Financial Accounting – II (MB132) : April 2006

Financial Accounting – II (MB132) : April 2006

• Answer all questions.
• Marks are indicated against each question.
1. Which of the following will not form a part of ‘Miscellaneous Expenditure’ of the Balance Sheet of a company?
(a) Preliminary expenses (b) Underwriting expenses
(c) Loss on sale of fixed assets (d) Discount on issue of shares
(e) Interest paid out of capital during construction.
(1 mark)
< Answer >
2. Which of the following is/are subjective method(s) of sales forecasting?
(a) Jury of executive opinion (b) Sales force estimate
(c) Regression Method (d) Time Series Projection Method
(e) Both (a) and (b) above.
(1 mark)
< Answer >
3. In accordance with AS -14, purchase consideration is the aggregate of shares and other securities issued and the
payment made in the form of cash or other assets by the transferee company to the __________ of the transferor
company.
(a) Equity holder (b) Preference holders
(c) Debenture holders (d) Shareholders
(e) All (a), (b), (c) and (d) above.
(1 mark)
< Answer >
4. In the Consolidated Balance Sheet of a Holding Company, the value of minority interest consists of the
proportionate share of minority shareholders in the
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)
< Answer >
5. Which of the following ratios measures the liquidity of a company?
(a) Debt-equity ratio (b) Interest coverage ratio
(c) Net profit margin (d) Acid-test ratio
(e) Return on equity.
(1 mark)
< Answer >
6. Under the Net Assets Method of calculating purchase consideration, assets and liabilities of the transferor
company are taken over by the transferee company at
(a) Book value (b) Fair value
(c) Market value (d) Replacement value
(e) Agreed value.
(1 mark)
< Answer >
7. Which of the following is not shown by a funds flow statement on cash basis?
(a) The sources of cash (b) The uses of cash
(c) Decrease in cash (d) The net change in working capital
(e) Increase in cash.
(1 mark)
< Answer >
2
8. Which of the following is false with regard to Economic Value Added (EVA)?
(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)
< Answer >
9. Which of the following points can be considered as the starting point of financial forecasting?
(a) Forecasting material requirements
(b) Forecasting man power requirements
(c) Forecasting financial requirements
(d) Forecasting sales volume
(e) Forecasting assets requirements.
(1 mark)
< Answer >
10. Dividend paid by a subsidiary company out of pre-acquisition profits is
(a) Adjusted against investment in subsidiary account at the time of consolidation of accounts
(b) Adjusted against general reserve at the time of consolidation of accounts
(c) Credited to profit and loss account as revenue receipts at the time of consolidation of accounts
(d) Ignored for consolidation purposes
(e) The claim of the shareholders of the holding company.
(1 mark)
< Answer >
11. When the identity of the specific statutory reserve created under the Purchase Method of accounting for
amalgamation is no longer required to be maintained, the following entry is to be made
(a) Statutory Reserves A/c Dr.
To Amalgamation A/c
(b) Statutory Reserves A/c Dr.
To Amalgamation Adjustment A/c
(c) Amalgamation Adjustment Dr.
To Statutory Reserves A/c
(d) Share Capital A/c Dr.
To Statutory Reserves A/c
(e) Statutory Reserves A/c Dr.
To Profit and Loss A/c
(1 mark)
< Answer >
12. Which of the following should be deducted from the share capital to find out paid-up capital?
(a) Calls-in-advance (b) Calls-in-arrears
(c) Share forfeiture (d) Discount on issue of shares
(e) Share premium.
(1 mark)
< Answer >
13. A funds flow statement is also known as
(a) Balance sheet (b) Profit and loss statement
(c) Income statement (d) Proforma statement
(e) Statement for the changes in financial position.
(1 mark)
< Answer >
14. Which of the following is not shown under the head ‘Share Capital’ in the Balance Sheet of a company?
(a) Preference share capital (b) Equity share capital
(c) Calls-in arrear (d) Share forfeiture
(e) Preference dividend.
(1 mark)
< Answer >
15. Which of the following ratios indicates the ability of a firm to service the financial charges? < Answer >
3
(a) Dividend pay-out ratio (b) Fixed charges coverage ratio
(c) Net profit margin ratio (d) Inventory turnover ratio
(e) Acid test ratio.
(1 mark)
16. As per schedule VI of the Companies Act, 1956, which of the following is not shown in the Balance Sheet of a
company under the head ‘Fixed Assets’?
(a) Lease hold property (b) Development of property
(c) Railway sidings (d) Designs
(e) Unadjusted development expenditure.
(1 mark)
< Answer >
17. According to schedule VI of the Companies Act, 1956, which of the following assets is/are shown under the head
‘investments’ in the balance sheet of a company?
I. Investments in the capital of partnership firms.
II. Investment in trust securities.
III. Investment in shares.
IV. Investment in debentures.
(a) Only (I) above (b) Only (II) above
(c) Both (III) and (IV) above (d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
18. In addition to the Managing Director or Manager of the company, who among the following is/are responsible
for keeping proper books of accounts of a company?
I. Every legal advisor of the company.
II. Every banker of the company.
III. Every officer and other employee and agent in default.
IV. Every auditor of the company.
V. Every member of the company.
(a) Only (III) above (b) Both (I) and (IV) above
(c) Both (III) and (IV) above (d) Both (IV) and (V) above
(e) All (I), (II), (III), (IV) and (V) above.
(1 mark)
< Answer >
19. In which of the following situations, price earnings ratio is applied?
(a) To determine the financial risk of a business entity
(b) To determine the expected market value of the shares of a company
(c) To assess the earning potential of a company in the near future
(d) To examine the operational efficiency of a company
(e) To check how efficiently the assets are utilized by a firm.
(1 mark)
< Answer >
20. Dividends are usually paid as a percentage of
(a) Authorized share capital (b) Net profit
(c) Paid-up capital (d) Called-up capital
(e) Called-up share capital plus calls-in-advance less un-paid calls.
(1 mark)
< Answer >
21. As per schedule VI of the Companies Act, 1956, under which of the following heads is ‘Premium on issue of
debentures’ shown in the balance sheet of a company?
(a) Miscellaneous expenditure (b) Debentures
(c) Reserves and surplus (d) Current liabilities and provisions
(e) Current assets.
(1 mark)
< Answer >
22. While preparing proforma financial statement by using budgeted expense method
(a) The method of extrapolation is applied to assess the total expenses of the company in proportion to increase
in sales
(b) The items related to various expenses are projected on the basis of the anticipated changes
< Answer >
4
(c) The future cost-sales ratio is assumed to be prevailed as per historical relationship
(d) A regression equation may be framed to project the costs during the future years
(e) All the expenses are increased by a fixed percentage.
(1 mark)
23. Declared dividend should be classified in the balance sheet as a
(a) Provision (b) Current liability (c) Reserve
(d) Current asset (e) Miscellaneous expenditure.
(1 mark)
< Answer >
24. According to which of the following accounting concepts consolidated financial statements are prepared when a
parent-subsidiary relationship exists?
(a) Going concern (b) Business entity
(c) Materiality (d) Cost (e) Periodicity.
(1 mark)
< Answer >
25. The profit and loss appropriation section of the profit and loss account shows the appropriation of profit and is
popularly known as
(a) Below the line (b) Above the line
(c) Profit and loss adjustment account (d) Specific reserve
(e) General reserve.
(1 mark)
< Answer >
26. According to the Companies Act, 1956, the companies have to compulsorily maintain their books of account
only on
(a) Accrual basis (b) Cash basis
(c) Accrual basis or cash basis whichever is followed consistently
(d) Hybrid basis (e) Tax basis.
