Financial Accounting (MB131): July 2005

Financial Accounting (MB131): July 2005

· Answer all questions.
· Marks are indicated against each question.
1. The retirement of the chairman of a company, even though has far reaching consequences on the health
of the company, is not accounted for in the books of account in recognition of
(a) Conservatism concept (b) Business entity concept
(c) Money measurement concept (d) Going concern concept (e) Materiality concept.
(1 mark)
< Answer >
2. Which of the following statements is prepared as of a particular date?
(a) Profit and loss account (b) Balance sheet
(c) Cash flow statement (d) Income and expenditure statement
(e) Profit and loss appropriation account.
(1 mark)
< Answer >
3. The fixed assets are recorded at their cost, in recognition of
(a) Matching concept (b) Money measurement concept
(c) Cost concept (d) Accrual concept (e) Materiality concept.
(1 mark)
< Answer >
4. If the sales day book of a business is undercast, it will
(a) Decrease gross profit but will not have any impact on net profit
(b) Decrease gross profit as well as net profit
(c) Decrease gross profit and increase net profit
(d) Increase gross profit as well as net profit
(e) Increase gross profit but will not have any impact on net profit.
(1 mark)
< Answer >
5. Which of the following accounts is closed at the end of the financial year?
(a) Salaries account (b) Plant and machinery account
(c) Debentures account (d) Sundry debtors account (e) Investments account.
(1 mark)
< Answer >
6. Which of the following is a liability of a firm?
(a) Debit balance of discount column of cashbook
(b) Credit balance of bank passbook
(c) Debit balance of bank column of cashbook
(d) Debit balance of cash column of cashbook
(e) Credit balance of bank column of cashbook.
(1 mark)
< Answer >
7. Consider the following information of Hyder Ltd. of Hyderabad for the year 2004-2005:
Credit purchases during the year Rs. 9,25,000
Payment made to creditors during the year Rs.10,00,000
Closing balance of sundry creditors account Rs. 40,000
< Answer >
Discount received Rs. 10,000
The opening balance of sundry creditors account was
(a) Rs.25,000 (b) Rs.45,000 (c) Rs.75,000
(d) Rs.2,05,000 (e) Rs.1,25,000.
(1 mark)
8. Consider the following data pertaining to RSV & Co. for the year 2004-2005:
Opening stock Rs.1,00,000
Closing stock Rs. 90,000
Opening stock and closing stock includes stock of stationery, amounting to Rs.4,000 and Rs.3,000
respectively. General expenses include payment for stationery of Rs.36,000. Credit purchases of
stationery for Rs.9,000 recorded as ordinary purchases. Stationery of Rs.5,000 is consumed by the
proprietor.
The amount of stationery consumed to be charged to Profit and Loss account of RSV & Co. for the year
ending March 31, 2005 is
(a) Rs.46,000 (b) Rs.41,000 (c) Rs.47,000 (d) Rs.23,000 (e) Rs.39,000.
(2 marks)
< Answer >
9. A credit sale of goods to Shivendra should be debited to
(a) Sales account (b) Goods account
(c) Shivendra’s account (d) Purchases account (e) Cash account.
(1 mark)
< Answer >
10. Consider the Balance Sheet of Net Services Ltd. as on March 31, 2005:
Liabilities Rs. Assets Rs.
Share capital 1,00,000 Cash at bank 42,000
Profit and Loss account 19,000 Sundry debtors 90,000
Sundry creditors 25,000 Closing stock 10,000
Prepaid Rent 2,000
Total 1,44,000 Total 1,44,000
Following is the summary of transactions that occurred during the month of April 2005:
Rs.
· Collections from debtors 88,000
· Payments to creditors 24,000
· Purchase of inventory on credit 80,000
· Sale of inventory on credit (cost Rs.70,000) 85,000
· Recognition of rent expenses in the month of April 2005 1,000
· Salaries paid by cheque in the month of April 2005 8,000
The company has the practice of routing transactions through bank account.
Considering the above Balance Sheet and the additional information, the cash at bank as on April 30,
2005 was
(a) Rs.97,000 (b) Rs.1,02,000 (c) Rs.98,000 (d) Rs.90,000 (e) Rs.1,06,000.
(2 marks)
< Answer >
11. Which of the following errors causes a mismatch in trial balance?
(a) Omission of an entry in the journal
(b) Recording of wrong amount in the journal
(c) Recording of wrong account in the journal
< Answer >
(d) Posting of wrong amount in the ledger in one account concerned
(e) Posting of correct amount to the correct side of wrong account.
(1 mark)
12. Consider the following data pertaining to Lairs Ltd. for the month of June 2005:
Purchases Issues Balance
Date Quantity
(Kg.)
Rate
(Rs.)
Quantity
(Kg.)
Quantity
(Kg.)
Rate
(Rs.)
01-06-2005 500 22.80
02-06-2005 400 24
10-06-2005 600 25
25-06-2005 1,000
If the company uses weighted average method for inventory valuation, the value of inventory as on June
30, 2005 is
(a) Rs.11,967 (b) Rs.12,000 (c) Rs.12,500 (d) Rs.11,400 (e) Rs.36,000.
(2 marks)
< Answer >
13. The following is the trial balance of Mythili Ltd. as on March 31, 2005:
Particulars Debit (Rs.) Particulars Credit (Rs.)
Land & building 3,65,000 Equity share capital
(Face value Rs.10 each)
5,00,000
Plant & machinery 6,72,000 Sundry creditors 1,50,000
Furniture & fixtures 2,85,000 Sales 16,15,000
Sundry debtors 1,80,000 Purchases returns 49,000
Purchases 6,72,000
Bank overdraft
(Rate of Interest-13% per annum) 3,00,000
Sales returns 22,000 Discount received 21,000
Opening stock
(as on April 01, 2004) 48,000 Reserves & Surplus 3,12,000
Bad debts 19,000 12% Debentures 2,80,000
Salaries and wages 5,10,000
Interest on bank overdraft 30,000
Advertisement 1,20,000
Annual fire insurance
premium (with effect from
May 01, 2004)
18,000
Investments (8% p.a.) 2,00,000
Discount allowed 12,000
General expenses 54,000
Cash at bank 20,000
Total 32,27,000 Total 32,27,000
The company has furnished the following additional information:
< Answer >
§ Closing stock as on March 31, 2005 was Rs.50,000.
§ Depreciation is to be provided on plant & machinery at the rate of 20% per annum and on furniture
and fixtures at the rate of 12% per annum.
§ A provision for discount on debtors is to be made at the rate of 5% on sundry debtors.
§ Goods worth Rs.5,000 are distributed as samples.
Considering the above trial balance and the additional information, the net profit of the company for the
year ended March 31, 2005 was
(a) Rs.58,900 (b) Rs.27,300 (c) Rs.37,300 (d) Rs.41,300 (e) Rs.49,900.
(3 marks)
14. On April 01, 2004, Sneha Limited showed a balance of Rs.5,600 to the credit of Provision for bad and
doubtful debts. On March 31, 2005, the Sundry Debtors showed a balance of Rs.2,50,400. Out of the
total debtors, the status of the following debtors is as follows:
Sinha Rs.3,800 - identified as bad debt and is to be written off
Gupta Rs.9,000 - expected to realize only 80%
Patel Rs.8,000 - expected to realize only 60%
Iyer Rs.5,500 - filed insolvency petition and the recovery chances are remote.
All other debts as on the date of finalisation of accounts are estimated to be good. The company
maintains a suitable provision for doubtful debts. The amount debited to the profit and loss account in
respect of provision for bad and doubtful debts for the year ended March 31, 2005 was
(a) Rs.14,300 (b) Rs.8,700 (c) Rs.15,700 (d) Rs.10,500 (e) Rs.4,900.
