of balance amount and adjustment of calls-in-advance
is
(a) Bank a/c. Dr. Rs. 5,000
Calls-in-Advance a/c. Dr. Rs.15,000
To Share first and final call a/c. Rs.20,000
(b) Share first and final call a/c. Dr. Rs.20,000
To Bank a/c. Rs.15,000
To Calls-in-Advance a/c. Rs. 5,000
(c) Bank a/c. Dr. Rs. 5,000
To Calls-in-Advance a/c. Rs. 5,000

(d) Bank a/c. Dr. Rs.15,000

Calls-in-Advance a/c. Dr. Rs. 5,000
To Share first and final call a/c. Rs.20,000
(e) Share first and final call a/c. Dr. Rs.15,000
Bank a/c. Dr. Rs. 5,000
 To Calls-in-Advance a/c. Rs.20,000.
(2 marks)
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45. The Balance Sheet of Smirna Ltd. as on March 31, 2004 is as under: An
sw
Liabilities Rs. Assets Rs. er
>
Share capital: Land and building 4,00,000
Equity shares of Rs.100 each 5,00,000 Plant and machinery 3,00,000
12% Preference shares of Rs.10 each 3,00,000 Furniture and fixtures 2,50,000
Reserves and surplus: Investments 2,25,000
General reserve 1,50,000 Sundry debtors 1,00,000
Profit and loss account 2,50,000 Inventories 1,50,000
18% Debentures 2,00,000 Cash 50,000
Sundry creditors 50,000
Bank overdraft 25,000
14,75,000 14,75,000
The 12% preference shares are redeemable at a premium of 10% during the month of July 2004. The
company wishes to maintain the cash balance at Rs.25,000. For the purpose of redemption of preference
shares, it proposed to sell the investments for Rs.2,00,000. The company proposes to issue sufficient
number of equity shares of Rs.100 each at a premium of 5% to raise required cash resources. The number
of equity shares to be issued is
(a) 1,500 (b) 1,000 (c) 500 (d) 2,000 (e) 750.
(2 marks)
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46. Twin Stars Ltd. offered 6,000 shares of Rs.100 each at a premium of 50%. 4,800 shares were An
underwritten by Alexander. The number of shares subscribed by the public was 5,400 out of which the sw
marked applications were for 3,600 shares. The liability of Alexander is for er
>
(a) 600 shares (b) 1,200 shares (c) 480 shares (d) 400 shares (e) Nil shares.
(1 mark)
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47. The balance of Profit and Loss account of Sneha Ltd. as on March 31, 2004 and as on April 01, 2003 was An
Rs.1,60,000 and Rs.70,000 respectively. On July 01, 2003, Mithra Ltd. acquired 80% of the shares of sw
Sneha Ltd. During the year 2003-2004, an amount of Rs.30,000 was declared as dividend out of the er
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profits of the year 2002-2003. Assuming that the profit is accrued evenly throughout the year, the amount
considered as capital profit while preparing the Consolidated Balance Sheet as on March 31, 2004 was
(a) Rs.46,000 (b) Rs.92,500 (c) Rs.70,000 (d) Rs.62,500 (e) Rs.1,15,000.
(2 marks)
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48. Dheeraj operates a tailoring shop in a hired premises at a rent of Rs.10,500 per month. The owner of the An
premises, who has recently completed her fashion-designing course, wishes to purchase the tailoring sw
business of Dheeraj. The details of the business of Dheeraj are as under: er
>
• • The profit for the year 2003-2004 is Rs.2,60,000
• • The capital employed by Dheeraj is Rs.21,50,000.
• • The value of the premises is Rs.4,50,000.
If the normal return on capital employed is 12%, the super profit is
(a) Rs. 2,16,500 (b) Rs. 74,000 (c) Rs.1,90,000 (d) Rs.3,32,000 (e) Rs.1,28,000.
(3 marks)
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49. Consider the following Balance Sheet of Kanwa Ltd. as on March 31, 2004: An
sw
Liabilities Rs. Assets Rs. er
Share capital 6,00,000 Land and building 2,60,000 >
Capital reserve 1,90,000 Plant and machinery 3,45,000
Profit and loss account 80,000 Non-trading investments 1,80,000
Sundry creditors 50,000 Sundry debtors 65,000
Inventory 50,000
Cash and bank 10,000
Preliminary expenses 10,000
9,20,000 9,20,000 The
market values of assets are as under:
Land and building – Rs.3,20,000
Plant and machinery – Rs.4,00,000
Non-trading investments – Rs.1,50,000
Sundry debtors includes Rs.5,000 due from Chitra who has become insolvent. The capital employed of
the company, for the purpose of valuation of goodwill is
(a) Rs.8,90,000 (b) Rs.7,90,000 (c) Rs.9,10,000 (d) Rs.8,70,000 (e) Rs.9,40,000.
(2 marks)
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50. During the year 2003-2004, Universe Ltd. reported a profit of Rs.4,20,000 after paying tax at the rate of An
50%. This profit includes an income of Rs.30,000 being a claim lodged in the month of January 2003 for sw
which no entry was passed in the year 2002-2003. The company expects to introduce a new product in er
>
the year 2004-2005. The introduction of the new product leads to an increase of fixed expenses by
Rs.50,000.
The future maintainable post-tax profits of the company are
(a) Rs.3,40,000 (b) Rs.7,60,000 (c) Rs.1,85,000 (d) Rs.3,80,000 (e) Rs.3,95,000.
(2 marks)
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51. Genial Ltd. issued 4,000, 12% debentures of Rs.100 each at a premium of 10%, which are redeemable An
after 10 years at a premium of 20%. The amount of loss on redemption of debentures to be written off sw
every year is er
>
(a) Rs.80,000 (b) Rs.40,000 (c) Rs.10,000 (d) Rs. 8,000 (e) Rs. 4,000.
(2 marks)
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52. On April 01, 2004, the balance of 12% Debentures of Rs.100 each of Venus Ltd. was Rs.4,00,000. The An
company reserves the right to redeem the debentures in any year by purchase in the open market. Interest sw
on debentures is payable on September 30 and March 31, every year. On June 1, 2004, the company er
>
purchased 1,000 of its 12% Debentures as investment at Rs.99 cum-interest. On July 01, 2004, it
purchased another 1,000 of its debentures at Rs.98 ex-interest. The company cancelled 2,000 own
debentures on July 15, 2004. The profit/loss on cancellation of own debentures is
(a) Rs. 1,000 (Loss) (b) Rs. 5,000 (Profit) (c) Rs. 3,000 (Profit)
(d) Rs. 3,000 (Loss) (e) No Profit/No Loss.
(2 marks)
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53. Consider the following data pertaining to three underwriters - Sudhir, Sundar and Suhas: An
sw
Particulars Sudhir Sundar Suhas er
>
Shares underwritten 2,000 4,000 6,000
Marked applications 1,500 2,000 2,750 If total applications received
 are for 11,200 shares, the final liability of Sundar is
(a) 350 shares (b) 220 shares (c) 4,000 shares (d) 2,000 shares (e) Nil shares.
(2 marks)
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54. On July 01, 2003, VIBGYR Ltd. acquired 60% shares of Indigo Ltd. for Rs.8,00,000. The share capital of An
Indigo Ltd. consists of 10,000 shares of Rs.100 each. On April 01, 2003, the Profit and loss account and sw
General Reserve showed balances of Rs.50,000 (Dr.) and Rs.2,00,000 respectively. Their balances as on er
>
March 31, 2004 are Rs.1,90,000 (Cr.) and Rs.2,25,000 respectively. The amount of goodwill / capital
reserve shown in the Consolidated Balance Sheet as on March 31, 2004 was
(a) Rs.1,25,000 (Capital reserve) (b) Rs. 70,250 (Goodwill)
(c) Rs. 50,000 (Goodwill) (d) Rs. 15,000 (Goodwill)
(e) Rs. 65,000 (Goodwill).
(2 marks)
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55. Zeal Ltd. forfeited 1,000 shares of Rs.10 each, which were issued at par, for non-payment of first call of An
Rs.2 and final call of Rs.3. Of the forfeited shares, 800 shares were re-issued to Ramya at a discount of sw
30%. The journal entry to record the re-issue is er
>
Rs. Rs.
(a) Share capital a/c. Dr.
8,000
Dr.
To Bank a/c. 5,600
To Share forfeiture a/c. 2,400
(b) Bank a/c. Dr.
5,600
Dr.
Share forfeiture a/c.
2,400
Dr.
To Share capital a/c. 8,000
(c) Bank a/c. Dr.
5,600
Dr.
Discount on issue of shares a/c. Dr. 2,400
To Share capital account. 8,000
(d) Bank a/c. Dr.
7,000
Dr.
Discount on issue of shares a/c. Dr.
3,000
To Share capital a/c. 10,000
(e) Bank a/c. Dr.
8,000
Dr.
To Share forfeiture a/c.
2,400
To Share capital a/c. 5,600. (2 marks)
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56. Consider the following data pertaining to a company: An
sw
Average capital employed – Rs.3,25,000 er
Closing capital employed – Rs.4,50,000 >
The amount of capital employed at the beginning of the year was
(a) Rs.3,87,500 (b) Rs.3,25,000 (c) Rs.4,00,000 (d) Rs.2,00,000 (e) Rs.1,25,000.
(1 mark)
 <
57. ESS Ltd. issued 1,000, 12% debentures at the rate of Rs.100 each during the year 1999-2000. Interest on An
debentures is payable half yearly on September 30 and March 31 every year. The company has power to sw
purchase its own 12% debentures in the open market for cancellation. The following purchases were er
>
made during the year 2002-2003:
On June 01, 2004 – 400 of its own 12% debentures at the rate of Rs.99 ex-interest.
On July 01, 2004 – 300 of its own 12% debentures at the rate of Rs.105 cum- interest.
The total amount debited to own debenture investment account was
(a) Rs.70,000 (b) Rs.70,200 (c) Rs.71,100 (d) Rs.70,600 (e) Rs.71,500.
(2 marks)
Questions 58 and 59 are based on the following information:
The Authorized Share Capital of Mithra Ltd. is Rs.20,00,000, which is divided into 1,00,000 Equity
Shares of Rs.10 each and 10,000, 12% Preference Shares of Rs.100 each. Out of 1,00,000 equity shares,
70,000 shares have been subscribed and called-up and paid-up to the extent of Rs.8 per share.
The company has the following balances as on March 31, 2004:

