Accountancy XII 1

Accountancy XII 2
Accountancy XII 3
 Accountancy (Code No. 055)
Class-XII (2015-16)
One Paper Theory: 80 Marks
3 Hours

Units Periods Marks

Part A Accounting for Partnership Firms and Companies

Unit 1. Accounting for Partnership Firms 90 35

Unit 2. Accounting for Companies 60 25

150 60

Part B Financial Statement Analysis

Unit 3. Analysis of Financial Statements 30 12

Unit 4. Cash Flow Statement 20 8

50 20

Part C Project Work 40 20

Project work will include:

Project File 4 Marks

Written Test 12 Marks (One Hour)

Viva Voce 4 Marks

OR

Part B Computerized Accounting

Unit 3. Computerized Accounting 60 20

Part C Practical Work 26 20

Practical work will include:

Practical File 4 Marks

Practical Examination 12 Marks (One Hour)

Viva Voce‟ 4 Marks

Part A: Accounting for Partnership Firms and companies 60 Marks 150 Periods
Unit 1: Accounting for Partnership Firms 90 periods

Units/Topics Learning Outcomes

Partnership: features, Partnership Deed. After going through this Unit, the students will be
Provisions of the Indian Partnership Act 1932 in able to:
the absence of partnership deed. state the meaning of partnership, partnership
Fixed v/s fluctuating capital firm and partnership deed.
accounts.Preparation of Profit and Loss describe the characteristic features of
Appropriation account- division of profit among partnership and the contents of partnership

Accountancy XII 4
 partners, guarantee of profits. deed.
Past adjustments (relating to interest on explain the significance of provision of
capital, interest on drawing, salary and profit Partnership Act in the absence of partnership
sharing ratio). deed.
Goodwill: nature, factors affecting and Differentiate between fixed and fluctuating
methods of valuation - average profit, super capital, outline the process and develop the
profit and capitalization. understanding of preparation of Profit and Loss
Scope: Interest on partner's loan is to be treated Appropriation Account.
as a charge against profits. develop the understanding of making past
adjustments.
Accounting for Partnership firms - Reconstitution state the meaning, nature and factors affecting
and Dissolution. goodwill
Change in the Profit Sharing Ratio among the develop the understanding of valuation of
existing partners - sacrificing ratio, gaining goodwill using different methods of valuation
ratio, accounting for revaluation of assets and of goodwill.
reassessment of liabilities and treatment of describe the meaning of sacrificing ratio,
reserves and accumulated profits. Preparation gaining ratio and the change in profit sharing
of revaluation account and balance sheet. ratio among existing partners.
Admission of a partner - effect of admission of develop the understanding of accounting
a partner on change in the profit sharing ratio, treatment of assets and re-assessment of
treatment of goodwill (as per AS 26), liabilities and treatment of reserves and
treatment for revaluation of assets and re- accumulated profits by preparing revaluation
assessment of liabilities, treatment of reserves account and balance sheet.
and accumulated profits, adjustment of capital
explain the effect of change in profit sharing
accounts and preparation of balance sheet.
ratio on admission of a new partner.
Retirement and death of a partner: effect of
develop the understanding of treatment of
retirement / death of a partner on change in
goodwill as per AS-26, treatment of revaluation
profit sharing ratio, treatment of goodwill (as
of assets and re-assessment of liabilities,
per AS 26), treatment for revaluation of assets
treatment of reserves and accumulated profits,
and reassessment of liabilities, adjustment of
adjustment of capital accounts and preparation
accumulated profits and reserves, adjustment
of balance sheet of the new firm.
of capital accounts and preparation of balance
sheet. Preparation of loan account of the explain the effect of retirement / death of a
retiring partner. partner on change in profit sharing ratio.

Calculation of deceased partner state the meaning of sacrificing ratio.

profit till the date of death. Preparation of develop the understanding of accounting
deceased partner‟s cap treatment of goodwill, revaluation of assets
account and preparation of balance sheet. and re-assessment of liabilities and adjustment
Dissolution of a partnership firm: types of of accumulated profits and reserves on
dissolution of a firm. Settlement of accounts - retirement / death of a partner and capital
preparation of realization account, and other adjustment.
related accounts: capital accounts of partners develop the skill of calculation of deceased
and cash/bank a/c (excluding piecemeal partner's share till the time of his death and
distribution, sale to a company and insolvency prepare deceased partner's executor's account.
of partner(s)). discuss the preparation of the capital accounts
Note: of the remaining partners and the balance
(i) The realized value of each asset must be given sheet of the firm after retirement / death of a
at the time of dissolution. partner.

Accountancy XII 5
 (ii) In case, the realization expenses are borne by a understand the situations under which a
partner, clear indication should be given partnership firm can be dissolved.
regarding the payment thereof. develop the understanding of preparation of
realisation account and other related accounts.

Unit-2 Accounting for Companies 60 Periods

Units/Topics Learning Outcomes

Accounting for Share Capital After going through this Unit, the students will
Share and share capital: nature and types. be able to:

Accounting for share capital: issue and state the meaning of share and share capital
allotment of equity shares, private placement and differentiate between equity shares and
of shares, Employee Stock Option Plan (ESOP). preference shares and different types of share
Public subscription of shares - over subscription capital.
and under subscription of shares; issue at par understand the meaning of private placement
and at premium, calls in advance and arrears of shares.
(excluding interest), issue of shares for explain the accounting treatment of share
consideration other than cash. capital transactions regarding issue of shares.
Accounting treatment of forfeiture and re-issue develop the understanding of accounting
of shares. treatment of forfeiture and re-issue of
Disclosure of share forfeited shares.
Balance Sheet. describe the presentation of share capital in
the balance sheet of the company as per
Accounting for Debentures
schedule III part I of the Companies Act 2013.
Debentures: Issue of debentures at par, at a
explain the accounting treatment of different
premium and at a discount. Issue of debentures
categories of transactions related to issue of
for consideration other than cash; Issue of
debentures.
debentures with terms of redemption;
debentures as collateral security-concept, develop the skill of calculating interest on
interest on debentures. debentures and its accounting treatment.

Redemption of debentures: Lump sum, draw of state the meaning of redemption of

lots and purchase in the open market (excluding debentures.
ex-interest and cum-interest). Creation of develop the understanding of accounting
Debenture Redemption Reserve. treatment oftransactionsrelatedto
Note: Related sections of the Indian Companies Act, redemption of debentures.
2013 will apply.

Part B: Financial Statement Analysis 20 Marks

Unit 3: Analysis of Financial Statements 30 Periods

Financial statements of a company: After going through this Unit, the students will be
Statement of Profit and Loss and Balance able to:
Sheet in the prescribed form with major develop the understanding of major headings
headings and sub headings (as per Schedule and sub-headings (as per Schedule III to the
III to the Companies Act, 2013). Companies Act, 2013) of balance sheet as per
Scope: Exceptional items, extraordinary items the prescribed norms / formats.
and profit (loss) from discontinued operations state the meaning, objectives and limitations of
are excluded. financial statement analysis.

Accountancy XII 6
 Financial Statement Analysis: Objectives, describe the meaning of different tools of
importance and limitations. 'financial statements analysis'.
Tools for Financial Statement Analysis: develop the understanding of preparation of
Comparative statements, common size comparative and common size financial
statements, cash flow analysis, ratio statements.
analysis. know the meaning, objectives and significance
Accounting Ratios: Objectives, classification of different types of ratios.
and computation. develop the understanding of computation of
Liquidity Ratios: Current ratio and Quick ratio. current ratio and quick ratio.

Solvency Ratios: Debt to Equity Ratio, Total develop the skill of computation of debt equity
Asset to Debt Ratio, Proprietary Ratio and ratio, total asset to debt ratio, proprietary ratio
Interest Coverage Ratio. and interest coverage ratio.

Activity Ratios: Inventory Turnover Ratio, Trade develop the skill of computation of inventory
Receivables Turnover Ratio, Trade Payables turnover ratio, trade receivables and trade
Turnover Ratio and Working Capital Turnover payables ratio and capital turnover ratio.
Ratio. develop the skill of computation of gross profit
Profitability Ratios: Gross Profit Ratio, Operating ratio, operating ratio, operating profit ratio, net
Ratio, Operating Profit Ratio, Net Profit Ratio and profit ratio and return on investment.
Return on Investment.

Unit 4: Cash Flow Statement 20 Peiods

Meaning, objectives and preparation (as per AS After going through this Unit, the students will
3 (Revised) (Indirect Method only) be able to:
Scope: state the meaning and objectives of cash flow
(i) Adjustments relating to depreciation and statement.
amortization, profit or loss on sale of assets develop the understanding of preparation of
including investments, dividend (both final Cash Flow Statement using indirect method as
and interim) and tax. per AS 3 with given adjustments.
(ii) Bank overdraft and cash credit to be treated
as short term borrowings.
(iii) Current Investments to be taken as Marketable
securities unless otherwise specified.

Project Work 20 Marks 40 Periods

Note: Kindly refer to the Guidelines published by the CBSE.

Unit 3: Viva-Wee 4 Marks OR

Part B: Computerised Accounting 20 Marks 60 Periods

Unit 3: Computerised Accounting
Overview of Computerised Accounting System.
Introduction: Application in Accounting.

Features of Computerised Accounting

System. Structure of CAS.

Accountancy XII 7
Software Packages: Generic; Specific; Tailored.

Accounting Application of Electronic Spreadsheet.

Concept of electronic spreadsheet. Features

offered by electronic spreadsheet.

Application in generating accounting information - bank reconciliation statement; asset accounting; loan
repayment of loan schedule, ratio analysis
Data representation- graphs, charts and diagrams.

Using Computerized Accounting System.

Steps in installation of CAS, codification and Hierarchy of account heads, creation of accounts.
Data: Entry, validation and verification.

Adjusting entries, preparation of balance sheet, profit and loss account with closing entries and opening
entries. Need and security features of the system.

Database Management System (DBMS)

Concept and Features of DBMS.
DBMS in Business Application.
Generating Accounting Information - Payroll.

20 Marks 26
Part C: Practical Work Periods
Please refer to the guidelines published by CBSE.

Prescribed Books:
Financial Accounting -I Class XI NCERT Publication
Accountancy -II Class XI NCERT Publication
Accountancy -1 Class XII NCERT Publication
Accountancy -II Class XII NCERT Publication

Accountancy XII 8
 Suggested Question Paper Design
Accountancy (Code No. 055)
Class XII (2015-16) March 2016 Examination
One Paper Theory: 80 Marks
Duration: 3 hrs.

S. Typology of Questions Very Short Short Long Long Marks %

No. Short Answer Answer Answer Answer
Answer I II I II
1 Mark 3 Marks 4 Marks 6 Marks 8 Marks

Remembering - (Knowledge based

Simple recall questions, to know
1. specific facts, terms, concepts, 3 1 1 1 - 16 20%
principles, or theories; Identify,
define, or recite, information)
Understanding - (Comprehension -
to be familiar with meaning and to
understand conceptually,
2. 2 - 2 1 I 24 30%
interpret, compare, contrast,
explain, paraphrase, or interpret
information)
Application - (Use abstract
information in concrete situation,
to apply knowledge to new
3. - 2 2 1 - 20 25%
situations; Use given content to
interpret a situation, provide an
example, or solve a problem)

High Order Thinking Skills -

(Analysis & Synthesis- Classify,
compare, contrast, or
4. differentiate between different 2 - - 1 1 16 20%
pieces of information; Organize
and/or integrate unique pieces of
information)
Evaluation - (Appraise, judge,
and/or justify the value or worth
5. of a decision or outcome, or to 1 1 - - - 04 05%
predict outcomes based on values)

80(23)
100
TOTAL 8x1=8 4x3=12 5x4=20 4x6=24 2x8=16 +20 %
Projec

Scheme of options: All questions carrying 8 marks will have an internal choice.

Note: The Board has introduced Learning Outcomes in the syllabus to motivate students to constantly
explore all levels of learning. However these are only indicative. These do not in any way restrict the
scope of questions asked in the examinations. The examination questions will be strictly based on the
prescribed question paper design and syllabus

Accountancy XII 9
 CHAPTER – I

Accounting for partnership firms – Fundamentals

LEARNING OBJECTIVES:

After studying this chapter the student will be confident to:

 Understand and explain the meaning of partnership

 Understand the characteristics of Partnership
 Explain the meaning and contents of partnership deed.
 Apply their provisions of Partnership Act, 1932 in the absence of partnership deed.
 Prepare partners’ Fixed and fluctuating capital Accounts.
 Calculate interest on Capital and Drawings.
 Distribute profit among partners and prepare Profit and Loss Appropriation A/c.
 Make the accounting treatment of past adjustment.

SALIENT POINTS:

 Partnership deed: It is a document which contains the terms and conditions of

Partnership agreement either oral or written.
 Profit and Loss Appropriation Account : After the preparation of Profit and Loss
account, entries pertaining to Interest on Capital, Drawings , Salaries among the
partners are shown separately in a newly opened Profit and Loss Appropriation
Account.
 Rules applicable in the absence of Partnership Deed :
a) Profit sharing ratio will be equal
b) No Interest on Capital and Drawings
c) No Remuneration or Salary to the partners.
d) Interest on Loan advanced by the partner @6%p.a.
 Fixed and Fluctuating Capital Accounts :
When the Capitals are fixed, the Current account of the partners will be
maintained.

Accountancy XII 10
 1 and 3 Mark Questions

Q1 Define Partnership.

Ans. When two or more persons enter into an agreement to carry on business and share its
profit and losses, it is a case of partnership. The Indian partnership Act, 1932, defines
Partnership as follows:

"Partnership is the relation between persons and who have agreed to share the profits of
a business carried on by all or any of them acting for all.

Q.2 What do you understand by 'partners', 'firm' and 'firms' name?

Ans. The persons who have entered in to a Partnership with one another are individually called
'Partners' and collectively 'a firm' and the name under which the business is carried is
called 'the firm's name'.

Q.3 Write any four main features of partnership.

Ans. Essential elements or main features of Partnership :

i) Two or more persons: Partnership is an association of two or more persons.

ii) Agreement: The Partnership is established by an agreement either oral or in

writing.

iii) Lawful Business: A Partnership formed for the purpose of carrying a business, it

must be a legal business.

iv) Profit sharing: Profit of the firm is share by the partners in an agreed ration, if the
ratio is not agreed then equally. Profit also includes loss.
Q.4 What is the minimum and maximum number of partners in all partnership?

Ans. There should be at least two persons to form a Partnership. The maximum number of
Partners in a firm carrying an banking business should not exceed ten and in any other
business should not exceed ten and in any other business it should not exceed twenty.

Q.5 What is the status of partnership from an accounting viewpoint?

Ans. From an accounting viewpoint, partnership is a separate business entity. From legal
viewpoints, however, a Partnership, like a sole proprietorship, is not separate from the
owners.

Accountancy XII 11
Q.6 What is meant by partnership deed?

Ans. Partnership deed is a written agreement containing the terms and conditions agreed by
the Partners.

Q.7 State any four contents of a partnership deed.

i) The date of formation and the duration of the Partnership

ii) Name and address of the Partners

iii) Name of the firm.

iv) Interest on Partners capital and drawings

v) Ratio in which profit or losses shall be shared

Q.8 In the absence of a partnership deed, how are mutual relations of partners governed?

Ans. In the absence of Partnership deed, mutual relations are governed by the Partnership Act,
1932.

Q.9 Give any two reason in favour of having a partnership deed.

Ans. i) In case of any dispute or doubt, Partnership deed is the guiding document.

ii) It can specify the duties and powers of each Partner.

Q.10 State the provision of 'Indian partnership Act 1932’ relating to sharing of profits in
absence of any provision in the partnership deed.

Ans. In the absence of any provision in the Partnership deed, profit or losses are share by the
Partners equally.

Q.11 Why is it important to have a partnership deed in writing?

Ans. Partnership deed is important since it is a document defining relationship of among

Partners thus is assistance in settlement of disputes, if any and also avoids possible
disputes: it is good evidence in the court.

Accountancy XII 12
Q.12 What do you understand by fixed capital of partners?

Ans. Partners' capital is said to be fixed when the capital of Partners remain unaltered except
in the case where further capital is introduced or capital is withdrawn permanently.

Q.13 What do you understand by fluctuating capital of partners?

Ans. Partner’s capital is said to be fluctuating when capital alters with every transaction in the
capital account. For example, drawing, credit of interest, etc

Q.14 Give two circumstances in which the fixed capital of partners may change.

Ans.Two circumstances in which the fixed capital of Partners may change are :

i) When additional capital is introduced by the Partners.

ii) When a part of the capital is permanently withdrawn by the Partners.

Q.15 List the items that may appear on the debit side and credit side of a partner's fluctuating
capital account.

Ans.On debit side: Drawing, interest on drawing, share of loss, closing credit balance of the
capital.

On credit side : Opening credit balance of capital, additional capital introduced, share
of profit, interest on capital, salary to a Partner, commission to a Partner.

Q.16 How will you show the following in case the capitals are?

i) Fixed and ii) Fluctuating

. a) Additional capital introduced

b) Drawings

c) Withdrawal of capital

d) Interest on capital and

e) Interest on loan by partners?

Ans.i) In case, capitals are fixed:

Accountancy XII 13
 a) On credit side of capital (b) on debit side of current A/c (c) on debit side of
capital A/c (d) on credit side of current A/c (e) on credit side of loan from partner's
A/c

Q.17 If the partners capital accounts are fixed, where will you record the following items :

i) Salary to partners

ii) Drawing by a partners

iii) Interest on capital and

iv) Share of profit earned by a partner?

Ans. i) Credit side of Partner's current A/c
ii) Debit side of Partner's current A/c
iii) Credit side of Partners current A/c
iv) Credit side of Partners current A/c
Q.18 How would you calculate interest on drawings of equal amounts drawn on the Last day
of every month?

Ans. When a partners draws a fixed amount at the beginning of each month, interest on total
drawing would be on the amount withdraw for 6.5 months at the agreed rate of interest
per annum. Apply the following formula.

Rate X 6.5
Interest on drawing = total drawing x
100 X 12
Q.19 How would you calculate interest on drawing of equal amounts drawn on the last day of
every month?

Ans. When drawing of fixed amounts are made at regular monthly intervals on the day of every
month, Interest would be charged on the amount withdrawn at the agreed rate of interest
for 5.5 months. Apply the following formula. :
Rate X 5.5
Interest on drawing = Total drawing x
100 X 12

Q.20 How would you calculate interest on drawing of equal amount drawn in the middle of
every month?
Rate X 6.0
Ans. Interest on drawing = Total drawing x
100 X 12

Accountancy XII 14
Q.21 Ramesh, a partner in the firm has advanced a loan of a Rs. 1,00,000 to the firm and has
demanded on interest @ 9% per annum. The partnership deed is silent on the matter.
How will you deal with it?

Ans. Since the Partnership deed is silent on payment of interest, the provisions of the
Partnership Act, 1932 will apply. Accordingly, Ramesh is entitled to interest @ 6% p.a.

Q.22 The partnership deed provides that Anjali, the partner will get Rs. 10,000 per month as
salary. But, the remaining partners object to it. How will this matter be resolved?

Ans. No, he is not entitled to the salary because it is not so, Provided in the Partnership deed
and according to the Partnership act, 1932 if the Partnership deed does not provided for
payment of salary to Partners, he will not be entitled to it.

Q.23 Distinction between Profit and loss and profit and loss appropriation account:

Ans.

Profit & Loss A/c Profit & Loss Appropriation A/c

i) Profit and Loss A/c is prepared to i) In case of partnership firms, profit
ascertain net profit or net loss of and loss appropriation A/c is
the business for an accounting prepared to appropr iate /
year. distribute the profit of the year
among partners.
ii) It is prepared by all the business ii) Only partnership firms and
firms. companies prepare profit and loss
appropriation A/c

Q.24. State the Average period to be taken for calculating interest on drawing in different cases if

amount is withdrawn on regular interval.

Ans. TABLE SHOWING THE AVERAGE PERIOD WHEN WITHDRAWALS ARE

MADE REGULARLY
DATE OF WITHDRAWAL AVERAGE PERIOD
1 Beginning of every month (12+1)/2 = 6.5
Middle of every month (11.5+0.5)/2 = 6
End of every month (11+0)/2 = 5.5
2 Beginning of every quarter (12+3)/2 = 7.5
End of every quarter (9+0)/2 = 4.5
3 Beginning of half year (12+6)/2 =9
End of half year (6+0)/2 =3

Accountancy XII 15
PROBLEMS BASED ON FUNDAMENTALS

Q. 1 A,B,and C were partners in a firm having no partnership agreement. A,B and C contributed
Rs.2, 00,000, Rs.3, 00,000 and 1, 00,000respectively. A andB desire thatthe profits should be
divided in the ratio of capital contribution. C does not agree to this. How will the dispute be
settled?

ANS: C is correct because in the absence of Partnership deed the profits are to be shared equally.

Q2 A and B are partners sharing profits in the ratio of 3: 2 with capitals of Rs. 5, 00,000 and Rs.
3, 00,000 respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed an annual
salary of Rs. 25000. During 2006, the profits of the year prior to calculation of interest on
capital but after charging B's salary amounted to Rs. 1,25,000. A provision of 5% of the
profits is to be made in respect of Manager's commission.
Prepare an account showing the allocation of profits and partners' capital accounts.
Solution:2 Profit and Loss Appropriation Account
Particulars Amount Particulars Amount
Rs. Rs.
To Interest on Capital By Profit after B's
A 30,000 Salary but before
B 18,000 48000 other adjustments 1, 25,000

ToProv.Manager's
Commission 7,500
(5% of Rs.1, 50,000*)
To Profit transferred to:
A's Capital A/c 41700
B's Capital A/c 27800 69,500
125000 125,000
Partner’s capital Accounts
Particulars A B Particulars A B
To Balance c/d 571700 370800 By Balance b/d 500000 300000
By interest on capital 30000 18000
By salary - 25000
By P and L
Appropriation A/c 41700 27800
571700 370800 571700 370800

Accountancy XII 16
Q.3 X and Y are partners sharing profits and losses in the ratio of 3: 2 with capitals of Rs. 50,000
and Rs. 30,000 respectively. Each partner is entitled to 6% interest on his capital. X is
entitled to a salary of Rs. 800 per month together with a commission of 10% of net 'Profit
remaining after deducting interest on capitals and salary but before charging any
commission. Y is entitled to a salary of Rs. 600 per month together I. with-a commission of
10% of Net profit remaining after deducting interest on capitals and salary and after
charging all commissions. The profits for the year prior to calculation of interest on capital
but after charging salary of partners amounted to Rs. 40,000. Prepare partners' Capital
Accounts:-
(i) When capitals are fixed, and
(ii) When capitals are. Fluctuating.
Note: (1) Calculation of interest on Capital: Interest for 3 months i.e. from 1st April to 30th
June, 2004
A B
A on Rs. 5,00,000 @ 10% p.a. 12500
B on Rs. 3,00,000 @ 10% p.a. 7500
Interest for 9 months i.e. from 1st July, 2004 to 31st March, 2005:
A on Rs. 3,50,000 @ 10% p.a. 26250
B on Rs. 3,50,000 @ 10% p.a. 26250
Q 4 Give the answer to the following:
(1) P and Q are partners sharing profits and losses in the ratio of 3:2. On 1 st April 2009 their
capital balances were Rs.50, 000 and 40,000 respectively. On 1st July 2009 P brought
Rs.10, 000 as his additional capital whereas Q brought Rs.20, 000 as additional capital on
1st October 2009. Interest on capital was provided @ 5% p.a. Calculate the interest on
capital of P and Q on 31st March 2010.
(2) A and B are partners sharing profits and losses in the ratio of 2:1. A withdraws Rs.1500 at
the beginning of each month and B withdrew Rs. 2000 at the end of each month for 12
months. Interest on drawings was charged @ 6% p.a. Calculate the interest on drawings of
A and B for the year ended 31st December 2009.

Accountancy XII 17
 Ans. 1 Interest on Capital for A
DATE AMOUNT NO. OF MONTHS PRODUCT
1-4-2009 TO 31-3-10 50,000 12 6,00,000
1-7-2009 TO 31-3-10 10,000 09 90,000
TOTAL 6,90,000

Interest on capital for A will be = 6, 90,000 x 5/100 x 1/12

= 2,875
For B

DATE AMOUNT NO OF MONTHS PRODUCT

1-4-2009 to 31-3-10 40,000 12 4,80,000
1-10-2009 to31-3-10 20,000 06 1,20,000
TOTAL 6,00,000

Interest on capital for B willbe = 6, 00,000 x 5/100 x 1/12

= 2,500
Ans. 2 Interest on Drawings
For A = Total drawings of the year x rate/100 x Average calculatedperiod

= 18,000x6/100 x 13/2 x1/12 =585

For B = 24,000 x 6/100 x 11/2 x1/12 =660

Q.5 A, B and C are partners in a firm sharing profits and losses in the ratio of 2:3:5. Their fixed
capitals were 15, 00,000, Rs.30, 00,000 and Rs.6, 00,000 respectively. For the year 2009 interest
on capital was credited to them @ 12% instead of 10%. Pass the necessary adjustment entry.
Ans: TABLE SHOWING ADJUSTMENT

PARTICULARS A B C TOTAL
RS RS RS RS
Interest that should have been
credited @ 10% 1,50,000 3,00,000 6,00,000 10,50,000
Interest already credited @ 12% 1,80,000 3,60,000 7,20,000 12,60,000
Excess credit in partners account (30,000) (60,000) (1,20,000) (2,10,000)
By recovering the extra amount
paid the share of profits will
increase and it will be credited in
the ratio of 2:3:5 42,000 63,000 1,05,000 2,10,000
Net effect +12,000 +3,000 -15,000 Nil
Accountancy XII 18
Adjustment Entry:

C’s current A/c Dr. 15,000

To A’s Current A/c 12,000
To B’s Current A/c 3,000
( For interest less charged on capital, now rectified)

Q.6 From the following balance sheet of X and Y, calculate interest on capitals @ 10% p.a.
payable to X and Y for the year ended 31st December, 2008.
Liabilities Amount Assets Amount
X's Capital 50,000 Sundry Assets 1, 00,000
Y's capital 40,000 Drawings X 10,000
P& L appropriation A/c (1998) 20,000
1,10,000 1,10,000
During the year 2008, X's drawings were Rs. 10,000 and Y's Drawing were Rs. 3,000. Profit
during the year, 2008 was Rs.30, 000.
Ans : 6 Calculation of Opening Capitals X Y
Rs. Rs.
Capitals as on 31st Dec., 2008 50,000 40,000
Add: Drawings (Previously deducted). - 3,000
50,000 43,000
Less: Profit distributed (30,000- 20,000' equally 5,000 5,000
Opening Capitals 45,000 38,000
Interest on 'capitals: @ 10% p.a; 4,500 3,800
Working Notes:
(1) As X’s drawings are shown in the Balance Sheet, it means his drawings are not
deducted. From his .capital till now, so his drawings are not included back.
(2) Profits for 2008 were Rs. 30,000 and profits of Rs. 20,000· are, shown in the
Balance Sheet, which means only Rs. 10,000 profits were distributed between the
partners.

Accountancy XII 19
Q.7 A, B and C entered into partnership on 1st April, 2008 to share profits & losses in the ratio
of 4:3:3. A, however, personally guaranteed that C's share of profit after charging interest on
Capital @ 5% p.a. would not be less than Rs. 40,000 in any year. The Capital contributions
were:
A, Rs. 3, 00,000; B, Rs. 2, 00,000 and C, Rs. 1, 50,000.
The profit for the year ended on 31st March, '2008 amounted to Rs. 1, 60,000. Show the
Profit & Loss Appropriation Account. .
Solution:7 Profit and Loss Appropriation Account
(for the year ending on 31st March 2008)
Particulars Amount Particulars Amount
To Interest on Capital: By Profit before adjustments 1,60,000
A 15,000
B 10,000
C 7,500 32,500
To net Profit transferred
A. (51,000-1,750) 49,250
B. (1,27,500x3/10) 38,250
C. (38,250+1,750) 40,000 1, 27,500
1,60,000 1,60,000
Q 8 A, and C are partners with fixed capitals of Rs. 2,00,000, Rs. 1,50,000 and Rs. 1,00,000
respectively. The balance of current accounts on 1st January, 2004 were A Rs. 10,000 (Cr.);
B Rs. 4,000 (Cr.) and C Rs. 3,000 (Dr.). A gave a loan to the firm of Rs. 25,000 on 1st July,
2004. The Partnership deed provided for the following:-

(i) Interest on Capital at 6%.

(ii) Interest on drawings at 9%. Each partner drew Rs. 12,000 on 1st July, 2004.

(iii) Rs. 25,000 is to be transferred in a Reserve Account.

(iv) Profit sharing ratio is 5:3: 2 up to Rs. 80,000 and above Rs. 80,000 equally. Net
Profit of the firm before above adjustments was Rs. 1,98,360.

From the above information prepare Profit and Loss Appropriation Account, Capital and
Current Accounts of the partners.

Accountancy XII 20
Solution: 8
Profit and Loss Appropriation Account
for the year ended 31st December, 2004

Accountancy XII 21
Q.9 Ram and Shyam started a partnership business on 1st January, 2007. Their capital
contributions were Rs. 2,00,000 and Rs. 10,0000 respectively. The partnership deed provided:
i. Interest on capitals @10% p.a.
ii. Ram, to get a salary of Rs. 2,000 p.m. and Shyam Rs. 3,000 p.m.
iii. Profits are to be shared in the ratio of 3:2.
The profits for the year ended 31st December, 2007 before making above appropriations
were Rs. 2,16,000. Interest on Drawings amounted to Rs. 2,200 for Ram and Rs. 2,500 for
Shyam. Prepare Profit and Loss Appropriation Account.

Ans:9 Profit and Loss Appropriation Account

for the year ending on 31st Dec., 2007

Particulars Amount Particulars Amount

To Interest on Capital: Rs. ByProfit 2,16,000
Interest
on Drawings
Ram 20,000 Amit 2,200
Shyam 15,000 35,000 Vijay 2,500 4,700
To Salary
Ram 24,000
Shyam 36,000 60,000
To Net profit transferred
Ram Capital A/c 75,420
Shyam Capital A/c 50,280 1,25,700
2,20,700 2,20,700

Q.10 P and Q are partners with capitals of Rs. 6,00,000 and Rs. 4,00,000 respectively. The profit
[

and Loss Account of the firm showed a net Profit of Rs. 4, 26,800 for the year. Prepare Profit and
Loss account after taking the following into consideration:-
(i) Interest on P's Loan of Rs. 2,00,000 to the firm
(ii) Interest on 'capital to be allowed @ 6% p.a.
(iii) Interest on Drawings @ 8% p.a. Drawings were; P Rs 80,000 and Q Rs. 1000,000.
(iv) Q is to be allowed a commission on sales @ 3%. Sales for the year was Rs.
1000000

Accountancy XII 22
 (v) 10% of the divisible profits is to be kept in a Reserve Account.
[Solution:10 Profit and Loss Account for the year ended

Particulars Amount Particulars Amount

To Interest on P's Loan A/c 12000 By profit before interest 426800
To Profit transferred to
P&L Appropriation A/c 414800

426800 426800

Profit and Loss Appropriation Account for the year ended.

Particulars Amount Particulars Amount

To interest on Capital By profit and Loss A/c (Profit) 414800
P 36000 By interest on drawings
Q 24000 60000 P 3200
To Q's commission 60000 Q 2000 5200
To reserve A/c 30000
To profit
P's Capital 135000
Q's capital 135000 270000
420000 420000

Notes:

(i) If the rate of interest on Partners' Loan is not given in the question, it is to be wed
@ 6% p.a. according to the Partnership Act.

(ii) Interest on Partners' Loan is treated as a charge against Profit, so it is shown in the
debit of Profit and Loss A/c.

(iii) If the date of Drawings is not given in the question, interest on drawings will be
charged and average period of 6 months. .

(iv) Reserve Fund is calculated at 10% on Rs. 3,00,000 (i.e. Rs. 4,26,800 + Rs. 5,200-
12,000 - Rs. 60,000 - Rs. 60,000.

Accountancy XII 23
 Guarantee of profit
A, B and C arte partners. They admit D and guarantee that his share of profit will not be less than
Rs. 20,000. Profits to be shared 4:3:3:2 respectively. Total profits were Rs. 96,000. It was agreed
that excess payable to D over his share will be borne by A,B and C in the ratio of 3:2:1. Calculate
share of profit for each partner.
Books of A,B and C
Profit and Loss appropriation account for the year ending………
Particulars Rs. Particulars Rs.
To profit transferred to:
A’s Capital a/c By Profit & Loss A/c 96,000
(Rs.96,000x4/12) 32,000
Less: Deficiency borne 2,000 30,000
B’s Capital A/c
(96,000x3/12) 24,000
Less: Deficiency borne 1,333 22,667
C’s Capital A/C
(Rs.96,000x3/12) 24,000
Less: Deficiency borne 667 23,333
D’s Capital A/C
(Rs.96,000x2/12) 16,000
Add: Deficiency recoveredfrom 20,000
the
Capitals of: A 2,000
B 1,333
C 667

96,000 96,000

VALUE BASED QUESTIONS

HOTS
Q-1 A and B are partners with ratio 3:2 with capitals of 2lac and 1lac respectively.show the
distribution of profits in each of the following .alternative cases
Case 1- if the partnership deed is silent as to the int on capital and the profits for the yr are 50,000
Case 2-if if the partnership deed provides for int on capital @ 8% p.a and the losses for the year
are 50,000
Case 3- if the partnership deed provides for int on capital @ 8% p.a and the profits for the yr
50,000
Case 4-if the partnership deed provides for int on capital @ 8% p.a and the profits for the yr
15,000
Case 5-if the partnership deed provides for int on capital @ 8% p.a even if it involves the firm in
loass and the profits for the yr are 15,000.
Sol:profit and the loss appropriation account
Accountancy XII 24
 Dr. Cr.
Particulars Amount Particulars amount
To profit transferred BY P&l account 50,000
to (profit for the year)
A 3/5 30,000 50,000
B 2/5 20,000

50,000 50,000

Case 2-
Profit and loss account
Particulars Amount Particulars amount
To profit and loss BY loss transferred To 50,000
account(loss) A 3/5 30,000
50,000 B 2/5 20,000

50,000 50,000

CASE 3
Sol:profit and the loss appropriation account
Dr. Cr.
Particulars Amount Particulars amount
To int on capital BY P&l account 50,000
A 16,000 (profit for the year)
B 8,000 24,000
To profit transferred
to
A 3/5 15,000 26,000
B 2/5 10,400

50,000 50,000

CASE 4
:profit and the loss appropriation account
Dr. Cr.
Particulars Amount Particulars amount
To int on capital BY P&l account 50,000
A 15,000 *2/3 (profit for the year)
B 15000*1/3 24,000
To profit transferred
to
Accountancy XII 25
A 3/5 15,000 26,000
B 2/5 10,400

50,000 50,000

CASE 5
Profit and loss account
Particulars Amount Particulars amount
To int on capital* BY profit for the yr 15,000
A 16,000 By loss transf to
B 8,000 24,000 A 3/5 5400 9,000
B 2/5 3600

24,000 24,000

NOTE -int on capital will be allowed even if the firm incurs loss .it means int on capital is a
charge against profits.

Q2 (calculation of int on capital when the profits are inadequate)

A and B contribute 5 lac and 3 lac respectively by the way of capital on which they agree interest
of 6% p.a.profit sharing ratio 3:2.profit for the yr is 4 lac before allowing int on capital pass
necessary accounts.

Sol:
Case 1) when partnership deed is silent in treating int as a charge or appropriation
profit and the loss appropriation account
Dr. Cr.
Particulars Amount Particulars amount
To int on capital BY P&l account 40,000
A 40,000 *5/8 - 40,000 (profit for the year)
25,000
B 40,000*3/8 15,000

40,000
40,000

Note:profit is 40,000 whereas int due on capitals 48,000 .so the available profits will be
distributed in ratio of int 30,000:18,000 or 5:3.
Case 2- when the partners agree that the int. shoud be allowed irrespective of profit

Profit and loss account

Particulars Amount Particulars amount

Accountancy XII 26
To int on capital* BY profit for the yr 40,000
A 30,000 By loss transf to
B 18,000 48,000 A 4,800 8000
B 3,200

48,000 48,000

Q3) A ,B and C are partners in a firm .capital accounts on 1 april 2011 stood at 1,00,000 , 80,000
and 60,000 .each partners withdrew 5,000 during the FY 2011-12.
As per the provisions of the deed
a) B was entil;tled to a salary of 1,000 p.m
b) Int on capital was to be allowed @ 10 % p.a
c) Int on drawings was to be charged @ 4% p.a
d) Profits and losses were to be shared in the ratio of their capitals
e) The net profit of 75,000 for the yr ended 31st march 2012 was divided equally amongst
the partners without providing for the terms of the deed..pass the single adjusting journal
entry to rectify the error.
Sol) statement of adjustments
Particulars A B C

1. amount which should have been credited

Salary 12,000
Int on capital 10,000 8,000 6,000
Profit(75,000-12,000-24,000+300 for int on drawings =39,300) in 16,375 13,100 9,825
5:4:3

26,375
33,100 15,825

2. amount which should have been debited : 100

Interest on Drawings 25,000 100 100
Profit already distributed equally 25,000 25,000

Dr. 25,100 25,100 25,100

Net Effect (Cr.)
1,275 (Cr.) (Dr.)
8,000 9,275

Adjustment entry

Accountancy XII 27
 Date Particulars L.f Dr. Cr.

C’s Capital A/c 9275

To A Capital A/c 1275
To B Capital A/c 8000
(Adjustment for salary, interest on capital,
interest on drawings and wrong distribution
of profit)

Q4) A ,B and C are in partnership and share profits in 3:1 and C receiving annual salary of
32,000 plus 5% on the profits after changing his salary and commission ,or ¼ th of the profits
of the firm whichever is more .any excess of the latter over the firm received by C is,under the
partnership deed is to be borne by A and B in 3:2.the profits is 1,68,000 after charging salary
of C .show the distribution of profits among partners .
Sol) profit and the loss appropriation account
For the yr ended ………………..
Dr. Cr.
Particulars Amount Particulars amount
To A’s capital BY P&l account - 2,00,000
1,60000*3/4= 1,68,000
1,20,000 1,14,000 (profit for the year)
Less due to C 3/5* Add: C’s salary 32,000
10,000 =6000
To B’S capital
1,60,000*1/4=40,000
Less
2/5*10,000=4000 36,000
To C’S Capital
¼*2,00,000 50,000

2,00,000
2,00,000

Profit before C’S SALARY AND COMMISSION 2,00,000

Less C’S salary 32,000
Less C’s commission (5/105 of 1,68,000) 8000

Thus C as manager will receive : 1,60,000

Salary of 32000+ commission of 8000 40,000

C as a partner will receive :

¼ of 2,00,000 50,000
Excess received by C as partner 10000
This excess amount of 10,000 will be deducted from A and B in the ratio 3:2 as mentioned in
the ques.
Q5) A and B were partners sharing ratio 3:2.they admitted C for 1/5th share in firm .C is
guaranteed a minimum profit of 2,00,000 for the year.any deficiency in C’S share is to be

Accountancy XII 28
 borne by A and B IN 4:1 .LOSSES FOR THE YR WERE 1,00,000.PASS NECESSARY
JOURNAL ENTRIES.
SOL) JOURNAL

DATE PARTICULARS L.F Dr Cr

A;S capital A/c Dr 48000
B’s capital A/c Dr 32000
C’s capital A/c Dr 20000
To profit and loss A /c 100000
(loss of 1,00,000 divided in 12:8:5)

A’ capital A/c Dr 176000

B’S capital A/c Dr 44000
To C’s capital A/c 2,20,000
(deficiency of C’s share of profit met
by A and B in 4:1 )

Working note
1) calculation of new ratio
share given to C is 1/5
remaining share is 4/5
thus A’s share =3/5 of 4/5=12/25
B’s share =2/5 of 4/5 =8/25
C’s share= 1/5
New ratio=12/25:8/25:5/25 or 12:8:5
2)C is guaranteed a min profit of 2,00,000 whereas share of loss debited to his capital account
is 20,000.hence he will be credited by 2,20,000 borne by A and B in 4:1

Accountancy XII 29
 Change in profit sharing ratio

Value based questions

Q1) the partners decided that 5% of net profit of the firm be spent every yr to
provide school uniform to low income group students admitted to private
schools as per provisions of Right To Education Act,2009.identify 2 values
involved in making such a decision.
Sol) 1) sensitivity of firm towards promotion of education among weaker
sections of society
2)promotion of “Right To Education Act ,2009”

Q2) A and B are partners .they decided to donate 50,000 or 5% of their net
profit (whichever is more) to an NGO which is engaged in cleanliness of area
,waste management and plantation of trees in the nearby area.do you find any
value in the decision of the partners?
Sol)values involved are
a)sensitivity of firm towards cleanliness of area and hygienic conditions of
nearby area
b)sensitivity towards area
c)fulfilment of social responsibility in their decisions.

Q3)A ,B and C after completing their computer engineering decided to start their
own business in computer softwares.they entered into partnership for this
purpose on 1 april 2013.identify any 4 values involved ehich motivated them to
form the partnership firm.
Sol) values are
1)faith and trust in each other
2) belief in team work
3) respecting friendship
4) creativity (searching for the new ideas for the business.)

Q4)Suggest any four entrepreneurial values which a firm should follow for it’s
successful operations for a long time.
SOL-Following are the entrepreneurial values which a firm should follow for it’s
successful operations –
1-Deliver high quality goods or services to the consumer
2-Provide goods or services at a reasonable price
3-Honestly and truthfulness in its dealing
4-providing after scale-services to the consumer.