(2 marks)
< Answer >
15. The capital account of Mr. Ganesh showed a balance of Rs.2,50,000 on April 01, 2004. During the year
2004-05, Mr. Ganesh brought in fresh capital of Rs.50,000 and withdrew Rs.10,000 by way of cash. He
also took goods worth Rs.5,000 for personal use. If capital account of Mr. Ganesh showed a balance of
Rs.3,10,000 on March 31, 2005, the profit for the year was
(a)Rs.30,000 (b) Rs.35,000 (c) Rs.40,000 (d) Rs.25,000 (e) Rs.27,000.
(1 mark)
< Answer >
16. Current liabilities are such obligations which are to be satisfied within a period of
(a) Three months (b) Six months (c) One year
(d) Two years (e) Three years.
(1 mark)
< Answer >
17. Consider the following data pertaining to AB Ltd.:
Particulars Rs.
Cost of the machinery purchased on April 01, 2004 6,60,000
Installation charges 40,000
Market value as on March 31, 2005 8,00,000
While finalizing the annual accounts, if the company values the machinery at Rs.8,00,000, which of the
following concepts is violated by the company?
(a) Cost (b) Matching (c) Realisation
(d) Periodicity (e) Business Entity.
(1 mark)
< Answer >
18. Which of the following statement is false?
(a) Capital Reserve arises out of capital profits
(b) Revenue Reserves are available for distribution as profit
(c) Specific Reserve is created out of capital profit
(d) General Reserves are not created for any specific purpose
(e) Credit balance in Profit & Loss Account is a Revenue Reserve.
< Answer >
(1 mark)
19. Which of the following is not a contingent liability?
(a) Claims against the company not acknowledged as debts
(b) Arrears of fixed cumulative dividends
(c) Prolonged illness of Chairman
(d) Liability on account of bills discounted
(e) Uncalled liability on shares partly paid.
(1 mark)
< Answer >
20. Consider the following data pertaining to Wren Ltd. for the year 2004-2005:
Particulars Rs.
Provision for doubtful debts as on April 01, 2004 4,000
Sundry debtors as on March 31, 2005 1,50,000
Bad debts to be written off 10,000
If a provision equal to 5% is to be created on the sundry debtors, the charge against profit and loss
account for the year ended March 31, 2005 is
(a) Rs.3,500 (b) Rs.7,000 (c) Rs.11,000 (d) Rs.13,000 (e) Rs.17,500.
(1 mark)
< Answer >
21. The opening inventory is
(a) Net purchases minus closing inventory
(b) Net purchases minus the cost of goods sold
(c) Total goods available for sale minus net purchases
(d) Total goods available for sale minus the cost of goods sold
(e) Total goods available for sale minus closing inventory.
(1 mark)
< Answer >
22. Consider the following data with regard to plant and equipment pertaining to Mittal Ltd.:
Cost of the plant (Rs.) 5,00,000
Installation charges (Rs.) 30,000
Estimated useful life (years) 8
Scrap value (Rs.) 50,000
If the firm follows the straight line method of depreciation, the rate of depreciation is
(a) 5.25% (b) 6.00% (c) 9.50% (d) 10.10% (e)
11.32%.
(2 marks)
< Answer >
23. Which of the following is a capital expenditure?
(a) Salaries (b) Purchase of computer for office use
(c) Salaries to computer staff (d) Depreciation on computer
(e) Royalty paid.
(1 mark)
< Answer >
24. The profits of Karunya Ltd. for the past 5 years are as under:
Year Rs.
2000-2001 75,000
2001-2002 3,00,000
2002-2003 3,46,500
2003-2004 4,53,000
< Answer >
2004-2005 7,42,500
The company noticed the following errors, while computing the weighted average profits for the
purpose of valuation of goodwill:
· The profit for the year 2004-2005 includes profit of Rs.22,500 on sale of plant.
· The depreciation charged for the year 2004-05 was excess by Rs.3,000.
The weighted average profit of the company to be considered for valuation of goodwill is
(a) Rs.4,76,100 (b) Rs.4,82,600 (c) Rs.3,83,400
(d) Rs.5,00,100 (e) Rs.4,74,100.
(2 marks)
25. When purchase consideration is greater than Net Asset Value, it is to be adjusted against
(a) Capital Reserve (b) Goodwill (c) Profit & Loss Account
(d) Preliminary Expenses (e) Promoters’ funds.
(1 mark)
< Answer >
26. The Balance Sheet of Snigdha Ltd. as on March 31, 2005 is as under:
Liabilities Rs. Assets Rs.
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
(issued at a discount of 10%)
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 April 2005. 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) 685 (d) 2,000 (e) 750.
(2 marks)
< Answer >
27. Great Tyres Ltd. issued 80,000 shares of Rs.10 each at a premium of 25% payable Rs.2 on application,
Rs.4.50 (including premium) on allotment and the balance on call. Applications were received for
1,92,800 shares and allotment was made as under:
· Applicants for 50,800 shares were allotted 30,480 shares pro-rata.
· Applicants for 96,000 shares were allotted 28,400 shares pro-rata.
· Applicants for 46,000 shares were allotted 21,120 shares pro-rata.
The surplus money, if any, would be refunded only after utilizing the excess received on application
towards the payment of allotment dues. The amount refunded to the applicants is
(a) Rs.Nil (b) Rs.7,400 (c) Rs.1,92,800
(d) Rs.1,34,400 (e) Rs.2,25,600.
(2 marks)
< Answer >
28. Consider the following information pertaining to M/s.Rainbow Ltd. as on March 31,2005: < Answer >
Liabilities Rs. Assets Rs.
Share capital 5,00,000 Land and building 3,60,000
(5,000 shares Rs .100 each) Plant and machinery 2,70,000
Reserves and surplus 4,60,600 Furniture 1,75,000
Sundry creditors 50,000 Inventories 90,000
Short term loan 80,000 Sundry debtors 60,000
Loans and advances 75,000
Cash on hand 10,000
Cash at bank 35,000
Preliminary expenses 15,600
10,90,600 10,90,600
The assets are to be revalued as under for the purpose of valuation of shares:
· Plant and machinery is to be revalued downwards by 10%.
· Furniture is to be valued at Rs.1,80,000.
· Provision of 5% is to be provided for doubtful debts.
The value of share of M/s.Rainbow Ltd. is
(a) Rs.220 (b) Rs.197 (c) Rs.184 (d) Rs.223 (e)
Rs.192.
(2 marks)
29. The authorized share capital of Growth Ltd. is 10,00,000 shares of Rs.10 each. The company is
planning to raise funds by making rights issue of equity shares to finance its expansion. The
Issued/Called-up/Paid-up share capital of the company is 5,00,000 shares of Rs.10 each. The value of
its share is Rs.42. The company offers to its shareholders the right to buy 2 shares at Rs.11 each for
every 5 shares held by them.
The share capital outstanding after the rights issue is
(a) Rs.70,00,000 (b) Rs.1,34,00,000 (c) Rs.50,00,000
(d) Rs.72,00,000 (e) Rs.1,00,00,000.
(2 marks)
< Answer >
30. The share capital of Jade Ltd. consists of 2,000 equity shares of Rs.10 each, Rs.5 paid -up and 500 6%
cumulative preference shares of Rs.10 each fully paid. It is proposed that the Wye Ltd. shall purchase
the whole of the capital of Jade Ltd.
The Balance Sheet of Jade Ltd. shows assets (exclusive of goodwill) Rs.30,000, outside liabilities
Rs.8,000, profit and loss account credit Rs.7,000 and paid-up capital Rs.15,000.
The assets and liabilities are accepted at Balance Sheet figures and there are no arrears of preference
dividend.