Profit & Loss a/c. (Credit) Rs.1,60,000

General reserve Rs.1,80,000

The company has decided in a general meeting to
capitalize part of the above reserves for the following purposes:
• • To make partly paid equity shares into fully paid shares.
• • To issue one bonus share for every ten equity shares held.
• • To utilize general reserve to the fullest extent and balance (if any) from profit and loss
account.
<
58. The amount to be transferred to Bonus to Shareholders account to effect the above transactions is An
sw
(a) Rs.70,000 (b) Rs.1,00,000 (c) Rs.2,10,000 (d) Rs.3,40,000 (e) er
Rs.2,40,000. >
(2 marks)
<
59. The journal entry passed to transfer the amount to Bonus to shareholders account is An
sw
er
>
 Rs. Rs.
(a) General Reserve a/c. Dr. Dr.
1,80,000
Dr.
Profit and Loss a/c.
30,000
Dr.
To Bonus to Shareholders a/c. 2,10,000
(b) General Reserve a/c. Dr.
Dr. 1,80,000
Dr.
Profit and Loss a/c. Dr.
60,000
Dr.
To Bonus to Shareholders a/c. 2,40,000
(c) General Reserve a/c. Dr.
Dr. 1,00,000
Dr.
To Bonus to Shareholders a/c. 1,00,000
(d) Bonus to Shareholders a/c. Dr.
Dr.
70,000
Dr.
To Bank/Cash a/c. 70,000
(e) General Reserve a/c. Dr.
1,80,000
Dr.
Profit and Loss a/c. Dr.
1,60,000
To Bonus to Shareholders a/c. 3,40,000.(2 marks)
<
60. Wise Ltd., a listed company, proposed to issue 1,00,000 equity shares of Rs.10 each at par by way of An
private placement. The maximum amount of brokerage that can be paid by the company is sw
er
(a) Rs.5,000 (b) Rs.10,000 (c) Rs.50,000 (d) Rs.25,000 (e) No brokerage can be paid. >
(1 mark)
<
61. Consider the following data pertaining to Bossom Friends Ltd. An
sw
Authorized share capital Rs. 2,00,000 er
Issued, called-up and paid -up capital Rs. 1,20,000 >
Calls in advance Rs. 8,000
Securities Premium Rs. 12,000
Profit for the current year Rs. 22,560 The directors of the company
proposed a dividend of 12%. The amount debited to Profit and Loss Appropriation account on account of
proposed dividend is
(a) Rs.2,707 (b) Rs.24,000 (c) Rs.15,360 (d) Rs.14,400 (e) Rs.15,840.
(1 mark)
<
62. Fair Fares Ltd. issued 1,000 12% debentures of Rs.100 each at a premium of 10%, redeemable at a An
premium of 10%. The journal entry to record the issue of debentures is sw
er
>
 Rs. Rs.
(a) Bank a/c. Dr. 1,10,000
Discount on issue of Debentures a/c. Dr. 10,000
To 12% Debentures a/c. 1,20,000
(b) Bank a/c. Dr. 1,10,000
Loss on redemption of Debentures a/c. Dr. 10,000
To 12% Debentures a/c. 1,00,000
To Premium on redemption of Debentures a/c. 10,000
To Debenture premium a/c. 10,000
(c) Bank a/c. Dr. 1,00,000
To 12% Debentures a/c. 1,00,000
(d) Bank a/c. Dr. 1,10,000
Loss on issue of Debentures a/c. Dr. 10,000
To 12% Debentures a/c. 1,10,000
To Premium on redemption of Debentures a/c 10,000
(e) 12% Debentures a/c. Dr. 1,00,000
Loss on issue of Debentures a/c. Dr. 10,000
To Bank a/c. 1,10,000.
(2
marks)
<
63. Sunbeams Ltd. issued 20,000 equity shares of Rs.100 each at a premium of 10%, payable: An
sw
On application Rs.20 er
On allotment Rs.40 (including premium) >
On first call Rs.30
On final call Rs.20 Mr. Amarnath, to whom 500 shares were
allotted, failed to pay the first call money and his shares were forfeited before the final call is made. The
journal entry to record the forfeiture by the company is
Rs. Rs.
(a) Share capital a/c. Dr. 40,000
Share premium a/c. Dr. 10,000
To Share first call a/c. 15,000
To Share forfeiture a/c. 35,000
(b) Share capital a/c. Dr. 50,000
Share premium a/c. Dr. 10,000
To Share first call a/c. 15,000
To Share final call a/c. 10,000
To Share forfeiture a/c. 35,000
(c) Share capital a/c. Dr. 40,000
To Share first call a/c. 15,000
To Share forfeiture a/c. 25,000
(d) Share capital a/c. Dr. 50,000
To Share first call a/c. 15,000
To Share forfeiture a/c. 35,000
(e) Share capital a/c. Dr. 50,000
To Share premium a/c. 10,000
To Share first call a/c. 15,000
To Share forfeiture a/c. 25,000 (2 marks)
 <
64. Consider the following data pertaining to Moon Light Ltd. as on March 31, 2004: An
sw
Per share er
Particulars Face value Paid-up value >
Rs. Rs.
Share Capital:
10,000 equity shares 100 100
5,000 equity shares 100 80
5,000 equity shares 100 70 If net assets of the
company are Rs.30,50,000, the value per share of Rs.80 paid-up share is
(a) Rs.120 (b) Rs.145 (c) Rs.110 (d) Rs.85 (e) Rs.165.
(2 marks)
<
65. On July 01, 2003, Gold Light Ltd. acquired 7,500 equity shares of Fair Products Ltd. for a consideration An
of Rs.9,00,000. The share capital of Fair Products Ltd. consists of 10,000 equity shares of Rs.100 each. sw
er
The balances of General reserve and Profit and loss account of Fair Products Ltd. are as under: >