Accountancy XII 30
 Q5) Deepa,Shikha , Tripiti and Urwarshi are partners in a firm . Deepa has
contributed 5,00,000 more towards capital on which she claims interest @6%p.a
Shikha and tripti agreed to it but Urwarshi opposed it arguing that partnership
deed does not provide for it .Identify the value ignored in this case.

Sol- Value of being just fair has been ignored because excess capital contributed
by Deepa is being utilized in business activities in the firm Application based
questions

Q1) WOULD A CHARITABLE DISPENSARY RUN BY 8 MEMBERS BE DEEMED A

PARTNERSHIP FIRM?GIVE REASON IN SUPPORT OF YOUR ANSWER.

SOL –It cannot be deemed a partnership because-

1-for partnership , there must be a business and

2-there must be sharing of profits from such business among the partners.In case of charitable
dispensary there is neither business nor sharing of profits .

Q2) A,B and C are partners decided that no interest on drawings is to be charged to any partner
.But after 1 yr C wants that interest on drawings should be charged to every partners. State how C
can do this.

SOL-He can only do this if it is consented by all partners (i.e by altering partnership deed ).

Q3) A and B are partners in a firm without a partnership deed . A is an active partner and claims a
salary of 18,000 p.m .state with reason whether the claim is valid or not.

SOL-His claim is not valid because no partner is entitled to get salary unless there is a provision
for the same in partnership agreement.

Accountancy XII 31
 Application based questions
Q1) P and Qwerepartners sharing profits and losses in 2:1.with effect from 1 april 2015 they
agreed top share the profits equally.they prepared a revaluation account and unrecorded asset
worth Rs 50,000 was found not to have recorded in the books.P was of the view that it should be
credited to revaluation account whereas Q was of the view that it shoud be credited to the capital
accounts of partners in equal proportion. Q agreed to the viewpointof P?explain what viewpoint
must have been put forward by P to which Q agree?

Sol) P would have given the argument that unrecorded asset belonged to the old firm when the
profit sharing ratio was 2:1.hence it shoud be credited to revaluation account so that the profit on
account of this asset could be shared in 2:1.

Q2)A and V are partners sharing profits and losses in 2:1.with effect from 1 april 2015 they
agreed to share the profits equally.on that date the balance sheet of the firm showed 75000 as
workmen compensation reserve against which there was no liability .V expressed his opinion that
it should be credited to the capital accounts equally.HoweverAnand was of the opinion that it
should be credited to the capital accounts in 2:1.He was able to convince V.explain what
argument must have been put forward by anand to which V agreed/

Sol)A would have given the argument that the reserve was created out of profits when their profit
sharing ratio was 2:1.hence it shoud be credited in old profit sharing ratio.

Goodwill
Hots
Q1) The excess amount which the firm can get on selling its assets over and above
the saleable value of its assets is called
A)surplus b) superprofits

c) reserve d) goodwill
sol) goodwill

Q2)capital employed by a partnership firm is 5,00,000.its average profit is

60,000.the normal rate of return in similar type of business is 10%.what is the
amount of superprofits?

Sol)superprofits =average profits-normal profits

=60,000-(10% of 5,00,000)

=60,000-50,000
=10,000
Q3) under the capitalization method,the formulae for calculating the goodwill is

Accountancy XII 32
a)superprofits *rate of return

b) average profits *rate of return

c)superprofits/rate of return

d)average profits/rate of return

sol)superprofits/rate of return
Q4)any change in the relationship of existing agreement and enforces making of a
new agreement is called
a)revaluation of partnership

b)reconstitution of partnership

c)realization of partnership

d)none of the above

sol) b)reconstitution of partnership

Accountancy XII 33
 CHAPTER - II

RECONSTITUTION OF PARTNERSHIP

(CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS,

ADMISSION OF A PARTNER, RETIREMENT/DEATH OF A PARTNER)

Admission of a Partner

Learning objectives:-

After studying this lesson, the students will be able to:

 Identify and deal effectively with the situation of reconstitution of partnership.

 Identify the problem arising due to admission of a partner in the firm.
 Calculate new and sacrifice ratio in different cases.
 Understand, calculate and make treatment of goodwill in different cases.
 Make accounting treatment of the revaluation of assets and liabilities and distribute the
profit and loss on revaluation among the old partners.
 Make accounting treatment of unrecorded assets and liabilities
 Prepare capital Accounts, Cash A/c and Balance Sheet of the New firm
 Adjust the Partners’ Capital Accounts

Salient Points:-

1. Goodwill is the monetary value of business reputation. It is an intangible asset.

2. Goodwill may be of two types:
a. Purchased goodwill
b. Non-purchased goodwill
3. When existing firm faces problem of limited financial resources and man power then one
new additional partner enters into firm.
4. There are three methods of valuation of goodwill:
a. Average Profit Method
b. Super Profit method
c. Capitalisation Method
5. When new partner is admitted into existing partnership then existing partners have to
sacrifice in favour of new partner, it is called sacrificing ratio.

Accountancy XII 34
 6. Share of goodwill of new partner will be credited to sacrificing partners into their
sacrificing ratio.
7. At the admission of new partner Profit & Loss on revaluation of assets and liabilities and
balances of accumulated profits & losses will be distributed among old partners (only) in
old ratio.

Rules to Prepare Revaluation account

Particulars Amount Particulars Amount

xxx
Increase in xxx Increase in Assets
Liabilities

xxx xxx
Decrease in Assets Decrease in
Liabilities

xxx xxx
Unrecorded Unrecorded Assets
Liabilities

Net Profit* Net Loss*

* Either Profit or Loss; to be distributed to old partners in old ratio.

Very Important Note:

 If any transaction after revaluation incurred loss to the firm, then it should be recorded to
the debit side
 If any transaction after revaluation incurred Profit to the firm, then it should be recorded to
the Credit side.
 If Student is not able to identify whether the transaction is related to Assets or
Liability then, they should check the balance sheet which is given in the question.

Short Cut to find Sacrifice Ratio:

Case 1: A & B are the partners sharing profit and losses in the ratio of 3:2. C is admitted in

the firm for 1/4th Share. Find Sacrifice ratio.

Sol: In this case Sacrifice ratio is : 3:2 ( i.e the old ratio)

Accountancy XII 35
 Explanation: Since nothing is mentioned, the how C has received ratio from the old
partners, therefore, it is assumed that the old partners have made sacrifice in old ratio.

Case 2: A & B are the partners sharing profit and losses in the ratio of 3:2. C is admitted in

the firm for 1/4th Share which is acquired from A & B equally. Find Sacrifice ratio.

Sol: In this case Sacrifice ratio is : 1:1 ( i.e Equal)

Explanation: Since it is mentioned that the old partners have given ratio equally to

the new partners, therefore, in this case the sacrifice ratio is Equal.

Case 3: A & B are the partners sharing profit and losses in the ratio of 3:2. C is admitted in

the firm for 1/4th Share which is acquired from A & B in the ratio of 5 : 3. Find
Sacrifice ratio.

Sol: In this case Sacrifice ratio is : 5:3

Explanation: Since it is mentioned that the old partners have given their share to C in the
ratio of 5:3 to the new partners.

Case 4: A & B are the partners sharing profit and losses in the ratio of 3:2. C is admitted in

the firm for 1/4th Share which is acquired wholly from A . Find Sacrifice ratio.

Sol: In this case Sacrifice is made by A only therefore, whole Amount of Goodwill will be
given to A.

Very Short Answer/Short Answer

Ql. At the time of change in profit sharing ratio among the existing partners, where will you
record an unrecorded liability?

Ans. Revaluation Account-Debit side

Q2. Anand, Bhutan and Chadha are partners sharing profits in ratio of 3:2:1. On 1st April
2014, they Admitted Mahesh for ¼ Share. Find Sacrifice Ratio.

Accountancy XII 36
Ans. S.R 3:2:1 (See Case 1 Above)

Q3. Give two characteristics of goodwill.

Ans. (i) it is an intangible asset having a definite value.

(ii) It helps in earning more profit.

Q4. Name any two factors affecting goodwill of a partnership firm.

Ans. (i) Favorable location (ii) Time period

Q5. In a partnership firm assets are Rs.5, 00,000 and liabilities are Rs. 2, 00,000. The
normal profit rate is 15%. State the amount of normal profits.

Ans. Rs.45,000

Q6. State the amount of goodwill, if goodwill is to be valued on the basis of 2 years’
purchase of last year’s profit Half Profit. Profit of the last year was Rs.20, 000.

Ans. Rs.20,000

Q7. Where will you record ‘increase in machinery’ in case of change in profit sharing ratio
among the existing partners?

Ans. Revaluation Account- Credit Side.

Q8. Name two methods for valuation of goodwill in case of partnership firm.

Ans. (i) Average Profit Method (ii) Super Profit Method

Q9 Give formula for calculating goodwill under ‘super profit method’.

Ans. Goodwill = Super Profit x Number of Years’ Purchase.

Q 10. Pass the journal entry for increase in the value of assets or decrease in the value of
liabilities in the Revaluation A/c?

Ans Assets A/c Dr. (with the amount of increase)

Liabilities A/c Dr. (with the amount of decrease)

To Revaluation A/c (with the total amount of gain)

Accountancy XII 37
 (Being revaluation of assets and liabilities)

Qll. P,Q and R are partners in a firm sharing profits in the ratio of 2:2:1 on 1.4.2007 the
partners decided to share future profits in the ratio of 3:2:1 on that day balance sheet of
the firm shows General Reserve of Rs 50,000. Pass entry for distribution of reserve.

Ans. General Reserve A/c Dr. 50,000

To P’s Capital A/c 20,000
To Q’s Capital A/c 20000
To R’s Capital A/c 10000
(Being Reserve distributed in old ratio)
Q12. “The gaining partner’s should compensate to sacrificing partner’s with the amount of
gain.” Journalise this statement.

Ans. Gaining Partner’s Capital A/c Dr

To Sacrificing Partner’s Capital A/c
(Being compensation given by gaining partner to sacrificing partner)

Q13. What are the two main rights acquired by the incoming new partner in a partnership
firm? ,

Ans, The two main rights are:

(i) Right to share the assets of the firm.

(ii) Right to share the future profits of the firm.

Q14. A and B are partners, sharing profits in the ratio of 3:2. C admits for 1/5 share . State the
sacrificing ratio.

Ans. Sacrificing Ratio - 3:2.

Q15. How should the goodwill of the firm be distributed when the sacrificing ratio of any of
the existing partner is negative (i.e. he is gaining)

Ans. In this case the partner with a negative sacrificing ratio, i.e. the gaining partner to the
extent of his gain should compensate to the sacrificing partner to the extent of his gain.

Ql6. In case of admission of a partner, in which ratio profits or loss on revaluation of assets
and reassessment of liabilities shall be divided?

Ans. Old ratio.

Accountancy XII 38
Q17. Give journal entry for distribution of ‘Accumulated Profits* in case of admission of a
partner.

Ans. Accumulated Profit A/c Dr.

To Old Partners Capital A/c

(Being distribution of accumulated profits among old partners)

Q18. At the time of admission of partner where will you record ‘unrecorded investment’?

Ans. Revaluation Account- Credit side.

Q19. The goodwill of a partnership is valued at Rs.20,000. State the amount required by a
new partner, if he is coming for 1/5 share in profits.

Ans. Rs.4,000.

Q20. What journal entries should be passed when the new partner brings his share of goodwill
in kind?

And.

(i) Assets A/c Dr - To

Premium for goodwill A/c

(ii) Premium for goodwill A/c Dr -

To Sacrificing Partners’ Capital A/c

Q21. What journal entries will be passed when the new partner is unable to bring his share of
goodwill in cash?

Ans. New Partner’s Capital A/c Dr. - -

To Sacrificing Partners’ Capital A/c
Q22. In case of admission of a new partner, goodwill was already appearing in the books of
the firm. Give journal entry for its treatment

Ans Old Partners Capital A/c Dr.

To Goodwill A/c -
(Being old goodwill written off among old partners)

Accountancy XII 39
Q23. At the time of admission of a new partner, workmen’s compensation reserve in
appearing in the Balance sheet as Rs1,000. Give journal entry if workmen’s
compensation at the time of admission is estimated at Rs 1,200.

Ans: Revaluation A/c 200

To Workmen’s Compensation Reserve A/c 200
(Being workmen’s compensation estimated at Rs. 1,200)

Q24. Give journal entry for recording deceased partner’s share in profit from the closure of
last balance sheet till the date of his death.

Ans. Profit & Loss Suspense Account Dr.

To Deceased Partner’s Capital Account
(Being share of profit to deceased partners)

Q25. Define gaining ratio.

Ans. Gaining ratio is the ratio in which remaining/continuing partners acquire the share of the
outgoing partner(s).

Q26. Give two circumstances in which gaining ratio can be applied.

Ans. (i) Retirement of a partner (ii) Death of a partner. .

Q27. At the time of retirement of a partner give journal entry for writing off the existing
goodwill.

Ans. All Partners Capital (including retiring) A/c Dr.

To Goodwill A/c

(Being old goodwill written off among all partners in, old ratio)

Accountancy XII 40
 1 Mark Questions
Admission of a Partner
Q.1 State the two financial rights acquired by a new Partner?

Ans. New partner is admitted to the partnership if it provided in the partnership deed or all the
existing partners agree to admit the new partner. Section 31 of the Indian Partnership
Act 1932 Provides that a person may be admitted as a new partner into a partnership
firm with the consent of all the Partners.

Q.2 Give the name of the compensation which is paid by a new Partner to sacrificing
Partners for sacrificing their share of profits.

Ans. When a partner joins the firm, he gets the following two rights along with others:

i) Right to share future profit of the firm and

ii) Right to share the assets of the firm.

Q.3 Enumeration the matters that need adjustment at the time of admission of a new Partner.

Ans. The matter that needs adjustment of the time of admission of a new partner is:

i) Adjustment in profit sharing ratio and adjustment of capital

ii) Adjustment for goodwill

iii) Adjustment of Profit / Loss arising from the Revolution of Assets and
Reassessment of Liabilities.

iv) Adjustment of accumulated profits, reserves and losses.

Q.4 Give two circumstances in which sacrificing Ratio may be applied.

Ans. Circumstances in which sacrificing Ratio may be applied are:

i) At the time of admission of a new partner for distributing goodwill brought in by the
new partner.

ii) For adjustment goodwill in case of change in Profit - sharing ratio of existing
partners.

Accountancy XII 41
Q.5 Why is it necessary to revalue assets and reassess liabilities of a firm in case of
admission of a new partner?

Ans. The assets are revalued and liabilities of a firm are reassess, at the time of admission of a
partner because the new partner should; neither benefit nor suffer because change in the
value of assets and liabilities as on the date of admission.

Q.6 What are the accumulated profit and accumulated losses?

Ans. The profit accumulated over the years and have not been credited to partners’ capital A/c
are known as accumulated Profit or undistributed profit, e.g. the General Reserve, Profit
and Loss A/c (credit balance).

The losses which have not yet been written off to the debit of Partners’ Capital A/c are
known as accumulated Losses, e.g. the Profit and Loss A/c appearing on the assets side
of Balance Sheet, etc.

Q.7 Explain the treatment of goodwill in the books of a firm on the admission of a new
Partner when goodwill already appears in the Balance sheet at its full value and the new
partner brings his share of good will in cash.

Ans. By following accounting standard - 10, the existing goodwill (i.e. goodwill appearing in
the Balance Sheet ) is written off to the old partners Capital a/c in their old profit sharing
ratio.

Old partners capital A/c Dr. .....

To Goodwill A/c [in old Ratio]
[Being the existing g/w written off in the old ratio.]

Q.8 Under what circumstances the premium for goodwill paid by the incoming Partner will not
recorded in the books of Accounts ?

Ans. When the premium for goodwill is paid by the incoming partner privately, it is not
recorded in the books of A/c as it is as a matter outside the business.

Q.9 A and B share profits and losses in the Ratio of 4:3, they admit C with 3/7th share;
which he gets 2/7th from A and 1/7 from B. What is the new profit sharing ratio?

Ans. A : - = 4/7-2/7 =2/7

B : : = 3/7-1/7=2/7
Accountancy XII 42
 C: =2/7+1/7=3/7
New Profit sharing Ratio is 2:2:3.

Q.10 The capital of A and B are Rs. 50,000 and Rs. 40,000. To Increase the Capital base of
the firm to Rs. 1, 50,000, they admit C to join the firm; C is required to Pay a sum of Rs.
70,000, what is the amount of premium of goodwill?
Ans. The total capital of the firm is Rs. 90,000. To increase the capital base to Rs. 1, 50,000,
C is to bring in Rs. 60,000 (Rs. 1, 50,000 - 9, 00, 00) But he bring in Rs. 70,000.
Therefore, the excess of Rs. 10,000 represent premium for goodwill.

Q.11 Distinguish between New Profit - sharing ratio and sacrificing ratio?
Ans. Distinction between New Profit - Sharing ratio and sacrificing ratio:

New Profit sharing Ratio

Sacrificing Ratio

1) It is related to all the Partners 1) It is related to old partners only

(Including new)

2) It is the ratio in which the all 2) It is the ratio in which old partners

Partner (including new) will share have sacrificed their share in favour

Profit in future. Of new Partner or when profit

Sharing Ratio is changed.

3) New Profit sharing Ratio = 3) Sacrificing Ratio =

Old Ratio - Sacrificing Ratio Old Ratio - New Ratio

3 marks questions:

Q 1 A & B are partners sharing in the ratio of 3:2. C is admitted. C gets 3/20th from A and 1/20th
from B. calculate new and sacrifice ratio
Ans: 9: 7: 4

Q2 X & Y are partners share profits in the ratio of 5:3. Z the new partner gets 1/5 of X’s
share and 1/3rd of Y’s share. Calculate new ratio.

Ans: 4:2:2

Q3 P & Q are partners sharing in the ratio of 5:3. They admit R for 1/4th share and agree to
share between them in the ratio of 2:1 in future. Calculate new ratio.

Accountancy XII 43
Ans: 2:1:1.

6-8 marks Questions

Q.1 Dinesh, Yasmine and Faria are partners in a firm, sharing profits and losses in 11:7:2
respectively. The Balance Sheet of the firm as on 31st Dec 2001 was as follows:

Liabilities Rs. Assets Rs.

Sundry Creditors 800 Factory 7,350
Public Deposits 1,190 Plant & Machinery 1,800
Reserve fund 900 Furniture 2,600
Capital A/c Stock 1,450
Dinesh 5,100 Debtors Rs. 1,500
Yasmine 3,000 Less: Prov B/D Rs. 300 1,200
Faria 5,000 Cash in hand 1,590
15,900 15,900

On the same date, Annie is admitted as a partner for one-sixth share in the profits with Capital of
Rs. 4,500 and necessary amount for his share of goodwill on the following terms:-

a. Furniture of Rs. 2,400 was to be taken over by Dinesh, Yasmine and Faria equally.

b. A Liability of Rs. 1,670 is created against Bills discounted.

c. Goodwill of the firm is to be valued at 2.5 years' purchase of average profits of 2 years.
The profits are as under: 2000:- Rs. 2,000 and 2001 - Rs. 6,000.

d. Drawings of Dinesh, Yasmine, and Faria were Rs. 2,750; Rs. 1,750; and Rs. 500
Respectively.

e. Machinery and Public Deposits are revalued to Rs. 2,000 and Rs. 1,000 respectively.

Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet of the new
firm.
Solution 1
Books of Dinesh, Yamine, Farte and Anie

Accountancy XII 44
 REVALUATION ACCOUNT

Particulars Rs. Assets Rs.

To Bills Discounted A/c 1670 By Public deposits A/c 190
By Machinery A/c 200
By Loss transferred to
Dinesh's capital A/c 704
Yasmine's Capital A/c 448
Faria's Capital A/c 128 1280
1670 1670

Particulars D Y F A Particualrs D Y F A
To Rev 704 448 128 By Bal b/d 5100 3000 5000
To Furniture 800 800 8000 By Reserve 495 315 90
To Drawings 2750 1750 500 By cash --
To Bal c/d 2258 900 3829 4500 By Premium 917 583 167 4500
6512 3898 5257 4500 6512 3898 5257 4500

BALANCE SHEET
as at 31.12.2001
Liabilities Rs. Assets Rs.
Sundry Creditors 800 Cash in Hand 2757
Public Deposits 1000 Factory Buildings 7350
Capitals : Machinery 2000
Dinesh 2258 Furniture 200
Yashmine 900 Stock 1450
Faria 3829 Debtors 1500
Annie 4500 11487 Less : Provision 300 1200
Bills Discounted 1670
14957 14957

Q.2 X and Y are partners as they share profits in the proportion of 3:1 their balance sheet
as at 31.03.07 as follows.

Accountancy XII 45
 BALANCE SHEET

Liabilities Rs. Assets Rs.

Capital Account Land 1,65,000
X 1,76,000 Furniture 24,500
Y 1,45,200 Stock 1,32,000
Creditors 91,300 Debtors 35,200
Bills Receivable 28,600
Cash 27,500
4,12,500 4,12,500

On the same date, Z is admitted into partnership for 1/5th share on the following terms
* Goodwill is to be valued at 3½ years purchase of average profits of last for year which was
Rs. 20,000 Rs. 17,000 Rs. 9,000 (Loss) respectively.
* Stock is fund to be overvalued by Rs. 2,000 Furniture is reduced and Land to be
appreciated by 10% each, a provision for Bad Debts @ 12% is to be created on Debtors
and a Provision of Discount of Creditors @ 4% is to be created.
* A liability to the extent of Rs. 1,500 should be created for a claim against the firm for
damages.
* An item of Rs. 1,000 included in Creditors is not likely to be claimed, and hence it should
be written off.
Prepare Revaluation Account, Partners: Capital Accounts and Balance Sheet of the new
firm if Z is to contribute proportionate capital and goodwill. The capital of partners is to be
in profit sharing ratio by opening current Accounts.

Solution 2
BOOK OF X, Y AND Z
REVALUATION ACCOUNT
Dr. Cr.
Particulars Amount Particulars Amount
To Stock A/c 2000 By land A/c 16500
To furniture A/c 2420 By creditors A/c 1000
To Provision for bad debts A/c 4224 By provision of discount on 3612
To claim against damages A/c 1500 creditors A/c
To profit transferred to
X's capital A/c 8266
Y's 2742 10968
21112 21112

Accountancy XII 46
 PARTNER'S CAPITAL ACCOUNT
Dr. Cr
Particulars X Rs. Y Rs. Z Rs. Particulars X Rs. Y Rs. Z Rs.
Y's Current A/c - 64,900 - By Balance b/d 1,76,000 1,45,200 -
To Balance 2,54,901 84,967 84,967 By revaluation 8,226 2,742 -
Profit
By premium a/c 5,775 1,925 -
By Cash a/c - - 84,967
By X's current 64,900 - -
2,54,901 1,49,867 84,967 2,54,901 1,49,867 84,967

BALANCE SHEET AS AT 31.3.07

Liabilities Rs. Assets Rs.
Claim against damages 1,500 Cash 1,20,167
Creditors Rs. 91,300 Land 1,81,500
Less Rs. 1,000 Furniture 21,780
90,300 Stock 1,30,000
Less Prov. 3,612 86,688 Debtors 35,200
Capital Less provision. 4,224 30,976
X Rs. 2,54,901 Bills receivables 28,600
Y Rs. 84,967 X's current a/c 64,900
Z Rs. 84,967 4,24,835
Current A/c (Y) 64,900
5,77,923 5,77,923
Important Question for Board (Case: 1, When capital of new partner not given)
Q.3. Rashmi and Pooja are partners in a firm. They share profits and losses in the ratio of 2:1.
They admit Santosh into partnership firm on the condition that she will bring Rs. 30,000
for Goodwill and will bring such an amount that her capital will be 1/3 of the total capital
of the new firm. Santosh will be given 1/3 share in future profits. At the time of admission
of Santosh, the Balance Sheet of Rashmi and Pooja was as under:

Accountancy XII 47
 Balance sheet
Liabilities Rs. Assets Rs.
Capital Account Cash 90,000
Rashmi 1,35,000 Machinery 1,20,000
Pooja 1,25,000 Furniture 10,000
Creditors 30,000 Stock 50,000
Bills Payable 10,000 Debtors 30,000
3,00,000 3,00,000

It was decided to:

a. revalue stock at Rs. 45,000.
b. depreciated furniture by 10% and machinery by 5%.
c. make provision of Rs. 3,000 on sundry debtors for doubtful debts.
Prepare Revaluation Account, Partners: Capital Accounts and Balance Sheet of the new firm.
Give full workings.

Solution : 3
REVALUATION ACCOUNTS
Dr. Cr.

Particulars Rs. Particulars Rs.

To Stock 5000 By Loss on Revaluation distributed
To Furniture 1000 Rashmi 10000
To Machinery 6000 Pooja 5000
To Debtors 3000
15000 15000
CAPITAL ACCOUNTS OF PARTNERS

Particulars Rashmi Pooja Santosh Particulars Rashmi Pooja Santosh

Rs. Rs. Rs. Rs. Rs. Rs.
To Revaluation A/c10000 5000 -- By Balance b/d 115000 115000 --
To Adv Susp. A/c2000 1000 -- By Cash A/c -- -- --
To Balance C/d145000 130000 -- By Premium a/c 20000 10000 --
By Reserve 16000 8000 --
By Work com.Res.6000 3000 -

Accountancy XII 48
 157000 136000 -- 157000 136000 --
To Balance c/d145000 130000 137500 By Balance b/d 145000 130000 -
By Cash A/c -- -- 137500
½ of (Rs. 145000
+ Rs. 130000)
145000 130000 137500 145000 130000 137500
BALANCE SHEET OF A, B & C AS AT
Dr. Cr.

Liabilities Rs. Assets Rs.

Creditors 30000 Cash 257500
Bills Payable 10000 Machinery 114000
Rashmi's Capital 145000 Furniture 9000
Pooja's capital 130000 Stock 45000
Santosh's capital 137500 Debtors 30000
Less : Provision 3000
452500 452500

Important Questions (Case 2, when new partners capital given & adjustment has to be
made for old partners )

Q.4 A, B and C are equal partners in a firm, their Balance Sheet as on 31st March 2002
was as follows:
Liabilities Rs. Assets Rs.
Sundry Creditors 27,000 Goodwill 1,17,000
Employees Provident Fund 6,000 Building 1,25,000
Bills Payable 45,000 Machinery 72,000
General Reserve 18,000 Furniture 24,000
Capitals: Stock 1,14,000
A 2,17,000 Bad Debts 1,02,000
B 1,66,000 Cash 12,000
C 90,000 Advertisement Suspense A/c 3,000
5,69,000 5,69,000

On that date they agree to take D as equal partner on the following terms:

Accountancy XII 49
a. D should bring in Rs. 1, 60,000 as his capital and goodwill. His share of goodwill is
valued at Rs. 60,000.
b. Goodwill appearing in the books must be written off.
c. Provision for loss on stock and provision for doubtful debts is to be made at 10% and 5%
respectively.
d. The value of building is to taken Rs. 2,00,000.
e. The total capital of the new firm has been fixed has been fixed at Rs. 4,00,000 and the
partners capital accounts are to be adjusted in the profit sharing ratio. Any
excess/Deficit is to be transferred to current account.
Required : Revaluation Account, Partners Capital Accounts, and the Balance Sheet of the new
firm.
Solution 4
REVALUATION ACCOUNT
Dr. Cr.
Particulars Rs. Particulars Rs.
To Stock 11400 By land & building 75000
To provision for doubtful debtors 5100
To Profit on Revaluation:
A's Capital A/c (1/3) 19500
B's Capital A/c (1/3) 19500
C's Capital A/c (1/3) 19500
75000 75000

CAPITAL ACCOUNTS OF PARTNERS

Particulars A B C Particulars A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Adver. By Balance b/d 217000 166000 90000
Sus. A/c 1000 1000 1000 By Revaluation 19500 19500 19500
to goodwill 39000 39000 39000 By General Res. 6000 6000 6000
To Current A/c122500 71500 -- By Premium A/c 20000 20000 20000
To Balance c/d100000 100000 100000 By Current A/c -- -- 450

262500 211500 140000 262500 211500 140000

Accountancy XII 50
 D’s Capital A/c

Particulars Amount Particulars Amount

To Balance c/d 100000 By Bank A/c 100000
100000 100000

BALANCE SHEET OF M/S A, B, C & D as at 31st march 2002

Liabilities Rs. Assets Rs
Sundry creditors 27000 Cash at bank 172000
Employees' Provident Fund 6000 Debtors 102000
Bills Payable 45000 Less : Provision 5100 96900
A's Capital 100000 Mr. X --
B's Capital 100000 Stock 102600
C's Capital 100000 Furniture & Fixtures 24000
D's Capital 100000 Plant & Machinery 72000
A's Current A/c 122500 Land & Building 200000
B's Current A/c 71500 C's Current A/c 4500
672000 672000

Accountancy XII 51
 Retirement of a Partner

LEARNING OBJECTIVES:

After studying this lesson, we are confident; you should be competent enough to:

 Identify adjustments arising due to retirement of a partner.

 Calculate new and gaining ratio.
 Make accounting treatment of goodwill in different cases.
 Make accounting treatment of the revaluation of assets and liabilities and distribution of
profit or loss on revaluation among partners.
 Make accounting treatment of undistributed profit or loss.
 Determine the amount payable to retiring partner and make payment as per agreement and
provisions of law.
 Make adjustment of partners’ capital account

Salient Points:-

1. An existing partner may wish to withdraw from a firm for various reasons.
2. The amount due to a retiring partner will be the total of :-
a. his capital in the firm
b. His share in firm’s accumulated profits and losses.
c. His share of profit or loss on revaluation of assets and liabilities
d. ;his share of profits till the date of retirement
e. His remuneration and interest on capital.
f. His share in firm’s goodwill.
3. The ratio in which the continuing (remaining) partners have acquired the share from the
outgoing partner is called gaining ratio.
4. Share of goodwill of outgoing partner will be debited to gaining partners in their gaining
ratio.
5. At the retirement of a partner Profit & Loss on Revaluation of Assets and liabilities and
balances of accumulated Profits and losses will be distributed among all partners
(including outgoing partner) in their old ratio.
6. The outstanding balance of outgoing partner’s capital A/C may be settled by fully or
partly payment and (or) transferring into his loan account.
7. Gaining Ratio = New Ratio – Old Ratio

Accountancy XII 52
 Shortcut to find Gaining Ratio:

Case 1: P, Q and R are partners sharing profits in the ratio of 7:2:1. P retires, state the Gaining
Ratio.

Ans: Gaining ratio : 2:1 (as nothing is mentioned how p has given his share to remaining
partners.

Case 2: P, Q and R are partners sharing profits in the ratio of 7:2:1. P retires and his shares are
taken by Remaining partners equally, state the Gaining Ratio.

Ans. Gaining Ratio: 1:1 (as the ratio was taken equally)

Case 3: P, Q and R are partners sharing profits in the ratio of 7:2:1. P retires and his shares are
taken by Remaining partners in 2:1 ratio, state the Gaining Ratio.

Ans: Gaining ratio: 2:1 (as the ratio was taken in the ratio of 2 :1)

Short Answers.

Q.1 What is meant by retirement of a partner?

Ans. Retirement of a partner is one of the modes of reconstituting the firm in which old
partnership comes to an end and a new partner among the continuing (remaining)
partners (i.e., partners other than the outgoing partner) comes into existence.

Q.2 ‘How can a partner retire from the firm?

Ans. A partner may retire from the firm;

i) In accordance with the terms of agreement; or

ii) With the consent of all other partners; or

iii) Where the partnership is at will, by giving a notice in writing to all the partners of
his intention to retire.

Q.3 What do you understand by ‘Gaining Ratio?

Accountancy XII 53
Ans. Gaining Ratio means the ratio by which the share in profit stands increased. It is
computed by deducting old ratio from the new ratio.

Q.4 What do you understand by ‘Gaining Partner’?

Ans Gaining Partner is a partner whose share in profit stands increased as a result of change
in partnership.

Q.5 Give two circumstances in which gaining ratio is computed.

Ans. Gaining Ratio is computed in the following circumstances: (i) When a partner retires or
dies. (ii) When there is a change in profit-sharing ratio.

Q.6 Why is it necessary to revalue assets and reassess liabilities at the time of retirement of a
partner?

Ans. At the time of retirement or death of a partner, assets are revalued and liabilities are
reassessed so that the profit or loss arising on account of such revaluation up to the date
of retirement or death of a partner may be ascertained and adjusted in all partners’
capital accounts in their old profit-sharing ratio.

Q.7 Why is it necessary to distribute Reserves Accumulated, Profits and Losses at the time
of retirement or death of a partner?

Ans. Reserves, accumulated profits and losses existing in the books of account as on the date
of retirement or death are transferred to the Capital Accounts (or Current Accounts) of
all the partners (including outgoing or deceased partner) in their old profit-sharing ratio
so that the due share of an outgoing partner in reserves, accumulated profits/losses gets
adjusted in his Capital or Current Account.

Q.8 What are the adjustments required on the retirement or death of a partner?

Ans. At the time of the retirement or death of a partner, adjustments are made for the
following:

(i) Adjustment in regard to goodwill.

(ii) Adjustment in regard to revaluation of assets and reassessment of liabilities.

Accountancy XII 54
 (iii) Adjustment in regard to undistributed profits.

(iv) Adjustment in regard to the Joint Life Policy and individual policies.

Q.9 X wants to retire from the firm. The profit on revaluation of assets on the date of
retirement is Rs. 10,000. X is of the view that it be distributed among all the partners in
their profit-sharing ratio whereas Y and Z are of the view that this profit be divided
between Y and Z in new profit-sharing ratio. Who is correct in this case?

Ans. X is correct because according to the Partnership Act a retiring partner is entitled to
share the profit up to the date of his retirement. Since the profit on revaluation arises
before a partner retires, he is entitled to the profit.

Q.10 How is goodwill adjusted in the books of a firm -when a partner retires from
partnership?

Ans. When a partner retires (or dies), his share of profit is taken over by the remaining
partners. The remaining partners then compensate the retiring or deceased partner in the
form of goodwill in their gaining ratio. The following entry is recorded for this purpose:

Remaining Partners’ Capital A/cs ...Dr.

[Gaining Ratio]

To Retiring/Deceased Partner’s Capital A/c [With his share of goodwill]

If goodwill (or Premium) account already appears in the old Balance Sheet, it should be
written off by recording the following entry:

All Partners’ Capital/Current A/cs ...Dr. [Old Ratio]

To Goodwill (or Premium) A/c

Q.11 X, Y and Z are partners sharing profits and losses in the ratio of 3 : 2 :1. Z retires and the
following Journal entry is passed in respect of Goodwill:

Y’s Capital A/c ...Dr. 20,000

To X’s Capital A/c 10,000

To Z’s Capital A/c 10,000

Accountancy XII 55
 The value of goodwill is Rs. 60,000. What is the new profit-sharing ratio between X and
Y?

Ans. Without calculating the gaining ratio, the amount to be adjusted in respect of goodwill
can be calculated directly with the help of following statement:

STATEMENT SHOWING THE REQUIRED ADJUSTMENT FOR GOODWILL

Particulars X(Rs.) V(Rs.) Z(Rs.)

Right of goodwill before retirement (3:2:1) 30,000 20,000 10,000

(Old Ratio) Right of goodwill after retirement 20,000 40,000 —

(Balancing Figure) (New Ratio)

Net Adjustment (-) 10,000 (+) 20,000 (-) 10,000

The new ratio between X and Y is 1 : 2.

Q.13 State the ratio in which profit or loss on revaluation will be shared by the partners when
a partner retires. ;

Ans. Profit or loss on revaluation of assets/liabilities will be shared by the partners (including
the retiring partner) hi their old profit-sharing ratio.

Q.14 How is the account of retiring partner settled?

Ans. The retiring partner account is settled either by making payment in cash or by promising
the retiring partner to pay in installments along with interest or by making payment
partly in call and partly transferring to his loan account. The -following Journal entry is
passed:

Retiring Partner’s Capital A/c ...Dr.

To Cash* [If paid in cash]Or

To Retiring Partner’s Loan [If transferred to loan]

6 to 8 marks questions

Q.1 The Balance Sheet of A, B and C on 31st December 2007 was as under :

BALANCE SHEET
Accountancy XII 56
 as at 31.12.2007

Liabilities Amount Assets Amount

A’s Capital 400,00 Buildings 20,000
B’s Capital 30,000 Motor Car 18,000
C’s Capital 20,000 Stock 20,000
General Reserve 17,000 Investments 1,20,000
Sundry Creditors 1,23,000 Debtors 40,000
Patents 12,000
2,30,000 2,30,000

The partners share profits in the ratio of 8 : 4 : 5. C retires from the firm on the same date
subject to the following term S and conditions:

i) 20% of the General Reserve is to remain’ as a reserve for bad and doubtful debts. ;

ii) Motor Car is to be decreased by 5%.

iii) Stock is to be revalued at Rs.17, 500.

iv) Goodwill is valued at’ 2 ½ years purchase of the average profits of last 3 years.

Profits were; 2001: Rs.11,000; 200l: Rs. 16,000 and 2003: Rs.24,000.

C. was paid in July. A and B borrowed the necessary amount from the Bank on the
security of Motor Car and stock to payoff C.

Prepare Revaluation Account, Capital Accounts and Balance Sheet of A and B.

Ans.2 SOLUTION

REVALUATION ACCOUNT

Particulars Rs. Particulars Rs.

To Motor Cars A/C 900 By Loss transferred to
To Stock A/C 2,500 A’s Capital A/c Rs. 1,600
B’s Capital A/c Rs. 800
C’s Capital A/c Rs. 1,000
3,400 3,400
PARTNERS CAPITAL ACCOUNT

Accountancy XII 57
Particulars ARs. B Rs. C Rs. Particulars A Rs. B Rs. C Rs.

To C’s Capital A/c 8,334 4,166 - By Balance b/d 40,000 30,000 20,000

To Revaluation A/c (Loss)1,600 800 1,000 By General Reserve A/c6,400 3,200 4,000

To Bank A/c - - 35,500 By A’s Capital A/c - - 8,334

Balance c/d 36,466 28,234 - By B’s Capital A/c - - 4,166

46,400 33,200 36,500 46,400 33,200 36,500

By Balance b/d 36,466 28,234 -

BALANCE SHEET OF A AND B

Liabilities Rs. Assets Rs.
Sundry creditors 1,23,000 Building 20,000
Bank Loan 35,500 Motor Car 17,100
Capital A 36,466 Stock 17,500
B 28,234 64,700 Investment 1,20,000
Debtors 36,600

Patents 12,000

2,23,200 2,23,200

Q.3 A, Band C were partners in a firm sharing profits equally: Their Balance Sheet
on.31.12.2007 stood as:

BALANCE SHEET AS AT 31.12.07

Liabilities Rs. Assets Rs.

A Rs. 30,000 Goodwill 18,000

B Rs. 30,000 Cash 38,000
C Rs. 25,000 85,000 Debtors . 43,000
Bills payable 20,000 Less: Bad Debt provision 3,000 40,000
Creditors 18,000 Bills Receivable 25,000
Workers Compensation Fund 8,000 Land and Building 60,000
Employees provide4nt Fund 60,000 Plant and Machinery 40,000

Accountancy XII 58
 General Reserve 30,000
2,21,000 2,21,000

It was mutually agreed that C will retire from partnership and for this purpose following
terms were agreed upon.

i) Goodwill to be valued on 3 years’ purchase of average profit of last 4 years which

were 2004 : Rs.50,000 (loss); 2005 : Rs. 21,000; 2006: Rs.52,000; 2007 :
Rs.22,000.

ii) The Provision for Doubtful Debt was raised to Rs. 4,000.

iii) To appreciate Land by 15%.

iv) To decrease Plant and Machinery by 10%.

v) Create provision of Rs;600 on Creditors.

vi) A sum of Rs.5,000 of Bills Payable was not likely to be claimed.

vii) The continuing partners decided to show the firm’s capital at 1,00,000 which
would be in their new profit sharing ratio which is 2:3. Adjustments to be made in
cash

Make necessary accounts and prepare the Balance Sheet of the new partners.

Ans.3 REVALUATION ACCOUNT

Particulars Rs. Particulars Rs.

To Provision for Debts A/c 1,000 By Land A/c 9,000
To Plant & Machinery A/c 4,000 By Provision on Creditors A/c 600
To Profit transferred to By Bills Payable A/c 5,000
A’s Capital A/c Rs. 3,200
B’s Capital A/c Rs. 3,200
C’s Capital A/c Rs. 3,2009,600
14,600 14,600

Accountancy XII 59
 PARTNER’S CAPITAL ACCOUNTS

Particulars ARs. B Rs. C Rs. Particulars A Rs. B Rs. C Rs.

To Goodwill A/c 6,000 6,000 6,000 By Balance b/d 30,000 30,000 25,000
To C’s Capital A/c 2,250 9,000 - By General Reserve 10,000 10,000 10,000
To C’s Loan A/c - - 46,116 By Workmen A/c 2,667 2,667 2,666
Compensation Fund
To Balance c/d 40,000 60,000 - By Revalu A/c (profit) 3,200 3,200 3,200
By A’s Capital A/c - - 2,250
By B’s Capital A/c - - 9,000
By Cash A/c (Deficiency)2,38329,133 -
48,250 75,000 52,116 48,250 75,000 52,116
By Balance b/d 40,000 60,000 -

BALANCE SHEET
as at 31.12.07
Liabilities Rs. Assets Rs.
Bills Payable 15,000 Debtors Rs. 43,000
Creditors 17,400 Less: Provision Rs. 4,000 39,000
Employees Provident Fund 60,000 Bills Receivables 25,000
C’s Loan 46,116 Land & Buildings 69,000
A’s Capital 40000 Plant & Machinery 36,000
B’S Capital 60000 1,00,000 Cash 69,516
2,38,516 2,38,516

Q.4 A, Band C were partners in a firm sharing profits equally: Their Balance Sheet
on.31.12.2007 stood as:
BALANCE SHEET AS AT 31.12.07

Liabilities Rs. Assets Rs.