The value of equity share in Jade Ltd. is
(a) Rs.11.00 (b) Rs .8.50 (c) Rs.5.00
(d) Rs.10.00 (e) Rs.12.50.
(2 marks)
< Answer >
31. Tantrum Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per share payable
as follows:
On application – Rs.5 (including premium)
On allotment – Rs.4
On final call – Rs.3
Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. Beejay to whom 60 shares
were allotted, failed to pay allotment money and call money. Mr. Raj, the holder of 100 shares, failed to
pay call money. All these shares were forfeited after proper notice.
On forfeiture, the amount debited to share capital account and share premium account respectively is
(a) Rs.1,600; Rs.320 (b) Rs.1,400; Rs.nil
(c) Rs.1,600; Rs.nil (d) Rs.1,120; Rs.320
< Answer >
(e) Rs.1,400; Rs.320.
(2 marks)
32. Lotus Ltd. has issued 10% Debentures at a discount of 10% redeemable at a premium of 10% after five
years. Which of the following statements is true with regard to the debentures?
(a) 10% of the outstanding amount is redeemed every year
(b) The debentures are issued at a premium of 10%
(c) The debentures are issued at a discount of 30%
(d) 10% of the outstanding amount shall not be redeemed
(e) The debentures carry interest rate of 10%.
(1 mark)
< Answer >
33. Which of the following is false?
(a) A company can issue convertible debentures
(b) A company can issue debentures with voting rights
(c) A company can buy its own shares
(d) A company can buy its own debentures
(e) There are legal restrictions on use of premium collected on issue of shares.
(1 mark)
< Answer >
34. On October 1, 2004, Sun Ltd. acquired 13,500 shares of Rs.10 each out of 18,000 equity shares of
Moon Ltd. at a price of Rs.2,02,500.
Moon Ltd. declared a dividend of 10% on its share capital for the year 2003-2004.
Sun Ltd. received this dividend in October 2004 and credited to its profit and loss account.
If the share of Sun Ltd. in capital profits and revenue profits, is Rs.76,500 and Rs.54,000 respectively, the
cost of control shown in the Consolidated Balance Sheet is
(a) Rs.2,02,500 (Goodwill) (b) Rs.2,25,000 (Goodwill)
(c) Rs.22,500 (Capital reserve) (d) Rs.60,000 (Capital reserve)
(e) Rs.28,000 (Goodwill).
(2 marks)
< Answer >
35. Capital profits are the
(a) Profits earned by the subsidiary company up to the date of acquisition of shares by the holding
company
(b) Post-acquisition profits of the subsidiary company
(c) Post-acquisition profits of the holding company
(d) Pre-acquisition profits of the holding company
(e) Profits earned by the subsidiary company by unusual transactions.
(1 mark)
< Answer >
36. A proposed dividend becomes a current liability from the
(a) Date of record (b) Date of payment
(c) Date of declaration (d) Date of distribution
(e)Date of proposal by the Board of Directors.
( 1 mark)
< Answer >
37. Which of the following factors is used as multiplier of super profits in valuation of goodwill of a
business?
(a) Average capital employed in the business
(b) Simple profits (c) Number of years’ purchase
(d) Normal rate of return (e) Normal profits.
< Answer >
(1 mark)
38. Diana Ltd. has issued 10% 10,000 Preference Shares of Rs.100 each fully paid up and 1,30,000 equity
shares of Rs.10 each fully paid up which are issued at a premium of Rs.20. The profit for the year 2004-
05 is Rs.10,84,000 and the balance brought forward from the previous year, amounted to Rs.1,52,800.
· The company wanted to provide Rs.4,38,000 for taxation of the previous year, before making any
appropriations.
· The company declared an equity dividend of 10% and it has decided that an amount equal to 10%
of equity dividend shall be set aside for bonus to staff.
The total amount debited to Profit and Loss Appropriation Account on account of the above decisions is
(a) Rs.2,30,000 (b) Rs.1,43,000 (c) Rs.6,81,000
(d) Rs.5,81,000 (e) Rs.5,68,000.
(2 marks)
< Answer >
39. The amount shown under the head Reserves & Surplus of a company at the beginning of the accounting
year was Rs.10,00,000. During the year, the company made a profit of Rs.2,50,000 and appropriations
were made as follows:
Rs.
Dividend declared 50,000
Transfer to General Reserve 1,00,000
The amount shown under Reserves & Surplus at the end of the year is
(a) Rs.11,00,000 (b) Rs.12,00,000 (c) Rs.12,50,000
(d) Rs.10,50,000 (e) Rs.11,50,000.
(2 marks)
< Answer >
40. Consider the following Balance Sheet of Mugdha Ltd.:
Balance Sheet of Mugdha Ltd. as on March 31, 2005
Liabilities Rs. Assets Rs.
Share Capital 70,000 Fixed Assets 1,59,300
Reserves & Surplus 31,300 Current Assets:
Long term Loans 1,43,020 Sundry debtors 85,000
Current Liabilities: Inventories 65,000
Sundry Creditors 67,000 Cash on hand 12,020 1,62,020
Outstanding salaries 5,000
Bank Temp.-overdraft 5,000 77,000
Total 3,21,320 Total 3,21,320
The quick ratio of Mugdha Ltd. is
(a) 2.10 (b) 1.28 (c) 1.26 (d) 1.10 (e) 1.45.
(2 marks)
< Answer >
41. The opening balance of Profit and Loss Appropriation account of a company is Rs.25,000, net income
for the year is Rs.50,000, and the closing balance of the Profit and Loss Appropriation account is
Rs.55,000. If there were no appropriations other than payment of dividends, the amount paid by the
company in the form of dividends during the year is
(a) Rs.80,000 (b) Rs.30,000 (c) Rs.20,000 (d) Rs.50,000 (e)
Rs.5,000.
(1 mark)
< Answer >
An intangible asset is a
(a) Monetary item without physical substance
< Answer >
(b) Non-monetary asset with physical substance
(c) Monetary asset without physical substance
(d) Monetary asset with physical substance
(e) Non-monetary asset without physical substance.
(1 mark)
43. Consider the following data pertaining to Optimum Ltd.
Sundry assets of the company are Rs.22,50,800 and current liabilities are Rs.93,625.
Average capital employed in the business is Rs.18,00,000.
Rate of interest expected from capital having regard to the risk involved is 10%.
Net trading profits of the company for the past three years were Rs.3,22,800, Rs.2,72,100 and
Rs.3,37,500.
Fair remuneration to the directors for their services is Rs.36,000 per annum.
The value of goodwill on the basis of 3 years’ purchase of super profits calculated on the average of
past three years profits is
(a) Rs.3,92,400 (b) Rs.1,30,800 (c) Rs.2,84,400
(d) Rs.1,66,800 (e) Rs.1,77,247.
(2 marks)
< Answer >
44. Consider the following data pertaining to Sun-Shine Ltd.:
Year Profits (Rs.)
2002-2003 2,56,000
2003-2004 2,69,000
2004-2005 2,82,000
The profit for the year 2004-2005 includes an abnormal income of Rs.6,000. If normal rate of return is
10% on capital employed of Rs.24,00,000, super profits of the company is
(a) Rs.16,000 (b) Rs.24,000 (c) Rs.27,000 (d) Rs.29,000 (e)
Rs.Nil.
(2 marks)
< Answer >
45. AB Ltd. issued 10,000 shares of Rs.10 each at a premium of Rs.2 payable as follows:
Rs.3 on application
Rs.3 on allotment (inclusive of premium of Rs.2)
Rs.3 on first call
Rs.3 on second and final call.
Mr. Don who holds 100 shares, has failed to pay the first call money of Rs.3 per share. The company
has forfeited his entire shares. On forfeiture, the amount credited to shares forfeited account was
(a) Rs.900 (b) Rs.700 (c) Rs.600 (d) Rs.500 (e)
Rs.400.