As on July 01, 2003 As on March 31, 2004

Rs. Rs.
General reserve 1,40,000 1,70,000
Profit and loss account 1,20,000 1,55,000 The
amount of minority interest shown in the Consolidated Balance Sheet as on March 31, 2004 is
(a) Rs.4,20,000 (b) Rs.3,97,500 (c) Rs.2,66,250 (d) Rs.3,15,000 (e)
Rs.3,31,250.
(2 marks)
<
66. The directors of Prosperous Ltd. proposed a dividend of 14% on March 31, 2004. Consider the following An
data pertaining to the Company as on March 31, 2004. sw
er
The Called-up and paid-up Capital Rs. 8,00,000 >
General Reserve Rs. 2,20,000
Profit for the year 2003-04 Rs. 1,28,600
The minimum amount of current profits to be transferred by the company to reserves is
(a) Rs.96,000 (b) Rs.12,860 (c) Rs.9,645 (d) Rs.6,430 (e) Rs.30,800.
(2 marks)
<
67. Consider the following balance sheet of Radha Ltd. as on March 31, 2004. An
sw
Liabilities Rs. Assets Rs. er
Share capital: Land and building 80,000 >
Equity shares of Rs.10 each fully paid 2,00,000 Plant and machinery 95,000
18% Preference shares of Rs.10 each 50,000 Furniture and fixtures 45,000
Reserves and surplus: Investments 33,000
General reserve 20,000 Sundry debtors 35,000
Profit and loss account 16,000 Inventories 24,000
18% Debentures 30,000 Cash 18,000
Sundry creditors 16,000 Preliminary expenses 12,000
Bank overdraft 10,000
3,42,000 3,42,000 The
intrinsic value of equity share of the company is
(a) Rs.9.50 (b) Rs.16.30 (c) Rs.10.80 (d) Rs.14.30 (e) Rs.11.20.
 (2 marks)
<
68. The nominal capital of Buzy Bee Ltd. is Rs.10,00,000 divided into shares of Rs.10 each. The company An
offers two shares for every three shares held by its existing shareholders. If the rights issue price is Rs.30 sw
per share and the market value at the time of rights issue is Rs.45 per share, the value of right is er
>
(a) Rs.8 (b) Rs.30 (c) Rs.10 (d) Rs.45 (e) Rs.6.
(1 mark)
<
69. The following are the Balance Sheets of S Ltd. and J Ltd. as on March 31, 2004: An
sw
S Ltd. J Ltd. S Ltd. J Ltd. er
Liabilities Assets >
Rs. Rs. Rs. Rs.
Share capital 12,00,000 4,00,000
Land and building 2,50,000 1,50,000
Profit and loss Plant and machinery 3,10,000 1,20,000
account 2,75,000 1,15,000 Furniture and fittings 1,50,000 1,25,000
Sundry creditors 80,000 15,000 Investments in J Ltd. 4,00,000 –
Bills payable 20,000 10,000 Sundry debtors 1,25,000 60,000
Short-term loan 25,000 - Bills receivable 85,000 30,000
Closing stock 1,45,000 25,000
Cash on hand 60,000 14,000
Cash at bank 75,000 16,000
16,00,000 5,40,000 16,00,000 5,40,000 S
Ltd. acquired 60% shares of J Ltd. on March 31, 2004. The total of Consolidated Balance Sheet of S Ltd.
as on March 31,2004 is

(a) Rs.18,31,000 (b) Rs.17,40,000 (c) Rs.16,25,000 (d) Rs.20,65,000 (e) Rs.19,45,000.
(3 marks)
<
70. Health Ltd. acquired 55% shares of Wealth Ltd. on February 01, 2003. Health Ltd. sells goods at cost An
plus 20%. During the year 2003-04, it supplied goods worth Rs.75,000 to Wealth Ltd., out of which, 60% sw
are still in stock of Wealth Ltd. as on March 31, 2004. The unrealized profit on stock to be adjusted while er
>
preparing the Consolidated Balance Sheet as on March 31, 2004 is
(a) Rs.4,950 (b) Rs.4,125 (c) Rs.9,900 (d) Rs.10,800 (e) Rs.6,000.
(1 mark)
<
71. The annual profits of a company for the past three years were Rs.95,000, Rs.1,10,000 and Rs.1,16,000. An
The capital employed is Rs.9,50,000 and the normal rate of return is 10%. The value of goodwill of the sw
company on the basis of 4 years’ purchase of super profits is er
>
(a) Rs.95,200 (b) Rs.24,000 (c) Rs.12,000 (d) Rs.95,000 (e) Rs.48,000.
(1 mark)
<
72. The following are the details pertaining to the operations of Loknath Ltd. An
sw
March 31, 2002 March 31, 2003 March 31, 2004 er
Particulars
Rs. Rs. Rs. >
Sales 50,00,000 65,00,000 78,00,000
Other expenses 26,00,000 31,00,000 45,00,000
Interest on debentures 4,80,000 4,80,000 4,80,000
Assuming the tax rate of 40%, the value of goodwill on the basis of 4 years’ purchase of average post-tax
profits is
(a) Rs.61,28,000 (b) Rs.45,96,000 (c) Rs.25,53,300 (d) Rs.80,48,000 (e) Rs.30,64,000.
(2 marks)
<
73. A company forfeited 2,000 shares of Rs.10 each (which were issued at par) held by Mr. John for non- An
 sw
payment of allotment money of Rs.4 per share. The called-up value per share was Rs.9. On forfeiture, the er
amount debited to share capital is >