A Rs. 30,000 Goodwill 18,000

B Rs. 30,000 Cash 38,000
C Rs. 25,000 85,000 Debtors . 43,000
Bills payable 20,000 Less: Bad Debt provision 3,000 40,000

Accountancy XII 60
 Creditors 18,000 Bills Receivable 25,000
Workers Compensation Fund 8,000 Land and Building 60,000
Employees provide4nt Fund 60,000 Plant and Machinery 40,000
General Reserve 30,000
2,21,000 2,21,000

It was mutually agreed that C will retire from partnership and for this purpose following terms
were agreed upon.

i) Goodwill to be valued on 3 years’ purchase of average profit of last 4 years which

were 2004 : Rs.50,000 (loss); 2005 : Rs. 21,000; 2006: Rs.52,000; 2007 :
Rs.22,000.

ii) The Provision for Doubtful Debt was raised to Rs. 4,000.

iii) To appreciate Land by 15%.

iv) To decrease Plant and Machinery by 10%.

v) Create provision of Rs;600 on Creditors.

vi) A sum of Rs.5,000 of Bills Payable was not likely to be claimed.

vii) The continuing partners decided to show the firm’s capital at 1,00,000 which
would be in their new profit sharing ratio which is 2:3. Adjustments to be made in
cash

Make necessary accounts and prepare the Balance Sheet of the new partners.

Ans.4 REVALUATION ACCOUNT

Particulars Rs. Particulars Rs.

To Provision for Debts A/c 1,000 By Land A/c 9,000
To Plant & Machinery A/c 4,000 By Provision on Creditors A/c 600
To Profit transferred to By Bills Payable A/c 5,000
A’s Capital A/c Rs. 3,200
B’s Capital A/c Rs. 3,200
C’s Capital A/c Rs. 3,200 9,600
14,600 14,600

Accountancy XII 61
 PARTNER’S CAPITAL ACCOUNTS

Particulars ARs. B Rs. C Rs. Particulars A Rs. B Rs. C Rs.

To Goodwill A/c 6,000 6,000 6,000 By Balance b/d 30,000 30,000 25,000
To C’s Capital A/c 2,250 9,000 - By General Reserve 10,000 10,000 10,000
To C’s Loan A/c - - 46,116 By Worksmen A/c 2,667 2,667 2,666
Compensation Fund
To Balance c/d 40,000 60,000 - By Revalu A/c (profit) 3,200 3,200 3,200
By A’s Capital A/c - - 2,250
By B’s Capital A/c - - 9,000
By Cash A/c (Deficiency)2,383 29,133 -
48,250 75,000 52,116 48,250 75,000 52,116
By Balance b/d 40,000 60,000 -

BALANCE SHEET
as at 31.12.07
Liabilities Rs. Assets Rs.
Bills Payable 15,000 Debtors Rs. 43,000
Creditors 17,400 Less: Provision Rs. 4,000 39,000
Employees Provident Fund 60,000 Bills Receivables 25,000
C’s Loan 46,116 Land & Buildings 69,000
A’s Capital 40000 Plant & Machinery 36,000
B’S Capital 60000 1,00,000 Cash 69,516
2,38,516 2,38,516

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

Accountancy XII 62
 DEATH OF A PARTNER

Learning Objectives:

After studying this Unit, students will be able to understand and prepare:
a) Deceased partners capital account
b) Deceased partners Executor account
c) Executors loan account
d) Calculation of share of profit and Goodwill of the deceased partner.

SALIENT POINTS:
 Gaining Ratio: When the partner retires or dies, his share of profit is taken over by
the remaining partners.
 Gaining ratio is applied for the purpose of calculating Goodwill to be paid off to the
deceased partner.
 The deceased partner s share of profit till the date of death will be calculated by
preparing Profit and Loss Suspense account on the date of Death.

SHORT QUESTIONS--- (3-4 MKS)

1. A, B and C are partners sharing profits and losses in the ratio of 5:4:1. The profit for the
year ending 31, March, 2010 was Rs 1, 00,000. B died on 30th June 2010. Calculate C’s
share of profit till the date of death and pass necessary journal entry.

Profit and Loss suspense a/c – Dr 10,000

B’s Capital Account 10,000

(Being B’s share of profit transferred to his
capital account)

C’s share of profit = 1, 00,000 X 4/10 X 3/12 = 10,000

2. X, Y and Z are partners in a firm sharing profits and losses in the ratio of 5:4:1.The
Partnership agreement provides that the share of profit of the deceased partner will be
worked out on the basis of sales. The sales for the year 2009-10 was Rs 8,00,000 and the
sales from April 1, 2010 to June 30, 2010 was Rs 1,50,000. The profit for the year ended
31st March 2010 amounted to Rs 1,00,000. Y died on 30th June 2010. Calculate his share
of profit and pass necessary journal entry.

Profit and Loss suspense a/c – Dr 7500

Y’s Capital Account 7500

(Being Y’s share of profit transferred to
his capital account

Sales for the year 2009-10 ----8, 00,000 Profit for the year 2009-10 -----1,00,000
Sales from April 1,2010 to 30th June 2010 -----1,50,000 Profit upto 30th June 2010----?
C’s share of profit = 1,00,000/8,00,000 X 1,50,000 = 18750 X 4/10 = 7500.

Accountancy XII 63
3. Ram, Mohan and Sohan were partners sharing profits and losses in the ratio of 5:3:2. On
31st March, 2006 their Balance Sheet was as under:
Liabilities Rs Assets Rs
Capitals Leasehold 1,25,000
Ram 1,50,000 Patents 30,000
Mohan 1,25,000 Machinery 1,50,000
Sohan 75,000 Stock 1,90,000
Workmen’s
Compensation Reserve 30,000 Cash at Bank 40,000
Creditors 1,55,000
5,35,000 5,35,000
Sohan died on 1st August, 2006. It was agreed that :
(i) Goodwill of the firm is to be valued at Rs. 1,75,000.
(ii) Machinery be valued at Rs. 1,40,000; Patents at Rs. 40,000; Leasehold at
Rs. 1,50,000 on this date.
(iii) For the purpose of calculating Sohan’s share in the profits of 2006-07, the profits
should be taken to have accrued on the same scale as in 2005-06, which were
Rs. 75,000.
Prepare Sohan’s Capital Account and Revaluation Account. (6)
Revaluation Account
Particulars Amt Particulars Amt
Machinery 10,000 Leasehold 25000
Capital Accounts: Patents 10,000
Ram 12500
Mohan 7500
Sohan 5000
35000 35000
Sohan’s capital Account
Particulars Rs Particulars Rs
Balance b/d 75000
Sohan’s Executor’s 1,26,000 Revaluation a/c 5000
account
Ram’s Capital a/c 21875
Mohan’s capital a/c 13125
P & L Suspense A/c 13125
Workmen’s
Compensation reserve
a/c 6000
1,26,000 1,26,000

Working Note :
a)Total Goodwill of the firm = 1,75,000

Accountancy XII 64
Sohan’s share of goodwill = 1,75,000 X 2/10 = 35000 ( to be divided in the ratio of 5:3 i.e gaining
ratio)
b) Sohan’s share of profit = 75000 X 4/12 x 2/10 = Rs 5000

4. Following is the Balance sheet of P , Q and R as on 31st December 2010 sharing profits in the
ratio of 5:3:2.
Particulars Rs Particulars Rs
Capital Accounts Cash 13000
P 30000 Debtors 8000
Q 25000 Machinery 30000
R 15000 Stock 10000
Creditors 7000 Patents 6000
Reserve Fund 10000 Building 20000
87000 87000
st
P died on 1 July 2011 on the following terms-
i) Patents are to be valued at Rs 8000, Machinery at Rs 28000 and Building at Rs 30,000.
ii) Interest on Capital is to be provided at 10% p.a.
iii) Goodwill of the firm is valued at 2 years purchase of the average profits of the last five
years which were-
2006 - Rs 15,000 2007 – Rs 13000 2008 – Rs 12,000
2009—15,000 and 2010--- Rs 20,000
iv) Profit for the year 2011 has been accrued on the same scale as in 2010.
v) P’s Executor is to be paid Rs 11,500 and balance transferred to his loan account.
Prepare Revaluation Account, P’s Capital account and P’s executors account.Also pass
necessary journal entries.
Revaluation Account
Particulars Rs Particulars Rs
Machinery 2000 Patents 2000
Capital Accounts- Buildings 10000
P 5000
Q 3000
R 2000
12000 12000

P’s Capital Account

Particulars Rs Particulars Rs
P’s Executors a/c 61500 Balance b/d 30000
Reserve fund 5000
Q’s Capital a/c 9000
R’s Capital a/c 6000
Revaluation a/c 5000
Interest on capital 1500
61500 61500

Accountancy XII 65
 P’s Executor’s account
Particulars Rs Particulars Rs
Bank/cash a/c 11500 P’s Capital a/c 61500
P’s Executor’s Loan
a/c 50000
61500 61500
Working Note :
a) Interest on Capital : 30,000 X 10/100 X 6/12 = Rs 1500
b) Reserve fund = 10,000 X 5/10 = Rs 5000
c) P’s Share of profits = 20,000 X 5/10 X 6/12 = Rs 5000.(for 6 months)
d) Total Goodwill of the firm =
Average profits = 75000/5 = Rs 15000
Goodwill = 15000 X 2 = 30,000
P’s share of Goodwill = 30,000 X 5/10 = 15000(to be divided in Gaining ratio 3:2)
Journal
SN Particulars LF Amt Amt
1 Revaluation a/c ----Dr 2000
Machinery a/c 2000
(Being machinery revalued)
2 Patents a/c --Dr 2000
Building a/c - Dr 10000
Revaluation a/c 12000
(Being Assets revalued)
3 Revaluation a/c --- Dr 10000
P’s Capital a/c 5000
Q’s Capital a/c 3000
R’s Capital a/c 2000
(Being Revaluation profit distributed)
4 Reserve fund a/c –Dr 5000
P’s Capital a/c 5000
(Being reserve distributed)
5 Q’s Capital a/c ---Dr 9000
R’s Capital a/c ---Dr 6000
P’s capital a/c 15000
(Being deceased partner ‘s account credited by his
share of goodwill contributed by the gaining partners)
6 Interest on capital a/c – Dr 1500
P’s Capital a/c 1500
(Being Interest on capital provided to the deceased
partner)
7 P’s Capital a/c ---Dr 61500
P’s executor’s a/c 61500
(Being P’s balance due transferred to his executor’s
a/c)
8 P’s executor’s a/c --Dr 61500
Cash a/c 11500
P’s executor’s loan a/c 50000
(Being amount paid to the executor and balance

Accountancy XII 66
 transferred to his loan account)

5. X, Y and Z are partners sharing profits and losses in the ratio of 2:2:1 respectively. Their
Balance Sheet as on 31st march 2007 was as follows—
Balance Sheet as on 31/03/10
Liabilities Rs Assets Rs
Sundry Creditors 1,00,000 Cash at bank 20,000
Capital Accounts Stock 30,000
X 60,000 Sundry Debtors 80,000
Y 1,00,000 Investments 70,000
Z 40,000 Furniture 35,000
General Reserve 50,000 Buildings 1,15,000
3,50,000 3,50,000

Z died on 30th September 2007 and the following was provided—

a) “Z” will be entitled to his share of profit upto the date of death based on last year’s profit.
b) Z’s share of Goodwill will be calculated on the basis of 3 years purchase of average profits
of last four years . The profits of the last four years was as follows—
Year I – 80,000, Year II –Rs 50,000 Year III – Rs 40,000 and Year IV –Rs
30,000
c) Interest on Capital was provided at 12% p.a.
d) Drawings of the deceased partner upto the date of death was Rs 10,000.
e) Rs 15,400 should be paid immediately to the executor of the deceased partner and the
balance in four equal yearly instalments with interest at 12% on remaining balance.
Prepare Z’s capital account and Z’s executors account till the account is finally closed.
Z’s Capital Account
Particulars Rs Particulars Rs
Drawings 10,000 Balance b/d 40,000
Z’s Executor’s a/c 75,400 General Reserve 10,000
Profit &Loss
Suspense a/c 3,000
Interest on
capital 2400
X’s Capital a/c 15,000
Y’s capital a/c 15,000
85400 85400

Accountancy XII 67
 Z’s Executor’s Account
Date Particulars Rs Date Particulars Rs.
30/09/07 Bank a/c 15400 30/09/07 Z’s Capital a/c 75400
31/03/08 Interest on Loan
(on Rs
60,000@12% for 6
months)
31/03/08 Balance c/d 63600 3600
79000 79000
30/09/08 Bank a/c 1/04/08 Balance b/d 63600
( 15000+ 7200) 22,200
30/09/08 Interest on Loan(On
Rs 60,000 @ 12%
for 6 months)
31/03/09 Balance c/d 47,700 3600
31/03/09 Interest on Loan(on
Rs 45000 @12%
for 6 months)
2700
69900 69900
30/09/09 Bank a/c 1/04/09 Balance b/d 47,700
(15000+5400) 20,400
30/09/09 Interest on loan(on
Rs 45000 @ 12%
for 6 months)
31/03/10 Balance c/d 31800 2700
31/03/10 Interest on loan ( on
Rs 30,000@12%
for 6 months)
1800
52200 52200
30/09/10 Bank 1/4/10 Balance b/d 31800
a/c(15000 + 18600
3600)
31/03/11 Balance c/d 15900 30/09/10 Interest on loan(on
Rs 30,000 @12%
for 6 months) 1800
31/03/11 Interest on Loan(on
Rs 15000 @12%
for 6 months) 900
34500 34500
30/09/11 Bank a/c 1/04/11 Balance b/d 15900
(15000+1800) 16800
30/09/11 Interest on loan(on
Rs 15000 @12%
for 6 months) 900
16800 16800

Accountancy XII 68
6 Anil, Jatin and Ramesh were sharing profit in the ratio of 2:1:1. Their Balance Sheet as at
31.12.2001 stood as follows:-

Liabilities Rs Assets Rs
Creditors 24,400 Cash 1,00,000

Bank Loan 10,000 Debtors 20000

Less : Provision 1600 18,400

Profit and Loss A/c 18,000 Stock 10,000

Bills Payable 2,000 Building 20,000

Anil’s Capital 50,000 Investment 14,000

Jatin’s Capital 40,000 Goodwill 22,000

Ramesh’s Capital 40,000

1,84,400 1,84,400

Ramesh died on 31st March 2002. The following adjustments were agreed upon-

(a) Building be appreciated by Rs. 2,000

(b) Investments be valued at 10% less than the book value.

(c) All debtors (except 20% which are considered as doubtful) were good.

(d) Stock be increased by 10 %

(e) Goodwill be valued at 2 years’ purchase of the average profit of the past five years.

(f) Ramesh’s share of profit to the death be calculated on the basis of the profit of the
preceding year. profit for the years 1997, 1998, 1999 and 2000 were Rs. 26,000,
Rs. 22,000, Rs. 20,000 and Rs. 24,000 respectively.

Prepare revaluation account, partner’s capital Account, Ramesh ‘s Executors’ Account and
Balance sheet immediately after Ramesh’s death assuming that Rs. 18, 425 be paid
immediately to his executors and balance to b left to the Ramesh’s Executor’s Account

Accountancy XII 69
 Revaluation Account

Particulars Rs Particulars Rs

Investment A/c 1,400 Building A/c 2,000

Provision for doubtful 2,400 Stock A/c 1,000

debt A/c

Loss transferred to

Anil’s Capital A/c 400

Jatin’s Capital A/c 200

Ramesh’s Capital A/c 200

3800 3800

Partners Capital Accounts

Particulars Anil Jatin Ramesh Particulars Anil Jatin Ramesh

Goodwill 11000 5500 5500 By Balance 50000 40000 40000

A/c b/d

Ramesh 7333 3667 Profit and 9000 4500 4500

Capital A/c Loss A/c

Revaluation 400 200 200 Profit &Loss 1125

A/c (Loss) Susp A/c

Ramesh’s 50925 Anil’s Capital 7333

Executor’s A/c
A/c

Balance 40,267 35,133 ---- Jatin’s Capital 3667

c/d A/c

59,000 41,500 56,625 59,000 41,500 56,625

Accountancy XII 70
 Ramesh’s Executor’s account

Particulars Rs Particulars Rs

Cash Account 18425 Ramesh’s Capital 50925

account

Balance c/d 32500

50925 50925

Balance sheet

Liabilities Rs Assets Rs

Bank Loan 10, 000 Cash 81,575

Creditors 20,400 Debtors 20000 16000

Less Provision 4000

Bills Payable 2,000 Stock 11000

Ramesh’s Executor’s 32,500 Building 22000

Loan

Anil’s Capital 40,267 Investments 12600

Jatin’s Capital 35,133 Profit &Loss Suspense 1125

A/c

1,44,300 1,44,300

Accountancy XII 71
 DISSOLUTION OF PARTNERSHIP FIRM

Learning Objectives

After Studying this unit, the students will be able to understand:

*Meaning of Dissolution

* Distinction between Dissolution of Partnership and Dissolution of Partnership firm.

* Preparation of Realisation Account

* Procedure of settlement of accounts

* Preparation of Memorandum Balance sheet (to find out missing figures)

* Necessary journal entries to close the books of the firm.

SALIENT POINTS:

 Dissolution : Dissolution of the firm is different from Dissolution of Partnership.

 Realisation account : It is prepared to realize the various assets and pay off the liabilities.
 Closure of the Books of Accounts : When the firm is dissolved, finally all the books of
accounts are closed through Bank Account.
1. Distinguish between Dissolution of Partnership and Dissolution of Partnership firm

Dissolution of Partnership Dissolution of partnership firm

a) The Partnership is dissolved but the a) The firm winds up the business.
business continues. The Business is
not terminated
b) Assets and liabilities are revalued b)Assets are sold and the liabilities are
through revaluation account and the paid off through Realisation account.
Balance sheet is prepared

c) The Books of accounts are not d) The Books of accounts are closed.
closed as the business is not
terminated.

2. State the provisions of Section 48 of the Partnership Act 1932 regarding settlement of
Accounts during the Dissolution of Partnership firm.

Ans. According to section 48—

a) Losses including the deficiencies of Capitals are to be paid---

Accountancy XII 72
 i) First out of profits
ii) Next out of Capitals of the partners
iii) Lastly if required, by the partners individually in their profit sharing ratio(as their
liability is unlimited)
b) The Assets of the firm and the amount contributed by the partners to make up the
deficiency of capital shall be applied for –
i) First to pay the debts of the firm to the third parties.
ii) Next, Partners Loan(Partner has advanced to the firm)
iii) Partners capitals
iv) The residue, if any shall be distributed among the partners in their profit sharing
ratio.
3. Distinguish between Realisation account and Revaluation account

Realisation Account Revaluation Account

a) It is prepared in the case of a)It is prepared in the case of

Dissolution of Partnership firm. Dissolution of Partnership.

b) This account is prepared to realise b) This Account is prepared to revalue

the assets & pay off the liabilities . the assets and liabilities during
Admission, Retirement and Death of the
partner.

c) In this books of accounts are closed c) In this case books are not closed

4. A and B are partners sharing profits and losses equally. They decided to dissolve their firm.
Assets and Liabilities have been transferred to Realisation Account. Pass necessary Journal
entries for the following.

a) A was to bear all the expenses of Realisation for which he was given a commission of
Rs 4000.
b) Advertisement suspense account appeared on the asset side of the Balance sheet
amounting Rs 28000
c) Creditors of Rs 40,000 agreed to take over the stock of Rs 30,000 at a discount of 10%
and the balance in cash.
d) B agreed to take over Investments of Rs 5000 at Rs 4900
e) Loan of Rs 15000 advanced by A to the firm was paid off.
f) Bank loan of Rs 12000 was paid off.

Accountancy XII 73
 JOURNAL

SN Particulars LF Debit(Rs) Credit(Rs)

a) Realisation account –Dr 4000
A’s Capital account 4000
(Being commission given to A)
b) A’s Capital account –Dr 14000
B’s Capital account –Dr 14000
Advertisement Suspense account 28000
(Being Advertisement suspense
written off)
c) Realisation account –Dr 13000
Cash account 13000
(Being creditors paid off)
d) B’s Capital account –Dr 4900
Realisation account 4900
(Being asset taken over by the
partner)
e) A’s Loan account –Dr 15000
Cash account 15000
(Being partners loan paid off)
f) Realisation account -- Dr 12000
Cash account 12000
(Being Bank loan paid off)
4. X and Y are partners in the firm who decided to dissolve the firm. Assets and Liabilities are
transferred to Realisation account. Pass necessary journal entries—
a) Creditors were Rs 1,00,000. They accepted Building valued Rs 1,40,000 and paid cash to
the firm Rs 40,000
b) Aman, an old customer whose account of Rs 1000 was written off as bad in the previous
year paid 40% of the amount.
c) There were 300 shares of Rs 10 each in ABC Ltd which were acquired for Rs 2000 were
now valued at Rs 6 each. These were taken over by the partners in the profit sharing ratio.
d) Profit on Realisation Rs 42000 was divided among the partners.
e) Land and Building (Book value Rs 1, 60,000) was sold for Rs 3,00,000 through a broker
who charged 2% commission on the deal.
f) Plant and machinery (Book value Rs 60,000) was handed over to the creditor in full
settlement of his claim.

Accountancy XII 74
 S.N Particulars LF Debit(Rs) Credit(Rs)

a) Cash account –Dr 40000

Realisation account 40000
(Being cash received from the
creditor)
b) Cash a/c –Dr 400
Realisation a/c 400
(Being cash received from a debtor
whose account was wriiten off
earlier)
c) X’s Capital a/c –Dr 900
Y’s Capital a/c –Dr 900
Realisation a/c 1800
(Being Investments taken over by
the partners)
d) Realisation a/c –Dr 42000
X’s Capital a/c 21000
Y’s capital a/c 21000
(Being profit on Realisation
distributed among the partners)
e) Cash a/c—Dr 294000
Realisation a/c 294000
(Being Land and Building realized)
f) NO JOURNAL ENTRY

LONG QUESTIONS—6-8 MKS

6) Following is the Balance sheet of Karan and Sandeep who share profits and losses equally as
on 31st march 2010

Liabilities Rs Assets Rs

Capitals-- Bank 40,000

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

Accountancy XII 75
The firm was dissolved on the above date.

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

Sundry assets Liabilities:

Debtors-25000 Creditors : 30,000
Stock-35,000 Bank loan : 5000 35000
Furniture-40,000
Machinery-60,000 1,60,000
Bank 2000 Karan’s Capital a/c 15750
a/c(outstanding
repair bill)
Bank(Creditors & Bank a/c(stock) 20125
Bank loan) 35,000
Capital accounts- Bank a/c(Assets 80,000
Karan : 5787.5 realized)
Sandeep: 5787.5
11575 Bank a/c(Debtors) 32700

Bank
a/c(Investments) 25,000

208575 208575

Accountancy XII 76
 Partners Capital accounts

Particulars Karan Sandeep Particulars Karan Sandeep

Realisation 15750 Balance b/d 1,00,000 50,000

a/c(stock)

Workmen’s
compensation
7500 7500
fund

Bank account 97537.5 63287.5 Realisation 5787.5 5787.5

a/c

113287.5 63287.5 113287.5 63287.5

Bank account

Particulars Amount Particulars Amount

Balance b/d 40,000 Realisation a/c 37000

(repair bill, creditors and

bank loan)

Realisation a/c( stock) 20125 Karan’s capital 97537.5

Realisation
a/c(Machinery &
80,000 Sandeep’s capital 63287.5
furniture)

Realisation 32700
a/c(Debtors)

Bank(Investments) 25,000

197825 197825

Accountancy XII 77
 5. Following is the Balance sheet of X and Y who share profits in the ratio of 4:1 as on 31st
march 2010
Balance sheet
Liabilities Rs Assets Rs

Sundry Creditors 8,000 Bank 20,000

Bank overdraft 6,000 Debtors 17,000

Less provision 2000 15,000

X’s Brother’s loan 8,000 Stock 15,000

Y’s Loan 3,000 Investments 25,000

Investment Building 25,000

Fluctuation fund 5,000
Capitals-
X-50,000 Goodwill 10,000
y-40,000 90,000
Profit and Loss a/c 10,000

1,20,000 1,20,000

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

Accountancy XII 78
 Realisation account

Particulars Amt(Rs) Particulars Amt(Rs)

Sundry Assets Sundry Liabilities

Debtors 17,000 Creditors – 8000

Stock 15,000 Bank overdraft - 6000

Investments 25,000 X’s Brothers loan- 8000

Building 25,000 92,000
Investment Fluctuation
Goodwill 10,000 fund – 5,000 29000
Provision for doubtful
debts - 2000
X’s Capital(Brothers 8000 Bank a/c (Assets realized) 72,000
loan)

Bank(Liabilities paid Y’s Capital(stock) 4000

off)
Loss transferred to capitals
Creditors- 6000
12000 X- 7200
Bank overdraft 6000
Y- 1800 9000

Bank(Realisation
expenses)
2000

1,14000 1,14,000

Partner’s Capital Accounts

Particulars X Y Particulars X Y

Profit & Loss 8,000 2,000 Balance b/d 50,000 40,000

a/c

Realisation 4,000 Realisation 8,000

a/c a/c

Realisation
a/c(loss)
7,200 1,800

Bank a/c 42,800 32,200

58,000 40,000 58,000 40,000

Accountancy XII 79
 Bank account

Particulars Amt (Rs) Particulars Amt(Rs)

Balance b/d 20,000 Y’s loan a/c 3,000

Realisation a/c(assets Realisation

realized) a/c(liabilities paid off)
72,000 12,000

Realisation 2,000
a/c(expenses)

X’s Capital a/c 42,800

Y’s capital a/c 32,200

92,000 92,000

6. A, B and C commenced business on 1st January 2008 with capitals of Rs 50,000, 40,000 and
Rs 30,000 respectively. Profits and losses are shared in the ratio of 4:3:3. During 2008 and
2009 they made profit of Rs 20,000 and Rs 25000 respectively. Each partner withdrew Rs
5000 per year.
On 31st December 2009, they decided to dissolve the firm. Creditors and cash on that date
were Rs 12,000 and Rs 2000 respectively. The Assets realized Rs 1,50,000. Creditors
were settled for Rs 11,500 and realization expenses were Rs 500.
Prepare Realisation a/c, Capital accounts and Cash account.

Realisation account
Particulars Rs Particulars Rs

Sundry Assets 1,45,000 Creditors 12,000

Cash a/c(Creditors) 11,500 Cash a/c(Assets

realized) 1,50,000

Cash a/c(Expenses) 500

Capital Accounts-
A- 2,000
B- 1,500
C- 1,500 5,000
1,62,000 1,62,000

Accountancy XII 80
 Partners Capital Accounts
Particulars A B C Particulars A B C

Cash a/c 60,000 45,000 35,000 Balance 58,000 43,500 33,500

b/d
Realisation 2,000 1,500 1,500
a/c
60,000 45,000 35,000 60,000 45,000 35,000

Cash account
Particulars Rs Particulars Rs

Balance b/d 2,000 Realisation(Creditors) 11,500

Realisation a/c 1,50,000 Realisation 500

a/c(expenses)
A’s Capital a/c 60,000

B’s Capital a/c 45,000

C’s Capital a/c 35,000

1,52,000 1,52,000

Working Note: Calculation of Closing capital(Capital as on 31/12/2009)

Particulars A B C

Opening Capital 50,000 40,000 30,000

Add Profits(of two 18,000 13,500 13,500

yrs)
Less Drawings(of 2 10,000 10,000 10,000
yrs)
Closing Capital 58,000 43,500 33,500

Accountancy XII 81
 Memorandum Balance sheet as on 31/12/2009
Liabilities Rs Assets Rs

Capitals-
X-58000
Y-43500
Z-33500 1,35,000 Cash 2000

Creditors 12,000 Sundry

Assets(Balancing fig) 1,45,000

1,47,000 1,47,000

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

Accountancy XII 82
 UNIT 4: Company Accounts- Share capital
LEARNING OBJECTIVES
After studying this chapter you will be able to understand:
I. Meaning and features of company
II. Meaning, Nature and Types of shares
III. Meaning, Nature and Types of share capital
IV. Issue of shares
V. Over and under subscription of shares
VI. Accounting treatment of forfeiture and re-issue of shares
VII. Disclosure of the share capital in the balance sheet

Company
Meaning of a company:
A company is an artificial person created by law, having separate entity with a perpetual
succession and a common seal.
Features of a company:
1. Separate legal entity: A company is a legal person and its entity is quite distinct
and separate from its members.
2. Perpetual existence: The existence of a company is not affected by the
retirement, death or insolvency of its members.
3. Limited liability: The liability of the shareholder of a company is limited to the
unpaid value of the shares.
4. Common seal: All documents prepared by the directors must bear the seal of
the company. The common seal acts as the official signature of the company.
5. Transferability of shares: The shares of the company are freely transferable
subject to certain conditions.
6. Separation of management and ownership: A company is owned by the
shareholders but because of their large number, they cannot participate in the
day to day management of the company. The company is managed by directors
who are elected by the shareholders.

Accountancy XII 83
 Shares
Meaning of a share:
The capital of a company is divided into smaller units of a fixed amount. These units are called
shares.

Types of shares:

1. Preference shares: Preference shares are shares which carry the following 2 rights:
a. Preferential right of dividend at a fixed rate before any dividend is paid to the equity
shareholders.
b. Preferential right to return of capital over the equity shareholders at the time of
winding up.
2. Equity shares: Equity shares are shares which do not carry any preferential rights. Their
rate of dividend is not fixed and it varies from year to year depending on the profits.

Share Capital of a Company

Every company requires capital to meet its financial requirements. The company raises its capital
by issuing shares, so it is called share capital.
Types:
1. Authorised, Registered or Nominal Capital: It is the maximum amount of share
capital that a company can issue during its life time.
2. Issued Capital: It is the part of authorized capital which is issued by company for
subscription.
3. Subscribed Capital: It is part of the issued capital which has been subscribed by the
public.
a. Subscribed and fully paid up: It is the part of issued capital which is called up by
the company and has been paid by the shareholders.
b. Subscribed but not fully paid: It includes:
i. Amount not called up by the company.
ii. Amount called up by the company but not paid by the shareholders.
4. Reserve Capital: It is part of uncalled up capital which can be called up only at the
time of winding up of the company.

Issue of Shares
A company collects its share capital by issuing shares. Shares may be issued in the
following ways:
i. For cash- private placement of shares
ii. For cash- public issue
iii. For consideration other than cash

Accountancy XII 84
 i. Private placement of shares: Private Placement of shares implies issue and allotment
of shares to a selected groups of persons privately and not to public in general
through public issue. In order to place the shares privately, a company must pass a
special resolution to this effect. In such a case, a statement in lieu of prospect is
issued instead of prospectus.
ii. Public issue of shares: following steps are followed by the company for issuing shares
for cash:
 Issue prospectus
 Receive applications
 Allotment of shares
 Make call on shares
Shares may be issued at:
a. Par: at a price equal to the face value.
b. Premium: at a price more than the face value.
Securities premium may be utilized by the company for following purposes:
 For writing off the preliminary expenses.
 For writing of expenses, discount allowed on issue or commission paid on
issue (underwriting commission).
 For providing for payment of premium payable on redemption of preference
shares or debentures.
 For issuing fully paid bonus shares to equity shareholders.
 For buy back of its own shares.
Earlier, company was allowed to issue shares at the discount subject to certain
conditions. But now as per section 53 of Companies Act, 2013, companies would
no longer be permitted to issue shares at discount.
iii. Issue of shares for consideration other than cash: If a company purchases some
assets from the vendor and instead of paying in cash, it makes the payment by issuing
shares; it is called issue of shares for consideration other than cash.
Shares may be issued at par or premium.
Under and over subscription of shares
Under subscription of shares: When the shares applied by the public are less than
the shares offered by the company.

Accountancy XII 85
 Over subscription of shares: When the shares applied by the public is more than the
shares offered by the company. In such a case, the company has 3 alternatives:
i. To make full allotment to some applicants and reject the excess applications
and return their money.
ii. Make pro-rata allotment.
iii. Combination of above two alternatives i.e. accepts some applications in full
reject some applications and make pro-rata allotment to the remaining.
Calls in arrears: When the shareholders fail to pay the mount of allotment or calls on
the due date. It is called calls in arrears. The entry passed is:

Calls in arrears a/c Dr.

To Share I/II/III call A/c
Calls in advance: When the shareholders pay amount of calls which have not yet
been called by the company, it is called calls in advance. The entries passed are:
i. On receipt of calls in advance:
Bank A/c Dr.
To calls in advance A/c
ii. Adjustment of calls in advance:
Bank A/c Dr.
Calls in advance A/c Dr.
To Share I/II/III call A/c

Forfeiture and Reissue of shares

Forfeiture of shares: Forfeiture of shares means cancellation of shares by the company for
non-payment of allotment or call money by the shareholders.
On forfeiture, the share capital is reduced by the called up amount on shares and not by the
nominal value of shares.
Reissue of shares: The Company has a right to reissue the forfeited shares in accordance
with the provisions of articles of the company. The forfeited shares may be reissued at par,
premium or discount.

VERY SHORT ANSWER QUESTIONS (1 mark)

Accountancy XII 86
 1. Give the definition of a company.
Ans. A company is an artificial person created by law, having separate entity with a
perpetual succession and a common seal.
2. Can forfeited shares be issued at a discount? If so to what extent?
(HOT)
Ans. Forfeited shares can be reissued at a discount. The maximum amount of discount
on reissue of forfeited shares is that the amount of discount allowed cannot
exceed the amount that had been received on forfeited shares on their original
issue and that the discount allowed on re issue of forfeited shares should be
debited to the share forfeited account.
3. What is an Escrow Account?
Ans. In order to fulfill certain obligations under the scheme of buy-back of securities an
account is opened, which is known as escrow account.
4. What do you mean by Private placement of shares?
Ans. Private Placement of shares implies issue and allotment of shares to a selected
groups of persons privately and not to public in general through public issue. In order to
place the shares privately, a company must pass a special resolution to this effect.
5. What are Sweat Equity shares?
Ans. Sweat Equity shares means easily shares issued by the company to its employees
or whole time directors at a discount or for consideration other than cash for providing know
- how or making available right in the nature of intellectual property rights or valve addition
by whatever name called.
6. What do you mean by ESOP?
Ans. Employees stock option plan is the right granted to the employees of the
company to purchases the shares lower than the market prices. It is worth mentioning
the options provide a right and not the obligation to buy shares. It means that the
employees under this plan are not necessarily required to purchase the shares. It is their
wish to buy or not.

SHORT ANSWER QUESTIONS (4 marks):

Q. Write a note on minimum subscription?
Ans. Minimum subscription is the amount received from shareholders which is sufficient from the
point of view of directors’ for following purposes:
(a) For purchasing necessary assets of the company.
(b) For paying preliminary expenses and commission on sales of shares.
(c) For paying loan if arranged for above two purposes.
(d) For working capital and for any other purposes which the directors agree upon.

Accountancy XII 87
 1. 50 shares of Rs. 10 each, issued at a premium of Rs. 5 per share, were forfeited by
sohan Ltd. for the nonpayment of allotment money of Rs.9 per share (including
premium). The first and final call on these shares at Rs. # per share was not made.
Forfeited shares were re-issued@ Rs. 12 per share, fully paid up. Journalise
A
n
s Date Particulars Debit Credit
l.f
Share capital a/c dr. 350
securities premium a/c dr. 250
To share forfeited a/c 150
To share allotment a/c 450
(Being 50 shares forfeited for non
payment of allotment money as
per
board's resolution dated…)
Bank A/c dr. 600
To share capital
a/c 500
To securities Premium a/c 100
(Being 50 shares reissued @Rs.12
per share, fully paid)
Shares Forfeited A/c Dr. 150
To capital reserve a/c 150
(being the balance of forfeited
shares
transferred to capital reserve.)

LONG ANSWER QUESTIONS (6 marks)

Q. XYZ Ltd. Registered with a nominal capital of Rs. 10,00,000 divided in 1,00,000 equity
shares of Rs. 10 each . Out of these, 20,000 equity shares were issued to the vendor as
fully paid as purchase consideration for a building acquired. 65,000 equity shares were
offered to the public and of these 60,000 equity shares were applied for and allotted. The
directors called Rs. 6 per share and received the entire amount except a call of Rs. 2 per
share on 5,000 equity shares.
How would you show the relevant items in the Balance Sheet of XYZ Ltd.
Balance Sheet as at
Particulars Note No. Amount
I. Equity and
Liabilities

Accountancy XII 88
 Share capital 1 5,50,000
II. Assets
Fixed Assets
Building 2 2,00,000
Current Assets
Cash 3,50,000

Notes:
Particulars Amount
1. Share Capital
Authorised Capital
100,000 equity shares of Rs 10 10,00,000
each.
Issued Capital
85,000 shares of Rs 10 each 8,50,000
Subscribed Capital
Subscribed and fully paid up 200,000
20,000 shares of Rs 10 each

Subscribed and not fully paid up

60,000 of Rs 6 called
up:3,60,000
Less: calls unpaid Rs 2 per share
on 5,000: 10,000 3,50,000
2. Assets
Fixed Assets:
Building 2,00,000
Current Assets:
Cash at bank 3,50,000

ESSAY TYPE QUESTIONS (8 marks)

Q. AB Ltd. Invited applications for issuing 1, 00,000 equity shares of Rs. 10 each. The amount
was payable as follows: On Application Rs.3 per share; On allotment Rs.2 per share; and on
1st and final call Rs.5 per share. Applications for 1,50,000 shares were received and prorata
allotment was made to all applicants as follows: Application for 80,000 shares were allotted
60,000 shares on pro-rata basis; Application for 70,000 shares were allotted 40,000 shares
on pro-rata basis; Sudha to whom 600 shares were allotted out of the group 80,000 shares
failed to pay allotment money. Her shares were forfeited immediately after allotment. Asha
who had applied for 1,400 share out of the group 70,000 shares failed to pay the first and
final call. Her shares were also forfeited. Out of forfeited shares 1,000 shares were reissued
@ Rs.8 per share fully paid up The reissued shares included all the forfeited shares of
Sudha. Pass necessary journal entries to record the above transaction

Ans. Journal Entries in the books of Ab Ltd.

Accountancy XII 89
 Date/
Sr. Particulars l.f Debit Credit
.Rs .Rs.
1 Bank A/c Dr. 4,50,000
To Equity share
Application a/c 4,50,000
(For application money received on
1,50,000 shares @ Rs.3 per share)

Equity share
2 application a/c Dr. 4,50,000
To Equity share capital
a/c 3,00,000
To equity share
allotment a/c 1,50,000
(For application money capitalized
and transferred to allotment a/c.)

Equity share allotment

3 a/c Dr. 2,00,000
To equity share capital 2,00,000
(For allotment money due on 1,00,000
shares @ Rs.2 per
share.)
4 Bank A/c Dr. 49,400
To equity share
allotment 49,400
(For amount received on allotment)
5 Equity share capital a/c Dr. 3,000
To Equity Share
allotment a/c 600
To share forfeiture a/c 2,400
(For 600 shares of sudha forfeited)
Equity share first& final calla/c.
6 Dr. 4,97,000
To Equity share capital 4,97,000
(For first and final call money due on
99,400 shares @ Rs.5 per shares.)
7 Bank a/c Dr 4,93,000
To equity share
first&final call 4,93,000
(For money received on first & final
call.)
8 Equity share capital Dr 8,000
To Equity share first&finala/c 4,000
To share forfeiture a/c 4,000
(for 800 share of Asha forfeited.)

Accountancy XII 90
 9 Bank a/c Dr. 8,000
Share forfeiture a/c Dr. 2,000
To Equity share capital 10,000
(For 1,000 share received and loss on
re-issue charged from share forfeiture
a/c.)

10 Share Forfeiture Dr. 2,400

To capital ReserveA/c 2,400
(For proportionate balance of share
forfeiture a/c transferred to capital
reserve a/c.)
Working notes:
Amount Received on application
Amount due 2,00,000
Less: Excess Received on application 1,50,000
50,000
Less: Calls in arrears 600
49,400
Due from Sudha on Allotment on 600 shares@2 each 1,200
Less: Excess on application on 200 shares
@Rs.3 each 600
600
If 60,000 shares allotted than applied 80,000
If 600 shares applied than 80000/60000*600=800 shares

Shares allotted to Asha

If 70000 shares applied ,allotted 40,000
If 1,400 shares than 40000/70000*1,400
Amount transferred to capital reserve
Balance of share forfeited a/c on Siddha’s share 2400
Balance of share forfeited a/c on Asha’s share 2000
4400
Less: Loss on capital Re-issue 2000
2400
Q. Bharat Ltd. Invited applications for issuing 2,00,000 equity shares of Rs. 10 each. The
amount was payable as follows:

On application Rs. 3 per share, on allotment Rs. 5 per share, and on first and final call Rs.
2 per share.
Applications for 3,00,000 shares were allotted 3,000 shares failed to pay the allotment and
call money. His shares were forfeited. Out of the forfeited shares, 2500 shares were
reissued as fully paid-up @ Rs. 8 per share.
Pass the necessary journal entries to record the above transactions.