(2 marks)
< Answer >
46. A company issues a share of Rs.10 each on which Rs.8 is called-up and a shareholder has not paid the
call money of Rs.2. The share is forfeited and the amount lying to the credit of share capital account in
respect of such share is
(a) Rs.10 (b) Rs.8 (c) Rs.6 (d) Rs.4 (e) Rs.Nil.
(1 mark)
< Answer >
47. Krishi Ltd. issued 1,50,000 shares of Rs.100 each at a discount of 10%. Ramya, to whom 300 shares
were allotted failed to pay the final call of Rs.30 per share and hence, all her shares were forfeited. At
the time of forfeiture, the amount transferred to share forfeiture account was
(a) Rs.9,000 (b) Rs.18,000 (c) Rs.21,000
(d) Rs.27,000 (e) Rs.30,000.
< Answer >
(1 mark)
48. On March 31, 2004, the net worth of Meta Limited was Rs.1,50,000. The net worth of the company as
on March 31, 2005, was Rs.4,00,000. During the year, the company raised Rs.1,00,000 by way of loan.
The company made a profit of Rs.20,000 but distributed Rs.40,000 as dividends, drawing the balance
amount from reserves. The amount of capital raised by the company during the year was
(a) Rs.2,50,000 (b) Rs.2,90,000 (c) Rs.2,70,000
(d) Data insufficient (e) Rs.2,30,000.
(2 marks)
< Answer >
49. On April 01, 2004, Parent Co. acquired 80% of equity shares of Subsidiary Co. when the balance in
profit and loss account of the Subsidiary Co. was Rs.Nil. Consider the following data pertaining to
Parent company and Subsidiary Company as on March 31, 2005:
Parent Co. (Rs.) Subsidiary Co. (Rs.)
Share Capital 20,00,000 5,00,000
Net Profit 5,00,000 1,00,000
Consolidated financial statement will report
(a) Net profit of Rs.6,00,000 (b) Profit of Rs.5,80,000
(c) Share Capital of Rs .25,00,000 (d) Share Capital of Rs.24,00,000
(e) Investments of Rs.4,00,000.
(2 marks)
< Answer >
50. Which of the following is/are a limitation(s) of a Balance Sheet?
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)
< Answer >
51. As on June 30, 2005, the overdraft balance of Mr.Y as per bank passbook is Rs.30,000. The passbook
balance did not agree with the balance as per cashbook. On scrutiny, the following omissions and
commissions were noticed:
· A cheque for Rs.6,000 issued to Mr.Z has not been presented for payment till date.
· Mr.M, a tenant, directly deposited into the bank account of Mr.Y an amount of Rs.20,000 towards
rent and the same is not accounted in the cashbook.
· A cheque for Rs.5,000 deposited in the bank is not yet realized till date.
· The interest on debentures for this year, directly collected by the bank, amounted to Rs.15,000.
The bank balance as per cashbook is
(a) Debit balance of Rs.26,000 (b) Credit balance of Rs.66,000
(c) Credit balance of Rs.36,000 (d) Debit balance of Rs.71,000
(e) Debit balance of Rs.66,000.
(3 marks)
< Answer >
52. After preparation of the Profit and Loss Account, the following balances are extracted from the books
of Universe Ltd. as on March 31, 2005:
Particulars Rs. Particulars Rs.
Called-up share capital 5,00,000 Plant and machinery 2,20,000
Land and building 4,90,000 Investments 60,000
< Answer >
Secured loans 3,00,000 Calls -in-arrear 30,000
Term loan from Bank 1,00,000 Capital reserve 90,000
Sundry creditors 90,000
Sundry debtors 1,20,000
Profit and loss account
(credit balance) 50,000
Stock 96,000 Outstanding expenses 500
Loans to employees 50,000
Provision for doubtful debts 10,000
Insurance premium paid in
advance 1,200
Interest received in advance 700 Cash 4,000
Bank balance (Debit) 40,000 Preliminary expenses 30,000
The total of the liabilities side of the balance sheet as on March 31, 2005 is
(a) Rs.11,01,200 (b) Rs.11,00,200
(c) Rs.11,31,200 (d) Rs.11,41,200 (e) Rs.11,01,900.
(2 marks)
53. Mugdha Ltd. purchased Rs.10,000 worth of goods on credit from Abuja. The payment was made
through a cheque at a discount of 2%. The entry passed in the books of Mugdha Ltd. to record payment
to Abuja is
(a) Abuja’s account Dr. Rs.10,000
To Bank account Rs. 9,800
To Discount account Rs. 200
(b) Abuja’s account Dr. Rs. 9,800
To Bank account Rs. 9,800
(c) Purchases account Dr. Rs.10,000
To Discount account Rs. 200
To Bank account Rs. 9,800
(d) Abuja’s account Dr. Rs.10,000
To Bank account Rs.10,000
(e) Abuja’s account Dr. Rs.10,000
To Trade discount Rs. 200
To Bank account Rs. 9,800 .
(2 marks)
< Answer >
54. A Payment entry of Rs.350 in cash book as conveyance to Mr.Sharma was wrongly credited to
Sharma’s account
(a) Sharma’s a/c. Dr. Rs.350
To Conveyance a/c. Rs.350
(b) Sharma’s a/c. Dr. Rs.350
To Misc. expenses a/c. Rs.350
(c) Conveyance a/c. Dr. Rs.350
To Sharma’s a/c. Rs.350
(d) Conveyance a/c.Dr. Rs.350
To Cash a/c. Rs.350
(e) Conveyance a/c.Dr. Rs.350
Sharma’s a/c. Dr. Rs.350
To Suspense a/c. Rs.700
(2 marks)
< Answer >
55. Goods have been purchased from S & Co. for Rs.750. But while posting the entry, the credit was given
to R & Co. The total of credit side of the trial balance is Rs.43,570. Assuming that this is the only error,
the total of the debit side of the trial balance before rectification was
(a) Rs.43,570 (b) Rs.44,420 (c) Rs.42,820 (d) Rs.44,320 (e) Rs.42,070.
(1 mark)
< Answer >
56. If a Company believes that some of its debtors may "default", it should act on this by making sure that
sufficient provision is created in the books. This is an example of
(a) Matching concept (b) Money measurement concept
(c) Consistency concept (d) Conservatism concept
(e) Business entity concept.
(1 mark)
< Answer >
57. If the shares are re-issued at a price which is more than the face value of the shares, the excess amount
will be credited to
(a) General Reserve (b) Share premium account
(c) Share forfeiture account (d) Profit & Loss account
(e) Share capital account.
(1 mark)
< Answer >
58. Manish Ltd. maintains its current ratio at 2.5. If the working capital as on March 31, 2005 stood at
Rs.60,000, then the current liabilities as on that date stood at
(a) Rs.24,000 (b) Rs.1,00,000 (c) Rs.40,000
(d) Rs.60,000 (e) Rs.1,50,000.
(1 mark)
< Answer >
59. Liabilities of a business are Rs.15,000 and owner’s equity is Rs.20,000. The business reflects on the
assets side of the balance sheet Rs.2,000 as debit balance of profit and loss account. The total of the
assets side of the Balance Sheet is
(a) Rs.15,000 (b) Rs.35,000 (c) Rs.37,000
(d) Rs.5,000 (e) Rs.33,000.
(1 mark)
< Answer >
60. Damaged inventory should be valued at
(a) Nominal value (b) Market value
(c) Net realizable value (d) Cost price or market price, whichever is lower
(e) Acquisition cost.