(1 mark)
< Answer >
27. No disclosure is required in consolidated financial statements in respect of
(a) Remittances-in-transit (b) Capital reserve
(c) Intra-group transactions (d) Goodwill
(e) Minority interest.
(1 mark)
< Answer >
28. Which of the following is/are true regarding the effect on return on equity, other things remaining constant?
(a) Greater the amount of sales, lower the return on equity
(b) Lower the equity multiplier, lower the return on equity
(c) Higher the assets turnover, lower the return on equity
(d) Lower the debt-assets ratio, higher the return on equity
(e) Higher the return on assets, lower the return on equity.
(1 mark)
< Answer >
29. Which of the following increases the external funds required?
(a) An increase in the spontaneous liabilities to sales ratio
(b) A decrease in the retention ratio
(c) An increase in the assets turnover ratio
(d) A decrease in the short-term bank borrowings
(e) Both (b) and (d) above.
(1 mark)
< Answer >
30. In which of the following circumstances, subscribed capital is equal to issued capital?
(a) When the board of directors have called up the total amount payable by the shareholders
(b) When the maximum share capital which the company is authorized to issue is offered to public
(c) When there are no calls-in-arears
(d) When all the shares offered to the public are taken up by the public
(e) Subscribed capital and issued capital are one and the same.
(1 mark)
< Answer >
31. Which of the following results in an increase in working capital of a company?
(a) An increase in outstanding rent (b) An increase in investments
< Answer >
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(c) A decrease in depreciation (d) A decrease in the amount of provision for tax
(e) An increase in gross fixed assets.
(1 mark)
32. Which of the following statements is/are true regarding inventory turnover ratio?
I. If the inventory turnover ratio has decreased from past, it means that either inventory is decreasing or cost
of goods sold is increasing.
II. If a firm has an inventory turnover that is slower than for its industry, then the inventory stocks may be low.
III. Low inventory turnover has impact on the liquidity of the business.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
33. Which of the following cannot be inferred from a funds flow analysis?
(a) Liquidity (b) Acquisition of non current assets
(c) External funds utilized (d) Pattern of financing
(e) None of the above.
(1 mark)
< Answer >
34. If the proposed dividend appears in the balance sheet of subsidiary company, while preparing the Consolidated
Balance Sheet, the share of minority shareholders should be
(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 Consolidated Balance Sheet
(e) Credited to Goodwill account.
(1 mark)
< Answer >
35. Which of the following equations is equal to Net Value Added?
(a) Gross Value Added + Depreciation (b) Gross Value Added + Interest
(c) Gross Value Added – Depreciation (d) Gross Value Added – Inventory
(e) Gross Value Added – Net Inventory.
(1 mark)
< Answer >
36. The item ‘Interest Accrued on Investments’ appears in the balance sheet of a company under the category of
(a) Loans and advances (b) Current assets
(c) Investments (d) Current liabilities
(e) Reserves and surplus.
(1 mark)
< Answer >
37. As per Accounting Standard 18, if two or more companies are subsidiaries of the same holding company, each
subsidiary is known as ___________ of the other subsidiary.
(a) Fellow subsidiary (b) Co-subsidiary (c) Subsidiary
(d) Associate (e) Sub-subsidiary.
(1 mark)
< Answer >
38. Which of the following denotes the dividend declared by the directors between two annual general meetings?
(a) Proposed dividend (b) Final dividend
(c) Interim dividend (d) Declared dividend
(e) Unpaid dividend.
(1 mark)
< Answer >
39. Which of the following ratios indicates the capital structure?
(a) Debt-assets ratio (b) Inventory turnover ratio
(c) Total asset turnover ratio (d) Return on equity (e) Return on assets.
(1 mark)
< Answer >
40. Economic value addition can be computed as
(a) Gross profit – Cost of capital
(b) Gross profit – Average cost of capital
< Answer >
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(c) Net operating profit before tax – Cost of capital
(d) Net operating profit after tax – Weighted average cost of capital
(e) Net operating profit before tax – Depreciation.
(1 mark)
41. Ananya Ltd. takes over the business of Arya Ltd. at the following values:
Particulars Amount (Rs.)
Fixed Assets 6,00,000
Current Assets 2,50,000
Debentures 1,50,000
Current Liabilities 1,00,000
The amount of purchase consideration in the above takeover (using Net Asset method) is
(a) Rs.8,50,000 (b) Rs.3,50,000
(c) Rs.7,00,000 (d) Rs.6,00,000 (d) Rs.7,50,000.
(2 marks)
< Answer >
42. Ashiki Ltd. is taken over by Asha Ltd.. Each share of Ashiki Ltd. has a market value of Rs.20 while the market
value of Asha Ltd. is Rs.40. The following is the balance sheet of Ashiki Ltd.
Liabilities Rs. Assets Rs.
Share Capital @Rs.10 10,00,000 Fixed Assets 15,00,000
Debentures 5,00,000 Current Assets 10,00,000
General Reserve 5,00,000
Creditors 5,00,000
25,00,000 25,00,000
If the purchase consideration is satisfied in the form of shares to be issued by Asha Ltd., at a par value of Rs.10
each, the number of shares issued as purchase consideration is
(a) 1,00,000 shares (b) 50,000 shares
(c) 10,00,000 shares (d) 1,50,000 shares
(e) 2,00,000 shares.
(2 marks)
< Answer >
43. The total debt-equity ratio of Appu Ltd. is 4:3. Its total asset is Rs.7000 lakh and its short-term debt is Rs.500
lakh. If total debt consists of long-term debt as well as short-term debt, the amount of long-term debt is
(a) Rs.500 lakh (b) Rs.3,500 lakh
(c) Rs.1,000 lakh (d) Rs.1,500 lakh (e) Rs.1,600 lakh.
(2 marks)
< Answer >
44. Arathi Ltd. acquires Bharati Ltd. for a consideration of Rs.40,00,000 to be satisfied in the form of fully paid
equity shares of Rs.10 each. The balance sheet of the two companies is as follows:
Liabilities Arathi Ltd. Bharati Ltd. Assets Arathi Ltd. Bharati
Ltd.
Equity share capital
@ Rs.10 each
40,00,000 25,00,000 Fixed assets 76,00,000 48,00,000
General reserves 15,00,000 3,00,000 Current assets 20,00,000 10,00,000
Development rebate
reserve 3,00,000 1,00,000
Export profit Reserve 6,00,000 4,00,000
Profit & loss A/C 12,00,000 9,00,000
Sundry liabilities 20,00,000 16,00,000
96,00,000 58,00,000 96,00,000 58,00,000
The amount of Goodwill/Capital Reserve resulting from the amalgamation accounted for under pooling of
interest method is
(a) Rs.4,00,000 (Goodwill) (b) Rs.4,00,000 (Capital Reserve)
(c) Rs.6,00,000(Goodwill) (d) Rs.6,00,000 (Capital Reserve) (e) Rs.Nil.