Date Particulars L.F Dr.(Rs) Cr.(Rs)

Bank a/c Dr. 9,00,000

Accountancy XII 91
 To Equity Share Application a/c 9,00,000
(Being the application money received on 3,00,000
shares)
Equity Share application a/c Dr. 9,00,000
To Equity share capital a/c 6,00,000
To Equity share allotment a/c 3,00,000
(Being the application money adjusted)

Equity share allotment a/c Dr. 10,00,000

To Equity share capital a/c 10,00,000
(Being the allotment amount due)
Bank a/c Dr. 6,89,500
To Equity share allotment a/c 6,89,500
(Being the remaining allotment money received on
1,97,000 shares)
Equity share first and final call a/c Dr. 4,00,000
To Equity share capital a/c 4,00,000
(Being the call money due)
Bank a/c Dr. 3,94,000
To Equity share first and final call a/c 3,94,000
(Being the call money received)
Equity share capital Dr. 30,000
To Equity share allotment a/c 10,500
To Equity share first and final call a/c 6,000
To Shares Forfeited a/c 13,500
(Being 3,000 shares forfeited for non-payment of
allotment and first and final call)
Bank a/c Dr. 20,000
Shares Forfeited a/c 5,000
To Equity share capital a/c 25,000
(Being reissue of 2,500 shares as fully paid at Rs. 8
per share)
Shares forfeited a/c Dr. 6,250
To Capital reserve a/c 6,250
(Being balance in shares forfeited account
transferred to capital reserve account)

Q. Alpha Ltd issued for public subscription 40,000 equity shares of Rs. 10 each. At a
premium of Rs. 2 per share payable as under:
On application Rs. 2 per share, on allotment Rs. 5 per share (including premium), on first
call Rs. 2 per share and on second call Rs. 3 per share.
Applications were received for 60,000 shares. Allotment was made pro rata basis to the
applicants for 48000 shares, the remaining applications being refused. Money overpaid on
application was applied towards sums due on allotment.
A, to whom 1,600 shares were allotted, failed to pay the allotment money and B, to whom
2,000 shares were allotted failed to pay the two calls. These were subsequently forfeited
after the second call was made.
Pass journal entries.
Accountancy XII 92
 Date Particulars L.F Dr.(Rs) Cr.(Rs)
Bank a/c Dr. 1,20,000
To Equity Share Application a/c 1,20,000
(Being the application money received on shares)
Equity Share application a/c Dr. 1,20,000
To Equity share capital a/c 80,000
To Bank 24,000
To Equity share allotment a/c 16,000
(Being the application money adjusted)

Equity share allotment a/c Dr. 2,00,000

To Equity share capital a/c 1,20,000
To Securities Premium 80,000
(Being the allotment amount due)
Bank a/c Dr. 1,76,640
To Equity share allotment a/c 1,76,640
(Being the remaining allotment money received )
Equity share first call a/c Dr. 80,000
To Equity share capital a/c 80,000
(Being the first call money due)
Bank a/c Dr. 72,800
To Equity share first call a/c 72,800
(Being the call money received)
Equity share second and final call a/c Dr. 1,20,000
To Equity share capital a/c 1,20,000
(Being equity second call money due)
Bank a/c Dr. 1,09,200
To Equity share second and final call a/c 1,09,200
Equity share capital a/c Dr. 36,000
Securities Premium a/c 3,200
To Equity share allotment a/c 7,360
To Equity share first call a/c 7,200
To Equity share second call a/c 10,800
To Shares Forfeited a/c 13,840
(Being shares forfeited for non-payment of
allotment, first and final call)

VALUE BASED QUESTIONS:

Q. A Ltd. Invited applications for issuing 1,00,000 equity shares of Rs 10 each. Applications
were received for 2,20,000 equity shares. Applications for 20,000 shares was rejected
and their application money was refunded. Shares were allotted to remaining
applications as follows:
Alloted 50% shares of Raj who had applied for 50,000 shares.
Alloting in full to Amir who had applied for 20,000 shares.

Accountancy XII 93
 Alloting shares to remaining applicants on pro-rata basis.
Which value has been affected by the company by rejecting applications for 20,000 shares
and by making discriminatory pro-rata allotment? Can there be some better alternative?
Ans. i. Value of equality has been affected.
Discriminatory pro-rata allotment will demotivate the small and retail investors.
Better alternative would be to allot shares by uniform pro-rata allotment basis.

Accountancy XII 94
 UNIT 5: ACCOUNTING FOR DEBENTURES

LEARNING OBJECTIVES:

 Understand the meaning and features of debentures.

 Understand the various types of debentures.
 Differentiate between shares and debentures.
 Journal entries regarding issue of debentures for cash and for consideration other
than cash.
 Accounting treatment of debentures issued as collateral security.
 Accounting treatment of issue and redemption of debentures at par, at discount
and at premium.
 Accounting Treatment of Interest on Debentures.
 Questions including HOTS and Value Based Questions.

Meaning of Debentures:
A debenture is a written acknowledgement of debt taken by the company. It is issued under the
seal of the company.
Features of Debentures:
1. A debenture is issued by a company in the form of a certificate, which is a written
acknowledgement of debt taken by the company.
2. It is issued under the seal of the company.
3. It contains a contract for the repayment of principal sum at a specified date.
4. It constitutes long term borrowing of the company.
5. Payment of debenture interest is a charge against profit. It means that payment of interest
has to be made whether the company earns a profit or not in a particular year. Normally,
interest is paid on half yearly basis at a fixed rate called coupon rate.
6. As per Companies Act, 2013, no company is allowed to issue debentures having a
maturity date of more than 10 years from the date of issue. However, a company engaged
in infrastructure projects can issue debentures for more than 10 years but not more than 30
years.
7. A debenture is generally secured by a charge on the assets of the company.
Types of Debentures:
Debentures may be classified as:
i. On the basis of redemption:
a. Redeemable debentures: Debentures which will be repaid by the company
either in lump sum at the end of specified period or by installments during the
lifetime of the company are called redeemable debentures.

Accountancy XII 95
 b. Irredeemable or perpetual debentures: Debentures which are not repayable
by the company during its lifetime are called irredeemable debentures.
ii. On the basis of convertibility:
a. Convertible debentures: There debentures are convertible into equity shares
or other securities after a specified period.
b. Non-convertible debentures: Such debentures cannot be converted into
shares, so these have to be redeemed in cash on due date.
iii. On the basis of security:
a. Secured/Mortgage debentures: These debentures are secured on some
assets of the company. If they are secured on particular assets of the
company, it is called fixed charge. If they are secured on all the assets of
the company in general, it is called fluctuating charge.
b. Unsecured/naked debentures: These debentures are not given any
security. These are treated as unsecured creditors at the time of liquidation
of the company.
iv. On the basis of record/transfer:
a. Registered debentures: Names and addresses of the holders of such
debentures are recorded in a register of the company. Such debentures are
not freely transferable. They can be transferred through execution of
transfer deed.
b. Bearer debentures: Names and addresses of the holders of such
debentures are not recorded in a register of the company. Such debentures
are transferable by mere delivery.
v. On the basis of coupon rate:
a. Coupon rate debentures: When the interest rate of interest on debentures is
fixed, they are called debentures with fixed coupon rate.
b. Zero coupon rate bond: A zero coupon rate bond is one which does not carry
a specified rate of interest. Such bonds are issued at a substantial discount to
compensate the investors. These bonds are also called deep discount bonds.
Difference between shares and debentures
Basis Share Debenture
Capital vs. loan It is a part of the capital of the It is a part of the loan and
company; hence shareholders hence debentureholders are
are the owners of the the creditors of the company.
company.
Reward A shareholder gets dividend A debenture holder gets
from the company. interest from the company.
Security A share is always unsecured. Debentures are usually
Hence, they bear more risk. secured on the assets of the
company. Hence they bear

Accountancy XII 96
 little risk.
Voting rights Shareholders have the right to Debentureholders have no
participate in and vote at voting rights in the company’s
company’s meetings. meetings nor they can
participate in the meeting.
Issue at discount Under section 53 of There are no restrictions on
companies’ act 2013, shares the issue of debentures at
cannot be issued at discount. discount.

Issue of debentures for cash

The debentures are issued in the same manner which is used for issuing shares of the company. A
company invites applications for debentures by issuing prospectus.
Debentures can be issued at par, premium or discount.
Issue of debentures for consideration other than cash
If a company purchases some assets from the vendor and pays the amount by issuing debentures
instead of making the payment in cash, it is called issue of debentures for consideration other than
cash.
Such debentures may be issued at par, premium or discount.
Accounting Treatment for issue of debentures for consideration other than cash-
i. On purchase of assets:
Assets A/c Dr.
To Vendor’s A/c
ii. On issuing debentures to the vendor:
a. At par:
Vendor’s A/c Dr
To Debentures A/c
b. At a premium:
Vendor’s A/c Dr
To Debentures A/c
To Securities premium reserve A/c

c. At a discount:
Vendor’s A/c Dr
Discount on issue of debentures A/c Dr
To Debentures A/c
Issue of debentures as collateral security

Accountancy XII 97
When a company takes loan from bank or financial institution or any other party and issues
debentures as collateral security, it is called issue of debentures as collateral security. A collateral
security is a secondary security besides the principal security.
The lender of money will not be entitled to any interest on such debentures.
Accounting Treatment:
1. First method:
Entry for bank loan:
Bank A/c Dr
To Bank Loan A/c
In balance sheet
i. Bank loan will be shown on the equity and liabilities side of balance sheet under the
head “Non current liabilities” under the sub head “long term borrowings”.
ii. In notes to accounts, detail of long term borrowing will be given as:
Bank Loan : Rs ….
(Secured against collateral security of …. Debentures of Rs. .. each)
2. Second method:
Entry for bank loan:
Bank A/c Dr
To Bank Loan A/c
Entry for issue of debentures as collateral security:
Debenture suspense A/c Dr
To Debentures A/c
Balance Sheet
Particulars Note No. Amount
1. Equity and Liabilities
Non current liabilities
a. Long term 1 5,00,000
borrowings
Notes to Accounts:
Note No. 1
Long Term Borrowings:
Bank Loan 500,000

Debentures A/c
6,00,000
-
Less: Debenture suspense A/c
6,00,000

Accountancy XII 98
Redemption of debentures

The repayment of debentures is called the redemption of debentures. The repayment of debentures
is done by the company in accordance with the terms of issue.
Accounting for issue debentures considering the terms and conditions of redemption
1. When debentures are issued at par and redeemable at par:
At the time of issue At the time of
redemption
Bank A/c Dr Debentures A/c Dr
To debenture app & To debentureholders a/c
allotment a/c
Debenture app & Debentureholders A/c
allotment a/c Dr.
Dr To bank a/c
To debentures A/c

2. When debentures are issued at discount and redeemable at par:

At the time of issue At the time of
redemption
Bank A/c Dr Debentures A/c Dr
To debenture app & To debentureholders a/c
allotment a/c
Debenture app & Debentureholders A/c
allotment a/c Dr.
Dr To bank a/c
Discount on issue of
deb a/c
Dr
To debentures A/c
3. When debentures are issued at premium and redeemable at par:
At the time of issue At the time of
redemption
Bank A/c Dr Debentures A/c Dr
To debenture app & To debentureholders a/c
allotment a/c
Debenture app & Debentureholders A/c
allotment a/c Dr.
Dr To bank a/c
To debentures A/c
To securities premium
reserve a/c

Accountancy XII 99
 4. When debentures are issued at par and redeemable at premium:
At the time of issue At the time of
redemption
Bank A/c Dr Debentures A/c Dr
To debenture app & Premium on redemption
allotment a/c of debentures a/c
Dr
To debentureholders a/c
Debenture app & Debentureholders A/c
allotment a/c Dr.
Dr To bank a/c
Loss on issue of
debentures A/c
Dr
To debentures A/c
To premium of
redemption of deb.a/c

5. When debentures are issued at discount and redeemable at premium:

At the time of issue At the time of
redemption
Bank A/c Dr Debentures A/c Dr
To debenture app & Premium on redemption
allotment a/c of debentures a/c
Dr
To debentureholders a/c
Debenture app & Debentureholders A/c
allotment a/c Dr.
Dr To bank a/c
Loss on issue of
debentures A/c
Dr
To debentures A/c
To premium of
redemption of deb.a/c

6. When debentures are issued at premium and redeemable at premium:

At the time of issue At the time of

Accountancy XII 100

 redemption
Bank A/c Dr Debentures A/c Dr
To debenture app & Premium on redemption
allotment a/c of debentures a/c
Dr
To debentureholders a/c
Debenture app & Debentureholders A/c
allotment a/c Dr.
Dr To bank a/c
Loss on issue of
debentures A/c
Dr
To debentures A/c
To premium of
redemption of deb.a/c
To securities premium
reserve a/c

Interest on Debentures
Interest on debentures is fixed and usually paid on half yearly basis. Interest on debentures is
always paid on the face value of the debentures. Interest is to be paid even if the company does
not earn profit. It is a charge against profit and must be debited to statement of profit and loss. As
per Income Tax Act, the company is required to deduct income tax at the specified rate before
making any payment to debenture holders.
Accounting Treatment of interest on debentures:
i. When interest becomes due:
Interest on debenture a/c Dr.
To debenture holders a/c
To income tax payable a/c
ii. When interest is paid:
Debenture holders A/c Dr.
To Bank A/c
iii. On payment of income tax:
Income Tax payable A/c Dr.
To Bank A/c
iv. On transfer of interest on debenture to statement of profit & loss:
Statement of profit & loss A/c Dr.
To Interest on Debenture A/c
QUESTIONS
Very short answer questions (1 mark):

Accountancy XII 101

 1. What is meant by convertible debentures?
Ans. Convertible debentures are those, the holders of which are given an option to exchanging
amount of their debentures with equity shares or other securities after a specified period.
2. Explain deep discount Bond
Ans. When debentures are issued without interest rate and issue price is thereby discounted,
the issue of debenture is said to have been made as deep discount bond
3. What do you mean by debentures issued as collateral security?
Ans. The issue of debentures as a collateral security means the issue of debentures as an
additional security against the loan in addition to principal security that may be offered.
4. What is debenture Trust Deed?
Ans. Debenture trust deed is a document created by the company whereby trustee is appointed
to protect the interest of debenture holders before they are offered for public subscription.

Short answer questions (3 marks):

1. Differentiate between shareholders and debenture holder.
Ans.
Point of Difference Share holder Debenture holder

1) Status There are the owners of the They are the creditors of the
company company

2) Return They are paid dividend They are paid interest

3) Security Shares are not secured Debentures are ordinarily

secured

Short answer questions (4 marks):

1. XYZ Co. Ltd., issued 10000 10% debentures of Rs.100 each at a premium of Rs. 5
payable as follows:

On application Rs.40, on Allotment Rs.65 (including premium).

All the debentures were subscribed and money was received, pass necessary journal
entries to record the issue of debentures.

Ans:

Journal Entries

1) Bank a/c Dr. 4,00,000 4,00,000

To 10% Debenture application
(Being application money received)
2) 10% Deb Application a/c Dr. 4,00,000 4,00,000
To 10% Debenture a/c

Accountancy XII 102

 (Being application money
transferred to debenture a/c)

3) 10% Deb allotment a/c Dr. 6,50,000

To Debenture a/c 6,00,000
To Securities Premium a/c 50,000
(Being debenture allotment due)

4) Bank a/c Dr. 6,50,000

To 10% Deb allotment a/c
(Being allotment money received) 6,50,000

2. A ltd issued 5,000 13% debentures of Rs.100 each at par and raised a loan of Rs.80, 000
from Bank collaterally secured by Rs. 100,000 13% debentures. How will you show the
debenture in the Balance Sheet of the Company assuming that the company has recorded
the issue of Debentures as collateral security in the books?

Ans:

Balance Sheet

Liabilities Amount Assets Amount

Secured Loans Current assets

13% Debenture
5,000 deb of Rs. 100 each at 500000 Bank a/c 500000
par
Bank loan (secured by the 80000
issue of 1000 13% deb of
Rs.100 each)

3. Ashoka Ltd. had Rs. 5, 00,000 12% debentures outstanding as on 1st Jan, 2003. During the
year company took a loan of Rs. 3, 00,000 from Bank of Punjab for which the company
placed with the bank debentures of Rs. 3, 60,000 as collateral security. Pass journal entries
to give effect to the above.

Ans:

Journal

Bank a/c Dr. 3,00,000

To Bank loan a/c 3,00,000

(Being loan taken from bank)

Accountancy XII 103

 Debenture suspense a/c Dr. 3,60,000

To 12 % Debenture a/c 3,60,000

(Being Debentures issued as collateral

security )

4. Pass Journal Entries to record the Issue of Debentures in the following cases:

a. 5000 15% debenture of Rs.100 each issued at Discount of 5% and redeemable at premium at
5% after 5 years.

b. 10000 15% debenture of Rs.100 each issued at a premium of 10% and redeemable at par after 6
years.

Ans:

Journal Entries

a. Bank a/c Dr. 4,75,000

loss on issue of Deb a/c Dr. 50,000
To15% debenture a/c 5,00,000

To premium on redemption of debenture 25,000

(Being issue of debenture at discount and

redeemable at 5% premium)
b. Bank a/c Dr. 1100000
To Debenture a/c 1000000
To Premium a/c 100000
(Being issue of debenture at premium
and redeemable at par)

4. A building has been purchased for Rs.1,10,000 from X Ltd., X Ltd., has been issued 12%
debentures in Purchase Consideration at a Premium of 10% Journalize the above
transaction.

Ans:

Journal entries

1) Building a/c Dr. 110000

To vendors a/c 110000
(Being purchasing of a building on credit)
2) Vendors a/c Dr. 110000 100000
To 12% debentures a/c
To securities premium a/c 10000

Accountancy XII 104

 (Being issue of 12% debentures at 10%
premium)
No. of debentures issued = 1, 10,000/110= 1000 debentures

5. Raghav Limited purchased a running business from Krishna traders for a sum of Rs.
15,00,000 payable Rs. 3,00,000 by cheque and for the balance issued 9% debentures of
Rs. 100 each at par.

The assets and liabilities consisted of the following:

Plant and Machinery 4, 00,000

Building 6, 00,000
Stock 5, 00,000
Debtors 3, 00,000
Creditors 2, 00,000

Record the necessary journal entries in the books of Raghav Limited.

Ans.
In the books of Raghav ltd.
Journal
Date Particulars L.F Dr. (Rs.) Cr.(Rs.)
Plant and Machinery a/c Dr. 4,00,000

Building a/c Dr. 6,00,000

Stock a/c Dr. 5,00,000

Debtors a/c Dr. 3,00,000

To Creditor’s a/c 2,00,000

To Krishna Traders 15,00,000

To Capital Reserve ( Bal. Fig) 1,00,000

( Being assets and liabilities taken

over from the vendor company).

Krishna Traders a/c Dr. 15,00,000

To Bank 3,00,000

12,00,000

Accountancy XII 105

 To 9% Debentures a/c

( Being issues of 12,000 debentures

of Rs.. 100 each at par and rest paid
by a cheque)

6. T ltd. Issued 5,000, 10% debentures of Rs 100 each on 1st April 2012. The issue was fully
subscribed. According to the terms of issue, interest on debentures is payable on half
yearly on 30th September and 31st march and tax deducted at source is 10%.
Pass the necessary journal entries related to the debenture interest for the half yearly
ending on 31st March, 2013 and transfer of debenture interest for the half yearly ending on
31st March 2013 and transfer of debenture interest to statement of profit and loss.
Ans.
In the books of Tata ltd
Journal
Date Particulars l.f. Debit Credit
31/03/2013 Interest on debentures a/c 25,000
Dr 22,500
To Debenture holders A/c 2500
To Income tax payable a/c(10%)
31/03/2013 Debenture holders A/c 22,500
Dr 22,500
To Bank A/c

31/03/2013 Income Tax payable A/c 2500

Dr 2500
To Bank A/c
31/03/2013 Statement of Profit & Loss A/c 50,000
Dr 50,000
To Interest on Debentures A/c
(25000+25000)

Long answer questions (6 marks):

1. Journalize the following transactions at the time of issue:

i. 10 debentures issued at Rs. 100 repayable at Rs. 100.

ii. 10 debentures issued at Rs. 95, repayable at Rs. 100
Accountancy XII 106
 iii. 10 debentures issued at Rs. 105 , repayable at Rs. 100
iv. 10 debentures issued at Rs. 100, payable at Rs. 105.
v. 10 debentures issued at Rs. 95, Repayable at Rs. 105.

Date Particulars Debit Credit

Amt Amt
(a) Bank a/c Dr. 1,000

To debenture Application a/c 1,000

Being Debenture application money

received)
Debenture Application a/c Dr. 1,000

To Debenture a/c 1,000

(Being 10 debentures of Rs. 100 each

issued at par redeemable at par)
(b) Bank a/c Dr. 950

To debenture Application a/c 950

(Being Debenture application money

received)
Debenture Application a/c Dr. 950

Discount on issue of Debentures Dr. 50

To Debenture a/c 1,000

(Being 10 debentures of Rs. 100 each

issued at a discount of 5% and repayable
at par.)
(c) Bank a/c Dr. 1,050

To debenture Application a/c 1050

Being Debenture application money

received)
Debenture Application a/c Dr. 1,050

To Debenture a/c 1,000

Accountancy XII 107

 To Securities premium a/c 50

(Being 10 debentures of Rs. 100 each

issued at premium of 5% and
redeemable at par)
(d) Bank a/c Dr. 1,000

To debenture Application a/c 1,000

Being Debenture application money

received)
Debenture Application a/c Dr. 1,000

Loss on issue of debentures a/c Dr. 50

To Debentures a/c 1,000

To Premium on redemption of 50
debentures a/c

(Being 10 debentures of Rs. 100 each

issued at par but repayable at a premium
of 5%)
(e ) Bank a/c Dr. 950

To debenture Application a/c 950

Being Debenture application money

received)
Debenture Application a/c Dr. 950

Loss on issue of debentures a/c Dr. 100

To Debentures a/c 1,000

To Premium on redemption of 50
debentures a/c

(Being 10 debentures of Rs. 100 each

issued at discount of 5% but repayable
at a premium of 5%)

High Order Thinking Skill Questions:

1. Why is premium on the issue of debentures considered as a capital profit?
Accountancy XII 108
 2. What is the nature of interest on debentures?
3. Name the head under which discount on issue of debentures appears in the Balance
Sheet of a Company.
4. Discount on issue of debenture is in the nature of
a. Revenue loss b. Capital loss
c. Deferred revenue expenditure d. None of these
Answers to HOTS Questions:
1. Premium on the issue of debentures is considered a capital profit because it is not an
income arising from the normal course of business operations.
2. Interest on debentures is a charge against profits. Interest on debentures is paid whether
the company earns profit or not.
3. Discount on issue of debentures will appear under the heading Miscellaneous Expenditure
on Assets side of the balance sheet.
4. Capital loss
Value Based Questions:
1. X ltd always makes payment of interest on debentures on time. It has never defaulted in the
payment of interest. Name the values fulfilled by X Ltd.
2. Z ltd has issued debentures on which interest is payable every year on 1 March. The company
failed to pay the interest on debentures due on 1st March, 2013 and the payment was made on 1st
May, 2013. Identify the values affected by delayed payment of interest.
3. V ltd acquired assets of Rs. 40 lakhs and took over creditors of Rs 4 lakhs from S ltd. V ltd
issued 12% debentures of Rs. 100 each at a premium of 20% as purchase consideration.
i. Calculate the number of debentures issued by V ltd.
ii. Which value has been ignored by the company by issuing debentures?
4. What do you mean by debentures trust deed? Which value is highlighted in this?
Answers to value based questions:
1. The values fulfilled by regular payment of interest are:
i. Trustworthiness
ii. Compliance of the law
iii. Time management
iv. Concern for debenture holders
2. The values affected by delayed payment of interest to debenture holders are:
i. Violation of law
ii. Trustworthiness
iii. Punctuality
iv. Efficiency and competency
3.
i. No. of debentures = 36,00,000/120 = 30,000 debentures
ii. The value of democratic management has been ignored by issuing debentures instead of
issuing equity shares.

Accountancy XII 109

4. Debenture Trust Deed is an agreement between the company and the trustees to protect the
interest of the debentureholders.
Values highlighted by debenture trust deed:
i. Value of commitment
ii. Value of obligation
iii. Value of security
iv. Protection of interest of the debentureholders
REDEMPTION OF DEBENTURES

UNIT 5: ACCOUNTING FOR DEBENTURES

LEARNING OBJECTIVES:

 Understand the meaning of redemption of debentures.

 Understand the various sources of redemption of debentures.
 Accounting Treatment
 Questions including HOTS and Value Based Questions.

Meaning of Redemption of Debentures:

Redemption of debentures means repayment of the amount of debentures to debentureholders.

Sources of Finance for the Redemption of Debentures

(1) Redemption from the proceeds of fresh issue of shares and debentures.
(2) Redemption of Debentures out of Capital.
(3) Redemption of Debentures out of Profits.

(1) Redemption from the proceeds of fresh issue of shares and debentures :

When a Company is in need of additional funds for the redemption of debentures, it may decide to
issue new equity shares, preference shares or debentures, the proceeds of the fresh issue of share
capital and debentures are utilized for redeeming the old debentures.

(2)Redemption of Debentures out of Capital: When no profits are set aside for
redemption of debentures it is called redemption out of Capital. ,it isn not possible to
redeem debentures purely out of capital.

Accountancy XII 110

 (3) Redemption of Debentures out of Profits : Redemption out of profits means that
an amount equal to debentures issued (i.e., 100% of the amount of debentures) is
transferred from Surplus in Statement of Profit and Loss to a newly opened account named
‘Debenture Redemption Reserve Account’.

SEBI Guidelines for redemption of debentures :

At least 25% of debentures issued must be redeemed out of profits by creating a ‘Debenture
Redemption Reserve’

Condition of Investing 15% of the debentures maturing during the year:

As per Rule 18(7) (C) of the Companies (Share Capital and Debentures) Rules 2014, every
company required to create DRR shall before the 30th day of April of each year, invest, a sum
which shall not be less than 15% of the amount of its debentures maturing (to be redeemed)
during the year ending on the 31st March of the next year.

Exemptions to the Rule of Creating DRR:

Rule 18(7) of Companies (Share Capital and Debentures) Rules, 2014 the following types of
Companies are exempted from creating DRR:

(i) Banking Companies; and

(ii) All India Financial Institutions regulated by Reserve Bank of India.

(1) Lump-sum payment at the end of fixed period: Under this method, the Company
redeems whole of its debentures in one lump-sum at the expiry of a specified period,

The journal entries in this method are as follows:

(i) Investment made @ 15% of the face value of debentures to be redeemed:

Debenture Redemption Investment A/c Dr.
To Bank A/c
(ii) Investment encashed:
Ban A/c Dr.
To Debenture Redemption Investment A/c
(iii) On transfer of profits from Surplus in Statement of P & L :
Surplus in Statement of Profit & Loss Dr.
To Debenture Redemption Reserve A/c
(iv) On redemption of debentures:
(a) Debentures A/c Dr.
To Debentureholders A/c

Accountancy XII 111

 (b) Debentureholders A/c Dr.
To Bank A/c
(v) When all the debentures are redeemed; DRR A/c is closed by transferring the amount
to General Reserve A/c
Debenture redemption reserve a/c
To General Reserve A/c

(2) Redemption of debentures in instalments by drawing a lot- Under this method,

debentures are redeemed in annual instalments. for eg debentures of Rs 10,00,000 may be
redeemed at the rate of Rs 2,00,000 p.a. Transfer of an amount equal to 25 % of debenture issued
to debenture redemption reserve before redemption is necessary in this method also.

(3)Redemption of debentures by the purchase of own debentures in the open market : Open
market means purchasing own debentures from the stock market. This procedure is usually
adopted by the Company only when its debentures are quoted at a discount on the stock exchange.

(A) When own debentures are purchased for Immediate Cancellation:

Example, if a Company purchased 500 of its own debentures of Rs 100 each at Rs 98 in the open
market and immediately cancels them after purchase, the following entries will be passed:

Date Particulars L.F. Dr (Rs.) Cr. (Rs.)

Own Debentures A/c Dr.
To Bank A/c 49.000
(500 debentures of Rs 100 each purchased in the
open market at Rs 98 per debenture) 49000

Debentures A/c Dr.

To Own Debentures A/c
To Profit on Redemption of Debentures A/c
(or Profit on Cancellation A/c) 50,000
(Cancellation of own debentures) 49,000
1,000

Profit on Redemption of Debentures’is a Capital profit. I should be used to write off any amount
of capital loss given in the question such as, discount on issue, premium on redemption etc., the
balance will be transferred to Capital Reserve. The entry will be:

Date Particulars L.F. Dr (Rs.) Cr. (Rs.)

Profit on Redemption of Debentures A/C 1,000
Dr.
To Capital Reserve A/c 1,000

If the purchase price of the debentures is more than the face value, there will be a loss on the
redemption of such debentures and the loss will be debited to “Loss on Redemption of Debentures
Accountancy XII 112
A/c”. Suppose, Debentures of the face value of Rs. 20,000 are purchased in the market at Rs
21,000, the entry will be:

Date Particulars L.F. Dr (Rs.) Cr. (Rs.)

Own Debentures A/c Dr. 21,000
To Bank A/c 21,000
Debentures A/c Dr.
Loss on Redemption of Debentures A/c Dr. 20,000
To Own debentures A/c 1,000
21,000

Very short answer questions (1 mark):

1. What do you mean by redemption of debentures?
Ans. Redemption of debentures means repayment of debentures.
2. State in brief, the SEBI Guidelines regarding Debenture Redemption Reserve
Ans. As per SEBI Guidelines, an amount equal to 25% of the debentures issued must be
transferred to DRR before the redemption begins.
3. Name 2 sources of finance for redemption of debentures
Ans.
i. Redemption from proceeds of fresh issue of shares and debentures
ii. Redemption out of profits
4. Which companies are exempted from creating debenture redemption reserve by SEBI?
Ans.
i. Debentures issued by all India financial institutions
ii. Banking company

Short answer questions (3 marks):

1. On 31st march 2015, Z ltd purchased its own 200 8% debentures of the face value Rs
20,000 from the open market for immediate cancellation at Rs 92. The expenses of
purchase amounted to Rs 400. Pass the journal entries.
Ans.
Books of Z ltd
Journal
Date Particulars L.f. Debit Credit
31/03/2015 Own debentures a/c 18,800
Dr 18,800
To bank A/c
(being the purchase of 200 own
debentures at rs 92)
31/03/2015 8% debentures a/c 20,000
Dr 18,800
To own debentures a/c 1,200
To profit on redemption of own
debentures a/c
(being cancellation of own debentures)

31/03/2015 Profit on redemption of own debentures 1200

Accountancy XII 113
 a/c Dr 1200
To capital reserve a/c
(being the profit on redemption of
debentures transferred to capital reserve)

Short answer questions (4 marks):

1. Pass journal entries for redemption of debentures in the following cases in the books of J
ltd:
i. Redeemed 5400 12% debentures of Rs 100 each by draw of lots.
ii. Purchased for immediate cancellation 930, 12% debentures of Rs 1000 each at Rs
975 each.

Ans.
Journal
Date Particulars l.f. Debit Credit
i. 12% debentures a/c Dr 5,40,000
To debentureholders a/c 5,40,000
(amount due on redemption)
Debentureholders a/c Dr 5,40,000
To bank a/c 5,40,000
(payment made to debentureholders)
ii. Own debentures a/c 9,06,750
Dr 9,30,000
To bank a/c
(being own debentures purchased at Rs 975 each)
12% debentures a/c 9,30,000
Dr 9,06,750
To own debentures a/c 23,250
To profit o redemption of debentures a/c
(cancellation of 930 own debentures)
Profit on redemption of debentures a/c 23,250
Dr 23,250
To capital reserve a/c
(profit on cancellation of debentures credited to
capital reserve)

Long answer questions (6 marks):

1. S ltd issued 5,000 6 % debentures of Rs 200 each at a premium of 5% on June 30 2011,
redeemable on June 30 2015. The issue was fully subscribed. The board of directors
decided to transfer the required amount to debenture redemption reserve on March 31,
2015. It was decided to invest 15% of the face value of debentures to be redeemed towards
debenture redemption investment on 30th April, 2015. Investments were encashed and
debentures were redeemed on due date. Record the necessary entries for issue and
redemption of debentures.
Ans.
In the books of S ltd

Accountancy XII 114

 Journal
Date Particulars l.f. Debit Credit
30/06/2011 Bank a/c 10,50,000
Dr 10,50,000
To 6% deb application & allotment a/c
(receipt of application money)
30/06/2011 6% deb application & allotment a/c 10,50,000
Dr 10,00,000
To 6% debentures a/c 50,000
To securities premium reserve a/c
(application money transferred to debentures
a/c)
31/03/2015 Statement of profit & loss a/c 2,50,000
Dr 2,50,000
To debenture redemption reserve a/c
(transfer of profits equal to 25% of nominal
value of debentures issued)
30/04/2015 Debenture redemption investment a/c 1,50,000
Dr 1,50,000
To bank a/c
(investment made at 15% of the face value of
debentures to be redeemed)
30/06/2015 Bank A/c 1,50,000
Dr 1,50,000
To debenture redemption investment a/c
(investment encashed)
30/06/2015 6% debentures a/c 10,00,000
Dr 10,00,000
To debentureholders a/c
(amount due on redemption)
30/06/2015 Debentureholders a/c 10,00,000
Dr 10,00,000
To bank a/c
(payment to debentureholders)
30/06/2015 Debenture redemption reserve a/c 2,50,000
Dr 2,50,000
To general reserve a/c
(transfer of DRR a/c to general reserve on
redemption of all debentures)
2. V ltd has 6,000 8% debentures of Rs 100 each due for redemption in four equal annual
instalments starting from March 31, 2015. DRR has a balance of Rs 70,000 on that date.
Record the journal entries. The company complied with respect to investment made in
government securities on 30th April 2014.
Ans
In the books of V ltd
Journal
Date Particulars l.f. Debit credit
30/04/2015 Debenture redemption investment 22,500

Accountancy XII 115

 a/c Dr
To bank a/c 22,500
(investment equal to 15% of face
value of debentures made)
31/03/2015 Statement of profit & loss Dr 80,000
To debenture redemption reserve
a/c 80,000
(transfer of profits to DRR)
31/03/2015 8% debentures A/c Dr 1,50,000
To debentureholders a/c 1,50,000
(payment due to
debentureholders)
31/03/2015 Debentureholders a/c Dr 1,50,000
To bank a/c 1,50,000
(payment made to
debentureholders)
31/03/2016 8% debentures A/c Dr 1,50,000
To debentureholders a/c 1,50,000
(payment due to debentureholders
31/03/2016 Debentureholders a/c 1,50,000
Dr 1,50,000
To bank a/c
(payment made to
debentureholders)
31/03/2017 8% debentures A/c Dr 1,50,000
To debentureholders a/c 1,50,000
(payment due to debentureholders
31/03/2017 Debentureholders a/c 1,50,000
Dr 1,50,000
To bank a/c
(payment made to
debentureholders)
31/03/2018 8% debentures A/c Dr 1,50,000
To debentureholders a/c 1,50,000
(payment due to debentureholders
31/03/2018 Debentureholders a/c 1,50,000
Dr 1,50,000
To bank a/c
(payment made to
debentureholders)
31/03/2018 Debenture Redemption Reserve 1,50,000
A/c
Dr 1,50,000
To general reserve a/c
(DRR a/c closed by transferring it
to general reserve)

Application Based Questions:

Accountancy XII 116
 1. Shubh ltd has the following balances appearing in the balance sheet
Rs
Securities premium reserve 22,00,000
9% debentures 1,20,00,000
Underwriting commission 10,00,000
The company decided to redeem its 9 % debentures at a premium of 10%. You are
required to suggest the ways in which the company can utilize the securities premium a/c.
Ans.
i. The company can utilize the securities premium reserve of Rs 12,00,000 to provide
for premium payable on redemption of debentures.
ii. The balance of Rs 10,00,000 can be utilized for writing off underwriting
commission of Rs 10,00,000.
2. X Ltd wants to redeem 5,000 5% debentures of Rs 100 each at 5 % premium. How much
amount it must transfer to Debenture Redemption Reserve if it has already a balance of Rs
1,00,000 in debenture redemption reserve a/c?
Ans. Rs 25,000
HOTS (High Order Thinking Skill) Questions:
1. Profit on cancellation of own debentures is:
a. Revenue profit b. capital profit
c. operating profit d. trading profit
2. Purchase of its own debentures by a company when these are not cancelled will be shown
in the balance sheet under:
a. Intangible assets heading on assets side
b. Non-current investments heading on assets side
c. Long term borrowing heading on equity and liabilities side
d. Debentures heading on equity and liabilities side

Answers to HOTS Questions:

1. b
2. b

Value Based Questions:

1. T Ltd. Issued 2,40,000 9% debentures of Rs. 500 each on April 1, 2010 redeemable over a
period of 3 years beginning April 1,2014 by draw of lots. Indicate the values in redeeming
the debentures in this manner.
2. X ltd issued 6, 00,000 10% debentures of Rs 100 each to be redeemed in three equal
instalments beginning 1st April 2009. It duly redeemed the debentures as per the terms of
the issue. Identify the values followed by X ltd in redeeming debentures on time.

Answers to value based questions:

1. Values involved are:
i. Providing equal opportunity to every debenture holder for redemption of
debentures.
ii. Judicious and rational decision to redeem the company’s debt in instalments.
iii. Transparency.
iv. Good corporate governance.
Accountancy XII 117
 2. Values followed by X ltd are:
i. Adherence to rule of law
ii. Time management
iii. Accountability
iv. Concern for debentureholders

UNIT 6. FINANCIAL STATEMENT ANALYSIS:

LEARNING OBJECTIVES:

After studying the lesson, students will be able to:

 Understand the meaning of financial statements and their objectives.
 Identify the parties interested in the financial statements.
 Understand the meaning of financial analysis and its objectives
 Understand the parties interested in financial Analysis
 Analyse the limitation of financial analysis
 Prepare comparative Income statement and Position Statement.
 Prepare Common Size Statements
 Understand the tools of Financial Analysis.

SALIENT POINTS:-
 Analysis of Financial statement is the systematic process of identifying the financial
strength and weaknesses of the firm by establishing the relationship between the items of
the Balance Sheet and income statement.
 The information available from the Analysis, serves the interest of different sections like
Management, shareholders, workers, creditors, government, Potential Investors,
Economist and Researchers and Stock Exchange.
 Financial analysis can be External Analysis and Internal Analysis, Horizontal analysis and
Vertical Analysis.
 External Analysis: when analysis is made on the basis of Published statements, reports and
information then this is known as External analysis.
 Internal Analysis: This analysis is based upon the information available to the business
only.
 Horizontal Analysis: This analysis is based on the financial statements of different years of
the same business unit or financial statements of a particular year of different business
units.
 Vertical Analysis: According to this analysis financial statement of the same period or
different items of the same financial statements are compared.
 Comparative statements, Common Size statements, Trend Analysis, Ratio Analysis, Fund
Flow Statement, Cash flow statement are the Tools of financial statement analysis.

Accountancy XII 118

  Comparative Statements: it helps in ascertaining change in the items of income statement
and Position Statement of different years in terms of figures and percentage.

IMPORTANT NOTE :

 Schedule VI is termed schedule III as per companies Act, 2013. However, there is
no change in any item of the schedule.
 Section 129 (1) of the companies Act 2013, requires that the financial statements
of a company shall be in the prescribed from given in Schedule III.
 One person company, small company and dormant company are exempted from
preparing cash flow statement with their financial statements.
 No debit balance of profit and loss along with assets. It is now presented as
negative balance within “Reserves and Surplus”.
 As per AS-26 preliminary Expenses are to be written off in the year in which they
are incurred.
 Schedule III has eliminated the concept of schedules and henceforth such
informations is to be furnished in terms of NOTES to ACCOUNTs.
 Schedule III requires that on the face of the balance sheet and statement of profit
and loss , only one amount shall be shown against each item and details of that
items shall be given in note relating to the items.
 The date of balance sheet will be stated as at 31st March instead of as on 31st March
.
 Schedule III does not provide for preparation of profit and loss appropriation
account.This means the appropriation should be presented in the note to accounts.
 Depreciation and amortization expenses are included in operating expenses .
 Spare parts and loose tools are excluded from inventory.
 Asper revised cbse guidelines non- current investment will not be deducted while
calculating capital employed.
 As per cbse circular no. 43 dated July 2nd 2013, accounting treatment of the
following items will not be examined in the board exam;
1. Money received against share warrants
2. Share application money pending allotment
3. Other long term liabilities
4. Deferred tax liabilities [net]
5. Capital works in progress
6. Intangible asset under development
7. Deferred tax asset [net]
8. Unamortized expenses

 As per cbse guidelines , while preparing cash flow stement:

1.bank overdraft and cash credit will be treated as short term borrowing and as
per para 17 of AS -3(revised) cash proceed from short term borrowing should

Accountancy XII 119

 be classified under financing activities . as such Bank overdraft and cash credit
will be treated as financing activities .
2. current investment to be taken as marketable securities unless otherwise
specified .
PART 1
Form of balance sheet

REVISED SCHEDULE III OF THE COMPANIES ACT 2013

BALANCE SHEET AS AT……………….
PARTICULARS NOTE FIGURES AS FIRGURES
(1) NO AT THE END ASA AT THE
(2) OF END OF
CURRENT THE
REPORTING PREVIOUS
PERIOD REPORTING
(3) PERIOD
(4)
1. EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital
(b) Reserves and Surplus
(c) Money received against share
warrants
(2) Share Applications Money Pending
Allotment
(3) Non-Current Liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities(Net)
(c) Other Long-term Liabilities
(d) Long-term provisions
(4) Current Liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
TOTAL
II ASSETS
(1) Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets
(ii) Intangible assets
(iii) Capital work-in progress
(iv) Intangible assets under
development

(b) Non-current investments

(c) Deferred tax assets (net)
(d) Long-term loans and advances

Accountancy XII 120

 (e) Other non-current assets
(2) Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
TOTAL

PART -II

STATEMENT OF PROFIT AND LOSS (Rs. In…..)