(1 mark)
< Answer >
61. Depreciation of assets refers to the process of
(a) Asset valuation for statement of financial position of the firm
(b) Allocating the cost of the asset to periods of its use
(c) Accounting for costs to reflect the change in general price level
(d) Accumulating a fund for the redemption of a liability
(e) Asset valuation based on current replacement cost.
(1 mark)
< Answer >
62. For a car manufacturing company which of the following is not a fixed asset?
(a) Land and Building (b) Machinery (c) Office
furniture
(d) Stock of cars (e) Patents.
(1 mark)
< Answer >
63. Which of the following statements is true in respect of trial balance?
(a) It has statutory importance from the view point of law
(b) It is a statement of assets and liabilities of a business
(c) It reveals the profit or loss of a business during a period
< Answer >
(d) It is a summary of all the balances of real accounts, personal accounts and nominal accounts
(e) It is a real account.
(1 mark)
64. Trading Account of a business ultimately reflects
(a) Net profit / loss (b) Materials consumed (c) Gross sales
(d) Gross profit / loss (e) Gross purchases.
(1 mark)
< Answer >
65. Which of the following factors that contributes to the value of goodwill of a business?
I. Favorable location of the business.
II. Efficient management.
III. High quality of products and services that contribute to increased customer satisfaction.
IV. Superior technology.
(a) Only (I) above (b) Both (II) and (III) above
(c) Both (I) and (IV) above (d) Both (II) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
66. An inexperienced book-keeper of M/s.Volga & Co. has drawn up the following trial balance of the firm
for the year ended March 31, 2005:
Trial Balance as on March 31, 2005
Particulars Debit (Rs.) Particulars Credit (Rs.)
Provision for doubtful debts 2,000 Capital 45,910
Bank overdraft 16,540 Sundry creditors 16,370
Sundry debtors 29,830 Discount allowed 7,330
Discount received 2,520 General expenses 8,290
Drawings 12,000 Returns inward 3,300
Office furniture 21,550 Cash sales 60,800
Purchases 1,09,230 Credit sales 1,08,020
Rent and rates 3,140
Salaries 25,200
Opening stock 24,180
Provision for depreciation on
office furniture
3,640
Total 2,49,830 Total 2,50,020
Subsequently, another trial balance was drawn and the residual difference was placed to a suspense
account. The amount debited/credited to suspense account was
(a) Rs.190 (debit) (b) Rs.530 (credit)
(c) Rs.11,750 (debit) (d) Rs.4,170 (debit)
(e) Rs.11,750(credit).
(2 marks)
< Answer >
67. Discount on issue of debentures is a
(a) Revenue expenditure to be debited to Profit and Loss account like any other discount allowed
(b) Capital loss to be written off in the year of issue of the debentures
(c) Capital loss to be written off over the tenure of the debentures
(d) Capital loss to be written off over a period of time as decided by the management
(e) Capital loss to be written off over a period of 10 years irrespective of the tenure of the debentures.
(1 mark)
< Answer >
68. Profit on reissue of forfeited shares is transferred to
(a) Forfeited shares account (b) General reserve account
(c) Profit and Loss account (d) Share premium account
(e) Capital reserve account.
(1 mark)
< Answer >
69. A company issued 10,000 common shares of Rs.30 par value for Rs.40 per share. The issue of the
shares would result in a
(a) Credit to share capital account – Rs.4,00,000
(b) Credit to Profit and Loss account – Rs.1,00,000
(c) Credit to Bank account – Rs.4,00,000
(d) Credit to Share premium account – Rs.3,00,000
(e) Debit to Bank account – Rs.4,00,000.
(1 mark)
< Answer >
70. Consider the following data pertaining to Whirl-Wind Ltd. for the month of June 2005:
Particulars As on June 01, 2005 (Rs.) As on June 30, 2005 (Rs.)
Stock 1,60,000 90,000
Sundry creditors 60,000 40,000
The company makes all purchases on credit. During the month of June 2005, the company paid a sum
of Rs.3,70,000 to the suppliers. The goods are sold at 25% above the cost. The sales for the month of
June 2005 were
(a) Rs.4,12,500 (b) Rs.5,25,000 (c) Rs.4,20,000
(d) Rs.4,10,000 (e) Rs.5,12,500.
(2 marks)
< Answer >
Suggested Answers
Financial Accounting (MB131) : July 2005
1. Answer : (c)
Reason : The retirement of the chairman of a company, even though it has far reaching consequences on the
health of the company, is not accounted in recognition of money measurement concept. This concept
envisages that a record is made only of information that can be expressed in monetary terms. As
retirement of the chairman cannot be expressed in monetary terms, the same is not accounted.
Conservatism concept envisages that recognition of revenue requires better evidence than recognition
of expenses. According to business entity concept, business is treated separately from its owners. A
business entity is assumed to carry on its operations forever under going concern concept. All material
items should be separately disclosed under materiality concept. Alternative (a) is the correct answer.
< TOP >
2. Answer : (b)
Reason : Balance sheet is prepared as on a particular date whereas profit and loss account, cash flow statement,
income and expenditure account are prepared for a particular period.
< TOP >
3. Answer : (c)
Reason : The fixed assets are recorded at their cost and not at their market value in recognition of cost concept.
(c) is the correct answer.
< TOP >
4. Answer : (b)
Reason : If sales day book is undercast, gross profit will be decreased, simultaneously net profit will be
decreased with the same amount. Therefore (b) is true.
< TOP >
5. Answer : (a)
Reason : Salaries account is a nominal account which is closed at the end of the year by transfer to profit and loss
account. Hence the answer is (a). The other alternatives i.e. plant and machinery account, debentures
account, sundry debtors account, investments account are real or personal accounts which will not be
closed at the end of the financial year.
< TOP >
6. Answer : (e)
Reason : Credit balance of bank column of cashbook represents bank overdraft and is a liability. Hence the
answer is (e). Credit balance of bank passbook, Debit balance of bank column of cashbook and Debit
balance of cash column of cashbook represents favorable balance. The debit balance of discount
column of cash book represents an expense.
< TOP >
7. Answer : (e)
Reason :
Rs.
Payment made to creditors 10,00,000
Discount received 10,000
Closing balance 40,000
10,50,000
Less : Credit purchase 9,25,000
Opening balance 1,25,000
< TOP >
8. Answer : (b)
Reason : Amount of stationery to be charged to profit and loss account for the year ended March 31, 2005:
Particulars Rs.
Opening balance of stationery 4,000
Add: Cash purchases of stationery included
in general expenses 36,000
Credit purchases of stationery included in purchases 9,000
49,000
< TOP >
Less: Closing balance of stationery 3,000
46,000
Less: Stationery consumed by the proprietor 5,000
Stationery debited to profit and loss account 41,000
9. Answer : (c)
Reason : A credit sale to Shivenra should be recorded as
Shivndra’s account Dr. To Sales account. Thus, shivendra’s account is debited.
< TOP >
10. Answer : (c)
Reason :
Cash at Bank Rs.
Opening Cash 42,000
Add : Collections from debtors 88,000
1,30,000
Less : Paid to creditors 24,000
Salaries paid 8,000
Closing cash balance at Bank 98,000
< TOP >
11. Answer : (d)
Reason : Posting of wrong amount in the ledger in one account concerned leads to mismatch in trial balance as
the wrong amount is recorded only in one account. Omission of an entry in the journal, recording of
wrong amount in the journal, recording of wrong account in the journal, posting of wrong amount in all
the accounts affected will not cause a mismatch in trial balance because the mistake is effected on both
sides.
< TOP >
12. Answer : (b)
Reason :
Purchases Issues Balance
Date
Quantity
(Kg)
Rate
per
kg.
(Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate per kg.
(Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate
per
kg.
(Rs.)
Amount
(Rs.)