(3 marks)
< Answer >
45. Arathi Ltd. acquires Bharati Ltd. for a consideration of Rs.40,00,000 to be satisfied in the form of fully paid
equity shares of Rs.10 each. The Balance Sheet of the two companies is as follows:
Liabilities Arathi Ltd. Bharati Ltd. Assets Arathi Ltd. Bharati
Equity share capital 40,00,000 25,00,000 Fixed assets 76,00,000 48,00,000
General reserves 15,00,000 3,00,000 Current assets 20,00,000 10,00,000
< Answer >
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General reserves 15,00,000 3,00,000 Current assets 20,00,000 10,00,000
Development rebate
reserve 3,00,000 1,00,000
Export profit Reserve 6,00,000 4,00,000
Profit & loss A/C 12,00,000 9,00,000
Sundry liabilities 20,00,000 16,00,000
96,00,000 58,00,000 96,00,000 58,00,000
The amount of Goodwill/Capital Reserve resulting from the amalgamation accounted for under Purchase method
is
(a) Rs.4,00,000 (Goodwill) (b) Rs.4,00,000 (Capital Reserve)
(c) Rs.2,00,000(Goodwill) (d) Rs.2,00,000 (Capital Reserve) (e) Rs.Nil.
(2 marks)
46. The following information is related to Arnika Industries Ltd.
Current liabilities and provisions Rs.150 lakh
Net sales Rs.700 lakh
Inventory turnover ratio 7
Current ratio 1.50
Receivables/Quick Assets Ratio 0.8
What is the amount of cash and bank balance? (Assume 360 days in a year)
(a) Rs.18 lakh (b) Rs.10 lakh (c) Rs.12 lakh
(d) Rs.15 lakh (e) Rs.25 lakh.
(2 marks)
< Answer >
47. H. Ltd. acquired 80% shares of S. Ltd. on April 01, 2004. The Balance Sheets of H. Ltd. and
S. Ltd. as on March 31, 2005 were as follows:
Balance sheets of H. Ltd. and S. Ltd. as onMarch 31, 2005
Liabilities H. Ltd.
(Rs.)
S. Ltd.
(Rs.)
Assets H. Ltd.
(Rs.)
S. Ltd.
(Rs.)
Share capital (Rs.10
each) 4,50,000 1,50,000 Land & building 2,10,000 1,20,000
General reserve 1,95,000 75,000 Plant & machinery 1,95,000 65,000
Profit & loss a/c 95,000 65,000 Furniture &fixtures 95,000 45,000
Sundry creditors 50,000 30,000 Investments 1,60,000 10,000
Bills payable 30,000 25,000 Stock 45,000 25,000
Sundry debtors 60,000 50,000
Bills receivable 35,000 20,000
Cash & bank 20,000 10,000
8,20,000 3,45,000 8,20,000 3,45,000
Other information:
i. As on the date of acquisition, the following balances were revealed in the books of S. Ltd.:
General reserve –– Rs.50,000
Profit & loss account –– Rs.30,000 (cr.)
ii. H. Ltd. received a dividend of Rs.12,000 from S. Ltd. from pre-acquisition profits and credited the amount
to investment account.
iii. Total bills payable of S Ltd. consisted of bills drawn by H. Ltd. and the same were discounted with the bank
by H. Ltd.
The total of Consolidated Balance Sheet of H. Ltd. and S. Ltd. as on March 31, 2005 was
(a) Rs.10,00,000 (b) Rs.11,00,000 (c) Rs.11,65,000
(d) Rs.20,00,000 (e) Rs.10,05,000.
(3 marks)
< Answer >
48. Arundhati Ltd. sells its goods on credit only. The average collection period of the company is 30 days. Its
balance sheet shows debtors balances of Rs.50 lakh as on 01.04.2005 and of Rs.70 lakh as on 31.03.2006. What
was its annual sales turnover for the year 2005-06? (Assume 360 days in a year.)
(a) Rs.250 lakh (b) Rs.300 lakh (c) Rs.720 lakh
(d) Rs.450 lakh (e) Rs.750 lakh.
(2 marks)
< Answer >
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49. Following is the balance sheets of H.Ltd. and its subsidiary S.Ltd. as on December 31, 2005.
Liabilities
H. Ltd.
(Rs.)
S. Ltd.
(Rs.) Assets H. Ltd. (Rs.)
S. Ltd.
(Rs.)
Share capital (Rs.10
each) 2,00,000 1,00,000 Land & building 2,00,000 1,00,000
General reserve 1,00,000 50,000 Plant & machinery 1,00,000 50,000
Profit & loss a/c as on
December 2004 50,000 40,000
Profit & Loss A/c 1,00,000 60,000 Investments 1,00,000 -
12% Debentures 2,00,000 1,00,000 Stock 1,50,000 1,50,000
Sundry creditors 1,00,000 50,000 Sundry debtors 1,00,000 50,000
Bills receivable 75,000 25,000
Cash & bank 25,000 25,000
7,50,000 4,00,000 7,50,000 4,00,000
H.Ltd. acquired shares in S.Ltd. on July 01, 2005.
S.Ltd. had a balance of Rs.40,000 in General Reserve on January 01, 2005. Goods costing Rs.20,000 of S.Ltd.
were destroyed in March 2005 and was charged to Profit and loss account for the year.
The share of H.Ltd. in the capital profits of S.Ltd. was
(a) Rs.21,000 (b) Rs.84,000 (c) Rs.1,00,000
(d) Rs.76,000 (e) Rs.23,000.
(3 marks)
< Answer >
50. Amoorv Industries Ltd. has made the following projections:
Expected increase in spontaneous Liabilities Rs.600 lakh
Expected increase in assets Rs.1200 lakh
Expected net profit by the end of the year Rs.600 lakh
Expected pay-out ratio 40 percent
The amount of external funds required by the firm is
(a) Rs.200 lakh (b) Rs.400 lakh (c) Rs.500 lakh
(d) Rs.240 lakh (e) Data insufficient.
(2 marks)
< Answer >
51. On December 01, 2005 H Ltd. acquired 70% shares in S Ltd.. The balance of profit and loss account of S Ltd. on
April 01, 2005 and March 31, 2006 was Rs.1,80,000 and Rs.2,95,000, respectively. The profit is earned evenly
throughout the year. The share of capital profit of HLtd. in the Consolidated Balance Sheet as onMarch 31, 2006 is
(a) Rs.2,06,500 (b) Rs.88,500 (c) Rs.1,79,667
(d) Rs.1,26,000 (e) Rs.1,08,000.
(2 marks)
< Answer >
52. On October 01, 2004, H.Ltd. acquired 70% shares in S.Ltd. at a cost of Rs.37,50,000. On October 01, 2004 the
profit and loss account and Capital reserve of S.Ltd. showed credit balances of Rs.5,00,000 and Rs.9,00,000
respectively. Following is the Balance Sheet of S.Ltd. as on March 31, 2005:
Liabilities Rs. Assets Rs.
Share capital 40,00,000 Land and building 31,50,000
(4,00,000 shares Rs.10 each) Machinery 14,70,000
Capital reserve 12,00,000 Furniture and fittings 10,80,000
Profit and loss account 8,00,000 Sundry debtors 3,90,000
Short term loan 4,00,000 Closing inventory 2,40,000
Sundry creditors 60,000 Cash on hand 70,000
Cash at bank 60,000
64,60,000 64,60,000
On October 15, 2004 S.Ltd. declared a dividend of 10% out of its previous years’ profits. Amount of
goodwill/Capital Reserve that is to be shown in the Consolidated Balance Sheet as on March 31, 2005 was
(a) Rs.2,50,000 (Goodwill) (b) Rs.2,50,000 (Capital Reserve)
(c) Rs.30,000 (Goodwill) (d) Rs.30,000 (Capital Reserve)
(e) Rs.3,10,000 (Capital Reserve).