PARTICULARS NOTE FIGURES FOR FIGURES FOR

NO THE THE
CURRENT PREVIOUS
RERPORTING REPORTING
PERIOD PERIOD
I. Revenue from operations

II. Other income

III. Total Revenue ( I+II )
IV. Expenses:
Cost of materials consumed
Purchases of stock-in-trade
Changes in inventories of finished
goods
Work-in-progress and stock-in-
trade
Employees benefits expenses
Finance costs
Depreciation and amortization
expenses
Other expenses

Total expenses
V. Profit before tax (III-IV)
VI. Tax
VII. Profit after tax (V-VI)

Remember: Under Revised Schedule III detail under each classification should be disclosed
in the Notes to Accounts giving reference number in the Balance Sheet and Statement of
Profit and Loss.
Note: As per syllabus contents of 2015-16 first five items (i.e, upto profit before exceptional
and extraordinary items) shall be used.

Accountancy XII 121

 Common Size Statements: In common size statements every item of the statement is
presented in the form of percentage of its important heading i.e Net Sales( in case of
Common Size income Statement) and Total of Assests and Liabilities(in case of
Common Size Balance Sheets)
QUESTIONS: 01 MARKS

1. How would you show the following two items in a company’s Balance Sheet as at 31st
March, 2015 as per the requirement of Schedule VI:
General Reserve(Since 31st March, 2014) Rs. 3,00,000, Statement of Profit and Loss(Debit
Balance) for 2014-15 Rs. 2,00,000.

Ans. Balance Sheet

As at 31st march, 2015
Equity and Liablities Note No. Rs.
Shareholders’ fund
Reserve and Surplus 1 1,00,000
Notes to Accounts:
Reserve and Surplus
General Reserve(1st April, 2014) 3,00,000
Less: Statement of Profit and Loss(Dr. Balance) 2,00,000
1,00,000

2. Under Which main headings and sub-headings of Equity and Liabilities of the balance
sheet as per the Revised Schedule III of a company will you classify the following items:
i. Proposed dividend.
ii. Fixed Deposit from Public.
Ans. Sr. No. Items Main-Heading Sub-Heading
i. Proposed dividend Current-Liabilities short-term provision
ii. Fixed deposit from Public non-current liabilities long term borrowing

3. State any two items which are shown under the head ‘Non Current Investment’
in a company balance sheet. (1)
Ans. (i) Government Securities.
(ii) Sinking Fund Investment.

4.How is analysis of Financial statements suffered from the limitation of window

dressing ? (1)

Ans. Analysis of financial statements is affected from the limitation of window dressing as
companies hide Some vital information or show items at incorrect value to portray better
profitability and financial Position of the business, for example the company may
overvalue closing stock to show higher profits.

5. What is the interest of Shareholders in the analysis of Financial Statements? (1)

Ans. (i) They want to judge the present and future earning capacity of the business.
(ii) They want to judge the safety of their investment.

6. Name two tools of Financial Analysis? (1)

Accountancy XII 122

 Ans. (i) Comparative Financial Statements.
(ii) Ratio Analysis etc.
7. What is Horizontal Analysis? (1)
Ans:The analysis which is made to review and compare the financial statements of two or
more than two Years is called Horizontal Analysis.
8. Give the example of Horizontal Analysis. (1)
Ans. Comparative Financial Statement.

9. What is Vertical Analysis? (1)

Ans:11 The Analysis which is made to review the financial statements of one particular year
only is called Vertical Analysis.

10. Give the example of Vertical Analysis? (1)

Ans. Ratio Analysis.

QUESTIONS 03 MARKS
1. Give the Main Heading and Sub- Heading ofEquity and Liabilities of the Balance sheet of a
company as per the Revised Schedule III of the companies Act.2013.

Ans.
2. EQUITY AND LIABILITIES
(5) Shareholders’ Funds
(d) Share Capital
(e) Reserves and Surplus
(f) Money received against share warrants
(6) Share Applications Money Pending Allotment
(7) Non-Current Liabilities
(e) Long-term borrowings
(f) Deferred tax liabilities(Net)
(g) Other Long-term Liabilities
(h) Long-term provisions
(8) Current Liabilities
(e) Short-term borrowings
(f) Trade payables
(g) Other current liabilities
(h) Short-term provisions
TOTAL
[

3. Give the Main Heading and Sub- Heading of Assets of the Balance sheet of a company as
per the Revised Schedule III of the companies Act.2013.
Ans. ASSETS
(1) Non-Current Assets
(a) Fixed Assets
i. Tangible Assets
ii. Intangible assets
iii. Capital work-in progress
iv. Intangible assets under development

Accountancy XII 123

 (b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
(2) Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets

4. Rearrange the following items under assets according to Revised or New Schedule III:
a. Livestock
b. Loose Tools.
c. Goodwill
d. Trademarks
e. Bills Receivable
f. Debtors
g. Land
h. Leasehold
i. Stock-in-Trade
j. Stores and Spare Parts
k. Vehicles
l. Cash at Bank
m. Work in Progress(Machinery)
n. Interest accrued on Investment
o. Furniture
p. Advance to Subsidiaries
q. Cash in Hand
r. Plant
s. Deposits with electricity supply company.
Ans.
i. Fixed Assets(Tangible): Livestock, Land, Leasehold, furniture, vehicles and plant
ii. Capital Work-in-progress: Work in progress(Machinery)
iii. Fixed Assets(Intangible): Goodwill and Trademarks
iv. Inventories: Loose Tools, Stock-in-Trade, Stores and Spare Parts.
v. Trade Receivables: Bill Receivables, Debtors
vi. Cash and Cash Equivalents: Cash at Bank, Cash in Hand
vii. Long term Loans and Advances: Advance to Subsidiaries, Deposits with Electricity
Supply Company.
viii. Other Current Assets: Interest Accrued on Investments.

4. List any three items that can be shown as contingent Liabilities in a company’s Balance
sheet.
Ans: (i) Claims against the Company not acknowledged as debts.
(ii) Uncalled Liability on partly paid shares.
(iii)Arrears of Dividend on Cumulative preference shares.
Q. Under which head the following items of a financial company will be shown :

Accountancy XII 124

 a) Dividend received
b) Interest earned
c) Profit on sale of fixed assets
d) Profit in sales of investment
Ans:
Revenue from operation—dividend received, interest earned and profit on sale of
investment
Other incomes—profit on sale of fixed assets.
QUESTIONS 04 MARKS

1. Prepare Comparative and Common Size income statement from the following information
for the year’s ended march 31, 2008 and 2009.

Particulars 2008(Rs.) 2009(Rs.)

1.Net Sales 8,00,000 10,00,000
2.Cost of Goods Sold 60% of sales 60% of sales
3.Indirect Expenses 10% of Gross profit 10% of Gross Profit
4.Income Tax rate 50% 60%
Ans.1.a
Comparative Income statement:
Particular 2008 2009 Change in Change in
amount amount amount Percentage
Net Sales 8,00,000 10,00,000 2,00,000 25%
Less: C.O.G.S. 4,80,000 6,00,000 1,20,000 25%
Gross Profit 3,20,000 4,00,000 80,000 25%
Less: Indirect Expenses 32,000 40,000 8,000 25%
Operating Profit/ PBT 2,88,000 3,60,000 72,000 25%
Less: tax 1,44,000 2,16,000 72,000 50%

Profit after tax 1,44,.000 1,44,000 ---------- ------------

Common Size Income statement

Particular 2008 2009 Percentage of Percentage of

amount amount Net sales in Net sales in
P.Y. C.Y.
Net Sales 8,00,000 10,00,000 100% 100%
Less: C.O.G.S. 4,80,000 6,00,000 60% 60%
Gross Profit 3,20,000 4,00,000 40% 40%
Less: IndirectExpenses 32,000 40,000 4% 4%
Operating Profit/ PBT 2,88,000 3,60,000 36% 36%
Less: tax 1,44,000 2,16,000 18% 21.6%

Profit after tax 1,44,.000 1,44,000 18% 14.4%

RATIO AND ANALYSIS

Learning outcomes:

Accountancy XII 125

  Explain the meaning of accounting ratios.
 Understand the objectives and limitation of accounting ratios.
 Classify the ratios as profitability, activity and solvency.
 Compute various profitability, activity and solvency ratios.
 Express your views about the operational efficiency and financial soundness of the
company.
 Comment upon the performance of the enterprise.
 Recommend financial measures to be adopted to strengthen financial structure of the
company

IMPORTANT FORMULAE OF RATIO ANALYSIS

Profitability ratio
1. Gross Profit Ratio = Gross profit/Net sales*100 {gross profit=Net sales- cost of
goods sold}
2. (a) Net profit ratio= Net Profit/Net sales*100 {Net Profit=Gross profit+operating
and non operatingincome-operating and non operating expenses.}
(b)Operating Net profit ratio =Operating Net profit/Net sales*10
3 Operating Ratio= (Cost of goods sold + Operating expenses) x 100
Net Sales

4 Return on investment ( ROI)= Net Profit before interest,tax and dividend X 100
Capital Employed
Capital employed= Share Capital+Undistributed profit+long term loans-
(fictitious assets like underwriting commission, preliminary expenses,
discount or loss on issue of shares and non-operating assets like Investments).
or
Net fixed assets+Working capital
working capital= Current assets-current liabilties.

5 Earning per share= Net Profit-Preference dividend

No.of Equity shares
6 Dividend per share=Net Profit after interest, taxes and preference dividend
Number of equity shares
7 Price Earning Ratio=Market price of a share
Earning per share

(B) TURNOVER OR ACTIVITY OR PERFORMANCE RATIOS:

1 Working capital turnover ratio=Net Sales
working capital
Working Capital= Current assets- current Liabilities
3 Debtors turnover ratio= Net credit sales
Average Debtors

Accountancy XII 126

 Average Debtors=Debtorsin the beginning+Debtors at the end
2
Receivables= Debtors+Bills receivable

4 Payable turnover ratio= Net credit purchases

Account Payable
5 Fixed Assets Turnover ratio= Sales or cost of goods sold
Net fixed assets
6 Current assets Turnover Ratio=Net sales or cost of goods sold
current
Assets
LIQUIDITY RATIOS:
1 Current ratio= current Assets
current liabilities
2 Liquid or quick or acid test ratio= liquid assets
current liabilities
Solvency ratios
1 Debt to equity ratio= Long term loans
Shareholder's funds
2 Total assets to debt ratio= Total assets
Long term debts
3 Proprietory ratio= Proprietors fund or shareholders fund
Total Assets
4 Current asset turnover ratio= Net sales/cost of goods sold
current assets
5 Fixed assets turnover rqatio= Net sales
Net fixed assets

Ratio Analysis

Questions for 1 mark

1) X Ltd has a debt Equity Ratio at 3:1. According to the Management, it should be
maintained at 1;1. What are the two choices to do so ?
Ans : The Two choices to maintain Debt Equity ratio at 1:1 are:
a) To increase the Equity
b) To reduce the debt

Accountancy XII 127

 2) Assuming that the Debt equity ratio is 1:2, state giving reason whether the ratio
willimprove, decline or will have no change if equity shares are issued for cash.
Ans It will decrease the ratio as Equity increases without change in the debt.
3) State the satisfactory ratio of Current ratio and Liquid Ratio
Ans The Standard Current ratio is 2:1 whereas Ideal Liquid ratio is 1:1.
4) Current ratio of a firm is 2:1. State whether ‘Purchase of goods for cash” will improve,
decrease or will not have any change in the ratio
Ans. It will not change the ratio as stock increases and cash decreases.
5) Define “ratio Analysis”
Ans Ratio Analysis refers to the process of computing, determining and explaining the
relationship between the component items of financial statements in terms of ratios.
2-3 MKS
6) A company has a current ratio of 4:1 and Quick ratio is 2.5;1. Assuming that the inventories
are Rs 22500, find out total current assets and current liabilities.
Ans Current ratio ---4:1
Quick ratio ---2.5:1
Inventory =4-2.5=1.5
If inventory is 1.5, then Current assets =4
If inventory = 22500, then current assets = 4X 22500/1.5 =60,000
Current Liabilities = 60,000/4 = Rs 15000.
7) From the following, calculate stock turnover ratio—
Net Sales –Rs 2,00,000 Gross Profit = 25% Opening stock = 5000
Closing stock : 15000
Ans – Stock Turnover ratio = Cost of goods sold/Average stock
Cost of sales= sales-gross profit
Cost of sales = 2,00,000 – 50,000 = 1,50,000
Average stock = Opening stock + closing stock= 20,000/2 =10,000
2
1,50,000/10,000 = 15 times.
8) Calculate Gross profit and sales—
Average stock = Rs 80,000
Stock turnover ratio = 6 times
Selling price = 25% above cost
Ans. Stock Turnover ratio = cost of sales/average stock
6 = cost of sales/80,000
Cost of sales = 80,000X 6 = 4,80,000
Gross profit = 4,80,000 X 25/100 = 1,20,000
Sales = Cost of sales + Gross Profit
4,80,000 + 1,20,000 = Rs 6,00,000
9) A Company made credit sales of Rs 7,20,000 during the year. If the collection period is 50
days and the year is assumed to be of 360 days. Calculate –
a) Average Debtors b) Debtors Turnover ratio c)Opening and Closing Debtors if the closing
Debtors are Rs 10,000 more than the opening Debtors.
Ans Credit sales per day = 7,20,000/360 = Rs 2000 per day.
Average Debtors = 2000 X 50 days = Rs 1,00,000
Debtors Turnover ratio = Net credit sales/Average Debtors
= 7,20,000/1,00,000 = 7.2 times.
Let the Opening Debtors be “x”

Accountancy XII 128

 Closing Debtors = “x + 10,000”
Total Debtors = x + x + 10,000 = 2,00,000
= 2x+ 10,000 = 2,00,000
= 2x = 1,90,000
x = 95,000 ( Opening Debtors = 95000)
Closing Debtors = 95000 + 10000 = Rs 1,05,000
10) Calculate Operating ratio— Rs
Net Sales = 5,40,000
Net Purchases 3,10,000
Opening Stock 75,000
Direct expenses 32,000
Closing Stock 50,000
Selling expenses 25,000
Distribution expenses 15,000

Operating ratio = Cost of sales +Operating expenses/Net sales *100

Cost of sales = Opening stock + Net purchases + direct expenses-closing stock
= 75000+3,10,000+32,000-50,000 = 3,67,000
Operating expenses = Selling expenses + Distribution expenses
= 25000+15000 = 40,000
Operating ratio = 3,67,000+40,000/5,40,000 X 100 = 75.37%

11) Net profit after Interest but before tax Rs 1,40,000

15% Long term debt : Rs 4,00,000
Shareholders fund : Rs 2,40,000
Tax rate : 50% , Calculate Return on capital employed.
Return on capital employed = Net profit before interest and tax/Capital employed X 100
Interest on long term debt = 15/100 X 4,00,000
= 60,000
Net Profit before Interest = 1,40,000 + 60,000 = 2,00,000
Capital employed = Debt + Shareholders fund
= 4,00,000 + 2,40,000 = 6,40,000
Return on Capital employed = 2,00,000/6,40,000 X 100 = 31.25%

12) Calculate Inventory Turnover Ratio—

Sales = Rs 4,00,000 Average stock – Rs 55,000 Gross Loss ratio =10%
Inventory Turnover ratio = Cost of sales/Average stock
=4,40,000/55000 = 8 times .

13) Calculate Fixed Assets turnover ratio-

Cost of goods sold : Rs 16,80,000
Gross profit = Rs 5,60,000
Capital employed = Rs43,00,000
Working capital = Rs 80,000

Fixed assets turnover ratio = Net sales/ Net fixed assets

Net sales = Cost of goods sold + Gross profit
= 16,80,000 + 5,60,000
= 22,40,000
Accountancy XII 129
Capital employed = Net fixed assets + Net working Capital
4,00,000 = Net Fixed assets + 80,000
Net Fixed assets = 3,20,000
Fixed assets turnover ratio = 22,40,000/3,20,000 = 7 times

14) Calculate Current Asset Turnover ratio if –

Cost of goods sold = Rs 7,50,000
Gross profit = Rs 2,10,000
Total Assets = Rs 3,00,00
Capital employed = Rs 3,00,000
Working capital Rs 60,000
Current Assets Turnover ratio = Net Sales/ Net Current assets
Net sales = Cost of sales + Gross Profit
= 7,50,000 + 2,10,000
= 9,60,000
Capital Employed = Net Fixed +Net Working Capital
Net Fixed Assets = Capital employed – Net working Capital
= 3,00,000 – 60,000
= 2,40,000.
Total Assets = Rs 3,00,000
Current Assets = Total assets – Fixed assets
= 3,00,000 – 2,40,000
= 60,000
Current Assets turnover ratio = Net Sales/Net current Assets
= 9,60,000/60,000 = 16 times.
15) From the following information calculate =
a) Debt equity ratio b) Total Assets to Debt ratio c) Proprietory ratio
Equity share capital = Rs 20,00,000
Reserves and Surplus = Rs 12,00,000
12% Debentures = Rs 10,00,000
Bank Loan = Rs 8,00,000
Current Liabilities = Rs 5,00,000
Fixed Assets = Rs 25,00,000
Goodwill = Rs 4,00,000
Current Assets = Rs 18,00,000
a) Debt Equity Ratio = Debt/Equity
Debt = 12% Debentures + Bank Loan
= 10,00,000 + 8,00,000
= 18,00,000
Equity = Equity share capital + Reserves and Surplus
= 20,00,000+12,00,000
= Rs 32,00,000
Debt / Equity = 18,00,000/32,00,000 = 0.56:1
b) Total Assets to Debt ratio = Total Assets/Long term Debt
Total Assets = Fixed assets + Goodwill + Current assets
= 25,00,000 + 4,00,000 + 18,00,000
=Rs 47,00,000
Long Term Debt = 12% Debentures + Bank Loan

Accountancy XII 130

 = 18,00,000
Total Assets to Debt Ratio = 47,00,000/18,00,000 = 2.6:1

c) Proprietory Ratio = Equity/Total Assets

= 32,00,000/47,00,000 = 0.68 or 68%

Unit 6.CASH FLOW STATEMENT

LEARNING OBJECTIVES

i) To understand the meaning of cash flow statement

ii) To understand the meaning of cash, cash funds and cash equivalents.
iii) To calculate operating profit and cash flow from operating activities
iv) To understand operating and non-operating expenses and incomes.
v) To calculate cash flow from operating, investing and financing activities.
vi) To prepare cash flow statement with additional information

SALIENT POINTS :

 Classification of Activities : The cash flow from Operating, Investing and Financing are
shown separately in Cash flow statement.
 Non cash items : The flow of cash which affects the statement is reflected in the
preparation of Cash flow statement.

i) What do you mean by cash flow statement?

A statement which shows inflow and outflow of cash and cash equivalents from
operating, investing and financing activities during a specific period.

ii) What are the various activities classified as per AS-3(revised) related to cash
flow statement?

(a) cash flow from operating activities

(b) cash flow from investing activities
(c) cash flow from financing activities.

iii) State one objective of cash flow statement.

Helpful for short term planning, for preparing cash budget

iv) What do you mean by cash equivalent?

Short –term highly liquid investments which are readily convertible into
known amount of cash and which are subject to an insignificant risk of change
in the value.

v) State the category of the following items for a financial as well as non-
financial company

Accountancy XII 131

 (1) Dividend received
(2) Dividend paid
(3) Interest paid
(4) Interest received

Answer

Financial company non-financial company

(1) Dividend received operating activity investing activity

(2) Dividend paid financing activity financing activity
(3) Interest paid operating activity financing activity
(4) Interest received operating activity investing activity

(Note; for objective type questions any one or two can be asked)

vi) What are the objectives of preparing cash flow statement?

Ans. The objectives of cash flow statement are:

i) To ascertain the specific sources (i.e., operating / investing financing activities) of

cash and cash equivalents generated by an enterprise.
ii) To ascertain the specific uses (i.e., operating / investing / financing activities) of
cash and cash equivalents used by an enterprise.
iii) To ascertain the net change in cash and cash equivalents (sources minus uses of
cash and cash equivalents) between the date of two Balance Sheets.
Problems
1) Calculate the net amount of cash flow if a fixed asset costing Rs. 32,000(having a
book value of Rs. 24,000) is sold at a loss of Rs. 8,000.
Cash inflow from investing activities – Rs. 16,000
(Book value –loss=Amount received from sale Rs. 24000-Rs.8,000)
2) From the following information calculate cash flow from operating activities:
Profit and loss account

For the year ended on 31-03-2007

Particulars Amount Particulars Amount

To Cost of goods sold 6,20,000 By sales 9,60,000

To selling and distribution

expenses 52,000 By Profit on sale of furniture 12,000

To office Expenses 1,20,000 By interest Received 2,400

To Loss on sale of machinery 57,600

To depreciation 24,000
To Discount on debentures 8,000
To payment for taxation 28,800
To Net Profit 64,000

Accountancy XII 132

 9,74,400 9,74,400

Additional information

Debtors 1,12,000 1,31,200

Stock 67,200 92,000
Creditors 50,000 60,000
Outstanding expenses 2,800 1,600

SOLUTION

Particulars Amount Amount

Net Profit before Taxation and extraordinary
items 92,800
Net Profit +Taxation(64,000+28,800)
Add non-operating expenses
Depreciation 24,000
Loss on sale of machinery 57,600
Discount on debentures written off 8,000 89,600
1,82,400
less non-operating incomes
Profit on sale of furniture (12000)
Interest Received (2,400) (14,400)
operating profit before working capital changes 1,68,000
Adjustments related to current assets and
liabilities
Add: Increase in current Liabilities
Creditors 10,000
1,78,000
Less : Decrease in current liabilities
outstanding expenses (1,200)
less Increase in current assets
debtors 19,200
Stock 24,800 (44,000)
1,32,800
Less payment of taxes (28,800)
Net cash flow from operating activities 1,04,000

3) From the following balance sheet calculate cash flow from operating
activities.

Accountancy XII 133

Liabilities 2,007 2008 Assets 2007 2,008
Creditors 31,200 39,000 cash in hand 7,800 3,120
Bills payable 33,600 7,800 cash in hand 9,800 3,680
Income received in advance 40,000 50,000 Short term investments 15,600 10,800
outstanding salaries 20,000 20,200 Investments 62,400 46,800
10% Debentures 93,600 1,24,800 Inventory 46,800 70,200
equity share capital 80,000 80,000 Debtors 39,000 46,800
profit and loss 30,000 62,400 Bills receivable 7,800 15,600

General Reserve 16,800 31,200 Fixed assets 1,56,000 2,18,400

3,45,200 4,15,400 3,45,200 4,15,400

Solution

Particulars Amount Amount

Net Profit Before Tax and Extraordinary items
(profit+Transfer to general reserve)
(Rs. 32,000+Rs. 14,400) 46,800
Adjustments
items to be added
Interest on debentures 9,360
Operating profit before working capital changes 56,160
Adjustments related to current assets and
liabilities
Add : Increase in Current liabilities
Creditors 7,800
Income Received in advance 10,000
outstanding salaries 200 18,000
74,160
Less: Increase in Current Assets
Inventory (23,400)
Debtors (7,800)
Bills Receivable (7,800) (39,000)
35,160
Less :Decrease in Current Liabilities
Bills Payable (25,800)
Net Cash from Operating Activities 9,360

4) X Ltd. made a profit of Rs.1, 00,000/- after charging depreciation of Rs.20,000/- on assets
and a transfer to General Reserve of Rs.30,000/-. The Goodwill written off was Rs.7,

Accountancy XII 134

 000/- and the gain on sale of machinery was Rs.3, 000/-. The other information available
to you (changes in the value of current assets and current liabilities) is as follows:
At the end of the year Debtors showed an increase of Rs.6, 000/-, creditors an increase of
Rs.10, 000/-, prepaid expenses an increase of Rs.200/-, Bills Receivable a decrease of
Rs.3, 000/-, Bills Payable a decrease of Rs.4, 000/- and outstanding expenses a decrease
of Rs.2, 000/-. Ascertain the cash flow from the operating activities.
Ans. Solution : CASH FLOW FROM OPERATING ACTIVITIES

Particulars Rs.
Net Profit 1,00,000
Add : Transfer to General Reserve 30,000
Net Profit before Tax 1,30,000
Adjustment for non-cash and non-operation expenses :

Add : Depreciation 20,000

Goodwill Written Off 7,000
27,000
Less : Gain on Sale of Machinery (3,000) 24,000
Operating Profit before working capital changes 1,54,000
Add : Decrease in Current Assets and Increase in
Current Liabilities
Increase in Creditors 10,000
Decrease in Bills Receivable 3,000 13,000
1,67,000
Less : Increase in Current Assets and Decrease in
Current Liabilities :
Increase in Debtors 6,000
Increase in Prepared Expenses 200
Decrease in Bill s Payable 4,000
Decrease in Outstanding Expenses 2,000 (12,200)
Cash Flow from Operating Activities 1,54,800

Accountancy XII 135

5) From the following Balance Sheets of Ranjan Ltd. prepare Cash Flow Statement:
Liabilities 2001 2002 Assets 2001 2002
Equity Share Capital 1,50,000 2,00,000 Goodwill 36,000 20,000
12% Pre. Share Capital 75,000 50,000 Building 80,000 60,000
General Reserve 20,000 35,000 Plant 40,000 1,00,000
Profit and Loss A/c 15,000 24,000 Debtors 1,19,000 1,54,500
Creditors 37,500 49,500 Stock 10,000 15,000
Cash 12,500 9,000
2, 97,500 2, 58,500 2, 97,500 3, 58,500
Depreciation charged on plant was Rs. 10000 and building Rs. 60000.

Ans. Solution:
Rajan Ltd.
CASH FLOW STATEMENT for the year ended 31st December, 2002
Particular’s Rs. Rs.
A. Cash Flow from Operating Activities

B. Net Profit before tax :

Closing Balanced of Profit and Loss A/c 24,000

Add: Transfer to General Reserve 15,000

Less: Opening Balance of Profit and Loss A/c (15,000)
Net Profit before tax and extraordinary items 24,000
Adjustments for:
Add: Depreciation on Plant 10,000
Depreciation on Building 60,000
Goodwill written off 16,000 86,000
Operating profit before working capital changes 1,10,000
Adjustments for:
Increase in Creditors 12,000
Increase in Debtors (35,500)
Increase in Stock (5,000) (28,500)
Net Cash from operating activities (A) 81,500

Accountancy XII 136

 B. Cash Flow from Investing Activities
Purchase of Plant (Note 2) (70,000)
Purchase of Building (Note 1) (40,000)
Net cash used in investing activities (B) (1,10,000)
C. Cash Flow from financing Activities
Issue of Equity Shares 50,000
Redemption of 12% Preference Shares (25,000)
Net Cash from financing activities (C) 25,000
Net decrease in cash and cash
Equivalents (A+B+C) (3,500)
Cash and cash equivalents at the beginning of the year 12,500
Cash and cash equivalents at the close of the year 9,000
Working Notes:

1. Dr. BUILDING ACCOUNT Cr.

Date Particulars Rs. Date Particulars Rs.
To Balance b/d 80,000 By Depreciation A/c 60,000
To Bank A/c 70,000 By Balance c/d 60,000
1, 20,000 1, 20,000

2. Dr. PLANT ACCOUNT Cr.

Date Particulars Rs. Date Particulars Rs.
To Balance b/d 40,000 By Depreciation A/c 10,000
To Bank A/c 70,000 By Balance c/d 1, 00,000
1,10,000 1,10,000
6) From the following Balance Sheet of India Ltd. and the additional information given
made out the Cash Flow Statement:
Liabilities 2007 2008 Assets 2007 2008
Share Capital 3, 00,000 4, 00,000 Goodwill 1, 15,000 90,000
Mortgage Loan 1, 50,000 1, 00,000 Land & Building 2, 00,000 1, 70,000
General Reserve 40,000 70,000 Plant 80,000 2, 00,000
P & L A/c 30,000 48,000 Debtors 1, 60,000 2, 00,000

Accountancy XII 137

 Proposed Div. 42,000 50,000 Stock 77,000 1, 09,000
Creditors 55,000 83,000 Bills Receivable 20,000 30,000
Bills Payable 20,000 16,000 Cash in hand 15,000 10,000
Provisions for Taxation 40,000 50,000 Cash at Bank 10,000 8,000
6, 77,000 8, 17,000 6, 77,000 8, 17,000
Additional information:
(1)Depreciation of Rs.1,000/- and Rs.20,000/- has been charged on Plant and Land &
Building respectively in 2006-07.
(2)The interim dividend of Rs.20, 000/- has been paid in 2007-08.
(3)Income Tax of Rs.35, 000/- was paid during the year 2007-08.

Ans. Cash Flow from operating activities Rs. 1, 25,000, cash used in investing activities Rs.
120000 cash used in Financing Activities Rs. 12,000, Net decrease in cash and Bank
Balance Rs. 7000.

7) From the following prepare cash flow statement as per AS-3

Liabilities 2010 2011 Assets 2010 2011

Share Capital 2,88,000 3,20,000 Fixed Assets 2,40,000 4,00,000

Reserves And Less Accumulated

Surpluses 64,000 80,000 Dep. 64,000 1,20,000

Bank Loan 80,000 60,000 1,76,000 2,80,000

creditors 2,48,000 2,40,000 Goodwill 64,000 56,000

bills payable 4,000 Investments 72,000 88,000

Proposed Dividend 36,000 48,000 Stock 1,60,000 1,80,000

Income Tax Payable 20,000 24,000 Debtors 1,60,000 1,52,000

Bank 1,04,000 20,000

7,36,000 7,76,000 7,36,000 7,76,000

Accountancy XII 138

Additional
information:

(i) During the year a part of the machinery costing Rs. 40,000 was sold for Rs. 20,000.

(ii) Depreciation provided during the year Rs. 80,000.

(iii) Interim Dividend paid during the year Rs. 20,000.

Solution

Cash Flow Statement for the year ended 2011

A Cash flow from operating activities:

Profit before Tax and Extraordinary items 1,08,000

Adjustments for :

Add: Depreciation 80,000

Goodwill Written off 8,000

Less: Profit on sale of Machinery (4,000)

operating profit before working capital changes 1,92,000

Add : Decrease in current assets:

Debtors 8,000

Add: increase in current liability:

Bills payable 4,000 12,000

2,04,000

Less : increase in current assets

Stock 20,000

less : Decrease in Current Activities

Creditors 8,000 (28,000)

cash from operating activities 1,76,000

Less Tax paid (20,000)

Net cash flow from operating activities 1,56,000

Accountancy XII 139

B Cash flow from investing activities

sale of machinery 20,000

purchase of fixed assets (2,00,000)

purchase of investment (16,000)

Cash flow in investing activities 1,96,000

C: Cash flows from operating activities:

Issue of Share capital 32,000

Repayment of bank loan (20,000)

payment of dividend

regular 36,000

interim 20,000 (56,000)

Cash used in financing activities (44,000)

A+B+C= (84,000)

Add cash and cash equivalents at the beginning 1,04,000

cash and cash equivalents at the end 20,000

Working Notes
(i) Calculation of Profit before tax and extra ordinary items:

Net profit during the year --------

Add: Transfer to reserves 16,000

Proposed dividend 48,000

Income tax provision 24,000

Interim Dividend 20,000

1,08,000

Accountancy XII 140

 Fixed assets account
Dr. Cr.

Particulars Rs. Particulars Rs.

To balance b/d 2,40,000 By Bank (sale) 40,000

To Cash a/c
(B.F)(purchase) 2,00,000 By Balance c/d 4,00,000

4,40,000 4,40,000

Machinery Disposal
Account

To Fixed Assets a/c 40,000 By cash a/c 20,000

TO Profit and loss a/c By accumulated

(B.F) 4,000 dep. 24,000

44,000 44,000

Accumulated
Depreciation Account Cr.

To assets disposal a/c 24,000 by balance b/d 64,000

To bal c/d 1,20,000 By P &L a/c 24,000

1,44,000 1,44,000

Income Tax Payable a/c

To cash a/c 20,000 By Balance b/d 20,000

To Balance c/d 24,000 By P&L a/c 24,000

44,000 44,000

Accountancy XII 141

 STUDY MATERIAL
ON
HOTS
Subject: Accountancy
CLASS – XII
Part –A
Accounting for Partnership and
Company Accounts

Accountancy XII 142

 Unit 1:

ACCOUNTING FOR PARTNERSHIP FIRMS: BASIC CONCEPTS

Q.1 State the conditions under which capital balances may change under the system of a Fixed
Capital Account.

Q.2 A is partner in a firm. His capital as on Jan 01, 2007 was Rs. 60,000. He introduced additional
capital of Rs. 20000 on Oct 01 2007. Calculate interest on A’s capital @ 9% p.a.

Q.3 A, B and C are partners in a firm having no partnership agreement. A, B and C contributed
Rs. 20,000, Rs. 30,000 and Rs. 1,00,000 respectively. A and B desire that the profit should
be divided in the ratio of capital contribution. C does not agree to this. How will you settle
the dispute.

Q.4 A and B are partners in a firm without a partnership deed. A is an active partner and claims a
salary of Rs. 18,000 per month. State with reason whether the claim is valid or not.

Q.5 Chandar and Suman are partners in a firm without a partnership deed. Chandar’s capital is Rs.
10,000 and Suman’s capital is Rs. 14,000. Chander has advanced a loan of Rs. 5000 and
claim interest @ 12% p.a. State whether his claim is valid or not.

Q.6 R, S, and T entered into a partnership of manufacturing and distributing educational CD’s on
April 01, 2006. R looked after the business development, S content development and T
financed the project. At the end of the year (31-03-2007) T wanted an interest of 12% on the
capital employed by him. The other partners were not inclined to this. How would you
resolve this within the ambit of the Indian Partnership Act, 1932?

Q.7 A, B and C are partners in a firm. A withdrew Rs. 1000 in the beginning of each month of the
year. Calculate interest on A’s drawing @ 6% p.a.

Q.8 A, B and C are partners in a firm, B withdrew Rs. 800 at the end of each month of the year.
Calculate interest on B’s drawings @ 6% p.a.

Q.9 A, B and C are partners in a firm. They have omitted interest on capital @ 10 % p.a. for three
years ended 31st march 2007. Their fixed capitals on which interest was to be calculated
through –out were
A Rs. 1,00,000
B Rs. 80,000
C Rs. 70,000

Give the necessary Journal entry with working notes.

Q.10 X, Y, and Z are partners sharing profits and losses in the ratio of 3:2:1. After the final
accounts have been prepared it was discovered that interest on drawings @ 5 % had not
been taken into consideration. The drawings of the partner were X Rs. 15000, Y Rs. 12,600,
Z Rs. 12,000. Give the necessary adjusting Journal entry.

Accountancy XII 143

Q.11 A, B and C are partners sharing profits and losses in the ratio of 3:2:1. Their fixed capitals
are Rs. 1,50,000, Rs. 1,00,000 and Rs. 80,000 respectively. Profit for the year after
providing interest on capital was Rs. 60,000, which was wrongly transferred to partners
equally. After distribution of profit it was found that interest on capital provided to them @
10% instead of 12% . Pass necessary adjustment entry.
Show your working clearly.

Q.12 Ravi and Mohan were partner in a firm sharing profits in the ratio of 7:5. Their respective
fixed capitals were Ravi Rs. 10,00,000 and Mohan Rs. 7,00,000. The partnership deed
provided for the following:-
(i) Interest on capital @ 12% p.a.
(ii) Ravi’s salary Rs. 6000 per month and Mohan’s salary Rs. 60000 per year.

The profit for the year ended 31-03-2007 was Rs. 5,04,000 which was distributed equally
without providing for the above. Pass an adjustment Entry.

Q.13 Distinguish between fixed capital method and fluctuating capital method.

Q.14 A, B and C were partners in a firm having capitals of Rs. 60,000, Rs. 60,000 and Rs. 80,000
respectively. Their current account balances were A- Rs. 10,000, B- Rs. 5000 and C- Rs.
2000 (Dr.). According to the partnership deed the partners were entitled to an interest on
capital @ 5% p.a. C being the working partner was also entitled to a salary of Rs. 6,000 p. a.
The profits were to be divided as follows:
(i) The first Rs. 20,000 in proportion to their capitals.
(ii) Next Rs. 30,000 in the ratio of 5:3:2.
(iii) Remaining profits to be shared equally.
During the year the firm made a profit of Rs. 1,56,000 before charging any of the above
items.
Prepare the profit and loss appropriate on A/C.

Q.15 A and B are partners sharing profits in proportion of 3:2 with capitals of Rs. 40,000 and Rs.
30,000 respectively. Interest on capital is agreed at 5 % p.a. B is to be allowed an annual
salary of Rs. 3000 which has not been withdrawn. During 2001 the profits for the year prior
to calculation of interest on capital but after charging B’s salary amounted to Rs. 12,000. A
provision of 5% of this amount is to be made in respect of commission to the manager.

Prepare profit and loss appropriation account showing the allocation of profits.

Accountancy XII 144

 Unit 2:
RECONSTITUTION OF PARTNERSHIP

ADMISSION OF A PARTNER

Q.1 On what occasions does the need for valuation of goodwill arise?

Q.2 Why is it necessary to revalue assetsand liabilities at the time of admission of a new partner?

Q.3 What is meant by sacrificing ratio?

Q.4 State two occasions when sacrificing ratio may be applied.

Q.5 A business has earned average profit of Rs. 60,000 during the last few years. The assets of the
business are Rs. 5,40,000 and its external liabilities are Rs. 80,000. The normal rate of return is
10%. Calculate the value of goodwill on the basis of capitalisation of super profits.

Q.6 The capital of a firm of Arpit and Prajwal is Rs. 10,00,000. The market rate of return is 15%
and the goodwill of the firm has been valued Rs. 1,80,000 at two years purchase of super profits.
Find the average profits of the firm.

Q.7 The average profits for last 5 years of a firm are Rs. 20,000 and goodwill has been worked
out Rs. 24,000 calculated at 3 years purchase of super profits. Calculate the amount of capital
employed assuming the normal rate of interest is 8 %.

Q.8 Rahul and Sahil are partners sharing profits together in the ratio of 4:3. They admit Kamal as
a new partner. Rahul surrenders 1/4th of his share and Sahil surrenders 1/3rd of his share in favour
of Kamal. Calculate the new profit sharing ratio.

Q.9 Ajay and Naveen are partners sharing profits in the ratio of 5:3. Surinder is admitted in to the
firm for 1/4th share in the profit which he acquires from Ajay and Naveen in the ratio of 2:1.
Calculate the new profit sharing ratio.

Q.10 A and B were partners sharing profits in the ratio of 3:2. A surrenders 1/6th of his share and
B surrenders 1/4th of his share in favour of C, a new partner. What is the new ratio and the
sacrificing ratio.

Q.11 Aarti and Bharti are partners sharing profits in the ratio of 5:3. They admit Shital for 1/4 th
share and agree to share between them in the ratio of 2:1 in future. Calculate new and sacrificing
ratio.

Q.12 X and Y divide profits and losses in the ratio of 3:2. Z is admitted in the firm as a new
partner with 1/6th share, which he acquires from X and Y in the ratio of 1:1. Calculate the new
profit sharing ratio of all partners.

Q.13 Rakhi and Parul are partners sharing profits in the ratio of 3:1. Neha is admitted as a partner.
The new profit sharing ratio among Rakhi, Parul and Neha is 2:3:2. Find out the sacrificing ratio.

Accountancy XII 145

Q.14 X and Y are partners sharing profits in the ratio of 5:4. They admit Z in the firm for 1/3rd
profit, which he takes 2/9th from X and 1/9th from Y and brings Rs. 1500 as premium. Pass the
necessary Journal entries on Z’s admission.

Q.15 Ranzeet and Priya are two partners sharing profits in the ratio of 3:2. They admit Nilu as a
partner, who pays Rs. 60,000 as capital. The new ratio is fixed as 3:1:1. The value of goodwill of
the firm was determined at Rs. 50,000. Show journal entries if Nilu brings goodwill for her share
in cash.

Q.16 A and B are partners sharing profits equally. They admit C into partnership, C paying only
Rs. 1000 for premium out of his share of premium of Rs. 1800 for 1/4th share of profit. Goodwill
account appears in the books at Rs. 6000. All the partners have decided that goodwill should not
appear in the new firms books.

Q.17 A and B are partners sharing profits in the ratio of 3:2. Their books showed goodwill at Rs.
2000. C is admitted with 1/4th share of profits and brings Rs. 10,000 as his capital but is not able
to bring in cash goodwill Rs. 3000. Give necessary Journal entries.
Q.18 Piyush and Deepika are partners sharing in the ratio of 7:3. they admit Seema as a new
partner. The new ratio being 5:3:2. Pass journal entries.
Q.19 A and B are partners with capital of Rs. 26,000 and Rs. 22,000 respectively. They admit C
as partner with 1/4th share in the profits of the firm. C brings Rs. 26,000 as his share of capital.
Give journal entry to record goodwill on C’s admission.
Q.20 A and B are partners sharing profits in the ratio of 3:2. They admit C into partnership for
1/4th share. C is unable to bring his share of goodwill in cash. The goodwill of the firm is valued
at Rs. 21,000. give journal entry for the treatment of goodwill on C’s admission.
Q.21 A and B are partners with capitals of Rs. 13,000 and Rs. 9000 respectively. They admit C as
a partner with 1/5th share in the profits of the firm. C brings Rs. 8000 as his capital. Give journal
entries to record goodwill.

Q.22 A, B and C were partners in the ratio of 5:4:1. On 31st Dec. 2006 their balance sheet showed
a reserve fund of Rs. 65,000, P&L A/C (Loss) of Rs. 45,000. On 1st January, 2007, the partners
decided to change their profit sharing ratio to 9:6:5. For this purpose goodwill was valued at Rs.
1,50,000.
The partners do not want to distribute reserves and losses and also do not want to
record goodwill.
You are required to pass single journal entry for the above.
Q.23 A and B were partners in the ratio of 3:2. They admit C for 3/13th share. New profit ratio
after C’s admission will be 5:5:3. C brought some assets in the form of his capital and for the
share of his goodwill.
Following were the assets:

Assets Rs.
Stock 2,44,000
Building 2,40,000
Plant and Machinery 1,40,000

Accountancy XII 146

At the time of admission of C goodwill of the firm was valued at Rs. 12,48,000.
Pass necessary journal entries.
RETIREMENT /DEATH OF A PARTNER

Q.1 Distinguish between Sacrificing Ratio and Gaining Ratio.