(a) Rs.10,000 (b) Rs.8,000 (c) Rs.2,000 (d) Rs.18,000 (e) Rs.20,000.
(1 mark)

END OF QUESTION PAPER

Suggested Answers
Financial Accounting - II (112) - July 2004
1. Answer : (b) <
TO
Reason : Schedule VI of the Companies Act, 1956 clearly specifies that the interest accrued on secured loans P
but not paid should be shown under the head ‘Secured Loans’. >

2. Answer : (e) <

TO
Reason :Dividend is not payable on the calls in advance paid by the shareholders. It is P
payable on the outstanding balance of called up shares minus calls in arrear amount. >

Capital redemption reserve cannot be used for writing off miscellaneous expenses
and losses. Capital profit realized in cash can be used for payment of dividend.
Reserves created by revaluation of fixed assets are not permitted to be capitalized.
Bonus issue cannot be made within 12 months of any right issue. Hence, (e) is the
answer.
3. <
Answer : (b) TO
Reason :EVA can be improved by downsizing non-profitable operations, units or by selling P
>
off sub-standard assets. Hence (b) is false. The computation of EVA involves a
complex procedure. Stern and Stewart suggested 175 different assumptions and
adjustments on the basic measure. EVA is a residual income measure that subtracts
the cost of capital from the operating profit generated by a business. In other words,
EVA measures whether the operating profit is enough compated to the total cost of
capital. EVA is simply after-tax operating profit minus the total annual cost of
capital. EVA is one variation if residual income with adjustments in the method of
calculation. Unlike the traditional measure of accounting profit where only part of
the cost of capital (cost of debt) is deducted, EVA requires deduction of full cost of
capital (Cost of debt as well as cost of equity). EVA can be used for making day-to-
day decisions as well as for strategic planning. For this purpose, EVA points have to
be identified. An EVA point is one which has revenue, expenditure and capitl issue
attached to it. EVA destroyers for each EVA point are identified and steps are taken to
improve them. EVA analysis is made for each and every EVA point for decision-
making. Thus (a), (c), (d) and (e) are true.
4. Answer : (a) <
TO
Reason :If the proposed dividend appears in the balance sheet of subsidiary company, while P
preparing the Consolidated Balance Sheet, the amount belonging to minority >
shareholders should be shown under proposed dividend in the Consolidated Balance
Sheet. Hence the answer is (a).
5. Answer : (e) <
TO
 Reason :Consolidated financial statements need not be prepared by a holding company which P
>
is a subsidiary of another holding company. A subsidiary company is excluded from
consolidation if the control is intended to be temporary because the subsidiary is
acquired and held exclusively with a view to its subsequent disposal in the near
future or if the subsidiary company operates under severe long-term restrictions,
which significantly impair its ability to transfer funds to the parent. Hence the answer
is (e).
6. Answer : <
(e) TO
Reason :Though the balance sheet is claimed to be the statement of all assets and liabilities, P
>
still it does not contain certain assets and liabilities. For example, the efficient
management force is a human asset available to the organization. Though efforts are
being made to quantify and present the human resources, most of the balance sheets
do not present the same. Also dissatisfied labor force is a liability to the organization.
The factors, which have a vital bearing on the earnings of the organization such as
changes in the managerial personnel, cessation of agreements, loss of markets, are
not disclosed. 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 is therefore not free from
bias. Hence the answer is (e).
7. Answer : (d) <
TO
Reason :According to SEBI guidelines, a debenture issue having a maturity of more than 18 P
months necessitates the creation of a special reserve known as debenture redemption >

reserve. Such debenture redemption reserve should be equivalent to at least 50% of

the amount of debenture issue prior to the commencement of the redemption.
8. Answer : (b) <
TO
Reason :Called up capital is the amount on the shares which is actually demanded by the P
company to be paid. However, there may be some shareholders who may make >

default in the payment. The money due from them is called calls-in-arrears. This
amount should be deducted from the called up capital to arrive at the paid-up capital.
Thus, (b) is the correct answer.
9. Answer : (e) <
TO
Reason :The intrinsic value method of valuation of shares is also known as break-up value P
method and asset backing method. The yield method is known as earning capacity >

method. The fair value method is an average of intrinsic value method and yield
method. Hence the answer is (e).
10 Answer : (c) <
TO
. Reason :The maximum amount beyond which a company is not allowed to raise funds by P
issue of shares is called nominal capital or authorized capital. The issued capital is >

that part of the nominal capital issued to the public and subscribed capital is that part
of the issued capital which is subscribed by the public. Paid up capital is the amount
which is paid-up by the shareholders. Reserve capital is that capital which will be
called-up only in case of liquidation
11. Answer : (d) <
TO
Reason :Dividends may be termed as the share of profits that is payable to the shareholders of P
a company. The Companies Act lays down the dos and don’ts associated with >

declaration/payment of dividends. As per the Companies Act, that dividends are paid
 on paid up capital which is part of the called up capital that has been paid up by the
shareholders and made available with the company for utilization. Hence, it is proper
to pay dividends on paid-up capital.
The other alternatives–
a. Authorized capital is the capital authorized to issue by its
memorandum. It is only nominal in nature unless and until the entire amount is
called up and paid up. Since the entire amount is not made available for utility,
dividends cannot be declare on authorized capital.
b. Issued capital is the part of nominal capital that is offered to the
public for subscription and the entire amount is not-available for claiming
dividend.
c. Called-up capital is that part of the subscribed capital which has
been called-up and cannot be a base for calculation of dividend.
e. Reserve capital is that part of uncalled capital which is to be called
up in the event of winding up of a company and under any circumstances,
dividend cannot be declared on it.
Thus, the statements (a), (b), (c) and (e) are not correct
12 Answer : (d) <
TO
. Reason :A prospectus (d) means any document described or issued as a prospectus and P
includes any notice, circular, advertisement or other document inviting deposits from >

the public or inviting offers from the public for the subscription or purchase of shares
or debentures of a body corporate. Total capital of a company is divided into units of
small denominations which are called as shares. Share certificate (a) is an ownership
security. Debenture (b) is a formal document constituting acknowledgement of a
debt given under the seal of the company. Fixed deposit receipt (c) is the
acknowledgement of deposit of a certain sum of money repayable after a fixed tenure
as per the contract and share warrant (e) is a financial instrument that gives the
holder the right to acquire equity shares. Thus, alternatives (a), (b), (c) and (e) are
not correct.
13 Answer : (b) <
TO
. Reason :If there is reduction in the value of fixed assets of subsidiary company as on the date of P
acquisition by holding company, it must be treated as capital loss and debited to goodwill >

account. The accounts mentioned in other alternatives have no relevance in the present
context
14 Answer : (c) <
TO
. Reason : The formula to calculate the value of share under yield method is P
Expected rate of return >
×Paid-up value of share
Normal rate of return
Hence the normal rate of return and paid-up value of share is required. The expected
rate of return number of equity shares is required to calculate the value of share
under intrinsic value method. Thus the answer is (c).
15 Answer : (b) <
TO
. Reason :According to the provision of Companies Act, the first auditor of a company should P
be appointed by the board of directors within one month from the date of registration >

of the company. Hence (b) is true.