01-06-05 500 22.80 11,400
02-06-05 400 24 9,600 900 23.33 21,000
10-06-05 600 25 15,000 1,500 24.00 36,000
25-06-05 1,000 24 24000 500 24.00 12,000
< TOP >
13. Answer : (b)
Reason : Trading and profit & loss account of Mythili Ltd. for the year ended March 31, 2005
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 48,000 By Sales 16,15,000
To Purchases 6,72,000 Less: Returns 22,000 15,93,000
Less : Returns 49,000 6,23,000
By Advertisement (free
samples)
5,000
To Gross profit c/f 9,77,000 By Closing stock 50,000
16,48,000 16,48,000
To Bad debts 19,000 By Gross Profit 9,77,000
To Salaries and wages 5,10,000
By Interest on
investments
16,000
To Intereston bank overdraft 30,000 (Accrued Income @ 8%
< TOP >
on Rs.2,00,000)
Add:Outstanding 9,000 39,000 By Discount received 21,000
To Advertisement 1,20,000
Add : Free samples 5,000 1,25,000
To Fire insurance premium 18,000
Less : Prepaid 1,500 16,500
To Discount allowed 12,000
To General expenses 54,000
To Outstanding interest on debentures 33,600
To Depreciation
Plant & machinery (20%) 1,34,400
Furniture & fixtures (12%) 34,200
To Provision for discount on debtors 9,000
To Net profit 27,300
10,14,000 10,14,000
14. Answer : (b)
Reason : The amount debited to profit and less account in respect of provision for doubtful debts is Rs.8,700.
Dr. Provision for bad and doubtful debts Cr.
Particulars Rs. Particulars Rs.
To Bad debts (Sinha) 3,800 By balance b/f 5,600
To Provision c/f 10,500 By Profit and loss account 8,700
14,300 14,300
Computation of suitable provision for the year ending March 31,2003
Particulars Rs.
Gupta Rs.9,000 Expected to realize only 80% hence doubt full part 1,800
PatelRs.8,000 Expected to realize only 60%. 3,200
Iyer Rs.5,500 Filed Insolvency petition and the recovery chances are remote 5,500
< TOP >
15. Answer: (d)
Reason: Amount (Rs.)
Balance in capital account on 31.3.95 3,10,000
Less : Fresh capital brought in 50,000
2,60,000
Add : Drawings 10,000
Add : Goods taken for personal use 5,000
2,75,000
Less : Capital at the beginning 2,50,000
Profit for the year 25,000
< TOP >
16. Answer : (c )
Reason : Current liabilities are such obligations which are to be satisfied within one year.
< TOP >
17. Answer : (a)
Reason : In terms of cost concept the value of an asset is to be determined on the basis of acquisition cost.
Valuation of machinery at market value is in violation of cost concept unless the machine is actually
sold, realizable value will give only a hypothetical figure. Market value is highly subjective because to
know the value of the asset one has to chase the uncertain future. The other concepts matching concept
(b) deals with matching costs with revenue, Realization concept (c) deals with recognition of income at
various levels of production, Periodicity concept (d) explains how the accounting information is to be
< TOP >
reported at regular intervals to foster comparability, Business entity concept (e) explains the owner is
different from the business entity. Thus, the concepts (b), (c), (d), and (e) do not explain how the fixed
assets are to be recorded.
18. Answer : (c)
Reason : Specific Reserve comes under Revenue Reserve and is created out of revenue profits. Capital Reserve
arises out of capital profits. Revenue Reserves are available for distribution as profit General Reserves
are not created for any specific purpose. Credit balance in Profit & Loss A/c is a Revenue Reserve
< TOP >
19. Answer : (c)
Reason : Prolonged illness of Chairman is not a contingent liability. All other options viz, claim against the firm
not acknowledged as debt, arrears of fixed cumulative dividend, liability on account of bills discounted
and uncalled liability on shares partly paid are contingent liabilities.
< TOP >
20. Answer : (d)
Reason :
Particulars Rs.
Opening Provision 4,000
Bad debts to be written off 10,000
Shortfall of provision 6,000
Provision required 5% of Rs.1,40,000
(Rs.1,50,000 – Rs.10,000) 7,000
Charge against profit and loss account 13,000
< TOP >
21. Answer : (c)
Reason : Total goods available for sale includes opening inventory and net purchases. Hence the opening
inventory is total goods available for sale minus net purchases. Hence (c) is the answer. Net purchases
minus closing inventory indicates the cost of goods sold. Net purchases minus the cost of goods sold
gives the difference of closing stock and opening stock. Total goods available for sale minus the cost of
goods sold is the closing inventory. Total goods available for sale minus closing inventory is the cost of
goods sold.
< TOP >
22. Answer : (e)
Reason : Depreciation =
Plant value-Scrapvalue
Life of theplant
=
(Rs.5,00,000+Rs.30,000) Rs.50,000
8years
-
=
Rs.5,30,000 Rs.50,000
8years
-
=
Rs.4,80,000
Rs.60,000
8years
=
=
Rs.60,000
100
5,30,000
´
= 11.32%
< TOP >
23. Answer : (b)
Reason : Purchase of computer for office use is a capital expenditure. Salaries to computer staff, Depreciation on
computer, Royalty paid etc. are items of revenue expenditure.
< TOP >
24. Answer : (a)
Reason :
< TOP >
2000-
2001
Rs.
2001-
2002
Rs.
2002-
2003
Rs.
2003-
2004
Rs.
2004-
2005
Rs.
Total
Rs.
Profit 7,42,500
Add: Depreciation
excess provided
3000
Less: profit on sale
of plant 22,500
Adjusted profits 75000 300000 346500 453000 723000
Weights 1 2 3 4 5
Profits × weights 75000 600000 1039500 1812000 3615000 7141500
Weighted average profits = Rs.71,41,500 / 15 = Rs.4,76,100
25. Answer : (a)
Reason : If the purchase consideration in more than net asset value, it is as be adjusted to capital reserve account,
therefore (a) is correct.
< TOP >
26. Answer : (b)
Reason : Dr. Cash account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d. 50,000 By Preference shareholders
(Rs.3,00,000 x 110%)
3,30,000
To Investments 2,00,000 By Balance c/d. 25,000
To Equity shares
(including premium) 1,05,000
3,55,000 3,55,000
No. of equity shares = Rs.1,05,000 / Rs.105 = 1,000 shares.
< TOP >
27. Answer : (b)
Reason :
Shares
applied
Shares
allotted
Application
money
received
Rs.
Application
money due
Rs.
Excess money
Rs.
Allotment
money due
(including
premium)
Rs.
Surplus /
(deficit)
Rs.
(1) (2) (3)=(1)×Rs.2 (4)=(2) ×
Rs.2
(5)=(3) –(4) (6)=(2)×Rs.4.5 (7) = (5)–
(6)
50,800 30,480 1,01,600 60,960 40,640 1,37,160 (96,520)
96,000 28,400 1,92,000 56,800 1,35,200 1,27,800 7,400
46,000 21,120 92,000 42,240 49,760 95,040 (45,280)
1,92,800 80,000 3,85,600 1,60,000 2,25,600 3,60,000
Hence the amount of refund is Rs.7,400
< TOP >
28. Answer : (c)
Reason :
Particulars Rs. Rs.
Land and building 3,60,000
Plant and machinery (Rs.2,70,000 ´ Rs.90%) 2,43,000
Furniture 1,80,000
Inventories 90,000
< TOP >
Sundry debtors (Rs.60,000 ´ 95%) 57,000
Loans and advances 75,000
Cash 10,000
Bank 35,000
Less: 10,50,000
Sundry creditors 50,000
Short term loan 80,000 1,30,000
Net assets 9,20,000
Value of share =
Rs.9,20,000 Rs.184
5,000
=
29. Answer : (a)
Reason : Present capital Rs.50,00,000
Rights issue 5,00,000 x
2
5 x Rs.10 = Rs.20,00,000
Total share Capital Rs.70,00,000
< TOP >
30. Answer : (b)
Reason:
Particulars Rs.