Q.2 Kamal, Kishore and Kunal are partners in a firm sharing profits equally. Kishore retires
from the firm. Kamal and Kunal decide to share the profits in future in the ratio 4:3.
Calculate the Gaining Ratio.

Q.3 P, Q and R are partners sharing profits in the ratio of 7:2:1. P retires and the new profit
sharing ratio between Q and R is 2:1. State the Gaining Ratio.

Q.4 A, B and C are partners in a firm sharing profits in the ration of 2:2:1. B retires and his
share is acquired by A and C equally. Calculate new profit sharing ratio of A and C.

Q.5 X, Y and Z are partners sharing profits in the ratio of 4/9, 1/3 and 2/9. X retires and
surrenders 2/3rd of his share in favour of Y and remaining in favour of Z. Calculate new
profit sharing ratio and gaining ratio.
Q.6 X, Y and Z have been sharing profits and losses in the ratio of 3:2:1. Z retires. His share is
taken over by X and Y in the ratio of 2:1. Calculate the new profit sharing ratio.

Q.7 P, Q and R were partners in a firm sharing profits in 4:5:6 ratio. On 28-02-2008 Q retired
and his share of profits was taken over by P and R in 1:2 ratio. Calculate the new profit
sharing ratio of P and R.

Q.8 Mayank, Harshit and Rohit were partners in a firm sharing profits in the ratio of 5:3:2.
Harshit retired and goodwill is valued at Rs 60000. Mayank and Rohit decided to share
future profits in the ratio 2:3. Pass necessary journal entry for treatment of goodwill.

Q.9 Ramesh, Naresh and Suresh were partners in a firm sharing profits in the ratio of 5:3:2.
Naresh retired and the new profit sharing ratio between Ramesh and Suresh was 2:3. On
Naresh retirement the goodwill of the firm was valued at Rs. 120000. Pass necessary
journal entry for the treat.

Q.10 L, M and O were partners in a firm sharing profits in the ratio of 1:3:2. L retired and the
new profit sharing ratio between M and O was 1:2. On L’s retirement the goodwill of the
firm was valued Rs. 120000. Pass necessary journal entry for the treatment of goodwill.

Q.11 State the journal entry for treatment of deceased partners share of profit for his life period in
the year of death.

Q.12 X, Y and Z were partners in a firm sharing profits and losses in the ratio of 3:2:1. The profit
of the firm for the year ended 31st March, 2007 was Rs. 3,00000. Y dies on 1st July 2007.
Calculate Y’s share of profit up to date of death assuming that profits in the year 2007-
2008 have been accured on the same scale as in the year 2006-07 and pass necessary
journal entry.

Accountancy XII 147

DISSOLUTION OF PARTNERSHIP FIRM

Q.1 Distinguish between dissolution of partnership and dissolution of partnership firm on the
basis of continuation of business.

Q.2 Why is Realisation Account prepared on dissolution of partnership firm?

Q.3 State any one point of difference between Realisation Account and Revaluation Account.

Q.4 All partners wish to dissolve the firm. Yastin, a partner wants that her loan of Rs. 2,00000
must be paid off before the payment of capitals to the partners. But, Amart, another
partner wants that the capital must be paid before the payment of Yastin’s loan. You are
required to settle the conflict giving reasons.

Q.5 On a firms dissolution debtors as shown in the Balance sheet were Rs. 17000 out of these Rs.
2000 became bad. One debtor of Rs. 6000 became insolvent and 40% could be recovered
from him. Full recovery was made from the balance debtors. Calculate the amount
received from debtors and pass necessary journal entry.

Q.6 On dissolution of a firm, Kamal’s capital account shows a debit balance of Rs. 16000. His
share of profit on realization is Rs. 11000. He has taken over firms creditors at Rs. 9000.
Calculate the final payment due to /from him and pass journal entry.

Q.7 A and B were partners in a firm sharing profits and losses equally. Their firm was dissolved
on 15th March, 2004, which resulted in a loss of Rs. 30,000. On that date the capital A/C
of A showed a credit balance of Rs. 20,000 and that of B a credit balance of Rs. 30000.
The cash account has a balance of Rs. 20000. You are required to pass the necessary
journal entries for the (i) Transfer of loss to the capital accounts and (ii) making final
payment to the partners.

Q.8 What journal entries would be passed in the books of A and B who are partners in a firm,
sharing profits in the ratio of 5:2, for the following transactions on the dissolution of the
firm after various assets (other than cash) and third party liabilities have been transferred
to Realisation Account?

(a) Bank loan Rs. 16,000 is paid.

(b) Stock worth Rs. 6000 is taken over by B.
(c) Loss on Realisation Rs. 14,000.
(d) Realisation expenses amounted to Rs. 2,000, B has to bear these expenses.
(e) Deferred Revenue Advertising Expenditure appeared at Rs. 28,000.
(f) A typewriter completely written off in the books of the firm was sold for Rs. 200.

Accountancy XII 148

 Unit 3 & 4: ACCOUNTING FOR SHARE CAPITAL & DEBENTURE

THEORETICAL QUESTIONS

Q.1 Jain Ltd has incurred a loss of Rs. 8,00,000 before payment of interest on debentures. The
directors of the company are of the opinion that interest on debentures is payable only when
company earn profit. Do you agree?

Q.2 As per latest guidelines governing the servicing of debentures a company is required to create
on special account. Name that account.

Q.3 Name the method of redemption of debentures in which there is no requirement of creating
Debenture Redemption Reserve.

Q.4 What is the nature of receipt of premium on issue of shares?

Q.5 Can a company issue shares at a premium in the absence of any express authority in its
articles?

Q.6 What is the maximum rate of interest which the board of directors of a company can normally
pay on calls-in-advance if the articles are silent on the matter of such interest?

Q.7 State with reason whether a company can issue its shares at a discount in its Initial Public
Offer (IPO).

Q.8 Why securities premium money can not be used for payment of cash dividend among
shareholders?

Q.9 Jamuna Ltd. with paid-up share capital of Rs. 60,00,000 has a balance of Rs. 15,00,000 in
securities premium account. The company management does not want to carry over this balance.
You are required to suggest the method for utilizing this premium money that would achieve the
objectives of the management and maximize the return to shareholders.

Q.10 Distinguish between a share and a Debenture.

Q.11 Can share premium be utilised for the purchase of fixed assets?

Q.12 State in brief, the SEBI guidelines regarding Debenture Redemption Reserve(DRR).

Q.13 Which companies are exempted from the obligation of creating DRR by SEBI?

Q.14 What is the restriction on reissue of forfeited shares at discount?

Accountancy XII 149

 PRACTICAL QUESTIONS

Q.1 X Ltd. issued 20,000 shares of Rs. 10 each at a premium of 10% payable as follows:-

On application Rs. 2 ( 1st Jan 2001), on allotment Rs. 4 (including premium) (1st April
2001), On first call Rs. 3 (1st June 2001), on second call & final call Rs. 2 (1st Aug. 2001).
Applications were received for 18,000 shares and the directors made allotment in
full. One shareholder to whom 40 shares were allotted paid the entire balance on his share
holdings with allotment money and another shareholder did not pay allotment and 1st call
money on his 60 shares but which he paid with final call.
Calculate the amount of interest paid and received on calls-in-advance and calls-in-
arrears respectively on 1st Aug. 2001.
Q.2 X Ltd took over the assets of Rs. 6,60,000 and liabilities of Rs. 80,000, Y Ltd for Rs.
600,000. Show the necessary journal entries in the book of X Ltd. assuming that
Case-I : The consideration was payable 10% in cash and the balance in 54000 equity shares of
Rs. 10 each.
Case-II : The consideration was payable 10% in cash and the balance in 45000 equity shares of
Rs. 10 each.
Case-III : The consideration was payable 10% in cash and the balance in 60,000 equity shares of
Rs. 10 each.
Q.3 X ltd. was formed with a capital of Rs. 500,000 divided into shares of Rs. 10 each out of these
2000 shares were issued to the vendors as fully paid as purchase consideration for a building
acquired, 1000 shares were issued to signatories to the memorandum of association as fully
paid. The directors offered 6500 shares to the public and called up Rs. 6 per and received the
entry called up amount on share allotted. Show these transaction in the Balance sheet of a
company.
Q.4 X Ltd. invited applications for 11,000 shares of Rs. 10 each issued at 10% premium payable
as:
On application Rs. 3 (including Rs. 1 premium)
On allotment Rs. 4 (including Rs. 1 premium)
On 1st Call Rs. 3
nd
On 2 & final call Rs. 2
Application were received for 24000 shares.
Category I : One fourth of the shares applied for allotted 2000 shares.
Category II: Three fourth the shares applied for allotted 9000 shares.
Remaining applicants were rejected. Mr. Mohan holding 300 shares out of category II
failed to pay allotment and two calls and his shares were re issued @ Rs. 11 fully paid-up.
Pass necessary journal entries.
Q.5 A company forfeited 240 shares of Rs. 10 each issued to raj at a premium of 20%. Raman had
applied for 300 shares and had not paid anything after paying Rs 6 per share including
premium on application. 180 shares were reissued at Rs. 11 per share fully paid up. Pass
journal entries relating to forfeiture and reissue of shares.

Q.6 On 1st July 2007. A Ltd gave notice of their intention to redeem their outstanding Rs. 400,000
8% Debentures on 1st January, 2008 @ Rs. 102 each and offered the holders the following
options-

Accountancy XII 150

(a) To subscibe for (i) 6% cumulative preference shares of Rs. 20 each at Rs. 22.50 per share,
accepted by debenture holders of Rs. 1,71,000 or (ii) 12% debentures were issued @96%
accepted by the holders of Rs. 1,44,000 Debentures.
(b) Remaining debentures to be redeemed for cash if neither of the option under (a) was accepted.
Pass necessary journal entries.

Q. 7 Sonu Ltd. company issued 15,000 shares of Rs. 10 each. Payment on there shares is to be
made as follows:
On application Rs. 4 ( 1st Feb, 2003)
On allotment Rs. 3 (1st April, 2003)
On final call Rs. 3 (1st May, 2003)
Rakesh to whom 1000 shares were allotted paid the full amount on application and mohan to
whom 200 shares were allotted paid the final call money on allotment. Interest @ 6% was
paid on 1st May, 2003. Pass necessary journal entries.

Q.8 TPT Ltd. invited applications for issuing 1,00,000 equity shares of Rs. 10 each at a premium
of Rs. 3 per share. The whole amount was payable on application. The issue was over
subscribed by 30,000 shares and allotment was made on pro-rata basis. Pass necessary journal
entries in the books of the company.
Q9 What is Zero Coupon Bond ?
Q10 What is a Debenture Trust Deed?
Q.11 On 01-04-1999, A Ltd., issued 2000, 7% debentures of Rs. 100 each at a discount of 10%
redeemable at par after 4 years by converting them into equity shares of Rs. 100 each
issued at a premium of 25%.
Pass journal entries in the following cases:
(i) If debentures are redeemed on maturity.
(ii) If debentures are redeemed before maturity.
Q.12 Pass journal entries for the following at the time of issue of debentures:
(a) B Ltd. issues 30,000, 12% Debentures of Rs. 100 each at a discount of 5 % to be repaid at par
at the end of 5 years.
(b) E Ltd. issues Rs. 60,000, 12% Debentures of Rs. 100 each at a discount of 5 % repayable at a
premium of 10% at the end of 5 years.
(c) F Ltd. issues Rs. 70,000, 12% Debentures of Rs. 100 each at a premium of 5 % redeemable at
110%.
Q.13 500 shares of Rs. 100 each issued at a discount of 10% were forfeited for the non-payment
of allotment money of Rs. 50 per share. The first and final call of Rs.10 per share on these
shares were not made. The forfeited shares were reissued at Rs. 80 per share fully paid-up.
Q.14 200 shares of Rs. 100 each issued at a discount of 10% were forfeited for the non payment
of allotment money of Rs. 50 per share. The first and final call of Rs. 10 per share on these
shares were not made. The forfeited share were reissued at Rs. 14 per share fully paid up.

Q.15 800 Shares of Rs. 10 each issued at per were forfeited for the non-payment of final call of
Rs. 2 per share. These shares were reissued at Rs. 8 per share fully paid-up.

Accountancy XII 151

 STUDY MATERIAL ON HOTS
Subject: Accountancy CLASS – XII
Part –B
Analysis of Financial Statements
Unit 5

Analysis of Financial Statements

Qus:1 How will you show the following items in the Balance sheet of a company.
(i) Loosetools (ii) Livestock
Qus:2 Under what heads the following items on the Liabilities side of the Balance sheet Of a
company will be presented
(i) Provision for taxation.
(ii) Bills Payable
Qus:3 State any two items which are shown under the head ‘Reserves and Surplus” in a
company balance sheet.
Qus:4 Give the format of the Balance sheet of a company(main headings only) as per the
requirement of
Schedule VI of the companies Act.1956.
Qus:5 Give the heading under which the following items will be shown in a company’s
Balance sheet:
(i) Patents.
(ii) Discount on issue of Debentures
(iii) Sundry Debtors
(iv) Secutities Premium.
(v) Railway sliding.
Qus:6 The following balance have been from the book of Sahara Ltd. Share capital
Rs.10,00,000, securities Premium Rs. 1,00,000, 9% Debentures Rs. 500,000, Creditors Rs.
200,000., Proposed Dividend Rs. 50,000. , Freehold property RS. 9,00,000, share of Reliance
Industries Rs. 4,00,000, Work-in- Progress Rs. 4,00,000, Discount on Issue of Debentures Rs.
1,00,000. Prepare the balance sheet of the company as per schedule VI part 1 of the companies
Act.1956.
Qus:7 List any three items that can be shown as contingent Liabilities in a company’s
Balance sheet.
Qus:8 Give two examples Of “Miscellaneous Expenditure”
Q 9. State how the creditors are interested in the Analysis of Financial statements.
Qus:10 Prepare Comparative income statement from the following information for the years
ended march
31,2003 and 2004.

Particulars 2003(Rs.) 2004(Rs.)

1.Net Sales 10,00,000 15,00,000

Accountancy XII 152

2.Cost of Goods Sold 60% of sales 60% of sales
3. Direct Expenses 10,000 12,000
3.Indirect Expenses 10% of Gross profit 10% of Gross Profit
4.Income Tax rate 50% 60%
Interest on Investments @ Rs 40,000 p.a

RATIO ANALYSIS

Qus:1 How will you asses the liquidity or short term financial position of a business ?

Qus:2 Current ratio of Reliance Textiles Ltd. Is 1.5 at present. In future it want to improve
this ratio to 2.Suggest any two accounting transaction for improving the current ratio.

Qus:3 State one transaction which results in an increase in ‘ liquid ratio ‘and nochange in
‘current ratio’.

Qus:4 Why stock is excluded from liquid assets ?

Qus:5 Quick ratio of a company is 1.5 :1 . state giving reason whether the ratio will
improve , decline or Not change on payment of dividend by the company.

Qus:6 State one transaction which result in a decrease in ‘ debt-equity ratio ‘ and no
change in ‘ current Ratio ‘.

Qus:7 How does ratio analysis becomes less effective when the price level changes?

Qus:8. Indicate which ratio a shareholders would use who is examining his portfolio and
wants to decide Whether he should hold or sell his shareholdings?

Qus:9 Indicate which ratio would be used by a Long-Term creditor who is interested in
determining whether his claim is adequately secured ?

Qus:10 What will be the Operating profit, If operating Ratio is 78% ?

Qus:11 The Debaters turnover Ratio of a company is 6 times. State with reasons whether
the ratio will Improve , decrease, or not change due to increases in the value of closing
stock by Rs. 50,000?

Qus:12 What will be the impact of ‘ Issue of shares against the purchase of fixed assets ‘
on a debt Equity ratio of 1:1 ?

Qus:13 State one transaction involving a decrease in Liquid ratio and no change in current
ratio.

Qus:14 Assuming that the Debt Equity Ratio is 2:1. State giving reason , whether the ratio
will improve, decline or will have no change in case bonus shares allotted to equity
shareholders by Capitalizing profits.

Accountancy XII 153

 Qus:15 The ratio of current Assets (Rs. 9,00,000) to current liabilities is 1.5:1. The
accountant of this Firm is interested in maintaining a current ratio of 2:1 by paying some
part of current liabilities You are required to suggest him the amount of current liabilities
which must be paid for the Purpose.

Qus:16 A company has a loan of Rs.15,00,000 as part of its capital employed. The
interest payable on Loan is 15% and the ROI of the company is 25%. The rate of
income tax is 60%.what is the Gain to shareholders due to the loan raised by the
company ?

Qus:17 Rs.2,00,000 is the cost of goods sold, inventory turnover 8 times, stock at the
beginning is 1.5 Times more than the stock at the end. Calculate the value of opening &
closing stock .

Qus:18 From the given information, calculate the stock turnover ratio: sales
Rs.5,00,000, Gross Profit 25% on cost , opening stock was 1/3rd of the value of closing
stock. Closing stock was 30% Of sales.

Qus:19 Calculate cost of goods sold from the following information: Sales Rs.12,00,000,
Sales Returns Rs.80,000, operating expenses Rs.1,82,000, operating ratio 92%.

Qus:20 Calculate the amount of opening stock and closing stock from the following
figures: Average Debt collection period 4 month stock turnover ratio 3 times. Average
Debtors Rs.1,00,000 Cash sales being 25% of total sales Gross profit ratio 25% stock at
the end was 3 Times that in the beginning.

Qus:21 (a) Calculate return on Investment from the following information :

Net profit after Tax Rs.6,50,000.

12.5% convertible debentures Rs 8,00000.
Income Tax 50%.
Fixed Assets at cost Rs.24,60,000.
Depreciation reserve Rs.4,60,000.
Current Assets Rs. 15,00,000.
Current Liabilities Rs. 7,00,000.

(b) Profit before interest and tax(PBIT) Rs.2,00,000, 10% preference shares of
Rs.100 each.
Rs.2,00,000, 2,0000 equity shares of Rs. 10 each, Rate of tax @ 50%
calculate earning pen
Share(EPS).

Accountancy XII 154

 Unit: 6
CASH FLOW STATEMENT

Qus:1 Why is the cash flow statement not a suitable judge of profitability ?

Qus:2 Under which accounting standard , cash flow statement is prepared ?

Qus:3 Why do we add back depreciation to net profit while calculating cash flow from operating
activities.

Qus:4 How will you classify loans given by Birla Finance Ltd.? While preparing cash flow
statement.

Qus:5 How will you classify deposits by customers in HDFC Bank while preparing cash flow
statement.

Qus:6 Where will you show purchase of computer in cash flow statement ?

Qus:7 Give two examples of ‘ Significant non cash transactions ‘.

Qus:8 How will you classify loans given by Tata Manufacturing Company.

Qus:9 A company receives a dividend of Rs. 2 Lakhs on its investment in other company’s share
will it be
Cash inflow from operating or investing activities in case of a.
(i) Finance Company.
(ii) Non-Finance Company.

Qus:10 How are various activities classified as per AS-3 (Revised) ?

Qus:11 Cash flow from operating Activities + Cash flow from Investing Activities + Cash flow
from Financing
Activities =……………………………………

Qus:12 What are the two methods which can be employed to calculate net cash flow from
operating activities ?

Qus:13 Escorts Ltd. Engaged in the business of manufacturing tractors invested Rs.40,00,000 in
the shares of a Car manufacturing Company. state with reason whether the dividend received on
this investment will be cash flow from operating activities or Investing activities.

Qus:14 Modern Toys Ltd. Purchased a machinery of Rs.20,00,000 for manufacturing toys. State
giving reason Whether the cash flow due to the purchase of machinery will be cash flow from
operating activities,
Investing activities or Financing activities ?

Qus:15 From the following profit or loss account find out the flow of cash from operating
activities ofMohan Ltd.

Accountancy XII 155

 Dr. PROFIT AND LOSS ACCOUNT
Cr.

Particulars Amount Particulars Amount

(Rs) (Rs)
To Rent Paid 14,000 By Gross Profit 1,82,000
Less: Prepaid 2,000 12,000 By Profit on Sale of Machine
To Salaries 25,000 By Tax Refund 12,000
To Depreciation 15,000 By Rent received 4,000
To Loss on sale of Furniture 10,000 Add: Rent accrued 1,000 3,800
To Goodwill written Off 8,000
To Bad Debts 3,000
To Office Expenses 18,000 5,000
To Discount allowed 7,000
To Proposed Dividend 30,000
To Provision for Tax 22,000
To Net Profit 52,800
2,02,800 2,02,800

Note: There was increase in Closing stock by Rs. 25,000.

Qus:16 Prepare Cash flow Statement from the following information of Box Ltd. For the year
ended March 31,2004.

BALANCE SHEETS OF LION LTD. AS ON MARCH 31,2004

Liabilities 2003 2004 Assets 2003 2004

(Rs) (Rs) (Rs) (Rs)

Share capital 3,00,000 4,00,000 Goodwill 70,000 30,000

Profit & Loss Account 1,20,000 2,60,000 Machinery 3,00,000 3,20,000
General Reserve 60,000 95,000 12% Investments 1,50,000 3,00,000
Tax Provision 70,000 80,000 Stock 35,000 1,85,000
Creditors 50,000 90,000 Debtors 50,000 70,000
Bill Payables 30,000 10,000 Cash at Bank 30,000 40,000
Depreciation Provision 25,000 40,000 Short term Investment 20,000 30,000

6,55,000 9,75,000 6,55,000 9,75,000

Additional Information :

1.Investment costing Rs.50,000 were sold for Rs. 48,000 during the year.
2.Tax paid during the year Rs.70,000.
3.Interest received on Investment Rs. 12,000.

Accountancy XII 156

 SUGGESTED ANSWERS
ON
HOTS
Unit 1: ACCOUNTING FOR PARTNERSHIP FIRMS: BASIC CONCEPTS

Ans. 1 (i) When additional capital is introduced.

(ii) When capital is withdrawn.

Ans. 2 60000 X 9/100 = 5400

20000 X 9/100 X 3/12 = 450

Total Interest 5850

Ans. 3 C is correct as in the absence of partnership agreement, profits and losses are divided
equally among partners.

Ans. 4 A’s claim is not valid as in the absence of partnership deed, no salary is allowed to
partners.

Ans. 5 Chander’s claim is not valid as in the absence of partnership deed interest on partners loan
is provided @ 6% p.a.

Ans. 6 As per provision of Indian Partnership act 1932, when there is no partnership, no partner is
entitled for interest on his capital contribution.

Ans. 7 Interest on drawing = 12000 X 6/100 X 6.5/12 = 390

Ans. 8 Interest on drawing = 9600 X 6/100 X 5.5/12 = 264

Ans. 9 ANALYSIS TABLE

A B C
Interest on Capital (3 years) 30000 24000 21000
Cr.
Adjustment of profit 25000 25000 25000
Dr.
(Cr) 5000 (Dr) 1000 (Dr) 4000)
Journal Entry :-
B’s current A/C Dr. 1000
C’s Current A/C Dr. 4000
To A’s current A/C 5000
(Adjustment entry for omission of interest on capital @ 10% p.a.)

Ans. 10 ANALYSIS TABLE

X Y Z Total
Interest on drawings 750 630 600 1980
Accountancy XII 157
(Dr)
Adjustment of profit 990 660 330 1980
(Cr)
(Cr) 240 (Cr) 30 (Dr)270 -

Z’s Capital A/C Dr. 270

To X’s Current A/C 240
To Y’s current A/C 30
(Adjustment entry for omission of interest on drawings @ 5 % p.a.)
Ans. 11 ANALYSIS TABLE
A B C Total
Wrong profit 20000 20000 20000 60000
Dr.
Interest on Capital @ 2% 3000 2000 1600 6600
Cr.
Correct profit 26700 17800 8900 53400
Cr.
(Cr) 9700 (Dr) 200 (Dr) 9500 -
B’s Current A/C Dr. 200
C’s Current A/C Dr. 9500
To A’s current A/C 9700
(Adjustment entry for interest on capital and distribution in wrong ratio.)
Ans. 12
ANALYSIS TABLE
Ravi Mohan Total
Wrong Profit Distributed Dr. 252000 252000 504000
Interest on capital omitted Cr. 120000 84000 204000
Salary to be provided Cr. 72000 60000 132000
Current Profit Cr. 98000 70000 168000
Net adjustment Cr. 38000 Dr. 38000
Mohan’s current A/C Dr. 38000
To Ravi’s Current A/C 38000
(Adjustment entry for omission of certain provisions of partnership deed.)
Ans. 13 Distinction between Fixed and Fluctuating Capital method:-
Basis of differences Fixed capital method Fluctuating Capital Method
(i) Number of Two accounts are maintained in Only one account is maintained.
Accounts fixed capital method.
(ii) Change in capital Remain unchanged Balance fluctuate frequently.
A/C balances
(iii) Recording of Adjustment regarding interest on All these adjustments are
transactions capital, interest on drawings partners recorded in partners capital
salary and profits etc are recorded in accounts.
partners current account.

Ans. 14 Profit transferred to A’s current A/C Rs. 51,000

B’s current A/C Rs. 45,000

Accountancy XII 158

 C’s current A/C Rs. 44,000

Ans. 15 Net profit transferred to A’s Capital A/C Rs. 4,650

B’s Capital A/C Rs. 3,100

Unit2: RECONSTITUTION OF PARTNERSHIP

ADMISSION OF A PARTNER

Ans. 1 Need of valuation of goodwill arises on the following occasions:-

(i) Change in profit sharing ratio of existing partners.
(ii) Admission of a partner.
(iii) Retirement of a partner.
(iv) Death of a partner.

Ans. 2 It is necessary to revalue assets and reassess liabilities at the time of admission of new
partners as if assets and liabilities are overstated or understated in the books then its benefits or
loss should not affect the near partner.

Ans. 3 Sacrificing ratio is the ratio in which old partners have agreed to sacrifice their share of
profit in favour of the new partner. This ratio is calculated by deducting the new ratio from the old
ratio.
Sacrificing Ratio = Old Ratio - New Ratio

Ans. 4 (i) On admission of a new partner.

(ii) On change on profit sharing ratio of existing partner.

Ans. 5 (i)Capital employed = Assets – Liabilities

= 540000 – 80000
= Rs. 460000

(ii) Normal Profit = Capital employed X Normal rate of return/100

= Rs. 460000 X 10/100 = 46000

(iii) Super Profit = Firm’s Average profit – Normal Profit

= 60000 – 46000
= 14000

(iv) Goodwill = Super profit X 100/ Normal rate of return

= 14000 X 100/ 10
= 140000

Ans. 6 (i) Super profit = Value of goodwill /Number of years purchase

= 180000/2
= 90000
(ii) Normal Profit = Capital employed X Normal rate of return /100
= 1000000 X 15/ 100
= 150000

Accountancy XII 159

 (iii) Average Profit = Normal Profit + Super profit
= 150000 + 90000
= 240000
Ans. 7 (i) Super profit = value of goodwill/ number of years purchase
= 240000/3
= 80000
(ii) Normal Profit = Average profit – Super profit
= 20000 – 8000
= Rs. 12000
(iii) Capital Employee = Normal Profit X 100/ Normal rate of return
= 12000 X 100/8
= 150000
Ans. 8 Rahul’s sacrificing share = 4/7 X 1/4 = 1/7
Sahil’s sacrificing share = 3/7 X 1/3 = 1/7
Rahul’s new share = 4/7 – 1/7 = 3/7
Sahil’s New share = 3/7 – 1/7 = 2/7
Kamal’s share = 1/7+1/7 = 2/7
New profit sharing ratio = 3:2:2

Ans. 9 Ajay’s sacrifies = 1/4 X 2/3 = 2/12

Naveen’s sacrifies =1/4 X 1/3 = 1/12
Ajay’s new share = 5/8 – 2/12 = 11/24
Naveen’s New share = 3/8 – 1/12 = 7/24
Surender’s share = 1/4 or 6/24
New ratio = 11:7:6
Ans. 10
Old ratio = A: B = 3:2
A surrender = 3/5 X 1/6 = 3/30 =1/10
B surrender = 2/5 X 1/4 = 1/10
A’s new share = 3/5 – 1/10 = 5/10
B’s new share = 2/5 – 1/10 = 3/10
C’s new share = 1/10 +1/10 = 2/10
New ratio = 5/10, 3/10, 2/10 OR 5:3:2
Sacrificing Ration = Old ratio – New ratio
A = 3/5 – 5/10 = 1/10
B = 2/5 – 3/10 = 1/10
Sacrificing ratio = 1:1
Ans. 11
Old ratio = 5:3
Shital = 1/4th Share

Let the profit be Rs. 1

Remaining profit = 1-1/4 =3/4
Arti : Babita = 2:1
Arti’s share = 3/4 X 2/3 = 1/2
Babita’s Share = 3/4 X 1/3 = 1/4
New Ratio = 1/2, 1/4, 1/4 Or 2:1:1
Sacrificing ratio = Old ratio – New ratio

Accountancy XII 160

 Arti’s sacrifies = 5/8 – 2/4 = 1/8
Babita’s Sacrifies = 3/8 – 1/4 = 1/8
Sacrificing Ratio = 1:1

Ans. 12 Old ratio = X:Y = 1:1

Z is admitted for 1/6th share which he acquire from X,Y in the ratio of 1:1

Since 1/6 X 1/2 = 1/12 from X and Y

X’s new ratio = 3/5 – 1/12 = 31/60
Y’s New ratio = 2/5 – 1/12 = 19/60
Z’s share = 1/6
New ratio = 31/60, 19/60,1/6 or 31:19:10

Ans. 13
Old ratio = Rakhi : Parul = 3:1
New ratio = Rakhi: Parul: Neha = 2:3:2
Rakhi’s sacrifice = 3/4 – 2/7 = 13/28
Parul’s sacrifice = 1/4 -3/7 = 5/28 (Gain)

So, Rakhi’s sacrifice 13/28th share and Parul is gaining to the extent of 5/28th share.

Ans. 14
Cash A/C Dr. 1500
To premium A/C 1500
(cash brought in by Z for his share of goodwill)

Premium A/C Dr. 1500

To X’s capital A/C 1000
To Y’s Capital A/C 500
(Goodwill distributed among sacrificing partners in the ratio of 2:1.)

Ans. 15
Cash A/C Dr. 70000
To Nilu’s capital A/C 60000
To premium A/C 10000
(Cash brought in by new partner)

Premium A/C Dr. 10000

To Priya’s capital A/C 10000
(Amount of goodwill distributed among sacrificing partner in their sacrificing ratio.)

Ans. 16
Cash A/C Dr. 1000
To premium A/C 1000
(Amount of goodwill brought in by C)

Premium A/C Dr. 1000

C’s capital A/C Dr. 800
To A’s capital A/C 900

Accountancy XII 161

 To B’s capital A/C 900
(Rs. 1800 distributed among sacrificing partners in sacrificing ratio.)

A’s capital A/C Dr. 3000

B’s capital A/C Dr. 3000
To goodwill A/C 6000
(Old goodwill written off among old partners in old ratio.)

Q. 17
Cash A/C Dr. 10000
To C’s capital A/C 10000
(Cash brought in by C for his share of capital)

A’s capital A/C Dr. 1200

B’s Capital A/C Dr. 800
To goodwill A/C 2000
(Old goodwill written off among old partners in old ratio.)

C’s capital A/C Dr. 3000

To A’s capital A/C 1800
To B’s capital A/C 1200
(Adjustment of goodwill on admission of C)

Ans. 18
Cash A/C Dr. 4000
To premium A/C 4000
(Amount of goodwill brought in by new partner)
Premium A/C Dr. 4000
To Piyush’s capital A/C 4000
(Goodwill distributed among sacrificing partners in their sacrificing ratio.)
Ans. 19
Cash A/C Dr. 26000
To C’s capital A/C 26000
(Amount of capital brought in by new partner.)

C’s capital A/C Dr. 7500

To A’s capital A/C 3750
To B’s capital A/C 3750
(C’s share of goodwill distributed among A and B)
Calculation of Hidden goodwill:-
Capital of A and B = 26000 + 22000
= 48000
C brings = 26000 for 1/4th share
Total capital of the firm = 26000 X 4/1
= 104000
Existing capital of the firm = 48000 + 26000
= 74000
Goodwill = 104000 – 74000
Accountancy XII 162
 = 30000

C’s share of goodwill = 30000 X 1/4 = 7500

Ans. 20
C’s capital A/C Dr. 5250
To A’s capital A/C 3150
To B’s capital A/C 2100
(C’s share of goodwill distributed among old partners in sacrificing ratio i.e. 3:2)
Ans. 21
Cash A/C Dr. 8000
To C’s capital A/C 8000
(Amount of capital brought in by new partner)

C’s capital A/C Dr. 2000

To A’s capital A/C 1000
To B’s capital A/C 1000
(Share of goodwill distributed among A and B in sacrificing ratio i.e. 1:1)
Calculation of Hidden Goodwill.
C brings 8000 for 1/5 share

Since total capital of the firm = 8000 X 5/1

= 40000
Existing capital of the firm = 13000 + 9000 + 8000
= 30000
Goodwill = 40000 – 30000
= 10000
C’s share of goodwill = 10000 X 1/5
= 2000
Ans. 22
C’s Capita; A/C Dr. Rs. 25, 500
To A’s Capital A/C Rs. 8,500
To B’s Capital A/C Rs. 17,000
Ans. 23
Rs Rs
(i) Stock A/C 2,44,000
Dr.
Building A/C 2,40,000
Dr
Plant & Machinery A/C 1,40,000
Dr. 3,36,000
To C’s capital A/C 2,88,000
To premium A/C
(ii) Premium A/C 2,88,000
Dr. 2,68,800
To A’s Capital A/C 19,200
To B’s Capital A/C
Ans. 24
Z’s Capital A/C Rs. 9000

Accountancy XII 163

Dr.
To X’s Capital A/C Rs. 9000

RETIREMENT AND DEATH OF A PARTNER

Ans. 1
Basis Sacrificing Ratio Gaining Ratio
(i) Meaning Proportion in which old partners sacrifice Proportion in which continuing
their share in favour of new partner. partner gain the share of outgoing
partner on his retirement.
(ii) Occasion Sacrificing ratio is calculated at the time Gaining ratio is calculated at the
of admission of new partner. time of retirement or death of a
partner.
(iii) Formula Sacrificing ratio = Old ratio – New ratio Gaining ratio – Old ratio

Ans. 2 Gaining Ratio = New ratio – Old ratio

Kamal’s Gain = 4/7 – 1/3 = 5/21
Kunal’s Gain = 3/7 – 1/3 = 2/21
Gaining Ratio = 5:2

Ans. 3 Old ratio = P Q R

7: 2: 1
New ratio =Q R
2:1
Gaining Ratio = New ratio – Old ratio
Q’s gain = 2/3 – 2/10 = 14/30
R’s gain = 1/3 – 1/10 = 7/30
Gaining Ratio = 14:7 or 2:1

Ans. 4 A’s gaining share = 2/5 X ½ = 1/5

A’s new share = 2/5 + 1/5 = 3/5
C’s gaining share = 2/5 X ½ = 1/5
C’s New share = 1/5 + 1/5 = 2/5
New ratio of A and C = 3:2

Ans. 5
Y’s gaining share = 4/9 X 2/3 = 8/27
Z’s gaining share = 4/9 – 8/27 = 4/27
Y’s new share = Old share + gain
= 1/3 + 8/27 = 17/27
Z’s new share = 2/9 + 4/27 = 10/27
[
New Ratio = 17:10
Gaining ratio = 8/27 : 4/27 or 2:1
Ans. 6
Old Ratio = 3:2:1
Z Retire
X’s Gaining = 1/6 X 2/3 = 2/18
X’s New share = 3/6 + 2/18 = 11/18
Y’s Gaining = 1/6 X 1/3 = 1/18

Accountancy XII 164

 Y’s new share = 2/6 + 1/18 = 7/18
New Ratio = 11/18, 7/18 Or 11:7

Ans. 7 Old ratio =PQR

= 4:5:6
Q retired
P’s gaining = 1/3 X 5/15 = 1/9
P’s new share = 4/15 + 1/9 = 17/45
R’s Gaining share = 2/3 X 5/15 = 2/9
R’s new share = 6/15 + 2/9 = 28/45
New Ratio = 17:28

Ans. 8 Rohit’s capital A/C Dr. 24000

To Mayank’s capital A/C 6000
To harshit’s Capital A/C 18000
(Adjustment Entry for treatment of goodwill in gaining ratio.)

Ans. 9 Suresh capital A/C Dr. 48000

To Ramesh’s capital A/C 12000
To Naresh capital A/C 36000
(Goodwill adjusted among the gaining partner in gaining ratio.)

Ans. 10 O’s capital A/C Dr. 40000

To C’s capital A/C 20000
To M’s capital A/C 20000
(Adjustment of goodwill in gaining partners in their gaining ratio.)
Ans. 11 Profit and loss suspense A/C Dr
To deceased partner’s capital A/C
Ans. 12 Total profit for the year ended 31st March 2007 = Rs 300000
Y’s share of profit up to date of death = 300000 X 2/6 X 3/12
= 25000
Profit and Loss suspense A/C Dr. 25000
To Y’s capital A/C 25000
( Y’s share of profit transferred to Y’s capital A/C)

Ans. 13 Profit and Loss suspense A/C Dr. 10000

To B’s capital A/C 10000
(B’s share of profit transferred to B’s capital A/C)
A’s capital A/C Dr. 15000
C’s capital A/C Dr. 5000
To B’s capital A/C 20000
(B’s share of goodwill transferred to B’s capital A/C and debited to remaining
partners capital A/C in their gaining ratio.)
B’s share of profit = Number of days from 1 April to 12th June 2007
= 73 Days
B’s share of profit = 150000 X 1/3 X 73/365
= Rs. 10000
Ans. 15 Profit & Loss suspense A/C Dr. Rs. 12,500

Accountancy XII 165

 To C’s capital A/C Rs. 12,500

DISSOLUTION OF PARTNERSHIP FIRM

Ans. 1 In case of dissolution of partnership, the firm may continue its business operation but in
case of dissolution of partnership firm, the business operations are discontinued.

Ans. 2 Realisation account is prepared to ascertain profit or loss on sale of assets and payment of
liabilities.

Ans. 3 Realisation Account is prepared on dissolution of partnership firm and Revaluation

account is prepared on reconstitution of partnership firm.

Ans. 4 Yustin’s claim is valid as according to section 48 (b) of partnership Act, partners loan are
to be paid before any amount is paid to partners on account of their capitals.

Ans. 5 Cash A/C Dr. 11400

To Realisation A/C 11400
(For debtors realized on dissolution of firm)
Ans. 6 Kamal’s capital A/C Dr. 4000
To cash A/C 4000
(for final payment to Kamal)

Ans. 7 (i) A’s capital A/C Dr. 15000

B’s capital A/C Dr. 15000
To realization A/C 30000
(For transfer of loss on dissolution)
(ii) A’s capital A/C Dr. 5000
B’s capital A/C Dr. 15000
To cash A/C 20000
(For final payment to partners)
Ans. 8
JOURNAL
Dr. (Rs) Cr. (Rs.)
(a) Realisation A/CDr. 12000
To Bank A/C 12000
(b) B’s capital A/C Dr. 6,000
To realisation A/C 6,000
(c) A’s capital A/C Dr. 10,000
B’s capital A/CDr. 4,000
To Realisation A/C 14000
(d) B’s capital A/C Dr. 2,000
To bank A/C 2,000
(e) A’s capital A/C Dr. 20,000
B’s capital A/C Dr. 8,000
To deferred revenue advertising expenditure 28,000
A/C
(f) Bank A/C Dr. 200
To realisation A/C 200

Accountancy XII 166

 Unit 3 & 4: ACCOUNTING FOR SHARE CAPITAL & DEBENTURE

Ans.1 No’ because Interest on debentures is a charge against profit and not an appropriation of
profit.

Ans. 2 Debenture Redemption Reserve Account.

Ans. 3 Redemption of debentures by conversion.

Ans. 4 Capital Nature.

Ans. 5 Yes. [ Hint See section 78]

Ans. 6 According to table ‘A’ not exceeding 6 % p.a.

Ans. 7 Section 79 Companies Act- the shares must be of a class already issued. So a company
cannot issue shares at a discount in its Initial Public Offer.

Ans. 8 It is restricted under section 78 of Indian Companies Act.

Ans. 9 Mention the provisions of section 78.

Ans. 10 Basis of difference :

(i) Ownership
(ii) Return
(iii) Voting Right
(iv) Convertibility

Ans. 11 No.

Ans. 12 As per SEBI guidelines, an amount equal to 50% of the debenture issue, must be
transferred to DRR before the redemption begins.

Ans. 13 The following companies are exempted from the obligation of creating DRR –
(i) A company which has issued debentures with a maturity of 18 months or less.
(ii) Infrastructure companies, which are wholly engaged in the business of developing,
maintaining and operating infrastructure facilities.

Ans. 14 A Company can reissue forfeited shares at a discount not more than amount forfeited on
these shares.

Accountancy XII 167

 PRACTICAL QUESTIONS
Ans. 1 Interest on Calls in advance Rs. 2.80
Interest on Calls in arrears Rs. 5.50
Ans. 2

Solution:-

(i) Sundry Assets A/C 660,000

Dr. 20,000
Goodwill A/C 80000
Dr. 600000
To Sundry Liabilities
To Y Ltd.
(ii) Y Ltd. 60,000
Dr. 60000
To Bank A/C
Case I Y Ltd 540,000
Dr. 540, 000
To Equity share capital A/C
Case II Y Ltd 540,000
Dr. 450,000
To Equity share capital A/C 90,000
To securities premium A/C
Case III Y’ Ltd 540,000
Dr. 60000
Discount on issue share A/C 600,000
Dr.
To Equity share capital A/C

Ans. 3 Issued Capital Rs. 95000.