16 Answer : (c)
. Reason :The costs in chartering a company are considered as preliminary expenses and hence
should be debited to preliminary expenses account. Subsequently, they will be
written off over a period of time.
17 Answer : (c) <
TO
. Reason :According to the Companies Act, 1956, the underwriting commission payable shall P
not exceed 5 percent on the issue price of shares. >

18 Answer : (c) <

TO
. Reason :Section 226 of the Companies Act specifies the persons qualified as an auditor of the P
company and the wife of the Managing director of the company (c) if otherwise >
qualified can be appointed as an auditor of a company. A body corporate (a) is
disqualified to be appointed as auditor of a company. An officer or employee of the
company is disqualified and by virtue of this, Managing Director of the company (b)
is disqualified to appointed as auditor of a company. A shareholder of the company
(d) with voting rights cannot be appointed as auditor of a company. An individual
who is indebted to the company for a sum exceeding Rs.1,000.(e) or who has given
any guarantee or provided any security in connection with the indebtedness of any
third person is disqualified to be an auditor of a company. Thus, alternative (c) is the
correct answer,
19 Answer : (b) <
TO
. Reason :Equity method is adopted in accounting for investments of the investor, when the P
investor has significant influence over the investee. Cost method (a) is the method >

where in the acquisition of any asset is reported in the books at its historical cost.
And it is not the appropriate method to account for the investments where the
investor has significant influence. Amortised cost method (c) is a method where in
the cost of the asset is amortised over its useful life and is not the appropriate
method. Super profit method (d) is one of the methods of valuation of
goodwill. Moving average method (e) is a method of valuation of inventories and is
not the method of accounting for investments of the investor when the investor has
significant influence over the investee. Thus, (b) is the correct answer.
20 Answer : (e) <
TO
. Reason :In the Consolidated Balance Sheet of a Holding Company, the value of minority P
>
interest consists of the proportionate share of minority shareholders in the (I)
Nominal value of share capital of subsidiary company (III) Reserves and profits of
the subsidiary company at the time of acquisition by the holding company and (V).
Income of the subsidiary company after the acquisition by the holding company
Hence, the alternative (e) the combination of the these statements is the correct
answer. (II) Reserves of the holding company and (IV) Income of the holding
company after its acquisition are entirely the share of the share holders of the holding
company and do not belong to the minority share holders of the subsidiary company
and the alternatives (b), (c) and (d) with these statements are incorrect. The
alternative (a) is incorrect because it does not represent the entire share of the
minority share holders. Thus, alternative (e) is the correct answer.
21 Answer : (d) <
TO
. Reason :Where 78% of debentures is held by a nationalized bank (d) a company need not pass P
a special resolution of appoint an auditor of the company. In case of the situations >

stated in other alternatives where 27% of equity share capital is held by a State
Government (a) where 30% of preference share capital is held by a public financial
institution & where 49% of equity is held by the Central Government. (c) a special
 resolution is required to appoint an auditor. (d) is the correct answer.
22 Answer : (e) <
TO
. Reason :According to Section.76 of the Companies Act, a company is authorized to pay P
underwriting commission only if the shares or debentures are offered to the general >

public. No underwriting commission can be paid, if the issue is privately placed. The
shares taken by Promoters, Directors, employees and directors’ friends cannot be
considered as shares offered to the general public. As such no underwriting
commission is payable on these shares.
23 Answer : (d) <
TO
. Reason :An individual is considered to have a substantial interest in an enterprise, if that P
individual owns, directly or indirectly 20% interest in the voting power of the >

enterprise (d). The other alternatives are incorrect answers because they do not
comply with the condition specified. Thus, (d) is the correct answer.
24 Answer : (e) <
TO
. Reason :Under Subtractive approach of computation of Value added is measured as a P
difference between the Sales revenue and the cost of material and services bought >

(e).In calculating profit, bought in materials and services, labor, depreciation interest
etc. are deducted from sales revenue and while calculating value added only the cost
of bought in materials and services are deducted. Thus, alternative (e) is the correct
answer and the components in other alternatives do not suit the computation and are
not the correct answers.
25 Answer : (d) <
TO
. Reason : Capital employed = Net fixed assets + net current assets P
= Gross fixed assets – depreciation + current assets – current >

liability.
26 Answer : (e) <
TO
. Reason :As per schedule VI of the Companies Act, 1956, Unadjusted development P
expenditure (e) is shown under Miscellaneous expenditure and is the correct answer. >

It is not shown under the head fixed assets. The other assets stated in alternatives
Lease hold property (a), Development of property (b), Railway sidings (c) and
Designs (d) are the fixed assets and not the correct answers. Thus, alternative (e) is
the correct answer.
27 Answer : (a) <
TO
. Reason :As per the Companies Act, 1956, with regard to maintenance of books of accounts by P
a company it is mandatory that the books of account are to be maintained under >

accrual system of accounting it cannot be any other system of accounting. Thus, the
statement in alternative (a)The books of account can be either on cash system or
accrual system of accounting is false and is the correct answer. The statements in
other alternatives are true with regard to maintenance of books of accounts and are
not the correct answers (b) Companies have to compulsorily follow double entry
system of accounting (c) A set of cost accounts must be maintained in addition to the
financial accounts by the companies that are engaged in manufacturing, processing
or mining activities (d) the books of accounts should be preserved for a period of
eight years preceding the current year (e) The books of account shall be open to
inspection by any director during business hours. Thus, (a) is the correct answer.
28 Answer : (b) <
TO
. Reason :The auditor of a company gives a report that the financial statements of the company P
>
reflect a true and fair view subject to certain reservations. Such a report is known as
qualified opinion (b). The alternative (b) is the correct answer. Clean report (a)
specifies that the that financial statements of the company reflect a true and fair view
and there are nothing which needs to be qualified. Un-qualified opinion (c) states that
there is nothing which needs to be qualified it is a clean report and is not the correct
answer. Provisional report subject to issue of final report (d) is not a report to be
given by the auditor and is not the correct answer. Alternative (e) the combination of
two incorrect answers is also incorrect. Thus, alternative (b) is the correct answer.
29 Answer : (e) <
TO
. Reason : At the time of forfeiture of shares which were originally issued at a discount, the accounting entry P
>
involves
I Share capital account Dr. (with the called-up value of shares forfeited)
II To Share forfeiture account (with the amount received on forfeited shares)
III To Discount on issue of shares (with the amount of discount allowed on forfeited shares)
IV To Calls-in-arrears (with the amount due but not paid on forfeited shares)
Thus, the combination of the above entries , the alternative (e) is the correct answer.
Share capital is not debited with the paid up value of shares and the alternatives with
the combination V are incorrect. Alternative (e) is the correct answer.
30 Answer : (c) <
TO
. Reason :As per the Schedule VI of the Companies Act, 1956, ‘Premium on issue of P
debentures’ is shown under head Reserves and Surplus in the balance sheet of a >

company. It is unlike share premium which is to be utilized as per section 79 of the