< Answer >
9
(2 marks)
53. The data on the current assets and current liabilities of Arpita Ltd. for the financial year 2005-06 are given below
(in terms of Rs. lakh):
Debtors Cash balance Inventory Current liabilities
Beginning 100 70 30 60
Ending 120 60 45 55
The change in net working capital of the company is
(a) Rs.15 lakh (b) Rs.20 lakh (c) Rs.25 lakh
(d) Rs.30 lakh (e) Rs.50 laksh.
(2 marks)
< Answer >
54. M/s.Hold Ltd. acquired 85% shares of M/s. Sold Ltd. on December 12, 2004. M/s.Hold Ltd. makes a profit of
15% on its sales. During the year 2005-06, it supplied goods worth Rs.60,000 to M/s.Sold Ltd., out of which,
50% are still in stock of M/s Sold Ltd. as on March 31, 2006. The company adheres to AS-21, for reporting
purposes. The unrealized profit on stock to be adjusted while preparing Consolidated Balance Sheet is
(a) Rs.3,060 (b) Rs.3,825 (c) Rs.2,550 (d) Rs.4,500 (e) Rs.3,600.
(2 marks)
< Answer >
55. The following figures are collected from the annual report of Akhaya Ltd.:
Return on investment = 12 percent
Number of outstanding equity shares = 1,00,000
Net worth = Rs.25 lakh
Total debt = Rs.40 lakh
Average cost of debt = 9 percent
Applicable tax rate = 40 percent
The earning per share for Akhaya Ltd. is
(a) Rs.2.00 (b) Rs.2.26 (c) Rs.2.52 (d) Rs.2.73 (e) Rs.2.99.
(3 marks)
< Answer >
56. M/s.Hell Ltd. acquired 90 % shares of M/s. Sell Ltd. on October 1, 2005. At the time of acquisition, the plant
and machinery of M/s.Sell Ltd. was revalued by M/s.Hell Ltd. at 20% above its book value of Rs.6,00,000. At
the time of Consolidation of Balance Sheet on March 31, 2006, the share of M/s.Hell Ltd. in the profit is
(a) Rs.1,08,000 (Capital profit) (b) Rs.1.08,000 (Revenue profit)
(c) Rs.1,40,000 (Capital profit) (d) Rs.1,20,000 (Revenue profit)
(e) Rs.1,20,000 (Capital profit).
(1 mark)
< Answer >
57. On July 01, 2005, M/s.Hat Ltd. acquired 8,000 equity shares of M/s. Sat Ltd. for a consideration of Rs.8,00,000.
The share capital of M/s. Sat Ltd. consists of 10,000 equity shares of Rs.100 each.
The balances of General reserve and Profit and loss account ofM/s.Sat Ltd. are as under:
As on July 01, 2005 (Rs.) As on March 31, 2006 (Rs.)
General reserve 1,70,000 2,00,000
Profit and loss account 1,50,000 1,75,000
The amount of minority interest shown in Consolidated Balance Sheet as onMarch 31, 2006 is
(a) Rs.3,30,000 (b) Rs.2,75,000 (c) Rs.3,07,500
(d) Rs.2,50,000 (e) Rs.2,69,000.
(2 marks)
< Answer >
58. Consider the following data pertaining to Abbas Ltd.
Authorized share capital Rs. 20,00,000
Issued, called-up and paid -up capital Rs. 12,00,000
Calls in advance Rs. 80,000
Securities Premium Rs. 1,20,000
Profit for the current year Rs. 2,55,600
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.30,672 (b) Rs.2,40,000
< Answer >
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(c) Rs.1,53,600 (d) Rs.1,44,000 (e) Rs.1,58,400.
(1 mark)
59. The Managing Director of Alluri Ltd. is entitled to a commission of 5% on net profits before charging such
commission. The net profit of the company for the year ended March 31, 2006 was reported to be Rs.25,50,000.
Subsequently, it was noticed that the following transactions were omitted:
Particulars Rs.
Payment of director’s remuneration 50,000
Sale of a plant (cost price Rs.1,00,000; written down value Rs.80,000) 1,10,000
Payment of bonus to production executive 50,000
Payment of income tax and super tax 5,000
Issue of 20,000 equityshares ofRs.10 each at a premiumofRs.2 2,40,000
The commission payable by the company to the managing director for the year 2005-2006 is
(a) Rs.1,23,500 (b) Rs.1,26,000 (c) Rs.1,28,500
(d) Rs.1,17,620 (e) Rs.1,60,000.
(2 marks)
< Answer >
60. Hot Ltd. holds 80% shares of Sot Ltd. As on March 31, 2006, the bills payable of Sot Ltd. consists of Rs.20,000
out of which bills worth Rs.6,000 were drawn by Hot Ltd. and the same were discounted with the bank.
If the Balance Sheet of Hot Ltd. does not have any bills payable, the amount of bills payable to be shown in the
Consolidated Balance Sheet as on March 31, 2006 is
(a) Rs.10,000 (b) Rs.6,000 (c) Rs.14,000 (d) Rs.20,000 (e) Rs.Nil.
(1 mark)
< Answer >
61. The directors of M/s.Agra Ltd. proposed a dividend of 14%. The minimum amount of current profits to be
transferred by the company to reserves is
(a) 2.5% (b) 10% (c) 7.5% (d) 5% (e) 20%.
(1 mark)
< Answer >
62. Consider the following data pertaining to a company:
Average capital employed – Rs.25,00,000
Closing capital employed – Rs.30,00,000
The amount of capital employed at the beginning of the year is
(a) Rs.27,50,000 (b) Rs.25,00,000 (c) Rs.22,50,000
(d) Rs.20,00,000 (e) Rs.5,00,000.
(1 mark)
< Answer >
63. Consider the following data pertaining to M/s April Ltd.:
Particulars Rs.
Nominal equity share capital 50,000
Issued and called-up equity share capital 48,000
Paid-up equity share capital 48,000
Calls in advance 1,000
10% Preference share capital (fully paid-up) 50,000
If the company declares a dividend of 10%, the total dividend payable is
(a) Rs.10,100 (b) Rs.10,000 (c) Rs.9,900 (d) Rs.9,800 (e) Rs.4,800.
(1 mark)
< Answer >
64. For a company, the net profit margin is 12 percent, debt-equity ratio is 2.00 and the total asset turnover is 1.67.
What is the return on equity for that company?
(a) 3.34 percent (b) 20 percent (c) 24 percent
(d) 30 percent (e) 60 percent.
(2 marks)
< Answer >
65. For Akash Ltd., the current ratio is 2.75 while the acid test ratio is 2.00. What is the percentage of inventories
with respect to the current liabilities?
(a) 20.00 percent (b) 27.50 percent (c) 40.00 percent
(d) 55.00 percent (e) 75.00 percent.
(1 mark)
< Answer >
66. Aryan Ltd. purchased furniture for Rs.60,000 two years ago. The current book value of the furniture is
Rs.43,350. If the company charges depreciation on furniture under written down value method, the rate of
depreciation charged was
< Answer >
11
(a) 35% (b) 30% (c) 25% (d) 20% (e) 15%.
(1 mark)
67. The sales turnover of a company is Rs.120 lakh while the amount of credit sales is 80 percent of total sales. If the
amount of receivables increases from Rs.8.50 lakh to Rs.11.50 lakh during the year, what is its average collection
period from its debtors?
(a) 22.5 days (b) 27.5 days (c) 32.5 days
(d) 37.5 days (e) 42.5 days.
(2 marks)
< Answer >
68. Consider the following data pertaining to Ananth Ltd. as on March 31, 2006:
Particulars Rs.