Ans. 4 Hint-
(i) Amount received on allotment Rs. 26,100.
(ii) Amount transferred to share forfeited A/C Rs. 900
(iii) Amount transferred to Capital Reserve Rs. 600.

Ans. 5 Capital Reserve Rs. 990.

Ans. 6
Hints-
(1) Case a (i) – No. of preference shares issued 7752.
(2) Case a (ii)- No. of debentures issued 1530.
(3) Remaining 85000 debentures paid in cash.

Ans. 7 Interest on Calls in advance = 15 + 3 = Rs. 18

Accountancy XII 168

Ans. 8
(i) Dr. Bank A/C Rs. 16,90,000, Cr.Eq.share Application A/C Rs. 16,90,000.
(ii) Dr.Eq.Share Application A/C Rs. 16,90,000, Cr.Eq. share Capital A/C Rs.10,00,000,
Cr. Security premium A/C Rs. 300,000, Cr. Bank A/C Rs. 3,90,000.
Ans. 9 Debentures Issued without a predetermined rate of interest are called zero coupon Bond.
Ans 10. A company issuing Debentures by way of public issue is required to appoint the trustees
and execute a trust deed . It is a document created by the company which issues the Debentures.

Ans. 11 Case (i) – No. of Equity shares to be issued 1,600.

Case (ii) – No. of Equity shares to be issued 1,440.

Ans. 12
Journal of B Ltd.
(a)
(i) Bank A/C Dr. 28,50,000
To. Deb. Application & Allotment A/C 28,50,000

(ii) Deb. Application & allotment A/C Dr. 28,50,000

Discount on issue of Debentures Dr. 1,50,000
To 12 % debentures A/C 30,00,000

Journal of E Ltd.
(b)
(i) Bank A/C Dr. 57,000
To. Deb. Application & Allotment A/C 57,000

(ii) Deb. Application & allotment A/C Dr. 57,000

Journal of F Ltd.
Loss on issue of Debentures A/C Dr. 9,000
To 12 % debentures A/C 60,000
To Debenture Redemption Premium A/C 6000

(c)
(i) Bank A/C Dr. 73,500
To. Deb. Application & Allotment A/C 73,500

(ii) Deb. Application & allotment A/C Dr. 73,500

Loss on issue of Debentures A/C Dr. 7,000
To 12 % debentures A/C 70,000
To Securities premium A/C 3,500
To Debenture Redemption Premium A/C 7,000

Ans. 13 Capital Reserve Rs. 10,000

Ans. 14 Capital Reserve Rs. 600

Accountancy XII 169

Ans. 15 Capital Reserve Rs. 4,800.

Unit 5: Analysis of Financial Statements

Ans:1 (i- Current Assets

ii) Fixed Asset.

Ans:2 Items Heading Sub-Heading

Provision for Taxation Current Liabilities Provision
& Provision
Bills payable Current Liabilities Current Liabilities
& Provision
Ans:3 (i) Capital Reserve
ii) Debenture Redemption Reserve

Ans:4 Balance sheet as on______

Liabilities Rs. Assets Rs.

Share capital Fixed Assets

Reserve & surplus Investment
Secured Loans Current Assets,
Unsecured Loans Loan and Advances
(a) Current Assets
(b) Loans & Advance
Current Liabilities & Provision Miscellaneous Expenditures
(a) Current Liabilities Profit & Loss amount (Dr.Balance)
(b) Provision

Ans:5 (i) Fixed Assets.

(ii) Miscellaneous Expenditures
(iii)Current Assets Loans & Advance under Current Assets.
(iv)Reserve and Surplus.
(v)Fixed Assets.

Ans:6 Total of Balance Sheet Rs.18,50,000.

Ans:7 (i) Claims against the Company not acknowledged as debts .

(ii) Uncalled Liability on partly paid shares.
(iii)Arrears of Dividend on Cumulative preference shares.

Ans:8. Discount on Issue of shares, Advertisement Suspense a/c

Accountancy XII 170

 Accounting Ratios
Ans:1 Short term financial position of the business is assessed by calculating current ratio and
liquid ratio.

Ans:2 (i) Payment of current liabilities.

(ii) Issue of share capital etc.

Ans:3 Sale of stock at cost price.

Ans:4 (i) because there is uncertainty whether it will be sold or not.

(ii) It will take time before it is converted into debtors’ and cash.

Ans:5 Quick ratio will improve as both the liquid assets and current liabilities will decrease by the
same
Amount.
Ans:6 Conversion of debentures into shares.

Ans:7 Accounting ratios are calculated from financial statements, which are down on the basis of
historical
Cost as recorded in the book of accounts .
Ans:8 Total Assets to Debt Ratio.
Ans:9 Debt-Equity-Ratio.
Ans:10 100-78=22%
Ans:11 No change because it will neither affect net credit sales nor average receivable.
Ans:12 Debt-equity ratio will decrease because the Long-term loans remain unchanged where as
the
Shareholders funds are increased by the amount f share capital issued .
Ans:13 Purchase of goods for cash .

Ans:14 Debt equity ratio will not change as the total amount of shareholders funds will remain
same.

Ans:15 Payment of current Liabilities Rs.3,00,000.

Ans:16 Net gain to shareholders Rs.60,000.

Ans:17 Closing stock = Rs.14,285.

Opening stock = Rs.35,715.
Ans:18 Stock turnover Ratio = 4 times .
Ans:19 Cost of goods sold =Rs.8,48,400.
Ans:20 Opening stock Rs. 50,000.
Closing stock Rs. 1,50,000.
Ans:21 (a) Net profit before interest Rs.14,00,000
capital employed Rs. 28,00,000
Return on investment 50%.
(b)Earning per share Rs. 4.

Accountancy XII 171

 Unit 6: Cash Flow Statement

Ans:1 Cash Flow statement is prepared on cash basis of accounting but profit is calculated on
accrual basis. So cash flow statement is not a judge of profitability.

Ans:2 Under accounting standard-3(Revised).

Ans:3 Depreciation reduces the net profit without reducing the cash balance as it is a non-cash
item.

Ans:4 As Operating Activities.

Ans:5 Operating Activities.

Ans:6 As Outflow under Investing Activities.

Ans:7 Give any two examples-

(i) Acquisition of fixed asset by issue of debentures or shares.
(ii) Conversion of debentures into shares.

Ans:8 Classified as Financing Activities.

Ans:9 It will be operating activities in case of a finance company and investing activities in case
of Non-Financing Company.

Ans:10 (i) Operating Activities.

(ii)Investing Activities.
(iii)Financing Activities.

Ans:11 …= Net Increase /Decrease in cash and Cash Equivalents.

Ans:12 Direct Method and Indirect Method.

Ans:13 Investing Activities Because …………….

Ans:14 Investing Activities Because …………….

Ans:15 Cash from Operating Activities Rs.1,03,800.

Ans:16 (i) Cash Inflow From Operating Activities Rs.80,000.

(ii)Cash Outflow on Investing Activities Rs.1,60,000,
(iii)Cash Inflow From Financing Activities Rs. 1,00,000.

Accountancy XII 172

 Model Paper (Issued by CBSE)
Question Paper Design
Accountancy (Code No. 055)
Class XII (2014-15)
March 2015 Examination

One Paper Theory: 80 Marks

Duration: 3 hrs.

S. No Typology of Question Very Short Short Answer I Short Answer Long Answer I Long Answer Marks Marks
Answer 1 3 Marks II 6 Marks II %
Mark 4Marks 8marks
1. Remembering- (Knowledge
based
Simple recall questions, to
know specific facts, terms, 3 1 2 1 - 20 25%
concepts, principles, or
theories; Identify, define, or
recite, information)
2. Understanding-
(Comprehension –to be
familiar with meaning and to
understand conceptually,
2 - 1 1 1 20 25%
interpret, compare,
contrast, explain,
paraphrase, or interpret
information)
3. Application (Use abstract
information in
concrete situation, to apply
knowledge to new situations;
Use given content to - 2 1 1 - 16 20%
interpret a situation, provide
an example,or solve a
problem)-

4. High Order Thinking Skills

(Analysis& Synthesis-
Classify, compare, contrast,
or differentiate between
different pieces of 2 - - 1 1 16 20%
information; Organize and/or
integrate unique pieces of
information from a variety of
sources)
5. Evaluation and Multi-
Disciplinary-(Appraise,
judge, and/or justify the
1 1 1 - - 08 10%
value or worth of a decision
or outcome, or to predict
outcomes based on values)
6. 80(23)+20
TOTAL 8x1=8 4x3=12 5x4=20 4x6=24 2x8=16 100%
Projects

Accountancy XII 173

 SAMPLE QUESTION PAPER ACCOUNTANCY (055) CLASS-XII 2015
Time allowed –Three hours Max Marks 80
General Instructions:
1) This question paper contains two parts A and B.
2) Part A is compulsory for all.
3) Part B has two options-Financial statement Analysis and Computerised Accounting.
4) Attempt only one option of Part B.
5) All parts of a question should be attempted at one place.
PART A: ACCOUNTING FOR PARTNERSHIP FIRMS AND COMPANIES
1. Any change in the relationship of existing partners which results in an end of
the existing agreement and enforces making of a new agreement is called
(a) Revaluation of partnership.
(b) Reconstitution of partnership.
(c) Realization of partnership.
(d) None of the above. (1)

2. Karan, Nakul and Asha were partners in a firm sharing profits and losses in the
ratio 3:2:1. At the time of admission of a partner, the goodwill of the firm was
valued at `2,00,000. The accountant of the firm passed the entry in the books of
accounts and thereafter showed goodwill at `2,00,000 as an asset in the
Balance Sheet. Was he correct in doing so? Why? (1)

3. Anu, Bina and Charan are partners. The firm had given a loan of `20,000
to Bina. They decided to dissolve the firm. In the event of dissolution, the
loan will be settled by:
(a) Transferring it to debit side of Realization account.
(b) Transferring it to credit side of Realization account.
(c) Transferring itcapitaltoaccountdebit. side of Bina’s
(d) Bina paying Anu and Charan privately.

4. Differentiate between ‘Capital Reserve’ and Reserve Capital. (1)

5. Metacaf Ltd. issued 50,000 shares of ` 100 each payable `20 on application (on
st st st
1 May 2012); `30 on allotment (on 1 January 2013); `20 on first call (on 1 July
st
2013) and the balance on final call (on 1 February 2014). Shankar, a shareholder
holding 5,000 shares did not pay the first call on the due date. The second call was
made and Shankar paid the first call amount along with the second call. All sums
due were received.
st
Total amount received on 1 February was:
(a) `15,00,000
(b) `16,00,000
(c) `10,00,000
(d) `11,00,000 (1)
6. Abha and Beena were partners sharing profits and losses in the ratio of 3:2. On
st th
April 1 2013, they decided to admit Chanda for 1/5 share in the profits. They
had a reserve of `25,000 which they wanted
Accountancy XII 174
 to show in their new balance sheet. Chanda agreed and the necessary
st
adjustments were made in the books. On October 1 2013, Abha met with an
accident and died. Beena and Chanda decided to admit
Abha’s daughter Fiza in their`2,00,000partnership,capitalwho. a
share in the reserve on the date of her death. (1)

7. State any three purposes for which securities premium can be utilized. (3)

8. Ankur and Bobby were into the business of providing software solutions in
India. They were sharing profits and losses in the ratio 3:2. They admitted Rohit
for a 1/5 share in the firm. Rohit, an alumni of IIT, Chennai would help them to
expand their business to various South African countries where he had been
working earlier. Rohit is guaranteed a minimum profit of `2,00,000 for the year. Any share is
to be borne by Ankur and Bobby in the ratio 4:1. Losses for the year were `10,00,000. Pass
the
necessary journal entries (3)

9. Newbie Ltd. was registered with an authorized capital of `5,00,000 divided into
50,000 equity shares of `10 each. Since the economy was in robust shape, the
company decided to offer to the public for subscription 30,000 equity shares of
`10 each at a premium of `20 per share. Applications for 28,000 shares were
received and allotment was made to all the applicants. All calls were made and
duly
received except the final call of ` 2 per share on 200 shares. Show the of Newbie Ltd.as per
Schedule VI of the Companies Act 1956. Also prepare Notes to Accounts for the
same. (3)

10. Drumbeats Ltd. had a prosperous shoe business. They were manufacturing
shoes in India and exporting to Italy. Being a socially aware organization, they
wanted to pay back to the society. They decided to not only supply free shoes to
50 orphanages in various parts of the country but also give employment to
children from those orphanages who were above 18 years of age. In order to
meet the fund requirements, they decided to raise 50,000 equity shares of ` 50
each and 40,000 9% debentures of ` 40 each. Pass the necessary journal entries
for issue of shares and debentures. Also identify one value
which the company wants to communicate to the society. (3)

11. Following is the Balance Sheet of Punita, Rashi and Seema who are sharing profits in the
ratio 2:1:2 as
st
on 31 March 2013. (4)
Liabilities Amount(`) Assets Amount(`)
Creditors 38,000 Building 2,40,000
Bills Payable 2,000 Stock 65,000
Capitals: Debtors 30,000
Punita 1,44,000 Cash at bank 5,000
Rashi 92,000 Profit and Loss Account 60,000
Seema 1,24,000 3,60,000
4,00,000 4,00,000
Accountancy XII 175
 th
Punita died on 30 September 2013. She had withdrawn 44,000 from her capital
on July 1, 2013. According to the partnership agreement, she was entitled to
interest on capital @8% p.a. Her share of profit till the date of death was to be
calculated on the basis of the average profits of the last three years. Goodwill was
to be calculated on the basis of three times the average profits of the last four
years. The profits for the years ended 2009-10, 2010-11 and 2011-12 were
`30,000, `70,000 and `80,000 respectively.
Prepare Punita’s account to be rendered to her executor
12. Kanika and Gautam are partners doing a dry cleaning business in Lucknow, sharing profits
in the ratio 2:1 with capitals `5,00,000 and `4,00,000 respectively. Kanika withdrew the
following amounts during
the year to pay the hostel expenses of her son.
`
st
1 April 10,000
st
1 June 9,000
st
1 Nov. 14,000
st
1 Dec. 5,000
Gautam withdrew `15,000 on the first day of April, July, October and January to
pay rent for the accommodation of his family. He also paid `20,000 per month as
rent for the office of partnership which
was in a nearby shopping complex.
Calculate interest on Drawings @6% p.a. (4)

13. (a) A firm earned profits of `80,000, `1,00,000, `1,20,000 and `1,80,000 during
2010-11, 2011-12, 2012-13 and 2013-14 respectively. The firm has capital
investment of `5,00,000. A fair rate of return on
investment is 15% p.a. Calculate goodwill of the profits of last four years.

(b) Kabir and Farid are partners sharing profits and losses in the ratio of 7:3. Kabir
th th
surrenders 2/10 from his share and Farid surrenders 1/10 from his share in
favor of Jyoti, a new partner. Calculate new profit
sharing ratio and sacrificing ratio. (6)

14. (a) Sunrise Company Ltd. has an equity share capital of `10,00,000. The
company earns a return on investment of 15% on its capital. The company needed
funds for diversification. The finance manager had the following options: (i)
Borrow `5,00,000 @15% p.a. from a bank payable in four equal quarterly
installments starting from the end of the fifth year (ii) Issue `5,00,000, 9%
Debentures of Rs. 100 each redeemable at a premium of 10% after five years. To
increase the return to the shareholders, the company opted for option (ii). Pass
the necessary journal entries for issue of debentures.

(b) Walter Ltd. issued ` 6,00,000 8% Debentures of ` 100 each redeemable after 3
years either by draw of lots or by purchase in the open market. At the end of three
years, finding the market price of debentures at `95 per debenture, it purchased
all its debentures for immediate cancellation. Pass necessary journal entries for
cancellation of debentures assuming the company has sufficient balance in
Debenture

Accountancy XII 176

 Redemption Reserve. (6)

15. Ashish and Neha were partners in a firm sharing profits and losses in the ratio 4:3. They
decided to
st
dissolve the firm on 1 May 2014. From the information given below, complete Realisation A/c,
Partner’s
Capital Accounts and Bank A/c: (6)
Dr. Realisation A/c Cr.
Liabilities Amount(`) Assets Amount(`)
To sundry assets: By Sundry liabilities:
-Machinery 5,60,000 -Creditors 40,000
-Stock 90,000 -Ashish’s wife 25,000
-Debtors 55,000
By Bank:
To Bank: -Machinery 4,80,000
-Creditors ______ -Debtors 10,000

To Ashish’s Cap By Ashish’s C

-Ashish’s wife’ 34,000 -Stock 1,28,000
-typewriter 70,000 1,98,000
To Neha’s Capit
-Realisation expenses 7,000 By Neha’s Cap
-Debtors 40,000
To profit transferred to:
Ashish’s capita
Neha’s c3,000apital 7,000
7,93,000 7,93,000

Dr. Partner’s Capital AccountsCr.

Particular
Particulars Ashish(`) Neha(`) s Ashish(`) Neha(`)
To Realisation A/c _____ ____ By _____ _____
To Bank A/c 4,00,000 4,50,000 By _____ _____
By _____ _____

Dr. Bank A/c Cr.

Particulars Amount(`) Particulars Amount(`)
By Realisation
To Balance b/d _______ A/c ______
To Realisation A/c 4,90,000 By Ashish’s Loan 4,000
By Ashish’s Capit 4,00,000
By Neha’s Capital _______

Accountancy XII 177

 16. A and B are partners in a firm sharing profits and losses in the ratio 3:1. They
st
admit C for a ¼ share on 31 March 2014 when their Balance Sheet was as
follows:
Liabilities Amount(`) Assets Amount(`)
Employees Provident Fund 17,000 Stock 15,000
Workmen’s Compensation Fund 6,000 Debtors 50,000
Investment Fluctuation Reserve 4,100 Less provision for
Capitals: A 54,000 doubtful debts 2,000 48,000
B 35,000 Investments 7,000
Cash 6,100
Goodwill 40,000
1,16,100 1,16,100
The following adjustments were agreed upon:
(a) C brings in `16,000 as goodwill and proportionate capital.
(b) Bad debts amounted to `3,000.
(c) Market value of investment is `4,500.
(d) Liability on account of workmen’s`2,000. compensation
Prepare Revaluation A/c and Partner’s Capital A/cs.
OR
X, Y and Z are partners in a firm sharing profits in proportion of 1/2, 1/6 and 1/3
respectively. The Balance Sheet as on April 1, 2014 was as follows:
Liabilities Amount(` ) Assets Amount(` )
Employees Provident Fund 12,000 Freehold Premises 40,000
Sundry Creditors 18,000 Machinery 30,000
General Reserve 12,000 Furniture 12,000
Capitals Stock 22,000
X 30,000 Debtors 20,000
Y 30,000 Less provision for
Z 28,000 doubtful debts 1,000 19,000
Cash 7,000
1,30,000 1,30,000
Z retires from the business and the partners agree that:
(a) Machinery is to be depreciated by 10%.
(b) Provision for bad debts is to be increased to ` 1,500.
(c) Furniture was taken over by Z for ` 14,000.
(d) Goodwill is valued at ` 21,000 on Z’s retirement.
(e) The continuing partners’ have decided to adjust after retirement of Z. Surplus or deficit
if any, in their capital accounts will be adjusted through
their current accounts.
Prepare Revaluation A/c and Partners’CapitalA/c’s. (8)

17. Amrit Ltd. issued 50,000 shares of `10 each at a premium of `2 per share payable
as `3 on application, `4 on allotment (including premium), `2 on first call and the
remaining on second call. Applications were received for 75,000 shares and a pro-
Accountancy XII 178
 rata allotment was made to all the applicants.
All moneys due were received except allotment and first call from Sonu who applied
for 1,200 shares. All his shares were forfeited. The forfeited shares were reissued
for `9,600. Final call was not made. Pass necessary journal entries.
OR
Velco Ltd. issued 30,000 shares of ` 10 each at a discount of `1 per share payable as
`3 on application, `2 on allotment, `2 on first Call and `2 on second call.
Applications were received for 40,000 shares and a pro-rata allotment was made to all the
applicants.
All money due were received except allotment and first call from Mohit who had
applied for 2,000 shares. His shares were forfeited after first call. Subsequently, the
second call was duly made and duly received. Thereafter, the forfeited shares were
reissued for `9 fully paid. Pass the necessary journal
Entries (8)

PART B: ANALYSIS OF FINANCIAL STATEMENTS

18. Cash deposit with the bank with a maturity date after two months belongs to
which of the following while preparing cash flow statement:
(a) Investing activities
(b) Financing activities
(c) Cash and Cash equivalents
(d) Operating activities. (1)

19. Finserve Ltd is carrying on a Mutual Fund business. It invested ` 30,00,000 in shares and
`15,00,000
in debentures of various companies during the year. It received ` 3,00,000 as dividend and
interest. Find
out cash flows from investing activities. (1)

20. (a) Name the sub heads of Liabilities’ under the Liabilities head in part the of ‘Current
Balance Sheet as per Schedule III of the Companies Act 2013.
(b) State any two objectives of Financial Statements Analysis. (4)
21. (a) From the following details, calculate Opening inventory: Closing inventory `60,000; Total
Revenue from operations `5,00,000
(including cash revenue from operations `1,00,000); Total purchases
`3,00,000 (including credit purchases `60,000). Goods are sold at a profit of
25% on cost.
(b) Current Assets of a company are `17,00,000. Its current ratio is 2.5 and
liquid ratio is 0.95.
Calculate Current Liabilities and
Inventory. (4)

22. Nimani Ltd. is into the business of back office operations. Honesty and hard
work are the two pillars on which the business has been built. It has a good
turnover and profits. Encouraged by huge profits, it decided to give the workers
bonus equal to two months salary. Following is the Comparative Statement of
st
Profit and Loss of Nimani Ltd. for the years ended 31 March 2013 and 2014.

Accountancy XII 179

 st
(a) Calculate Net Profit ratio for the years ending 31 March 2013 and 2014.
(b) Identify any two values which Nimani Ltd. wants to communicate to the society.

Particulars Note 2012-13 2013-14 Absolute Percentage

No. (`) (`) Change change
Revenue from operations 20,00,000 30,00,000 10,00,000 50
Less Employee benefit expenses 8,00,000 10,00,000 2,00,000 25
Profit before tax 12,00,000 20,00,000 8,00,000 66.67
Tax rate 40% 4,80,000 8,00,000 3,20,000 66.67
Profit after tax 7,20,000 12,00,000 4,80,000 66.67

(4)
st
23. Following are the Balance Sheets of Krishna Ltd. as on 31 March 2013 and 2014:

Particulars Note No. 2013-14 (`) 2012-13(`)

EQUITY AND LIABILITIES
(1) Shareholders Funds
(a) Share capital 14,00,000 10,00,000
(b) Reserves and Surplus 1 5,00,000 4,00,000
(2) Non Current Liabilities
Long term borrowings 5,00,000 1,40,000
(3) Current Liabilities
Trade Payables 1,00,000 60,000
Short term Provisions 2 80,000 60,000
Total 25,80,000 16,60,000
ASSETS
(1) Non Current Assets
(a) Fixed assets
(i) Tangible assets 3 16,00,000 9,00,000
(ii) Intangible Assets 4 1,40,000 2,00,000
(2) Current Assets
(a) Inventories 2,50,000 2,00,000
(b) Trade Receivables 5,00,000 3,00,000
(b) Cash and Cash Equivalents 90,000 60,000
Total 25,80,000 16,60,000

Accountancy XII 180

 Notes to Accounts:

S.No. Particulars As on 31.3.2014 As on 31.3.2013

(`) (`)
1. Reserves and Surplus
Surplus (i.e. balance in 5,00,000 4,00,000
Statement of Profit and Loss)

2. Short Term provisions

Provision for tax 80,000 60,000

3. Tangible assets
Machinery 17,60,000 10,00,000
Less Accumulated depreciation (1,60,000) (1,00,000)

4. Intangible Assets
Goodwill 1,40,000 2,00,000

Prepare a Cash Flow Statement after taking into account the following adjustment:
(i) Tax paid during the year amounted to ` 70,000. (6)
OR
Part B: Computerized Accounting
18. While navigating in the workbook, which of the following commands is used to move to
the beginning of the Current row:
a. [ ctrl] + [home]
b. [page Up]
c. [Home]
d. [ctrl] + [Back space] (1)

19. Join line in the context of Access table means:

a. Graphical representation of tables between tables
b. Lines bonding the data within table
c. Line connecting two fields of a table
d. Line connecting two records of a table (1)
20. Enumerate the basic requirements of computerised accounting system for a business
organization.
(4)

Accountancy XII 181

21. The generation of ledger accounts is not a necessary condition for making trial balance in a
computerised accounting system. Explain. (4)
Intentional manipulation of accounting records is much easier in computerised accounting
22. than in
manual accounting. How? (4)

23. Computerisation of accounting data on one hand stores voluminous data in a systematic
and organised manner where as on the other hand suffers from threats of vulnerability and
manipulations. Discuss the security measures you would like to employ for securing the
data from such threats. (6)

Accountancy XII 182

 Marking Scheme
Accountancy, Class XII
Board Examination,March, 2015
Sl.No. Outline Answers Marks
1. (b) Reconstitution of partnership. 1 Mark
2. No, the accountant’s decision -26,is 1 Mark
goodwill should be recorded in the books only when consideration in
money
or money’s worth has been paid fo
3. (c) Transferring it to debit side of Bina’s 1 Mark

4. ‘Capital Reserve’is the reserve that is created out of capital profits/gains 1 Mark
whereas, that part of the share capital which has not yet been called up
and
has been kept as reserve to be called up in the event of the winding up of
the
company is called ‘Reserve Capita
5. `16,00,000 1 Mark

6. `12,000 1Mark
7. The amount received as securities premium can be used for following
purposes (any three):
(a) In purchasing its own shares. 1x3
(b) Issuing fully paid bonus shares to the
members. =
(c) Writing off preliminary expenses of the
company.
(d) Writing off the expenses of, or the commission paid, or discount
allowed
on any issue of securities or debentures of the company. 3 Marks
(e) Providing for the premium payable on the redemption of any
redeemable
preferences shares or any debentures of the company.
8. Journal
L
Date Particulars F Debit (`) Credit (`)
Ankur’sCapitalA/c Dr. 4,80,000
Bobby’s CapitalDr. 3,20,000 1½
Rohit’s CapitalDr. 2,00,000
To Profit and Loss A/c 10,00,000
(Being loss debi
capital accounts)

Ankur’s CapitalDr. 3,20,000

Bobby’s CapitalDr. 80,000 1½
To Rohit’s Capi 4,00,000 =
(being the deficiency borne by
Ankur 1 ½ +1 ½
Accountancy XII 183
 and Bobby in the ratio 4:1) =3

9. Balance sheet of Newbie Ltd. as at:

Particulars Note No. (`)
Equity and Liabilities
1 mark
1) Shareholders funds
Share capital 1 2,79,600

Notes to Accounts.
1. Share Capital
Authorised Share Capital ½ mark
50,000 Shares of Rs. 10
each 5,00,000
Issued Share Capital ½ mark
30,000 Shares of Rs. 10
each 3,00,000
Subscribed Share Capital
(a) Subscribed and fully
paid
27,800 shares of Rs. 10 each fully called up
2,78,000 1 mark
(b) Subscribed but not fully paid 2,79,600 =1+ ½ +
200 shares of Rs. 10
each 2,000 ½ +1
Less calls in arrears (400) =
3 marks

10. Journal
Particulars F Debit (`) Credit (`)
Bank A/c Dr. 25,00,000
To Share Application and Allotment A/c 25,00,000
½x4
(Being the amount of application money received on 50,000 shares @Rs =
50 per share) 2 marks
Share Application and Allotment A/c Dr. 25,00,000
To Share Capital A/c 25,00,000
(Being the amount transferred to share capital)
Bank A/c Dr. 16,00,000
To 9% Debentures Application and Allotment A/c 16,00,000
(Being the amount received on 9% Debenture application and allotment
on 40,000 Debentures @Rs. 40 per debentures)
9% Debenture Application and Allotment A/C Dr. 16,00,000
To 9% Debentures A/C 16,00,000
(Being The amount transferred to Debentures A/c.)
Value which the company wants to communicate to the society: (Any
one)

Social responsibility 1 mark

Generation of employment opportunities. =2+1

Accountancy XII 184

 =

3 marks
11. Dr. Capital Account Cr. ½ mark
Particulars Amount(`) Particulars Amount(`) for each
To P&L A/c 24,000 By balance b/d 1,00,000 Item
By interest on
To Punita 1,22,880 capital 4,880 =
By P&L Suspense
executor’ A/c 6,000 ½ x 6
By Rashi’s 12,000 =
By Seema’sCapitalA/c 24,000 3 marks
1,46,880 1,46,880 +
1 mark

6 marks
14. Date Particulars LF Debit Credit
(a) (`) (`)
Bank A/c Dr. 5,00,000
To 9% Debenture Application and 1 mark
Allotment A/c 5,00,000
(Being Debenture application money received)
9% Debenture Application and Allotment A/c Dr. 5,00,000
Loss on issue of Debentures A/c Dr. 50,000 2 marks
To 9% Debenture A/c 5,00,000, =1+2
To Premium on redemption of DebenturesA/c =
(Being issue of debentures at par, redeemable at a 50,000
a premium) 3 marks

(b) Own debentures A/c Dr. 5,70,000

To Bank A/c 570,000 1 mark
(Being 60,000 debentures purchased for
cancellation @ Rs 75)
8% Debentures a/c Dr. 6,00,000
To Own Debentures A/c 5,70,000 1 mark
To Gain on Cancellation of Debentures A/c 30,000
(Being debentures cancelled)
Gain on Cancellation of Debentures A/c Dr. 30,000 ½ mark
To Capital Reserve 30,000
(Being the gain transferred to Capital Reserve)
Debenture Redemption Reserve A/c Dr. 3,00,000
To General Reserve 3,00,000 ½ mark
(Being the Amount of DebentureRedemption =
Reserve Transferred to General Reserve)
1+1+ ½
+½
=3
marks

Accountancy XII 185

 15.
Dr. Realisation A/c Cr.

Liabilities Amount(`) Assets Amount(`)

To sundry assets: By Sundry liabilities:
-Machinery 5,60,000 -Creditors 40,000
-Stock 90,000 -Ashish’s 25,000
-Debtors 55,000
By Bank:
To Bank: -Machinery 4,80,000
-Creditors 40,000 -Debtors 10,000

To Ashish’s By Ashish’
-Ashish’s wi 34,000 -Stock 1,28,000
-typewriter 70,000 1,98,000

To Neha’s C 7,000 By Neha’s ½ mark

-Realisation expenses -Debtors 40,000
for each
To profit transferred to: blank
Ashish’s ca x 12
Neha’s cap3,000i 7,000 =
6 marks
7,93,000 7,93,000

Dr. Partner’sitalAccountsCap Cr.

Particulars Ashish(`) Neha(`) Particulars Ashish(`) Neha(`)
To Realisation A/c 1,98,000 40,000 By Balance b/d 5,60,000 4,80,000
To Balance b/d 4,00,000 4,50,000 By Realisation A/c 34,000 7,000
By Realisation A/c 4,000 3,000
5,98,000 4,90,000 5,98,000 4,90,000

Dr. Bank A/c Cr.

To Balance b/d 4,04,000 By Realisation A/c 40,000
To Realisation A/c 4,90,000 By Ashish’s Loa 4,000
By Ashish’s Cap 4,00,000
By Neha’s Capit 4,50,000
8,94,000 8,94,000
16.
Dr. REVALUATION A/c Cr.
Particulars Amount(`) Particulars Amount(`)
To bad debts 1,000 By loss transferred to:
A’s CapitalA/c 750
2 marks
B’sCapital A/c 250

1,000 1,000

Dr. Partner’s Capital AccouCr.

Particulars A(`) B(`) C(`) Particulars A(`) B(`) C(`)
To Goodwill A/c 30,000 10,000 - By Balance b/d 54,000 35,000 -
To Revaluation By Cash A/c - - 23,200 2x3
750 250 -
A/c =
By Investment
fluctuation fund
1,200 400 - 6 marks
To Balance c/d 39,450 30,150 23,200 By Workm
Compensation 3,000 1,000 - =
fund
2+ 6

Accountancy XII 186

 By premium for
good will
12,000 4,000 - =
70,200 40,400 23,200 70,200 40,400 23,200 8 marks

OR OR
Dr. REVALUATION A/c Cr.
Particulars Amount(`) Particulars Amount(`)
To Machinery 3,000 By Furniture 2,000
To Provision for doubtful debts 500 By Loss transferred to :
X’s Capital A/c 750 2 marks
Y’s Capital A/c 250
Z’s Capital A/c 500
3,500 3,500

Dr. Partner’s Capital AccouCr.

Particulars X (`) Y (`) Z (`) Particulars X (`) Y (`) Z (`)
To Furniture - - 14,000 By Balance b/d 30,000 30,000 28,000
2x3
To Z’s Ca 5,250 1,750 - By General
6,000 2,000 4,000
=
Reserve 6 marks
To Revaluation A/c 750 250 500 By X’s C - - 5,250
To Z’s Lo - - 24,500 By Y’s C - - 1,750
To Y’s Cu - 15,000 - By X’s C 15,000 - - =
To Balance c/d 45,000 15,000 - 2+ 6
51,000 32,000 39,000 51,000 32,000 39,000
=
8 marks

Accountancy XII 187

 IN THE BOOK OF AMRIT
17. LTD.
JOURNAL
Date Particulars F Dr.(`) Cr. (`)
Bank A/c Dr. 2,25,000
To Share Application A/c 2,25,000
(Being application money received
on
75,000, shares @Rs.3 per share)
Share Application A/c Dr. 2,25,000
To Share Capital A/c 1,50,000
To Share Allotment A/c 75,000
(Being application money ½ mark
adjusted)
Share Allotment A/c Dr. 2,00,000
To Share Capital A/c 1,00,000
To Securities Premium A/c 1,00,000
(Being allotment money due on 50,000 1 mark
shares)
Bank A/c Dr. 1,23,000
To Share Allotment A/c 1,23,000
(Being allotment money received)
OR 1 mark
Bank A/c Dr. 1,23,000
Calls in Arrears A/c Dr. 2,000
To Share Allotment A/c 1,25,000
(Being allotment money received)
1 mark
Share First Call A/c Dr. 1,00,000
To Share Capital A/c 1,00,000
(Being first call due on 50,000
shares)
Bank A/c Dr. 98,400
To Share First Call A/c 98,400
(Being first call money received) ½ mark
OR
Bank A/c Dr. 98,400
Calls in arrears A/c Dr. 1,600
To Share First Call A/c 1,00,000
(Being first call money received) 1 mark

Accountancy XII 188

 Share Capital
A/c Dr. 5,600
Securities Premium A/c Dr. 1,600
To Share Forfeiture A/c 3,600
To Share Allotment A/c 2,000
To Share First Call A/c 1,600
(Being 800 shares forfeited for
non
payment of allotment money and first
call)
OR
Share Capital
A/c Dr. 5,600
Securities Premium A/c Dr. 1,600
To Share Forfeiture A/c 3,600
To Calls in Arrears A/c 3,600
(Being 800 shares forfeited for non
payment of allotment money and first
call)
Bank A/c Dr. 9,600
To Share Capital A/c 5,600
To Securities Premium A/c 4,000
(Being 800 shares re issued )
Share Forfeiture A/c Dr. 3,600
To Capital Reserve A/c 3,600
(Being Share Forfeiture amount
transferred to capital reserve)

OR
In The Books of Velco
Ltd.
JOURNAL
Date Particulars F Dr.(`) Cr. (`)
Bank A/c Dr. 1,20,000
To Share Application A/c 1,20,000
(Being application money received on
40,000 Shares @Rs.3 per share)
Share Application A/c Dr. 1,20,000
To Share Capital A/c 90,000
To Share Allotment A/c 30,000
(Being application money adjusted)
Share Allotment A/c Dr. 60,000
Discount on Issue of Shares A/c Dr. 30,000
To Share Capital A/c 90,000

Accountancy XII 189

 Bank A/c Dr. 28,500 1
To Share Allotment 28,500 mar ½
(Being allotment money received) k
OR
Bank A/c Dr. 28,500
Calls in Arrears A/c Dr. 1,500
To Share Allotment A/c 30,000 m
(Being allotment money received) ark
Share First Call A/c Dr. 60,000 =
To Share Capital A/c 60,000
+
(Being first call due)
1+
Bank A/c Dr. 57,000 1+
To Share First Call A/c 57,000 1+ ½
(Being first call received )
6) 1
OR
+ 1+
Bank A/c Dr. 57,000
+
Calls in Arrears A/c Dr. 3,000 60,000
1
To Share First Call A/c
=
(Being first call received)
(d) m
Share Capital A/c Dr. 12,000
arks
To Share Forfeiture A/c 6,000
OR
To Share Allotment A/c 1,500
To Share First Call A/c 3,000
To Discount on Issue of Shares A/c 1,500
(Being 1,500 shares forfeited for
non
payment of allotment money and first m
call) ark
Share Second and Final Call A/c Dr. 57,000
To Share Capital A/c 57,000
(Being second and final call due on 28,500
shares) m
Bank A/c Dr. 57,000 ark
To Share Second and Final Call A/c 57,000
(Being second and final call received
)
m
Bank A/c Dr. 13,500
ark
Discount on Issue of Shares A/c Dr. 1,500
To Share Capital A/c 15,000
(Being 1,500 shares reissued @Rs.9 per
share fully paid)
Share Forfeiture A/c Dr. 6,000 1
To Capital Reserve 6,000 mar
(Being the balance in Share Forfeiture A/c k
transferred to capital reserve)

Accountancy XII 190

 PART B
ANALYSIS OF FINANCIAL STATEMENTS

18. (c)Cash and Cash equivalents 1 mark

19. Cash flows from investing activities - Nil 1 mark

20. (a) CURRENT LIABILITIES

(a) Short term borrowings ½x4
(b) Trade payables = 2 marks
(c) Other current liabilities
(d) Short term provisions

(b) Objectives of Financial Statements Analysis (any two)

(i) Helps in assessing the earning capacity or profitability 1x2
(ii) Helps in assessing managerial efficiency =
(iii) Helps in assessing the long them and short term solvency of the 2 marks
enterprise. =
(iv) Helps in inter-firm comparison. 2+2
(v) Helps in forecasting and preparing budgets. =
(vi) Helps the users in understanding complicated matter in a
simplified 4 marks
manner.
(e) (a)
Total revenue from operations =` 5,00,000
Gross Profit =
=
=`
1,00,000
Cost of Revenue from operations= Net Revenue from opeartions-Gross
Profit
= ` 5,00,000-`1,00,000
= ` 4,00,000
Cost of Revenue from operations = Opening Inventory +
Net Purchases –
Closing inventory
` 4,00,000 = Opening inventory + ` 3,00,000 –`60,000
Opening inventory =` 1,60,000 2
marks

(b)
Current Ratio =

2.5 =
 Current
Liabilities = ` 6,80,000

Accountancy XII 191

 Quick Ratio
1 mark
 Quick Assets = ` 6,46,000
= Current Assets-Quick
Inventory Assets 1 mark
= ` 17,00,000 –` 6,46,000 =
= ` 10,54,000 2+1+1
=
Ans. Current
Liabilities = ` 6,80,000 4 marks
Inventory = ` 10,54,000
22. (a) Calculation of Net Profit Ratio:
Net Profit Ratio
=
2012-13 1 mark
Net Profit Ratio =
= 36% 1 mark
2013-14
Net Profit Ratio = 1x2
= 2 marks
= 40%
=
(b) Values that Himani Ltd. wants to communicate to the
society:
1+1+2
 Social responsibility.
= 4 marks
 Welfare of employees.
In the books of Krishna
23. Ltd.
Cash Flow
Statement
st
For the year ended 31 March’14
Particulars ` `
CASH FLOWS FROM OPERATING
ACTIVITIES
Net profit before tax (Working Note
1) 1,90,000
Add non operating/non cash items:
Depreciation on machinery 60,000
Goodwill Written off 60,000

Operating profit before working 3,10,000

capital changes
Add increase in Trade Payables 40,000
2 marks
Less Increase in Inventories (50,000)
Increase in Trade Receivables (2,00,000)

Accountancy XII 192

 Cash generated from operations 1,00,000
Less Income Tax
paid (70,000)
Cash flow from operating activities 30,000
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of
machinery (7,60,000) ½ mark
Cash used in investing activities (7,60,000)

CASH FLOWS FROM FINANCING

ACTIVITIES
Issue of shares 4,00,000 1 mark
Long term borrowings 3,60,000
Cash flow from financing activities 7,60,000
Net increase in cash and cash
equivalents 30,000
Add opening balance of cash and
cash
equivalents 60,000 1 mark
Closing balance of cash and cash
equivalents 90,000
Working Note 1:
Calculation of Net Profit Before Tax
Surplus i.e. Balance in Statement of Profit and Loss 1,00,000 ½ mark
Add provision for
tax 90,000
1,90,000

Dr. Provision for Tax A/c Cr.

Particulars Amount(` ) Particulars Amount (`)
To cash (tax paid) 70,000 By balance b/d 60,000
By provision 1 mark
To balance c/d made during the 90,000
80,000 year
1,50,000 1,50,000

Accountancy XII 193

 SAMPLE PAPER
ACCOUNTANCY
Class – XII

Time allowed: 3 hours Maximum

Marks: 80

General Instructions:
7) This question paper contains Two parts A& B.
8) Both the parts are compulsory for all.
9) All parts of questions should be attempted at one place.
10) Marks are given at the end of each question.