Companies Act. The premium on issue of debentures is treated as profit and placed
under Reserves and Surplus in the balance sheet of a company. Thus, (c) is the
correct answer.
31 Answer : (d) <
TO
. Reason :The profit or loss on cancellation of own debentures is calculated at the time of P
Cancellation of own debentures (d) is the correct answer. The profit loss on >

cancellation cannot be calculated unless they are paid. Hence (d) is the correct
answer.
32 Answer : (b) <
TO
. Reason :The proposed dividend is classified as a provision and shown on the liability side of P
the balance sheet. The dividend finally decided by the shareholders in the annual >

general meeting as payable is termed as Declared Dividend. Any dividend declared

must be paid with thirty days from the date of declaration. Hence, a declared
dividend must be classified as a current liability in the balance sheet of the company.
Thus the answer is (b).
33 Answer : (e) <
TO
. Reason : All costs incurred to maintain production or to promote sales of existing products are excluded from P
the research and development costs. Any routine or promotional costs of market research of existing >
products cannot be called as research and development costs. The cost of materials consumed in the
process of research and development, amortization of patents and licenses related to research and
development, depreciation of premises that is used for carrying the work of research, salaries and
wages paid to personnel engaged in the research and development activities can be considered as
research and development expenses.
34 Answer : (d) <
TO
. P
Reason : If by the terms of issue, the price payable is above the par value of >
shares, it is called an issue at premium. The amount so received is to be credited
to share premium account.
35 Answer : (c) <
TO
. Reason :The company may receive from the shareholders the amount uncalled on the shares P
held by them even though the amount is not called for. In such a case the company is >

compelled to pay interest on the calls in advance at prescribed rate from the date of
receipt of advance to the date of appropriation i.e. the date when the call is made and
the advance received is appropriated from calls in advance account to the relevant
call account.
36 Answer : (b) <
TO
. Reason :The profits earned by a subsidiary company before the holding company acquiring P
control over it is known as capital profit. Any profit before acquisition date is the >

capital profit. Other profits mentioned in (a), (c), (d) and (e) are not true
37 Answer : (e) <
TO
. Reason :The cum-interest/cum-dividend quoting price of securities implies that interest P
accrued or dividend accrued is added to the value of the securities. Thus, it is more >

than the ex-interest price. The purchaser pays a higher price than the normal price,
the seller charges a higher price and the right of receiving dividend/interest is passed
on to the buyer. Thus, alternatives (a), (c) and (d) are correct. The alternative (b) the
right to receive the interest/dividend is retained by the seller is false.
38 Answer : (b) <
TO
. Reason :If the forfeited shares are reissued at a premium, the amount of such premium shall P
be credited to share premium account. >

39 Answer : (d) <

TO
. Reason :Brokerage should be paid only to the person carrying business of broker. Brokerage P
should not be paid in respect of promoters quota and when applications are made >

against underwriting commitments. The mailing costs and out-of-pocket expenses

should be borne by the broker Brokerage should be disclosed in the prospectus or
statement in lieu of prospectus.
40 Answer : (a) <
TO
. Reason :Tax deducted at source is the liability of the company towards the tax authority. It is P
also payable to the tax authority within very short period. So, it is the item of current >

liabilities. It cannot be treated as provisions or assets.

41 Answer : (a) <
TO
. Reason : Dr. Debenture redemption fund investment account Cr. P
>
 Particulars Rs. Particulars Rs.
To Balance b/d. By Bank:
12% Government 17,00 12% Government 20,000
loan 0 loan
10% Debentures 11,000 10% Debentures 12,350
Equity shares 12,00 Equity shares 15,000
0
To Debenture redemption 7,350
fund a/c.
47,35 47,350
0
42 Answer : (b) <
TO
. Reason : P
>
1999- 2000- 2001- 2002- 2003- Total
2000 2001 2002 2003 2004
Rs. Rs. Rs. Rs. Rs.
Rs.
Profit 8,50 27,00 40,500 46,000 64,250
0 0
Less: repair - 2,000
expenses
Add: + 100 200 200
Depreciation
Less: profit
on sale of 2,250
plant
Adjusted 8,50 27,00 38,600 46,200 62,200
profits 0 0
Weights 1 2 3 4 5
Profits × 8,50 54,00 1,15,80 1,84,80 3,11,000 6,74,100
weights 0 0 0 0
Weighted average profits = Rs.6,74,100 / 15 = Rs.44,940
43 Answer : (b) <
TO
. Reason : Alternative I P
Dr. Bank account Cr. >

Particulars Rs. Particulars Rs.

To Share application 60,000 By Balance c/d. 1,32,000
(Note 1)
To Share allotment 21,000
(Note 2)
To Share first and final call 21,000
(Note 3)
To Share capital 30,000
(reissue) (Note 4)
1,32,00 1,32,000
0
Working notes:
 1. Amount received on application = 7,500 × Rs.8 = Rs.60,000
2. Amount available for adjustment against allotment = Rs.60,000 – (5,000 × Rs.8)
= Rs.20,000
Amount receivable on allotment = (5,000×Rs.10) -Rs.20,000 = Rs.30,000
7,500
No. of shares applied by Sujana = 1,500 × 5,000
= 2,250 shares
Amount paid by Sujana on application = 2,250 × Rs.8 = Rs.18,000
Amount available for adjustment against allotment = Rs.18,000 - (1,500 × Rs.8)
= Rs.6,000
Amount defaulted by Sujana on allotment = (1,500 × Rs.10) – Rs.6,000 = Rs.9,000
Amount received on allotment = Rs.30,000 – Rs.9,000 = Rs.21,000
3. Amount receivable on first and final call = Rs.24 – (Rs.8 – Rs.10) = Rs.6 per share
Amount received on first and final call = (5,000 – 1,500) ×Rs.6 = Rs.21,000
4. Amount received on reissue of forfeited shares = 1,500 ×Rs.20 = Rs.30,000
Alternative II
Amount received on 3,500 shares = 3,500 × Rs.24 = Rs.84,000
Amount received from Sujana = 2,250 × Rs.8 = Rs.18,000
Amount received on 1,500 shares on reissue = Rs.1,500 ×Rs.20 = Rs.30,000
Total bank balance = Rs.84,000 + Rs.18,000 + Rs.30,000 = Rs.1,32,000
44 Answer : (d) <
TO
. Reason : Amount payable by Raman on allotment is 500 shares × Rs.40 = Rs.20,000 P
>

Amount of calls-in advance paid by Raman = Rs.25,000 – Rs.20,000 = Rs.5000

Amount paid by Raman at the time of call = (500 shares × Rs.40) - Rs.5000 = Rs.15,000

Hence the entry to record the receipt of payment and adjustment of calls-in-advance is
Bank account Dr. Rs. 15,000
Calls-in-Advance a/c. Dr. Rs. 5,000
To Share first and final call a/c. Rs. 20,000
45 Answer : (b) <
TO
. Reason : Dr. Cash account P
Cr. >

Particulars Rs. Particulars Rs.