Credit sales 1,40,000
Credit purchases 20,000
Cash sales 20,000
Cash purchases 70,000
Wages paid 5,000
Salaries paid 2,000
Returns inward 3,000
Returns outward 2,000
Carriage inward 1,000
Carriage outward 1,000
Printing and stationery 600
Gas, water and fuel 2,000
Raw materials destroyed by fire 2,000
Additional Information:
Particulars As on April 01, 2005 As on March 31, 2006
Rs. Rs.
Inventory 27,000 40,000
Outstanding wages 500 700
Outstanding salaries 400 300
Gross profit of Ananth Ltd. for the year ended March 31, 2006 is
(a) Rs.73,800 (b) Rs.75,800 (c) Rs.74,800
(d) Rs.76,200 (e) Rs.75,200.
(3 marks)
< Answer >
69. The following information is related to Allepy Ltd.:
Gross profit Rs.45 lakh
Gross profit margin 20 percent
Total assets turnover ratio 3
Total debt to equity ratio 1.50
Current assets Rs.35 lakh
Current ratio 2.50
What is outstanding amount of term loan in its balance sheet? (Assume term loan is the only interest bearing
borrowings made by the company)
(a) Rs.22 lakh (b) Rs.25 lakh (c) Rs.28 lakh (d) Rs.31 lakh (e) Rs.34 lakh.
(2 marks)
< Answer >
70. Apurva Ltd. has the practice of creating provision for doubtful debts @ 5% on debtors. The balance of provision
for doubtful debts on April 01, 2005 and March 31, 2006 is Rs.30,000 and Rs.40,000, respectively. If the amount
collected from debtors is Rs.56,00,000, credit sales during the year 2005-2006 are
(a) Rs.58,00,000 (b) Rs.56,10,000 (c) Rs.54,00,000
(d) Rs.55,90,000 (e) Rs.56,00,000.
(2 marks)
< Answer >
71. Which of the following conditions have to be met to receive calls-in-advance?
(a) It should be authorized by a special resolution of the company
< Answer >
12
(b) It should be authorized by an ordinary resolution of the company
(c) It should be sanctioned by the Central Government
(d) It should be approved by the Company Law Board
(e) It should be authorized by the articles.
(1 mark)
72. The time interval between the dates of balance sheets of holding company and subsidiary company for the
purpose of consolidation of accounts
(a) Can be more than 1 year
(b) Can be more than 9 months but less than 1 year
(c) Can be more than 6 months but less than 9 months
(d) Cannot be more than 6 months
(e) Cannot be more than 2 months.
(1 mark)
< Answer >
73. Under which of the following heads is a claim against a company not acknowledged as debt shown?
(a) Notes to balance (b) Current liability
(c) Current asset (d) Secured loan
(e) Unsecured loan.
(1 mark)
< Answer >
13
Suggested Answers
Financial Accounting – II (MB132): April 2006
1. Answer : (c)
Reason: The loss on sale of fixed assets (c) is debited to profit and loss account and is not carried over under
Miscellaneous expenditure in the balance sheet of a company and alternative (c) is the correct
answer. the following will form part of ‘Miscellaneous Expenditure’ of the Balance Sheet of a
company till they are adjusted/written off completely Preliminary expenses (a), Underwriting
expenses (b), Discount on issue of shares (d) and Interest paid out of capital.(e) are not the correct
answers.
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2. Answer : (e)
Reason: In Jury of Executive opinion method, the personal judgements of many senior executives from
different fields are taken into account while in sales force estimates method, the personal judgement
of the sales personnel operating at the ground level are considered. But mathematical tools and
techniques are applied in the methods mentioned in the options (c) and (d). Hence, the option (e) is
answer.
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3. Answer : (d)
Reason: Para 3(g) of AS-14 clearly states that purchase consideration is the aggregate of shares and other
securities issued and the payment made in the form of cash or other assets by the transferee
company to the shareholders of the transferor company.
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4. Answer : (e)
Reason: In the Consolidated Balance Sheet of a Holding Company, the value of minority 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.
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5. Answer : (d)
Reason: The liquidity of a company is measured by the acid-test ratio as it is a liquidity ratio. The other
ratios, as mentioned in the other options, do not convey anything in relation to the liquidity of a
company.
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6. Answer : (e)
Reason: Under the Net Assets method of calculating purchase consideration, assets and liabilities of the
transferor company are taken over by the transferee company at agreed values. In the absence of
agreed values, book values of the assets and liabilities is considered.
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7. Answer : (d)
Reason: A funds flow statement on cash basis does not show the net change in working capital.
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8. Answer : (b)
Reason: EVA can be improved by downsizing non-profitable operations, units or by selling off sub-standard
assets. Hence (b) is false. The computation of EVA involves a complex procedure. Stern and
Stewart suggested 175 different assumptions and adjsutments 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
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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.
9. Answer : (d)
Reason: Forecasting sales volume is the first step in the exercise of financial forecasting. Based on the
amount of sales target to be achieved by the company, forecasting for the other requirements are
made.
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10. Answer : (a)
Reason: Dividends paid by a subsidiary company out of pre-acquisition profits are adjusted against
Investment A/c for the purpose of arriving at cost of control at the time of consolidation of accounts
(a) since they form part of capital profits they are adjusted against the cost of control and alternative
(a) is the correct answer. Since, they are capital profits, they cannot be adjusted against general
reserve at the time of consolidation (b) is the incorrect answer. They are not revenue receipts to be
transferred to Profit and Loss account at the time of consolidation of accounts and alternative (c) is
the incorrect answer. Since they are part of capital profits, they cannot be ignore for consolidation
purposes. And alternative (d) is incorrect. The dividends declared out of post-acquisition profits are
the claims of the shareholders of the holding company. and do not form part of cost of control. The
alternative (e) is not the correct answer. Thus, alternative (a) is the correct answer.
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11. Answer : (b)
Reason: When Statutory Reserves are incorporated in the financial statements of the transferee company by
way of the following entry.
Amalgamation Adjustment A/c Dr.
To Statutory Reserves A/c
This ENTRY is reversed when the statutory reserve is no longer required. Hence the journal entry is
Statutory Reserves A/c Dr.
To Amalgamation Adjustment A/c
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12. Answer : (b)
Reason: Called up capital is the amount on the shares which is actually demanded by the 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.
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13. Answer : (e)
Reason: A funds flow statement is known through different terms one of them is mentioned in the given
option (e). A balance sheet states the financial position of a company as on a particular date while
profit and loss statement or income statement shows the financial performance of a company during
a year or a particular time period. Proforma statements are prepared to project the financial position
(proforma balance sheet) of a company and the financial performance (proforma income statement)
of a company in future.
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14. Answer : (e)
Reason: Preference share capital, equity share capital, calls-in arrear and share forfeiture should be shown
under the head ‘Share capital’ in the balance sheet. However the preference dividend will be shown
under provisions if it is proposed and under current liabilities if declared. The unclaimed dividend
also will be shown under the head current liabilities, Thus the answer is (e).
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15. Answer : (b)
Reason: Dividend pay out ratio indicates the amount of dividend paid out of net profit earned by the
company. Net profit margin represents the amount of profit as a percentage of total sales. Inventory
turnover ratio implies how efficiently the inventories are used by a company while acid test ratio
shows the liquidity status for a company. But fixed chares coverage ratio represents the ability of a
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firm to meet its financial obligations to make service the debts as well as to pay the lease rentals.