Assets 30,000
Less: Liabilities 8,000
Net Assets 22,000
Less: Preference shares capital 5,000
Amount available for equity shares 17,000
Value of each equity share Rs.17,000 ¸ 2000 = Rs.8.50.
< TOP >
31. Answer: (c)
Reason: The journal entry is
Share capital account (160 x 10) Dr. Rs.1,600
To Share allotment account (60 x 3) Rs. 180
To Share final call account (160 x 3) Rs. 480
To Share forfeiture account (240 + 100 x 7) Rs. 940
(Forfeiture of 160 shares on which 60 shares paid only Rs.4 per share and 100 shares paid only Rs.7 per
share.)
Shares allotted = 60
Shares applied =
6,000
60 72
5,000
´ =
= 72 x 5 = Rs.360 – 120 = 240.
Amount debited to share capital is Rs.1,600 and share premium account is Rs.Nil.
< TOP >
32. Answer : (e)
Reason : The debentures carry rate of interest of 10%.
< TOP >
33. Answer : (b)
Reason : No company shall, after the commencement of the Companies Act, 1956, issue any debentures carrying
voting rights at any meeting of the company, whether generally or in respect of particular classes of
business.
< TOP >
34. Answer : (c) < TOP >
Reason : Cost of Control
Particulars Rs. Rs.
Cost of acquisition of shares 2,02,500
Less : Nominal value of 13,500 shares of Rs.10 each 1,35,000
Capital profits 76,500
Dividend for 2003-2004 (to be adjusted against cost of control) 13,500 2,25,000
Capital Reserve 22,500
35. Answer : (a)
Reason : Capital profits are the Profits earned by the subsidiary company up to the date of acquisition of shares
by the holding company.
< TOP >
36. Answer : (c)
Reason : The dividend recommended by the directors is a proposed dividend, till such time it is adopted by the
shareholders in the Annual General Meeting. Once it is adopted, it is a ‘Declared Dividend’ and it
becomes a legal liability from the date of declaration. Hence, the alternative (c) is the correct answer.
The declared dividend must be paid within 30 days from the date of declaration and must be classified
as current liability.
Taxt Book 280
< TOP >
37. Answer : (a)
Reason : Number of years’ purchase is the factor with which the super profits would have to be multiplied in
order to arrive at the value of goodwill.
Super profits: Average annual profits – (Average capital employed x Normal rate of return)
Goodwill: Number of years’ purchase x super profits.
< TOP >
38. Answer : (c)
Reason: Provision for taxation of the previous year
= Rs.4,38,000
Dividend on 10% on 10,000 Preference Shares of Rs.100 = Rs.1,00,000
10% Dividend on 1,30,000 equity shares of Rs.10 each = Rs.1,30,000
Amount equal to 10% of equity dividend shall be set aside
for bonus to staff. = Rs.
13,000
The total amount debited to Profit and Loss appropriation account = Rs. 6,81,000.
< TOP >
39. Answer: (b)
Reason: Amount (Rs.)
Reserves & Surplus (opening balance) 10,00,000
Add : Transfer to General Reserve 1,00,000
Balance in Profit & Loss A/c 1,00,000
Reserves & Surplus at the year end 12,00,000
< TOP >
40. Answer : (c)
Reason : Quick ratio :
Currentassets Inventories
Currentliabilities
-
=
Rs.1,62,020 Rs.65,000 Rs.97,020
1.26
Rs.77,000 Rs.77,000
-
= =
< TOP >
41. Answer : (c)
Reason : The opening balance of retained earnings i.e. profit and loss appropriation account is Rs.25,000 and the
profit earned during the year is Rs.50,000 thus total retained earnings is Rs.75,000 and the closing
< TOP >
balance is Rs.55,000. Thus, the amount of dividends paid is Rs.20,000.
42. Answer : (e)
Reason : An intangible asset is a non-monetary asset without physical substance.
< TOP >
43. Answer : (c)
Reason : Trading profits for the last three years :
Particulars Rs.
Year 1 3,22,800
Year 2 2,72,100
Year 3 3,37,500
Total 9,32,400
Average Profit Rs.(9,32,400 / 3) 3,10,800
Less : Remuneration of the directors 36,000
Average Maintainable Profits 2,74,800
Less : Normal Profit expected @ 10% on average
capital employed Rs.
10
18,00,000
100
æ ´ ö çè ÷ø
1,80,000
Super Profit 94,800
Goodwill at 3 years’ purchase Rs.(94,800 ´ 3) 2,84,400
< TOP >
44. Answer : (c)
Reason : Average of three years profits
Rs.2,56,000 Rs.2,69,000 Rs.(2,82,000 6,000)
3
+ + - =
Rs.8,01,000
3
= = Rs.2,67,000.
Profit as per normal return on capital employed = 10% of Rs.24,00,000 = Rs.2,40,000.
Super profit = Rs.2,67,000 – Rs.2,40,000 = Rs.27,000.
< TOP >
45. Answer : (e)
Reason : No. of shares forfeited = 100; amount received per share = 3 + 3 (inclusive of share premium of Rs.2).
Therefore, share forfeiture a/c. will be credited by = 100 x Rs.4 (i.e. Rs.3 + Re.1) = Rs.400.
According to Section 78 of the Companies Act, share premium received cannot be cancelled and it can
be utilized only for certain specified purposes enumerated under the said section.
< TOP >
46. Answer : (e)
Reason : When the shares are forfeited, the share capital is debited with the called up amount since share capital
account has been previously credited as and when call is made. Hence the amount to the credit of share
capital in respect of such share is Rs.Nil.
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47. Answer : (b)
Reason : The shares were issued at a discount of 10% i.e. they were issued for Rs.90 per share.
Ramya failed to pay the final call of Rs.30. Hence she has paid Rs.60 (Rs.90 – Rs.30).
The amount to be credited to shares forfeited account is Rs.60 x 300 shares = Rs.18,000
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48. Answer: (c)
Reason: Net worth = Capital + Reserves
The networth had increased by (Rs.4,00,000 – Rs.1,50,000) = Rs.2,50,000
The increase has been contributed by capital and reserves.
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But the reserves had decreased by (Dividends – Profit)
(Rs.40,000 – Rs.20,000) = Rs.20,000
Therefore the total contribution by equity Capital = Rs.2,50,000 + 20,000 = Rs.2,70,000
49. Answer : (b)
Reason : Profit of Parent Co. Rs.5,00,000
Add: Share in profit of Subsidiary Co. 80% of Rs.1,00,000 Rs. 80,000
Consolidated statement reflects profit of Rs.5,80,000
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50. Answer : (e)
Reason : Though the balance sheet is claimed to be the statement of all assets and liabilities, 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).
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51. Answer : (b)
Reason : Bank Reconciliation Statement
Particulars Rs. Rs.
Overdraft balance as per Pass book 30,000
Add: Cheques issued to Mr. Z but not presented for
payment 6,000
Rent deposited by Mr. M directly into the bank 20,000
Interest on debentures directly collected by bank 15,000 41,000
71,000
Less:
Cheque deposited, yet to be realised 5,000 5,000
Overdraft balance as per cash book 66,000
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52. Answer : (a)
Reason : Balance Sheet of Universe Ltd. as on March 31, 2005
Liabilities Rs. Assets Rs.