To Balance b/d. 50,000 By preference 3,30,000
shareholders
(Rs.3,00,000 x 110%)
To investments 2,00,00 By balance c/d. 25,000
0
To equity shares
(including premium) 1,05,00
0
3,55,00 355,000
0
No. of equity shares = Rs.1,05,000 / Rs.105 = 1000 shares.

46 Answer : (a) <

. Reason :In case of partial underwriting, the marked applications are compared with the shares TO
P
underwritten to determine the liability of the underwriters. >
Gross liability 4,800 shares
Less: marked applications 3,600 shares
1,200 shares The
liability of Alexander is 1,200 shares subject to a maximum of non-subscribed shares
i.e. 6,000 shares (6,000 shares – 5,400 shares). Hence the liability of Alexander is
for 600 shares.
47 Answer : (c) <
TO
. Reason : P
Rs. >
Profit and loss account as on April 01, 2003 70,000
Less: Dividends declared 30,000
Adjusted opening balance 40,000
Profits earned during the year (Rs.1,60,000 – Rs.40,000) 1,20,00
0
Profits for the period April 01, 2003 to July 01, 2003 30,000
Capital profits (Rs.40,000 + Rs.30,000) 70,000
48 Answer : (b) <
TO
. Reason : P
Profit for the year 2003-2004 2,60,000 >
Add: Rent (not relevant if the owner of the premises operates the 1,26,000
business) Rs. 10,500 x 12
Adjusted maintainable profits 3,86,000
Capital employed by Dheeraj 21,50,00
0
Add: Value of premises 4,50,000
Total capital employed 26,00,00
0
Normal profit (12% of Rs.26,00,000)
Super profits (Rs.3,86,000 – Rs.3,12,000) 74,000
49 Answer : (b) <
TO
. Reason : Consider the following Balance Sheet of Kanwa Ltd. as on March P
31, 2004: >

Assets Rs.
Land & building 3,20,000
Plant & machinery 4,00,000
Sundry debtors 65,000 – 5,000 60,000
Inventory 50,000
Cash and bank 10,000
8,40,000
Less: Sundry creditors 50,000
Capital employed 7,90,000
50 Answer : (d) <
TO
. Reason : P
>
 Particulars Rs.
Post-tax profits of 2003-2004 4,20,000
Pre-tax profits of 2003-2004 (Rs.4,20,000 / 50%) 8,40,000
Less: Income relating to 2002-2003 30,000
Normal profit of 2003-2004 8,10,000
Less: Additional fixed expenses 50,000
7,60,000
Less: Tax @50% 3,80,000
Future maintainable profit 3,80,000
51 Answer : (d) <
TO
. Reason : Amount debited to loss on issue of debentures = Rs,4,000 × Rs.100 × 20% = P
Rs.80,000 >

Amount of loss on issue of debentures to be written off every year = Rs.80,000 / 10 =

Rs.8,000.
52 Answer : (b) <
TO
. Reason : P
Dr. Cr. >
Date Particulars
(Rs.) (Rs.)
June 1, Own Debentures a/c. 97,000
2004 Dr.
Interest on Debentures A/c. 2,000
Dr.
To Bank A/c. 99,000
(Being the purchase of 1000 own debentures at the
rate of Rs.99 cum interest. Interest for 2 months from
April 1,2004 to May 31, 2004 is Rs.2,000)
July 01, Own Debentures A/c. 98,000
2004 Dr.
Interest on Debentures A/c. 3,000
Dr.
To Bank A/c. 1,01,000
(Being the purchase of 1000 own debentures
at Rs.98 ex-interest. Interest for 3 months
from April 1,2004 to June 30, 2004 is
Rs.3,000)
July 15, 12% Debentures A/c. 2,00,00
2004 Dr. 0
To Own debentures A/c. 1,95,000
To Capital reserve A/c. 5,000
(Being the profit on redemption of
debentures transferred to capital reserve A/c.)
Thus, the profit on cancellation of own debentures transferred to capital reserve is
Rs.5,000.
53 Answer : (b) <
TO
. Reason : P
>
 Particulars Sudhir Sundar Suhas Total
Shares underwritten 2,000 4,000 6,000 12,000
Less: unmarked applications 825 1,650 2,475 4,950
(in the ratio 1:2:3)
1,175 2,350 3,525 7,050
Less: Marked applications 1,500 2,000 2,750 6,250
(325) 350 775 800
Less: Surplus of Sudhir’s share
(in the ration 2:3) 325 130 195 Nil
Final liability Nil 220 580 800
54 Answer : (b) <
TO
. Reason : Amount transferred to reserves = Rs.2,25,000 – Rs.2,00,000 = Rs.25,000 P
>
Amount of profit for the year 2003-2004 is Rs.1,90,000 + Rs.50,000 = Rs.2,40,000
Amount of profit for 3 months (from April 01, 2003 to July 01, 2003)
Rs.2, 40, 000
 3  Rs 60, 000
= 12
Capital profit = Rs.60,000 – Rs.50,000 = Rs.10,000
 Rs.25, 000 
 × 3
Pre-incorporation reserve = Rs.2,00,000 +  12  = Rs.2,06,250
Rs. Rs.
Cost of investments 8,00,00
0
Less:
Face value of shares (Rs. 10,00,000 × 60%) 6,00,000
Share of cpital profits (Rs.10,000 × 60%) 6,000
Share of General reserve (Rs.2,06,250 × 60%) 7,29,75
1,23,750
0
Goodwill 70,250
55 Answer : (b) <
TO
. Reason : When the forfeited shares were issued at a discount, The actual amount received is to be debited to P
>
bank account. The share capital account is to be credited with the nominal value of shares.
Rs. Rs.
Bank a/c. Dr. 5,600
Share forfeiture a/c Dr. 2,400
To Share capital account. 8,000
56 Answer : (d) <
TO
. Reason : Average capital employed = (Opening capital employed + Closing capital P
employed) ÷ 2 >

2 × Rs.3,25,000 = Opening capital employed + Rs.4,50,000

Opening capital employed = Rs.6,50,000 –Rs.4,50,000 =Rs.2,00,000
57 Answer : (b) <
TO
. Reason : P
>
 01.06.2004
400 × Rs.99 ex. interest Rs.39,600
01.7.2004
300 × Rs.105 cum. interest = Rs.31,500 – Rs.30,600
Rs.900
3 12