16. Answer : (e)
Reason: As per schedule VI of the Companies Act, 1956, Unadjusted development 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.
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17. Answer : (e)
Reason: According to the Schedule VI of the Companies Act, 1956, the following assets is/are shown under
the head ‘investments’ in the balance sheet of a company
I Investments in the capital of partnership firms
II Investment in Trust securities
III Investment in shares
IV Investment in debentures.
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18. Answer : (a)
Reason: (III) Every officer and other employee and agent in default is/are held responsible for keeping
proper books of accounts of a company in addition to the Managing Director or Manager of the
company Thus, alternative (a) is the correct answer. The other persons mentioned in other
statements and alternatives (b), (c), (d) and (e) are incorrect because they are not the persons held
liable for proper keeping books of accounts
I Every legal advisor of the company
II Every banker of the company
IV Every auditor of the company
V Every member of the company. Thus, the correct answer is (a).
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19. Answer : (b)
Reason: The financial risk of a firm may be estimated by using the leverage and coverage ratios while the
earning potential of a company may be evaluated through the profitability ratios. The operational
and the level of efficiency in utilizing the assets may measured by using the turnover ratios. But
price-earnings ratio is used to determine the expected market price per share of the company. One
may project the EPS of a company for the next few years and thereafter by assuming the continuity
of the same P/E multiple, the future market price per share may be calculated.
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20. Answer : (c)
Reason: Dividends are usually paid as a percentage of called-up capital less calls-in-arrear (c).It is not paid
on authorized capital (a) unless it is fully called-up and paid-up. Net profit (b) is the basis for
declaring dividends but the computation is as a percentage of paid-up capital. And is not the correct
answer. No dividend is payable on calls-in-advance hence the alternative (d) which states paid-up
share capital plus calls-in-advance is incorrect. The alternative (e) is also incorrect because, it also
includes calls-in-advance. Thus, alternative (c) is the correct answer.
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21. Answer : (c)
Reason: As per the Schedule VI of the Companies Act, 1956, ‘Premium on issue of 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.
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22. Answer : (b)
Reason: The trend analysis, through the method of extrapolation and regression analysis are used for the
projection of sales volume of the company. The future relationship between various costs to sales is
assumed to follow historical relationship in case of percent of sales method. But in budgeted
expense method, the estimation of the various items is considered on the basis of the expected
changes to be happened in the market for the preparation of the proforma income statement. Hence,
the option (b) is the answer.
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23. Answer : (b)
Reason: The proposed dividend is classified as a provision and shown on the liability side of the balance
sheet. The dividend finally decided by the shareholders in the annual general meeting as payable is
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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).
24. Answer : (b)
Reason: Consolidated financial statements should reflect the economic activities of a business enterprise
measured without regard to the boundaries of the legal entity. A parent and subsidiary are legally
separate but are treated as a single business enterprise in consolidated statements, in recognition of
Business entity concept (b). The other concepts do not explain about consolidation of financial
statements. The Going concern concept (a) assumes that the business entity will continue to operate
in the absence of evidence to the contrary. Materiality (c) requires reporting the information that has
a value significant enough to affect decisions of those using the financial statements. Cost concept
(d) explains how the assets are to be recorded in the books of accounts. According to this, fixed
assets are to be recorded at cost less accumulated depreciation. Periodicity (e) explains that the
financial accounting process is meant to provide the information about the economic activities of the
business enterprise at regular intervals. It does not speak about consolidation of financial statements.
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25. Answer : (a)
Reason: In case of a company, it is not necessary to split the profit and loss account into three sections i.e.
Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account. Only Profit
and Loss Account may be prepared covering items appearing in Trading Account and Profit and
Loss Appropriation Account. The Profit and Loss Appropriation section of the profit and Loss
account shows the appropriation of profit and is popularly known as ‘below the line’ (a) is the
correct answer. There is no term ‘above the line’ (b) in accounting in this context. Profit and loss
adjustment account (c) is the final account depicting rectification of errors that are found after
preparation of final accounts. Specific reserve (d) is appropriation of profit for specific purpose
either for acquisition of an asset or amortization of expenditure or redemption of a liability and has
no relevance. General reserve (e) is the reserve created out of net profits, which is not the correct
answer.
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26. Answer : (a)
Reason: According to the Companies Act, 1956, the companies have to compulsorily maintain their books of
account only on accrual basis. Cash basis should not be followed.
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27. Answer : (c)
Reason: No disclosure is required in consolidated financial statements in respect of Intra-group transactions.
The other items, Remittances-in-transit, capital reserve/Goodwill and minority interest are disclosed
in consolidated financial statements.
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28. Answer : (b)
Reason: Du Pont equation for return on equity is:
Return on Equity (ROE)
Net profit Sales Average assets
Sales Average assets Average equity
× ×
The third component of the equation is called equity multiplier.
Thus, higher the assets turnover ratio, higher the equity multiplier, higher the debt-assets ratio,
higher the return on assets, higher will be the return on equity. Hence, (c), (d) and (e) are not correct
and (b) is correct. Return on equity does not depend on sales. Hence, (a) is also not true.
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29. Answer : (b)
Reason: A decrease in the retention ratio implies an increase in the dividend payment and less amount of
funds available for investment and hence increases the external funds required. Hence, (b) is true.
An increase in the spontaneous liabilities to sales ratio, an increase in assets turnover ratio (i.e. a
decrease in total assets to sales ratio) decreases the external funds required. Hence, (a) and (c) are
incorrect. Short-term bank borrowings are one of the sources of the external funds and does not
indicate the amount of funds required.
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30. Answer : (d)
Reason: The nominal value of shares taken up by the public is subscribed capital. The issued capital is the
nominal value of shares offered to the public. Hence subscribed capital is equal to issued capital
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when all the shares offered to the public are taken up by the public. When the board of directors
have called up the total amount payable by the shareholders, the called-up capital will be equal to
the subscribed capital. When the maximum share capital which the company is authorized to issue is
offered to public, the authorized capital will be equal to the issued capital.When all the shareholders
have duly paid the total amount payable by them, the called-up capital will be equal to the paid-up
capital. Subscribed capital and issued capital are not one and the same. Thus the answer is (d).
31. Answer : (d)
Reason : An increase in current assets or a decrease in current liabilities will increase the working capital.
Hence, a decrease in the amount of provision for tax i.e. a current liability results in an increase in
working capital. Option (a) results in an increase in current liability and hence results in decrease in
working capital. Other alternatives indicates changes in non-current assets and hence are not
correct.
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32. Answer : (c)
Reason : Inventory turnover ratio=Cost of goods sold/Average inventory
If the inventory turnover ratio has decreased from past, it means that either inventory is growing or
cost of goods sold sales are dropping. So statement (I) is incorrect.
If a firm has an inventory turnover that is slower than for its industry, then there may be obsolete
goods on hand, or inventory stocks may be high. So statement (II) is incorrect.
Low inventory turnover has impact on the liquidity of the business because most of the current
assets are tied up in inventory. So statement (III) is correct.
Hence option (c) is the answer.
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33. Answer : (e)
Reason : Using a funds flow statement we can know about all the given factors. i.e. liquidity, acquisition of
non current assets, about utilization of external funds and pattern of financing. Hence (e) is the
answer.
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34. Answer : (a)
Reason : If the proposed dividend appears in the balance sheet of subsidiary company, while 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).
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35. Answer : (c)
Reason : Net value-added is derived by deducting depreciation from the gross value added. Gross value
added is arrived at by deducting cost of all materials and services and other extraordinary expenses
from sales revenue and any other income. Therefore, Net value added = Gross value added –
Depreciation.