Share capital 5,00,000 Land & building 4,90,000
Less calls in arrear 30,000 4,70,000 Plant and machinery 2,20,000
Capital reserve 90,000 Investments 60,000
P & L A/c 50,000 Sundry debtors 1,20,000
Secured loans 3,00,000
Less provision for
doubtful
debts
10,000
1,10,000
Term Loan from Bank 1,00,000 Stock 96,000
Sundry creditors 90,000 Loans to employees 50,000
Outstanding expenses 500 Cash 4,000
Interest received in advance 700 Bank 40,000
Insurance premium paid in
advance
1,200
Preliminary expenses 30,000
11,01,200 11,01,200
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53. Answer : (a)
Reason : The entry to be passed for settlement of purchase of Rs.10,000 from Abuja at a discount of 2% will
involve a debit to Abuja’s account with Rs.10,000 and credit to Discount account Rs.200 and Bank
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account Rs.9,800. (a) is the correct answer.
54. Answer : (e)
Reason : The payment of conveyance recorded in the cash book instead of debiting to conveyance account has
been wrongly credited to sharma’s account. The rectification involves a debit to conveyance account
with Rs.350: a debit to Sharma’s account with Rs.350 and a credit to suspense account with Rs.700. (e)
is the correct answer.
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55. Answer : (a)
Reason : The mistake of posting of an item to the correct side of a wrong account will not affect the agreement of
a trial balance. Thus, the total of credit side will be the total of debit side too. Thus, before rectification
and after rectification the total of the debit side will be Rs.43,570. (a) is the correct answer.
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56. Answer : (d)
Reason : Conservatism concept (d) can be viewed as a practical justification for certain accounting treatments.
This requires the business enterprise to record an event in such as way as to ‘play safe’ at the time of
uncertainty. The practice of reporting the Closing inventory at lower of the cost or market value
appears to be in justification of this principle of conservatism. The practice of bringing into books the
anticipated losses on default and making sure all losses are brought to books is because of
Conservatism concept. Hence (d) is the right option. Matching concept (a) emphasizes that the whole
of the revenue earned by an enterprise is not income. To earn the revenue, resources are consumed and
the cost of the resources consumed should be set off to obtain income. This concept states that expenses
are to be recognized in the period of their related revenue. In financial accountancy, a record is made
only of information that can be expressed in monetary terms. If events cannot be quantified in monetary
terms then they do not facilitate accounting. This is because of money measurement concept (b). The
concept of consistency (c) requires a business enterprise to follow consistent accounting procedures and
practices from period to period. The steady application of practices and procedures is required to enable
a comparative study of the performance of the business over a period of time and also to make objective
comparison of various enterprise within an industry. In Accounting, business is considered to have a
separate existence from that of its proprietors or owners. It implies, a distinction between the economic
activities of the enterprise and that of the owners is to be maintained. All the transactions and the events
are analyzed and recorded in the books from the point of business enterprise. This concept i.e. business
entity concept (e) ensures that accounting records only reflect the economic activities of business and
not that of its owners. Hence option (e) is incorrect. Alternative (d) is the correct answer.
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57. Answer : (b)
Reason : If the forfeited shares are reissued at a price which is more than the face value of the shares, the excess
amount will be credited to Share premium account only. Hence only option (b) is correct. All other
options are incorrect.
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58. Answer : (c)
Reason : Current Ratio =
Current Assets
Current Liabilities
And Working capital = Current Assets – Current Liabilities
Supposing CL = 100
Then CA = 250 (as current ratio is 2.5)
Then Working capital = CA – CL = 150
If the working capital is 150, current assets is 250
If working capital is Rs.60,000 then current Assets = Rs.60,000 x 250/150 = Rs.1,00,000.
Therefore current liabilities = Rs.1,00,000 (CA) less Rs.60,000 (Working cap) = Rs.40,000.
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59. Answer : (b)
Reason : Total assets = Total outside liabilities + Owners’ equity = Rs.35,000 = Rs.15,000 + Rs.20,000. The
debit balance of profit and loss account of Rs.2,000 is included in the total assets. Thus the total of
assets side of Balance Sheet is Rs.35,000.
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60. Answer : (c)
Reason : The damaged inventory should be valued at its net realizable value. Hence the answer is (c). The cost
price or market price whichever is lower is used in case of normal inventory but not in case of damaged
inventory. The market value is not used in any case. The acquisition cost is used for valuing fixed
assets. The nominal value is not at all considered.
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61. Answer : (b)
Reason : Depreciation is the acquisition cost less salvage value of an asset spread over the economic life of that
asset. So, it is an allocation of cost of the asset to the periods of its use. It is not the asset valuation or
fund creation for the replacement of assets. It is not the accounting adjustment in respect of change of
general price level. Hence, (b) is correct.
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62. Answer : (d)
Reason : Stock of cars is a current asset for a car manufacturing company. Land and Building, machinery, office
furniture and Patent are fixed assets.
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63. Answer : (d)
Reason : A trial balance is a summary of all the ledger balances of real accounts, personal accounts and nominal
accounts outstanding on a particular date.
The other alternatives are not correct because
(a) Preparation of trial balance has no importance from the view point of law. There is no provision as
to its preparation in the Companies Act.
(b) The statement of assets and liabilities of a company is its balance sheet and not the trial balance.
(c) Profit and loss account reveals the profit or loss of a company and not the trial balance
(e) Trial balance is not a real account. Real account shows the worth of assets. Thus, the alternatives
a, b, c and e are false.
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64. Answer : (d)
Reason : Trading account of a business reflects Gross profit. (d) is the correct answer.
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65. Answer : (e)
Reason : The following are the factors that contributes to the value of goodwill of a concern
(a) Favorable location of the business
(b) Efficient management
(c) High quality of products and services that contribute to increased customer satisfaction
(d) Superior technology. Thus, the combination of all of the above (e) is the correct answer.
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66. Answer : (c)
Reason : Corrected Trial Balance
Particulars Debit (Rs.) Credit
(Rs.)
Provision for doubtful debts 2,000
Bank overdraft 16,540
Sundry debtors 29,830
Discount received 2,520
Drawings 12,000
Office furniture 21,550
Purchases 1,09,230
Rent and rates 3,140
Salaries 25,200
Opening stock 24,180
Provision for depreciation on furniture 3,640
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Capital 45,910
Sundry creditors 16,370
Discount allowed 7,330
General expenses 8,290
Returns inward 3,300
Cash sales 60,800
Credit sales 1,08,020
Total 2,44,050 2,55,800
Suspense (Debit) Rs.2,55,800 – Rs.2,44,050 = Rs.11,750.
67. Answer : (c)
Reason : Discount on issue of Debentures is a capital loss to be written off over the tenure of the debentures.
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68. Answer : (e)
Reason : If a company makes any profit/gain on reissue of forfeited shares, it must be transferred to capital
reserve account because it is a capital profit. Hence, (e) is true.
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69. Answer : (e)
Reason : The journal entry involves
Bank account Dr. Rs.4,00,000
To Share capital account Rs.3,00,000
To Share premium account Rs.1,00,000
Thus, the debit to bank account Rs.4,00,000, alternative (e) is the correct answer.
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70. Answer : (b)
Reason : Books of Whirl Wind Ltd
Dr. Stock Account Cr.
Date Particulars Rs. Date Particulars Rs.
June 01, 05 To Opening balance 1,60,000 June 30, 05 By Cost of goods
sold (bal. Fig)
4,20,000
To Purchases 3,50,000 By Closing
balance
90,000
5,10,000 5,10,000
Dr. Sundry creditors Account Cr
Date Particulars Rs. Date Particulars Rs.
June 30, 05 To Cash paid 3,70,000 June.01, 05 By Opening balance 60,000
To Closing balance 40,000 By Purchases
(balancing figure)
3,50,000
4,10,000 4,10,000
Sales = Rs.4,20,000 + 25% (Rs.4,20,000) = Rs.5,25,000.
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