(Interest for 3 months 30,000 × 12 100 =
Rs.900)
Rs.70,200 Amount debited to
own debenture investment account is Rs.70,200.
58 Answer : (c) <
TO
. Reason : The amount to be transferred to Bonus Dividend account is Rs.2,10,000. P
>
Workings:
Amount of bonus to be declared Rs.
To make the partly paid shares into fully paid 70,000 x Rs.2 1,40,000
70, 000
70,000
To cover bonus shares of 10 = 7,000 shares x Rs.10
Total bonus 2,10,000
59 Answer : (a) <
TO
. Reason :General Reserve a/c Dr. Rs. 1,80,000 P
>
Profit and Loss /c Dr. Rs. 30,000
To Bonus to shareholders a/c Rs. 2,10,000
60 Answer : (a) <
TO
. Reason :The listed companies are allowed to pay brokerage on private placement of capital at P
>
a maximum rate of 0.5 %.
Hence the maximum amount of brokerage that can be paid by Wise Ltd. is
1,00,000 shares × Rs. 10 × 0.5% = Rs.5,000.
61 Answer : (d) <
TO
. Reason :No dividends are paid on calls in advance nor on calls in arrear. Dividend declared = P
>
12% on Rs. 1,20,000 = Rs. 14,400
62 Answer : (b) <
TO
. Reason :In case of issue of debentures at premium and redeemable at a premium, loss on issue P
>
of debentures a/c should be debited with the amount of premium payable on
redemption and Bank account should be debited with actual amount received.
Corresponding credit should be given to debentures a/c with face value of debentures
and premium on redemption of debentures a/c with the amount of premium payable on
redemption and premium on issue of debentures with premium received. The Journal
entry will be
 Rs. Rs.
Bank a/c 1,10,000
Dr.
Loss on redemption of debentures a/c 10,000
Dr.
To 12% Debentures a/c 1,00,000
To Debentures premium a/c 10,000
To Premium on redemption of 10,000
debentures a/c
63 Answer : (c) <
TO
. Reason :When shares are forfeited, the share capital account should be debited with called up P
>
amount (excluding premium) and corresponding credit should be given to share call
account with amount not received and share forfeiture account with amount received.
If the premium is already received, the same should not be reversed. Hence the entry
is
Share capital a/c Dr. Rs.
40,000
To Share first call a/c Rs.15,000
To Share forfeiture a/c Rs.25,000
64 Answer : (b) <
TO
. Reason : P
>
Rs.
Net assets 30,50,000
Add: Notional call
5,000 × Rs.20 1,00,000
5,000 × Rs.30 1,50,000
Net assets available to equity share
33,00,000
holders Value
Net assets 33, 00, 000
= = Rs.165
of each fully paid share = No.of shares 20, 000

Value of Rs.80 paid up share = Rs.165 – Rs.20 = Rs.145.

65 Answer : (e) <
TO
. Reason : P
>
 Particulars Rs.
Nominal value of 2,500 shares @ Rs.100 per
2,50,000
share
Share of capital Profit (1,40,000 + 1,20,000) ×
65,000
25%
Share of Revenue Profit
[(1,70,000-1,40,000)+(1,55,000 – 1,20,000)] ×
16,250
25%
Minority interest 3,31,250
66 Answer : (d) <
TO
. Reason :Where the dividend proposed exceeds 12.5% but does not exceed 15%, the amount P
>
to be transferred to the reserves shall not be less than 5% of the current profits
The current profits Rs. 1,28,600 x 5% = Rs. 6,430.
67 Answer : (e) <
TO
. Reason : P
>
Particulars Rs.
Land and building 80,000
Plant and machinery 95,000
Furniture and fixtures 45,000
Investments 33,000
Sundry debtors 35,000
Inventories 24,000
Cash 18,000
3,30,000
Less:
Sundry creditors 16,000
Bank overdraft 10,000
18% Preference shares of Rs.10 each 50,000
18% Debentures 30,000 1,06,000
Net assets available for equity shareholders 2,24,000 Value per
share = Net assets / Number of equity shares
= Rs.2,24,000 / 20,000 = Rs.11.2
68 Answer : (e) <
TO
.  r  P
  (M − S) >
Reason :Value of right =  N + r 
Where r= No of rights issued = 2
N = No. of existing shares = 3
M = Market price = 45
S = Issue price of rights = 30
∴ Value of rights = [2 / (2+3)] x (Rs. 45 - Rs.30) = Rs.6
69 Answer : (a) <
TO
. Reason : Goodwill: P
>
 Particulars Rs.
Investments in J Ltd. 4,00,000
Less: Face value of shares (Rs.4,00,000 2,40,000
x 60%)
Share of capital profit (Rs.1,15,000 69,000
x 60%)
Goodwill 91,000

Minority interest:

Particulars Rs.
Face value of shares (Rs.4,00,000 x 1,60,000
40%)
Share of profit (Rs.1,15,000 x 40%) 46,000
Minority interest 2,06,000
Consolidated Balance Sheet of M/s.S Ltd. and its subsidiary M/s.J Ltd.
as on March 31, 2004
Liabilities Rs Assets Rs.
Share capital 12,00,000 Goodwill 91,000
Profit and loss a/c 2,75,000 Land and building 4,00,000
Sundry creditors 95,000 Plant and machinary 4,30,000
Bills payable 30,000 Furniture & fittings 2,75,000
Minority interest 2,06,000 Sundry debtors 1,85,000
Short term loan 25,000 Bills receivable 1,15,000
Closing stock 1,70,000
Cash 74,000
Bank 91,000
18,31,000 18,31,000
70 Answer : (b) <
TO
. Reason :Value of goods in stock = Rs.75,000 x 60% = Rs.45,000 P
>
Profit included in the goods = Rs.45,000 x 20 / 120 = Rs. 7,500
Unrealised stock to be adjusted = Rs.7,500 x 55% = Rs.4,125
71 Answer : (e) <
TO
. Reason :Average annual profits = (Rs.95,000 + Rs.1,10,000 + Rs.1,16,000) / 3 = Rs.1,07,000 P
>
Normal profit = Rs.9,50,000 x 10% = Rs. 95,000
Super profit = Rs.1,07,000 – Rs.95,000 = Rs.12,000
Goodwill = 4 x Rs.12,000 = Rs.48,000
72 Answer : (a) <
TO
. Reason : P
>
Particulars March 31, 2002 March 31, 2003 March 31, 2004
Rs. Rs. Rs.
Sales 50,00,000 65,00,000 78,00,000
Less: Other expenses 26,00,000 31,00,000 45,00,000
Interest on debentures 4,80,000 4,80,000 4,80,000
Pre-tax profit 19,20,000 29,20,000 28,20,000
Less: tax @40% 7,68,000 11,68,000 11,28,000
Post-tax profits 11,52,000 17,52,000 16,92,000
Average post-tax profits = (Rs.11,52,000 + Rs.17,52,000 +
Rs.16,92,000) / 3 = Rs.15,32,000
Goodwill = Rs.15,32,000 x 4 = Rs.61,28,000
73 Answer : (d) <
TO
. Reason :The amount to be debited to share capital account on forfeiture is the amount called- P
>
up i.e. Rs.9 x 2,000 shares = Rs.18,000

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