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36. Answer : (b)
Reason : The item interest accrued on investments appears in the Balance Sheet of a company under the
category of current assets.
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37. Answer : (a)
Reason : As per accounting standard 18, if two or more companies are subsidiaries of the same holding
company, each subsidiary is known as Fellow subsidiary.
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38. Answer : (c)
Reason : Though dividends can be declared only by a resolution of the shareholders, if the articles permit, the
directors can declare an interim dividend (c) between two annual general meetings. The dividend
recommended by the directors is termed as proposed dividend (a) till such time it is approved by the
shareholders in the AGM. The dividend finally decided by the shareholders in the AGM as payable
is termed as Declared dividend (d). The unclaimed portion of it is un-paid/ un-claimed dividend (e).
Final dividend (b) gives rise to an enforceable obligation.
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39. Answer : (a)
Reason : Debt asset ratio indicates the capital structure of a company. Inventory turnover ratio and total asset
turnover ratio are the turnover ratios that indicate how efficiently the assets are utilized by a
company. While return on equity and return on assets are the profitability ratios of a business entity.
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40. Answer : (d)
Reason : Economic value addition=Net operating profit after tax – Weighted average cost of capital.
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41. Answer : (d)
Reason : Net asset method refers to vendor company’s assets less liabilities taken over by the purchasing
company. In the above, purchase consideration is equal to
Particulars Amount (Rs.)
Fixed Assets 6,00,000
Current Assets 2,50,000
8,50,000
Less Debentures 1,50,000
Current Liabilities 1,00,000
Purchase consideration 6,00,000
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42. Answer : (b)
Reason : Each share of Asha Ltd. has a market value of Rs.40 while the market value of Ashiki Ltd. has
Rs.20. Hence purchase consideration payable is 1,00,000 x Rs.20 = Rs.20,00,000. This purchase
consideration is to be satisfied with the issue of shares of Asha Ltd. with a market value of Rs.40.
Hence, the number of shares of Asha Ltd. is 50,000.
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43. Answer : (b)
Reason : Here, the total debt-equity ratio is = 4:3 and the amount of total assets is Rs.7000 lakh.
So, the total amount of debt is =
4
Rs.7000 lakh
7
×
= Rs.4000 lakh.
But the amount of short term debt is Rs.500 lakh.
Hence, the amount of long term debt = 4000 – 500 = Rs.3500 lakh.
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44. Answer : (e)
Reason : In the case of amalgamation accounted for under Pooling of interest method, no goodwill or capital
reserve results. The excess of assets over liabilities is adjusted in the General Reserve not giving rise
to goodwill or capital reserve.
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45. Answer : (d)
Reason : When the amalgamation is accounted for under the purchase method, the journal entry is
Fixed Assets Dr. 48,00,000
Current Assets Dr. 10,00,000
To Sundry Liabilities 16,00,000
To Purchase Consideration 40,00,000
To Capital Reserve 2,00,000
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46. Answer : (e)
Reason : Inventory = =
Sales
Inventory Turnover ratio = Rs.100 lakh
Current assets = Current liabilities × current ratio = Rs.150 × 1.5 = Rs.225 lakh.
Quick assets = Current assets – Inventories = Rs.225 lakh – Rs.100 lakh = Rs.125 lakh
Receivables = Rs.125 lakh × 0.80 = Rs. 100 lakh
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So, the amount of cash and bank balance will be = Rs.225lakh – Rs.100 lakh – Rs.100 lakh
= Rs.25 lakh.
47. Answer : (e)
Reason : Consolidated balance sheet of H Ltd and S Ltd as on March 31, 2005
Liabilities Rs. Assets Rs.
Share capital (Rs.10 each) 4,50,000 Land & building Rs.
General reserve 1,95,000 H Ltd. 2,10,000
Capital reserve 12,000 S Ltd. 1,20,000 3,30,000
Profit & loss account Rs. Plant & machinery
H Ltd. 95,000 H Ltd. 1,95,000
Shares in S Ltd.
(Revenue profit)
60,000 1,55,000
S Ltd.
65,000 2,60,000
Sundry creditors: Furniture & fixtures
H Ltd. 50,000 H Ltd. 95,000
S Ltd. 30,000 S Ltd. 45,000 1,40,000
80,000 80,000 Investments 10,000
Stock – H Ltd.
45,000
Bills payable: S Ltd. 25,000 70,000
H Ltd. 30,000 Sundry debtors
S Ltd. 25,000 55,000 H Ltd. 60,000
Minority interest 58,000 S Ltd. 50,000
1,10,000
Bills receivable
H Ltd. 35,000
S Ltd. 20,000 55,000
Cash & bank
H Ltd. 20,000
S Ltd. 10,000 30,000
10,05,000 10,05,000
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48. Answer : (c)
Reason : Average collection period =
Average accounts receivable
Averagedailysales
Let the annual sales of the company is = S and so the amount of average daily sales =
S
360
So, the average daily sales =
Average accounts receivable
Average collection period
The average amount of account receivables for the company is : {50+70}/ 2 = Rs.60 lakh. Hence,
S Rs. = 60
360 30
Or, S = Rs.720 lakh.
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49. Answer : (b)
Reason : Reason: Analysis of Capital Profits of S.Ltd.
General Reserve as on January 01, 2005 40,000
Profit and Loss Account balance as on Jan 01, 2005 40,000
Profit for the year before transfer to G.Reserve and
Writing off loss of stock
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(60,000 + 10,000 +20,000 = 90,000)
Current profit for Jan 1 to July 1) 45,000
1,25,000
Less loss of stock in March 2005 20,000
1,05,000
Less share of minority interest (20% ) 21,000
Share of Holding Company ( 80% ) 84,000
50. Answer : (d)
Reason : The amount of external funds required by a company is given by : Expected increase in assets –
Expected increase in spontaneous liabilities – Expected retained earnings.
Here, the expected retained earnings of the company is Rs.600 lakh × 60 percent = Rs.360 lakh.
Hence, the required figure is Rs.1200 lakh – Rs.600 lakh – Rs.360 lakh = Rs.240lakh.
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51. Answer : (c)
Reason : Profit for the year 2004-2005 = Rs.2,95,000 – Rs.1,80,000 = Rs.1,15,000
Profit for 8 months (from April 01, 2005 to December 01, 2005)=
x , ,
8
1 15 000
12 = Rs.76,667
Share of capital profit of H Ltd. = (1,80,000 + 76,667) x 70% = Rs.1,79,667.
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52. Answer : (d)
Reason :
Capital Profits
(Rs.)
Pre-acquisition reserve 9,00,000
Pre-acquisition profits 5,00,000
14,00,000
Less: Dividend (40,00,000 x 10%) 4,00,000
10,00,000
Particulars (Rs.) (Rs.)
Cost of investments 37,50,000
Face value of investments (40,00,000 x 70%) 28,00,000
Capital profits Rs.(10,00,000 x 70%) 7,00,000
Dividend out of pre-acquisition profits Rs.4,00,000 x 70%) 2,80,000 37,80,000
Capital Reserve 30,000
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53. Answer : (d)
Reason : Change is net working capital can be calculated as : (120 + 60 + 45 – 55) –(100 + 70 +30 – 60) =
170 – 140 = Rs.30 lakh.
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54. Answer : (d)
Reason : Unrealised profit on stock to be adjusted while preparing Consolidated Balance Sheet = Rs.
60,000×15%×50% = Rs.4,500. Since the company adheres to AS-21 for reporting purposes, intra
group transactions are to be eliminated in full. Hence the unrealised profit to the extent of Rs.4,500
is to be eliminated or adjusted.
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55. Answer : (c)
Reason : Total assets of the company = Rs.25 lakh + Rs.40 lakh = Rs.65 lakh and so the amount of EBIT
registered by the company = Rs.65 lakh × 12 percent = Rs.7.80 lakh.
Now, interest paid by the company against the debt capital = Rs.40 lakh × 9 percent = Rs.3.60 lakh.
Hence, the earnings before taxes is = Rs.7.80 lakh – Rs.3.60 lakh = Rs.4.20 lakh and the net profit
for the company = Rs.4.20 lakh × 0.60 = Rs.2.52 lakh.
Therefore, the earnings per share will be = Rs.2.52.
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56. Answer : (a)
Reason : Book value of the machinery = Rs.6,00,000
Value of machinery on revaluation = 20% above book value
Profit on revaluation = 20% of Rs.6,00,000
= Rs.1,20,000
Share of H. Ltd. = 90%of Rs.1,20,000
= Rs.1,08,000 (Capital profit)
If the value of assets of the subsidiary company are revalued at the time of acquisition of shares,
profit or loss on such revaluation is treated as capital profit or capital loss and is divided among
minority shareholders and holding company according to their share.
There is no revenue profit in the instant problem.
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57. Answer : (b)
Reason :
Particulars Rs.
Nominal value of 2,000 shares @ Rs.100 per share 2,00,000
Share of capital Profit (1,70,000 + 1,50,000) × 20% 64,000
Share of Revenue Profit
[(2,00,000-1,70,000)+(1,75,000 – 1,50,000)] × 20% 11,000
Minority interest 2,75,000
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58. Answer : (d)
Reason : No dividends are paid on call in advance nor on calls in arrear Dividend = 12% on Rs. 12,00,000 =
Rs.1,44,000.
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59. Answer : (a)
Reason :
Particulars Rs. Rs.
Net Profit as calculated 25,50,000
Add: Revenue Profit on sale of plant 20,000
25,70,000
Less: Director’s remuneration 50,000
Bonus paid to production executive 50,000 1,00,000
Net Profit 24,70,000
Where the amount for which the fixed asset is sold exceed the written-down value, credit shall be
given for so much of the excess as is not higher than the difference between the original cost of the
fixed asset and its written down value. Hence only Rs.20,000 (Rs.1,00,000 – Rs.8,00,000) should be
added
The director’s remuneration and the bonus paid to any member of company’s staff should be
deducted whereas Income tax and super tax should not be deducted.
Credit should not be given to profits by way of premium on shares
Managing Director’s Commission = 24,70,000 × 5% = Rs.1,23,500.
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60. Answer : (d)
Reason : As the bills drawn by Hot Ltd. were already discounted with the bank, the same are no more intercompany
debts. Hence the bills payable should be shown at Rs.20,000.
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61. Answer : (d)
Reason : Where the dividend proposed exceeds 12.5% but does not exceed 15%, the amount to be transferred
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to the reserves shall not be less than 5% of the current profits
62. Answer : (d)
Reason : Average capital employed = (Opening capital employed + Closing capital employed) ÷ 2
2 × Rs.25,00,000 = Opening capital employed + Rs.30,00,000
Opening capital employed = Rs.50,00,000 – Rs.30,00,000
= Rs.20,00,000.
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63. Answer : (d)
Reason : Dividend is paid on paid-up capital
Equity share capital + Preference share capital
= Rs.48,000 + Rs.50,000 = Rs.98,000 = 10% of Rs.98,000 = Rs.9,800.
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64. Answer : (e)
Reason : The Return on Equity (ROE) for a company may be stated as:
ROE =
Net profit Net profit Sales TotalAssets
Networth sales Totalassets Networth
= × ×
= Net profit margin × total assets turn over ratio ×
Debt
Equity
 
 + 
 
1
= 12 × 1.67 × 3 = 60 percent.
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65. Answer : (e)
Reason : For any company, current ratio is the ratio between the current assets and current liabilities while the
acid test ratio is the ratio between the current assets less inventories and current liabilities. So, if the
current ratio is 2.75 and the acid test ratio is 2.00, then it can be said that the inventories constitute
for 75 percent of the current liabilities.
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66. Answer : (e)
Reason : Rate of depreciation = 1 –
n
S
C
= 1–
2
43,350
60,000
= 1 – 0.85 = 15%.
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67. Answer : (d)
Reason : Sales turnover = Rs.120 lakh and so credit sales = Rs.120 × 0.8
= Rs.96 lakh
So, the average daily credit sales =
= Rs. . 96
0 267
360 lakhs.
And the average account receivables = (8.50 +11.50) / 2 = Rs.10 lakh
So, the required average collection period is =
Average accounts receivable
Average daily credit sales
=
10
37.5 days
0.267
=
.
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68. Answer : (b)
Reason : Ananth Ltd.
Dr. Trading Account for the period ending March 31, 2006 Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 27,000 By Sales:
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To Opening stock 27,000 By Sales:
To Purchases Cash 20,000
Cash 70,000 Credit 1,40,000
Credit 20,000 1,60,000
90,000 (–) Returns inward 3,000 1,57,000
(–) Goods lost 2,000 By Closing stock 40,000
(–) Returns outward (–) 2,000 86,000
To Wages 5,000
(+) Outstanding as
on March 31, 2006 700
5,700
(–) Outstanding as
on April 01, 2005 500 5,200
To Carriage inward 1,000
To Gas, water, fuel 2,000
To Gross Profit 75,800
1,97,000 1,97,000
69. Answer : (d)
Reason : Gross profit = Rs.45 lakhs and gross profit margin = 0.2
So, the sales turnover =
45
0.2 = Rs.225 lakhs
Total assets =
Sales
Total assets turnover ratio
=
225
3 = Rs.75 lakhs.
But, total assets = Total liabilities = Total Debt + Total equity
and the total debt equity ratio = 1.50
So, total debt = 75 ×
3
2 + 3 = Rs.45 lakhs.
and total equity = 75 ×
2
2 + 3 = Rs.30 lakhs
Now, the amount of current liabilities
=
Current Assets
Current Ratio =
35
2.5 = Rs.14 lakhs
So, the amount of term loan in its balance sheet = 45 – 14 = Rs.31 lakhs.
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70. Answer : (a)
Reason : Dr. Sundry Debtors Account Cr.
Date Particulars Rs. Date Particulars Rs.
April 01,
2005
To Opening balance
(30,000/5%)
6,00,000
2005-2006 By Cash
56,00,000
2005-2006 To credit sales
(Balance figure)
58,00,000
March 31,
2006
By Closing
balance
8,00,000
64,00,000 64,00,000
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71. Answer : (e)
Reason : A company can accept advance money before calls from the shareholders, if this clause is
authorized by the articles of association. So, this is true. The other conditions, relating to the
question, stated in a, b, c and d are not correct.
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72. Answer : (d)
Reason : According to the sub-section 2(c) of Section 212 of the Companies Act, the time interval between
the dates of balance sheets of the holding company and subsidiary company should not be more than
6 months and hence the other points, stated in a, b, c and e are not correct.
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73. Answer : (a)
Reason : If the claim against a company is not fixed-up as debt, that information should be disclosed in the
financial statement. This type of claim cannot be treated either as current asset or current liability or
secured loan or unsecured loan in the balance sheet, because it is of the nature of a contingent
liability.
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