Part – A

Partnership, Share Capital and Debentures

1. If a partner advances some loan to the firm, he is entitled for interest on loan. Do you think
he will get interest on such loan if there is loss in the firm? (1)
Interest on loan will be paid whether there is profit or loss
Interest on loan will be paid only if there is some profit
No interest on loan will be paid in case of loss
Interest on loan is paid @6% p.a. when there is loss

2. State two financial rights acquired by a new partner.

(a) Right to share future profits and assets of the firm
(b) Right to share old profits and assets of the firm
(c) Right to share old reserves and goodwill of the firm
(d) Right to share future profits and old reserves (1)

3. X and Y are partners with Rs. 1,50,000 and Rs.1,00,000 as their respective capitals. They
th
admitted Z as a new partner for 1/6 share in profits. What will be his share of capital if he
has to bring
capital in proportion to his profit sharing ratio. (1)
(Hint: Rs. 50,000)

4. Vinod Limited invited applications for 20,000 shares of Rs.10 each. Applications were
Received for 25,000 shares. Name the kind of Subscription.
Give three alternatives for allotting shares. (1)

5. What is meant by Debenture? (1)

Accountancy XII 194

 6. Following is the extract of the Balance Sheet of, Blue and Red as on March 31, 2007:

Liabilities Amount Assets Amount

Current Accounts : Sundry Assets 30,00,000
Blue 1,00,000
Red 1,00,000 2,00,000

Capital Accounts :
Blue 10,00,000
Red 10,00,000 20,00,000
P/L Appropriation (31.3.07) 8,00,000
30,00,000 30,00,000
During the year Red’s drawings were Rs.30,000. Profits during 2007 is Rs.10,00,000.
Calculate interest on capital @ 5% per annum for the year ending March31, 2007. (3)
(Hint: Interest on Blue’s Capital Rs.50,000 and Red’s Capital Rs.50,000)

7. Explain dissolution of a firm by (i) Agreement and (ii) Notice. (3)

8. What entries would be passed for the following transactions on the dissolution of a
firm, if Sundry Assets and Outer Liabilities have already been transferred to
Realisation A/c.
(a) There was an unrecorded Asset of Rs.5,000 which was taken over by C at Rs.4,000.
(b) Stock worth Rs.7,000 was taken over by partner B.
(c) Workmen’s Compensation paid to employees by the firm Rs.8,000.
(d) Sundry Creditors amounted to Rs.4,000 were paid off at a discount of 4%.
(e) There was a debit balance of Profit & Loss Account in the firm.
(f) Loss on Realisation was Rs.36,000 to be distributed among the partners in 3:2:1 ratio.
(3)

9. A Partnership firm earned net profits during the last three years as
follows: Year 2008 Rs.38,000; Year 2009 Rs.44,000; Year 2010
Rs.50,000.
The Capital Employed in the firm throughout the above mentioned period has been
Rs.80,000. Having regard to the risk involved, 15% is considered to be a fair return on
the capital. The remuneration of all the partners during the period is estimated to be
Rs.20,000 per annum.
Calculate goodwill on the basis of
(i) Two years purchase of super profits.
(ii) Capitalisation Method (4) (Hint: (i) Rs.24,000 (ii) Rs.80,000)

Accountancy XII 195

 (c) A, B and C are partners in a trading firm. The firm has a fixed total capital of
Rs.60,000 held equally by all the partners. Under the partnership deed the partners
were entitled to:
A and B to a Salary of Rs.1,800 and Rs.1,600 per month respectively.
In the event of death of a partner, goodwill was to be valued at 2 years purchase
of the average profits of the last 3 years.
Profit upto the date of death based on the profits of the previous year.

(d) Partners were to be charged interest on drawings at 5% p.a. and allowed interest on
capitals at 6% per annum.
st
B died on January 1 , 2011. His drawings to the date of death were Rs.2,000 and interest there
st
on was Rs.60. The profits for the three years ending March 31 2008 Rs.21,200; 2009
Rs.3,200 (Dr.); and in 2010 Rs.9,000 respectively.
Prepare B’s Capital A/c to calculate the amount to be paid to his executors. (6) (Hint:
B’s Executors A/c Rs.41,490)

23. (a) Ranbaxy Limited purchased a machinery worth Rs.5,00,000 from Laborate
Pharmaceutical. Rs.2,75,000 was paid by issue of 9% Preference Shares of Rs.100 each at a
premium of 10%. The
balance was paid by cheque. Give necessary entries.
(b) On 1.1.2014 Govardhan Limited received in advance the first call of Rs.2 per share on 10,000
equity shares. The first call was made due on 15.2.2014. journalise the transaction and transfer the
advance to first call account by opening a calls in advance account. (4)

20. Registered capital of Sunshine Limited is Rs.5,00,000 divided in 50,000 Equity Shares of
Rs.10 each. Out of these 50,000 shares, company issued 10,000 shares to Luxmi Machines
Limited as
fully paid as purchase consideration for a Machinery acquired. Remaining 40,000 shares
were offered to the public but applications were received for 36,000 shares only, full
allotment was made to the applicants. Company called Rs.6 per share and received the
entire amount except a call of Rs.3 per share on 6,000 shares.
How would you show the relevant items in the Company’s Balance Sheet? (4)

13. Himanshu and Jayant were partners in a firm sharing profits in the ratio of 3:2. Their fixed
capitals on 1-4-2013 were : Himanshu Rs.6,00,000 and Jayant Rs.12,00,000. They agreed to
allow interest on capitals @12% per annum and to charge on drawings @15% per annum.
Himanshu will get a
commission of Rs.10,000 after charging interest on capital (if any profit available). The firm
earned a profit, before all above adjustments, Rs.1,80,000 for the year ended 31.3.2014. The
drawings of Himanshu and Jayant were Rs.18,000 and Rs.30,000 respectively. Prepare P/L
Appropriation Account if interest on capital is treated as a charge and will be allowed even if
the firm incurs a loss. (6) (Hint: Loss to Himanshu Rs.19,440 and Jayant Rs.12,960)

14. On January 1, 2004, Vinod Limited company made an issue of 1,000, 6% debentures of
Rs.1,000 each at Rs.960 per debenture. The terms of issue provided for the redemption of 200
debentures every year starting from the end of 2005 either by purchase or draw of lot at par at
the company’s option. Discount was written off in the same year against the available profit
Accountancy XII 196
 balance. On 31.12.2005 the company purchased for cancellation, debentures of the face value
of Rs.80,000 at
Rs.9.50 per debenture and of the face value of Rs.1,20,000 at Rs.900 per debenture.
Journalise the above transactions i.e. issue, redemption, profit on cancellation and discount
written
off etc. (6)

15. Rainbow Limited issued prospectus inviting applications of 4,000 Equity Shares of Rs.10 each
at a premium of Rs.4 per share payable as follows:
On Applications Rs.2 ; On Allotment Rs.7 (including premium);
First call Rs.3 and Second Call Rs.2 per share.
Applications were received for 6,000 shares and allotment made on pro-rata basis to the
applicants for 4,800 shares, the remaining applications being refused. Money received in
excess on Applications was adjusted towards allotment.
Mr. M to whom 80 Shares were allotted failed to pay the allotment and first call
money so his shares were forfeited.
Mr. N the holder of 120 shares, failed to pay two calls. So his shares were forfeited.
Of the shares forfeited 160 shares were reissued to Mr.SK credited as fully paid up for
Rs.8 per share. The whole share of Mr. M included. Give journal entries. (8)
(Hint: Capital Reserve Rs.272)

OR
Vinod Limited invited applications for 10,000 shares of Rs.100 each at 10% premium
included in the allotment money. Applications were received for 18,000 shares of which
applications of 3,000 shares were rejected and their money was returned. Rest of the
applicants were issued shares at pro-rata basis and their excess money was adjusted
towards allotment. The money was called as follows:
st nd
On Applications Rs.30; Allotment Rs.30; 1 Call Rs.30; 2 Call Rs.20.
Mr. David, a holder of 300 shares paid only the application money and Mr. Robert, a
holder of 600 shares paid up to the first call money. All the calls were made and the
payment received except that in case of Mr. David and Mr. Robert. Their shares were
nd
forfeited after the 2 Call and reissued at 15% discount. Pass necessary journal entries.
(Hint: Capital Reserve Rs.48,000)

16. The Balance Sheet of Mohan and Sohan carrying on business in partnership and sharing
rd
profits in proportion of 2/3rd and 1/3 respectively, stood as follows:
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors 10,300 Machinery 50,000
Reserve Funds 1,500 Furniture 3,000
Capital Accounts : Debtors 18,000
Mohan 51,450 Stock 27,000
Sohan 36,750 88,200 Cash 2,000
1,00,000 1,00,000
They admitted Kapil physical challenged person but expert in management, into partnership
th
giving him 1/5 share of profits on the following terms:
(a) The goodwill of the firm is to be valued at two years profits calculated on the average of the
st
1 three years profits, which amounted to Rs.20,000; Rs.15,000 and Rs.22,000.

Accountancy XII 197

 (b) Kapil is to bring in cash for the amount of his share of goodwill.
(c) Kapil is to bring in capital in proportion to her profit sharing arrangement with other partners.
Give necessary journal entries and Balance Sheet also identify the values involved in the question.
(8) (Hint: Balance of Capital A/cs Mohan Rs.57,517; Sohan Rs.39,783; Kapil Rs.24,325; B/S
Rs.1,31,925)

OR
st
A, B and C are equal partners in a firm, whose balance sheet as at 31 March 2013 was as follow:
(4)
Liabilities Amount Assets Amount
Creditors 4,000 Cash at Bank 6,400
Bills Payable 3,000 Debtors 9,000

General Reserve 3,000 Stock 10,600

Capitals : Furniture 2,000
A 8,000
B 6,000
C 4,000 18,000
28,000 28,000
B retired on the above date and the following was agreed upon:
(a) To reduce stock and furniture by 5% and 10% respectively.
(b) To provide for doubtful debts at 5% on debtors.
(c) Rent outstanding was Rs.260.
(d) Goodwill was valued at
Rs.4,200. A and C decided:
(i) To share profits and losses in 5:3 respectively.
(ii) Not to show goodwill in the books.
(iii) To readjust their capital in their new profit sharing ratio.
(iv) To bring in sufficient cash to pay off B immediately and to leave a balance of Rs.1,000 in the
Bank.
(v) Provided B’s Payment.
Prepare Revaluation A/c, Partners Capital A/cs and Balance Sheet.

(Hint: Revaluation Loss Rs.480; Balance Sheet Rs.21,420)

Part – B
Financial Statement Analysis

17. Why investors and Bankers are interested in financial analysis? (1)

18. State with reason whether Goodwill amortised would result in inflow, outflow or no flow
of cash or cash equivalents. (1)
(Hint: No flow)

19. How would you record increase in provision for doubtful debts while preparing
Cash Flow Statement? (1) (Hint: Add, Operating Activities).
Accountancy XII 198
 20. Give complete proforma of Balance Sheet as per Revised Schedule VI. (3)

21. Prepare a ‘Comparative Balance Sheet’ with the help of following information: (4)
Particulars Note 31st March 31st March
No. 2012 2013
I. EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share capital : Equity Share Capital 15,00,000 20,00,000
(b) Reserve and Surplus : (Statement of P/L) 4,00,000 3,00,000
(2) Non-current Liabilities
Long term borrowings : 11% Bank Loan 6,00,000 9,00,000
(3) Current Liabilities
Trade payables : Creditors 2,00,000 3,00,000

27,00,000 35,00,000
Total
II. Assets
(1) Non-Current Assets
Fixed Assets
(a) Tangible Assets : Plant & Machinery 15,00,000 20,00,000
(b) Intangible Asset : Goodwill 6,00,000 9,00,000
(2) Current Assets
(a) Inventories : Stock 4,00,000 3,00,000
(b) Cash and Cash Equivalents : Cash and Bank Balance 2,00,000 3,00,000
Total 27,00,000 35,00,000

22. Read the following carefully and give treatment

(a) The Stock Turnover Ratio of a company is 3 Times. State giving reasons, whether the
ratio improves, declines or does not change because of increase in the value of closing
inventory by Rs.5,000.
(b) The Current Ratio of a Company is 3:1. State with reasons whether the payment of
Rs.20,000 to the creditors will increase, decrease or not change the ratio.
(c) The Debt Equity Ratio of a company is 0.8:1 State whether the long term loan
obtained by the
company will improve, decrease or not change the ratio. (4)
(Hint: (a) Decline (b) Increase (c) Improve)

23. Calculate Cash flows from operating activities from the following information: (6)

Profit for the year 2003-04............................................................... Rs.50,000

Transfer to General Reserve During the year................................... Rs.10,000
Depreciation provided during the year............................................. Rs.20,000
Profit on sale of Furniture.............................................................. ..Rs.5,000
Loss on sale of Machine................................................................... Rs.10,000
Preliminary expenses written off during the year............................ Rs.10,000
Particulars 31.3.03 31.3.04
Debtors 10,000 15,000
Accountancy XII 199
 Bills Receivables 7,000 5,000
Stock 15,000 18,000
Prepaid Expenses 2,000 3,000
Creditors 20,000 18,000
Bills Payable 15,000 25,000
Outstanding Expenses 3,000 4,000

(Hint : Operating Activities Rs.97,000)

Accountancy XII 200

 CBSE QUESTION PAPER (MARCH -2015)

ACCOUNTANCY

[Time allowed : 3 hours] [Maximum marks :

80]

General Instructuions:

(i) This question paper contains three parts A, B and C.

(ii) Part A is compulsory for all candidates.

(iii) Candidates can attempt only one part of the remaining parts B and C.

(iv) All parts of the questions should be attempted at one place.

PART-A
(Accounting for Partnership Firms and Companies)
1. In the absence of partnership deed the profits of a firm are divided among the partners:
a. In the ratio of capital
b. Equity
c. In the ratio of time devoted for the firm’s business
d. According to the managerial abilities of the partners
Ans. (b)
Equally
2. A, B, C and D were partners in a firm sharing profits in the ratio of 4 : 3 : 2 : 1. On 1 st
1
January, 2015 they admitted E as a new partner for 10 share in the profits. E brought
`10,000 for his
share of goodwill premium which was correctly recorded in the books by the accountant.
The accountant showed goodwill at `1,00,000 in the books. Was the accountant correct in
doing so? Give reason in support of your answer.
Ans. No, the accountant is not justified. Self generated goodwill should not be recorded in the
books.
3. On the retirement of Hari from the firm of ‘Hari, Ram and Sharma’ the balance-sheet
showed a debit balance of `12,000 in the profit and loss account. For calculating the
amount payable to Hari this balance will be transferred
(a) to the credit of the capital accounts of Hari, Ram and Sharma equally
(b) to the debit of the capital accounts of Hari, Ram and Sharma equally

Accountancy XII 201

 (c) to the debit of the capital accounts of Ram and Sharma equally
(d) to the credit of the capital accounts of Ram and Sharma equally [1]
Ans. (b)
Debit of Hari, Ram & Sharma equally.
4. Kumar, Verma and Naresh were partners in a firm sharing profit and loss in the ratio of 3
: 2 : 2.
On 23rd January, 2015 Verma died. Verma’s share of profit till the date of his death was
calculated at `2,350.
Pass necessary journal entry for the same in the books of the firm.
Ans. Journal
Date Particular L/F Dr (`) Cr. (`)
2015, Profit & Loss suspense A/c Dr 2,350 —
Jan 23 To Verma’s Capital A/c — 2,350
(being profit share given to Verma on his
death)

5. Give the meaning of forfeiture of shares.

Ans. When a shareholder does not pay amount due on his shares, his shares are cancelled by
the company after giving due notice. This is called forfeiture of shares.

6. Joy Ltd. issued 1,00,000 equity shares of `10 each. The amount was payable as
follows: On application – `3 per share.
On allotment – `4 per share.
On 1st and final call – balance
Application for 95,000 shares were received and shares were allotted to all the applicants.
Sonam to whom 500 shares were allotted failed to pay allotment money and Gautam paid
his entire amount due including the amount due on first and final call on the 750 shares
allotted to him along with allotment. The amount received on allotment was:
(a) `3,80,000 (d) `3,78,000
(c) `3,80,250 (d) `4,00,250
Ans. (c)
` 3,80,250/-
7. State any three purposes other than ‘issue of bonus shares’ for which securities premium
can be utilized.
Ans. Securities premium can be utilized for :
(i) For buy back of its own shares.
(ii) Writing off preliminary expenses of the company.
(iii) Writing off expense/commission/discount on issue of securities or debentures.
8. On 1-4-2013 Jay and Vijay, entered into partnership for supplying laboratory equipments
to government schools situated in remote and backward areas. They contributed capitals
of `80,000 and `50,000 respectively and agreed to share the profits in the ratio of 3 : 2.
The partnership deed provided that interest on capital shall be allowed at 9% per annum.
During the year the firm earned a profit of `7,800.

Accountancy XII 202

 Showing your calculations clearly, prepare ‘Profit and Loss Appropriation Account’ of Jay
and Vijay for the year ended 31-3-2014.
9
Ans. Interest on Jay Capital = 80,000 × 100 = ` 7,200

Interest on Vijay’s Capital = 50,000 9 = ` 4,500

100
Net Profit = ` 7,800
Since interest on capital is an appropriation of profit, it cannot exceed profit.
Total interest on Capital = ` 7,200 + 4,500
= ` 11,700
7,200
Jay will get = 7800
11,700
= ` 4,800
4,500
Vijay will get = 7800
11,700
= ` 3,000

Profit & Loss Appropriation A/c

For the year ending March 31, 2014
Particular (`) Particular (`)
To Interest on Capital By Net Profit 7,800
Jay : 4,800
Vijay : 3,000 7,800
7,800 7,800

9. ‘Tractors India Ltd.’ is registered with an authorized capital of ` 10,00,000 divided into
1,00,000 equity shares of ` 10 each. The company issued 50,000 equity shares at a
premium of ` 5 per share. ` 2 per share were payable with application, ` 8 per share
including premium on allotment and the balance amount on first and final call. The issue
was fully subscribed and all the amount due was received except the first and final call
money on 500 shares allotted to Balaram.
Present the ‘Share capital’ in the balance sheet of ‘Tractors India Ltd.’ as per Schedule VI
Part I of the Companies Act, 1956. Also prepare notes to accounts for the same.

Ans. In the books of ‘Tractors India Ltd’

Balance Sheet
As at…………………………...
S.No Particulars Dr
1 Equity and liabilities

Accountancy XII 203

 1. Shareholder’s Fund
(a) Share Capital 1
(b) Reserve and surplus 2
Notes to Accounts:
Note 1.
Particulars (`)
Share Capital
Authorized share capital
1,00,000 shares of (`)10 each 10,00,000
Issued share capital
50,000 share of (`)10 each 5,00,000
Subscribed share capital
Subscribed and fully paid up
49,500 shares of (`)10 each fully called up 4,95,000
Subscribed but not fully paid up
500 shares of (`)10 each 5,000
Less : Call in Arrear 2,500 2,500
4,97,500
Note 2.
Particulars (`)
Reserve and Surplus
Securities premium reserve A/c 2,50,000
10. ‘Sangam Woolens Ltd.’, Ludhiana, are the manufacturers and exporters of woolen
garments. The company decided to distribute free of cost woolen garments to 10 villages
of Lahul and Spiti District Himachal Pradesh. The company also decided to employ 50
young persons from these villages in its newly established factory. The company issued
40,000 equity shares of `10 each and 1,000 9% debentures of `100 each to the vendors for
the purchase of machinery of `5,00,000.
Pass necessary Journal Entries. Also identify any one value that the company wants to
communicate to the society.
Ans. In the books of ‘Sangam Woollens Ltd.’
Journal
Date Particular L.F. Dr. (`) Cr. (`)
Machinery A/c Dr. 5,00,000 —
To Vendor A/c — 5,00,000
(Being machinery purchased from vendor)
Vendor A/c Dr. 5,00,000 —
To Equity share capital A/c — 4,00,000
To 9% debentures A/c — 1,00,000
(Being 40,000 shares of ` 10 each and 1,000
debentures of ` 100 each issued to vendor for
payment of machinery)

Value communicated (Write any one)

Helping the poor and needy
Generating employment

Accountancy XII 204

11. Dev, Swati and Sanskar were partners in a firm sharing profits in the ratio of 2 : 2 : 1. On
31-3-2014 their balance sheet was as follows:
Liabilities Amount(`) Assets Amount(`)
Trade Payable 17,000 Building 1,04,000
Bank Loan 13,000 Inventory 16,000
Capitals: Trade Receivables 23,000
Dev 77,000 Cash 40,000
Swati 87,000 Profit and Loss A/c 57,000
Sanskar 46,000 2,10,000
2,40,000 2,40,000
On 30th June, 2014 Dev died. According to partnership agreement Dev was entitled to
interest on capital at 12% per annum. His share of profit till the date of his death was to be
calculated on the basis of the average profits of last four years. The profits of the last four
years were:
Years Profit (`)
2010-2011 2,04,000
2011-2012 1,80,000
2012-2013 90,000
2013-2014 (Loss) 57,000
On 1-4-2014, Dev withdraw ` 15,000 to pay for his medical bills.
Prepare Dev’s account to be presented to his executors.

Ans. Dev’s Account

Particulars Amount(`) Particulars Amount(`)
To P & L A/c 22,800 By Balance b/d 77,000
To Drawings A/c 15,000 By Interest on capital 2,310
To Dev’s Executor’s A/c (Bal. 51,935 By P & L Suspense A/c 10,425
Fig.)
89,735 89,735
Working Note:
1. Interest on Dev’s capital = 77,000 12 3 2,310
100 12
2. Average profits of last 4 years
= 2,04,000 1,80,000 90,000 57,000 = 1,04,250
4
2 3
Dev’s share of profit = 1,04,250 10,425
5 12
12. Kumar, Gupta and Kavita were partners in a firm sharing profits and losses equally. The firm
was engaged in the storage and distributed of canned juice and its godown were located at
three different places in the city. Each godown was being managed individually by Kumar,
Gupta and Kavita. Because of increase in business activities at the godown managed by
Gupta, he had to devote more time. Gupta demanded that his share in the profits of the
firm be increased, to which Kumar and Kavita agreed. The new profit sharing ratio was
agreed to be 1 : 2 : 1. For this purpose the goodwill of the firm was valued at two years

Accountancy XII 205

 purchase of the average profits of last five years. The profits of the last five years were as
follows:
Year Profit (`)
I 4,00,000

II 4,80,000
III 7,33,000
IV (Loss) 33,000
V 2,20,000
You are required to :
Calculate the goodwill of the firm.
Pass necessary Journal Entry for the treatment of goodwill on change in profit sharing
ratio of Kumar, Gupta and Kavita.
Ans. Total profit of last 5 years

= 4,00,000 4,80,000 7,33,000 33,000 2,20,000 =

3,60,000 5

Goodwill = Average profits × No. of years

purchase = 3,60,000 × 2 = 7,20,000
Old profit sharing ratio = Kumar : Gupta : Kavita = 1 :
1 : 1 New profit sharing ratio = Kumar : Gupta :
Kavita = 1 : 2 : 1
2 1 6 4 2
Gupta’s Gain = Gupta’s new share – Gupta’s old share =
4 3 12 12
1 1 4 3 1
Kumar’s sacrifice = Kumar’s old share – Kumar’s new share =
3 4 12 12
1 1 1
Similarly Kavita’s sacrifice =
3 4 12

Gupta will pay = 7,20,000 2 1,20,000

12

Kumar and Kavita will get = 7,20,000 1 60,000

12
Journal
Date Particular L.F. Dr. (`) Cr. (`)
Gupta’s Capital A/c Dr. 1,20,000
To Kumar’s capital A/c 60,000
To Kavita’s Capital A/c 60,000
(Being adjusting entry for change in profit sharing
ratio)

13. On 1-4-2010 Sahil and Charu entered into partnership for sharing profits in the
1
ratio of 4 : 3. They admitted Tanu as a new partner on 1-4-2012 for 5 th share

Accountancy XII 206

 which she acquired equally from Sahil and Charu. Sahil, Charu and Tanu earned
profits at a higher rate than the normal rate of return for the year ended 31-3-
2013. Therefore, they decided to expand their business. To meet the requirements

of additional capital they admitted Puneet as a new partner on 1-4-2013 for 17

th share in profits which he acquired from Sahil and Charu in 7 : 3 ratio.
Calculate:
New profit sharing ratio of Sahil, Charu and Tanu for the year 2012-13.
New profit sharing ratio of Sahil, Charu, Tanu and Puneet on Puneet’s admission.
Ans. For 2012-13
Old ratio = Sahil : Charu
= 4 : 3 Tanu new partner

Tanu’s share = 15
Tanu acquires this equally from Sahil and Charu.
1 1 1
Tanu takes from Sahil and Charu =
5 2 10
Sahil’s new share = 4 1 40 7 33 7
10 70 70
3 1 30 7 23
Charu’s new share =
7 10 70 70
33 : 23 : 1 33 : 23 :14
New profit sharing ratio = Sahil : Charu : Tanu =
70 70 5
New profit sharing ratio on Puneet’s admission:
Old ratio = Sahil : Charu : Tanu = 33 : 23 : 14

Puneet’s share = 17
Puneet acquires this from Sahil and Charu in the ratio = 7 : 3
7
Puneet takes from Sahil = 1 7
7 10 70
Puneet takes from Charu = 1
3 3
7 10 70
33 7 26
Sahil’s new share =
70 70 70
23 3 20
Charu’s new share =
70 70 70
New profit sharing ratio = Sahil : Charu : Tanu : Puneet

1.1 7026 : 2070 : 1470 : 1070 = 26 : 20 : 14 : 10 = 13 : 10 : 7 : 5

14. Bharat Ltd. had an authorized capital of `20,00,000 divided into `2,00,000 equity shares
of `10 each. The company issued 1,00,000 shares and the dividend paid for shares was `2
for the year ended 31-3-2008. The management of the company decided to export its
products to the neighbouring countries Nepal, Bhutan, Sri Lanka and Bangladesh. To
meet the requirement of additional funds the financial manger of the company put up the
following three alternatives before its Board of Directors:
(w) Issue 54,000 equity shares.

Accountancy XII 207

 (x) Obtain a loan from Import and Export Bank of India. The loan was available at 12%
per annum interest.
To issue 9% debentures at a discount of 10%.
After comparing the available alternatives the company decided on 1-4-2008 to issue 6,000
9% debentures of `100 each at a discount of 10%. These debentures were redeemable in
four installments starting from the end of third year. The amount of debentures to be
redeemed at the end of third, fourth, fifth and sixth year was as follows:
Year Profit `
III 1,00,000
IV 1,00,000
V 2,00,000
VI 2,00,000
Prepare 9% debentures account for the yeas 2008-09 to 2013-14.
Ans. In the books of Bharat Ltd.
Dr. 9% Debentures A/c Cr.
Date Particular L.F. (`) Date Particular L.F. (`)
2009 2008
Mar 31 To Bal c/d 6,00,000 Apr 1 By Deb. App & Allot. A/c 5,40,000
By Dis. on issue of Deb. 60,000
6,00,000 6,00,000
2010 2009
Mar 31 To Bal c/d 6,00,000 Apr 1 By Bal b/d 6,00,000
6,00,000 6,00,000
2011 2010
Mar 31 To Deb. hol. A/c 1,00,000 Apr 1 By Bal b/d 6,00,000
Mar 31 To Bal c/d 5,00,000
6,00,000 6,00,000

2012 2011
Mar 31 To Deb. hol. A/c 1,00,000 Apr 1 By Bal b/d 5,00,000
Mar 31 To Bal c/d 4,00,000
5,00,000 5,00,000
2013 2012
Mar 31 To Deb. hol. A/c 2,00,000 Apr 1 By Bal b/d 4,00,000
Mar 31 To Bal c/d 2,00,000
4,00,000 4,00,000
2014 2013
Mar 31 To Deb. hol. A/c 2,00,000 Apr 1 By Bal b/d 2,00,000
2,00,000 2,00,000

15. Bora, Singh and Ibrahim were partners in a firm sharing profits in the ratio of 5 : 3 : 1.
On 2-3-2015 their firm was dissolved. The assets were realized and the liabilities were
paid off. Given below are the Realisation Account, Partners, Capital Account and Bank
Account of the firm. the accountant of the firm left a few amounts un posted in these
accounts. You are required to complete these accounts by posting the correct amounts.
Dr. Realisation Account Cr.
Particulars Amount (`) Particulars Amount (`)

Accountancy XII 208

 To Stock 10,000 By Provision for bad debts 5,000
To Debtors 25,000 By Sundry Creditors 16,600
To Plant and machinery 40,000 By Bills payable 3,400
To Bank: By mortgage loan 15,000
Sundry creditors 16,000 By Bank-assets realized:
Bills payable 3,400 Stock 6,700
Mortage Loan 15,000 34,400 Debtors 12,500
To bank (Outstanding repairs) 400 Plant & Machinery 36,000 55,200
To Bank (Exp.) 620 By Bank-unrecorded assets
realized 6,220
By ___________ —
1,10,420 1,10,420
Dr. Capital Account Cr.
Particulars Bora (`) Singh (`) Ibrahim (`) Particulars Bora (`) Singh (`) Ibrahim (`)
— — — — By Bal. b/d 22,000 18,000 10,000
— — — — By General
reserve 2,500 1,500 500
24,500 19,500 10,500 24,500 19,500 10,500
Dr. Bank Account Cr.
Particulars Amount (`) Particulars Amount (`)
To Bal. b/d 19,500 By Realisation (liabilities) 34,400
To realization (assets realized) 55,200 By realization (unrecorded liabilities) 400
__________________ — By ____________________ —
By ____________________ —
80,920 80,920

Ans. Dr. Realisation Account Cr.

Particulars Amount(`) Particulars Amount(`)
To Stock 10,000 By Provision for bad debts 5,000
To Debtors 25,000 By Sundry creditors 16,600
To Plant and Machinery 40,000 By Bills payable 3,400
To Bank By Mortage Loan 15,000
Sundry Creditors 16,000 By Bank
Bills Payable 3,400 Stock 6,700
Mortgage loan 15,000 34,400 Debtor 12,500
To Bank A/c 400 Plant & Machine A/c 36,000 55,200
To Bank A/c 620 By Bank (unrecorded assets) 6,220
By Loss transferred to
Bora’s capital 5,000
Singh’s capital 3,000
Ibrahim’s capital 1,000 9,000
1,10,420 1,10,420
Dr. Capital Account Cr.
Particular Bora Singh Ibrahim Particular Bora Singh Ibrahim
To Realisation 5,000 3,000 1,000 By Balance B/d 22,000 18,000 10,000
To Bank 19,500 16,500 9,500 By General Reserve 2,500 1,500 500
24,500 19,500 10,500 24,500 19,500 10,500

Accountancy XII 209

 Dr. Bank Account Cr.
Particulars Amount(`) Particulars Amount(`)
To Bal. b/d 19,500 By Realisation (liabilities) 34,400
To Realisation 55,200 By Realisation 400
To Realisation 6,220 By Realisation 620
By Bora’s capital 19,500
By Singh’s capital 16,500
By Ibrahim’s capital 9,500
80,920 80,920

16. Alfa Ltd. invited applications for issuing 75,000 equity shares of ` 10 each. The amount
was payable as follows:
On application and allotment – ` 4 per
share. On first – ` 3 per share
On second and final call – Balance
Applications for 1,00,000 shares were received. Shares were allotted to all the applicants on
pro-rata basis and excess money received with application was transferred towards sums
due on first call. Vibha who was allotted 750 shares failed to pay the first call. Her shares
were immediately forfeited. Afterwards the second call was made. The amount due on
second call was also received except on 1000 shares, applied by Monika. Her shares were
also forfeited. All the forfeited shares were re-issued to Mohit for ` 9,000 as fully paid up.
Pass necessary journal entries in the books of Alfa Ltd. for the above transactions.

Accountancy XII 210

Ans. In the books of ‘Alfa Ltd.’
Journal
Date Particular L.F. Dr. (`) Cr. (`)
Bank A/c Dr. 4,00,000
To Share application and allotment A/c 4,00,000
(Being application and allotment money received)
Share application and allotment A/c Dr. 4,00,000
To Share capital A/c 3,00,000
To Share 1stcall A/c 1,00,000
(Being application and allotment money
transferred to share capital account)
Share Ist call A/c Dr. 2,25,000
To Share capital A/c 2,25,000
(Being Ist call money due)
Bank A/c Dr. 1,23,750
To Share Ist call A/c 1,23,750
(Being Ist call money received)
Share capital A/c Dr. 5,250
To Forfeited share A/c 4,000
To Ist call A/c 1,250
(Being Visha Share’s forfeited)
Share second and final call A/c Dr. 2,22,750
To Share capital A/c 2,22,750
(Being second and final call money due)
Bank A/c Dr. 2,20,500
To Share second and final call A/c 2,20,500
(Being final call money received)
Share capital A/c Dr. 7,500
To Forfeited share A/c 5,250
To Second and final call A/c 2,250
(Being Monika shares forfeited)
Bank A/c Dr. 9,000
Forfeited share A/c Dr. 6,000
To share capital A/c 15,000
(Being all forfeited share re-issued)
Forfeited share A/c Dr. 3,250
To Capital reserves A/c 3,250
(Being balance of forfeited A/c transferred to
capital reserve A/c)
Working Note:
1. Applied Alloted Excess
1,00,000 75,000 25,000

Accountancy XII 211

 2. Vibha
Application money received on 1,000 × 4 = 4,000
Less: Application money adjusted on 750 × 4 = 3,000
Excess money 1,000

1st call money due 750 × 3 = 2,250

Less: Excess money 1,000

Amount not paid on 1st call 1,250

OR
16. Jeevan Dhara Ltd. invited applications for issuing 1,20,000 equity shares of ` 10 each at a
premium of ` 2 per share. The amount was payable as follows:
On application - ` 2 per share
On allotment - ` 5 per share (including
premium) On first and final call – balance
Applications for 1,50,000 shares were received. Shares were allotted to all the applicants on
pro-rata basis. Excess money received on applications was adjusted towards sums due on
allotment. All calls were made, Manu who had applied for 3,000 shares failed to pay the
amount due on allotment and first and final call. Madhur who was allotted 2,400 shares
failed to pay the first and final call. Shares of both Manu and Madhur were forfeited. The
forfeited shares were re-issued at ` 9 per share as fully paid up.
Pass necessary journal entries for the above transactions in the books of Jeevan Dhara Ltd.
Ans. In the books of ‘Jeevan Dhara Ltd.’
Journal
Date Particular L.F. Dr. (`) Cr. (`)
Bank A/c Dr. 3,00,000
To Share application A/c 3,00,000
(Being application money received)
Share application A/c Dr. 3,00,000
To Share capital A/c 2,40,000
To Share allotment A/c 60,000
(Being application and allotment money
transferred)
Share allotment A/c Dr. 6,00,000
To Share capital A/c 3,60,000
To Security premium reserve 2,40,000
(Being allotment money due)
Bank A/c Dr. 5,29,200
To Share allotment A/c 5,29,200
(Being allotment money received)
Share Ist and final call A/c Dr. 6,00,000
To Share capital A/c 6,00,000
(Being Ist call money due)
Bank A/c Dr. 5,76,000
To Share Ist and final call A/c 5,76,000
(Being Ist call money received)

Accountancy XII 212

 Share capital A/c Dr. 24,000
Security premium reserve Dr. 4,800
To Forfeited share A/c 6,000
To Share allotment A/c 10,800
To Share first and final call A/c 12,000
(Being Manu share forfeited)
Share capital A/c Dr. 24,000
To Forfeited share A/c 12,000
To First and final call A/c 12,000
(Being Madhur shares were forfeited)
Bank A/c Dr. 43,200
Forfeited share A/c Dr. 4,800
To share capital A/c 48,000
(Being share all forfeited share re-issued)
Forfeited share A/c Dr. 13,200
To Capital reserves 13,200
(Being balance of forfeited share transferred to
capital reserve a/c)
Working Note:
1. Applied Alloted Excess
1,50,000 1,20,000 30,000
2. Manu
Application money received on 3000 × 2 = 6000
Less: Application money adjusted on 2400 × 2 = 4800
Excess money 1200
Allotment money due 2400 × 5 = 12000
Less: Excess money 1200
Amount not paid on allotment 10800

Accountancy XII 213

17. Charu and Harsha were partners in affirm sharing profits in the ratio of 3 : 2. On 1-4-2014
their balance Sheet was as follows:
Balance sheet of Charu and Harsha
As on 1st April, 2014
Liabilities Amount (`) Assets Amount
(`)
Creditors 17,000 Cash 6,000
General reserve 4,000 Debtors 15,000
Workmen compensation fund 9,000 Investments 20,000
Investment fluctuation fund 11,000 Plant 14,000
Provision for bad debts 2,000 Land and Building 38,000
Capitals:
Charu 30,000
Harsha 20,000 50,000
93,000 93,000

On the above data Vaishali was admitted for 1/4th share in the profits of the firm on the
following terms:
(a) Vaishali will bring `20,000 for her capital and `4,000 for her share of goodwill premium.
(b) All debtors were considered good.
(c) The market value of investments was `15,000.
(d) There was a liability of `6,000 for workmen compensation.
(e) Capital accounts of Charu and Harsha are to be adjusted on the basis of Vaishali’s
capital by opening current accounts.
Prepare revaluation Account and Partners’ Capital Account.
Ans. Revaluation Account
Particulars Amount(`) Particulars Amount(`)
To Profit transferred to By Provision for bad debts 2,000
Charu’s capital A/c 1,200
Harsha’s Capital A/c 800 2,000
2,000 2,000
Partner’s Capital Accounts
Particulars Charu Harsha Vaishali Particulars Charu Harsha Vaishali
To Current By bal. b/d 30,000 20,000
A/c (Bal. By General Resv. 2,400 1,600
Fig.) 4,200 2,800 By Workmen
To bal. c/d 36,000 24,000 20,000 compensation Fund 1,800 1,200
By Invest. Fluc. Fund 3,600 2,400
By Cash 20,000
By Premium for
goodwill 2,400 1,600
40,200 26,800 20,000 40,200 26,800 20,000

Working Notes:

Accountancy XII 214

 Total capital of firm = 20,000 × 14 = ` 80,000
Total capital distributed in new profit sharing ratio

Charu = 80,000 9 36,000

20

Harsha = 80,000 6 24,000

20

Vaishali = 80,000 5 20,000

20

OR

1
17. Amit, Balan and Chander were partners in a firm sharing profits in the proportion of 2,
1 1
3
and 6 respectively. Chander retired on 1-4-2014. The Balance Sheet of the firm on
the date of Chander’s retirement was as follows:
Balance Sheet of Amit, Balan and Chander as on 1-4-2014
Liabilities Amount (`) Assets Amount
(`)
Sundry creditors 12,600 Bank 4,100
Provident fund 3,000 Debtors 30,000
General reserve 9,000 Less: Provision 1,000 29,000
Capitals: Stock 25,000
Amit 40,000 Investments 10,000
Balan 36,500 Patents 5,000
Chander 20,000 96,500 Machinery 48,000
1,21,100 1,21,100
It was agreed that:
(a) Goodwill will be valued at `27,000.
(b) Depreciation of 10% was to be provided on machinery.
(c) Patents were to be reduced by 20%.
(d) Liability on account of Provident Fund was estimated at `2,400.
(e) Chander took over investments for `15,800.
(f) Amit and Balan decided to adjust their capitals in proportion of their profit sharing
ratio by opening current accounts.
Prepare Revaluation Account and Partners’ Capital Accounts on Chander’s retirement.
Ans.
Revaluation Account
Particular (`) Particular (`)
To Machinery 4,800 By provident fund 600
To patents 1,000 By Investment 5,800
To profit transferred to

Accountancy XII 215

 Amit’s Capital 300
Balan Capital 200
Chander Capital 100 600
6,400 6,400

Partner Capital Account

Particular Amit Balan Chander Particular Amit Balan Chander
To Chander’s Capital 2,700 1,800 By Balance B/d 40,000 36,500 20,000
To Investment 15,800 By General Reserve 4,500 3,000 1,500
To Chander’s Loan A/c 10,300 By Revaluation A/c 300 200 100
To Balance C/d 42,100 37,900 By Amit’s Capitals 2,700
By Balan’s Capital 1,800
44,800 39,700 26,100 44,800 39,700 26,100

To Current A/c (Bal. By Balance B/d 42,100 37,900

Fig.) 5,900 By Current A/c
To balance c/d 48,000 3,2000 (Bal. Fig) 5,900
48,000 37,900 48,000 37,900

Working Note :

(e) Chander’s share in goodwill = 27,000 × 16 = 4,500

(f) Combined Capital = 42,100 + 37,900 = 80,000

PART-B
(Financial Statements Analysis)
17. Which of the following transactions will result into ‘Flow of Cash’?
Deposited ` 10,000 into bank.
Withdraw cash from bank ` 14,500.
Sale of machinery of the book value of ` 74,000 at a loss of ` 9,000.
Converted ` 2,00,000 9% debentures into equity shares.
Ans. (c) Inflow of cash
18. While preparing the ‘Cash Flow Statement’ the accountant of Gulfam Ltd., a financing
company showed ‘Dividend received on Investments’ on ‘Investing Activity’. Was he
correct in doing so? Give reasons.
Ans. No, he is not correct. Since, Gulfam Ltd. is a financing company, its main business is
lending and investing in securities. Thus, ‘Dividend received on investments’, should be
shown as operating activity.
19. Under which major headings the following items will be presented in the balance sheet of
a company as per Schedule VI Part I of the Companies Act, 1956?
(a) Loans provided repayable on demand
(b) Goodwill
(c) Copyrights
(d) Loose tools

Accountancy XII 216

 (e) Cheques
(f) General Reserve
(g) Stock of finished goods and
(h) 9% debentures repayable after three years

Ans.
Item Major Head
(1) Loans provided repayable on demand Current Assets
(2) Goodwill Fixed Assets/Non-current assets
(3) Copy rights Fixed Assets/Non-current assets
(4) Loose tools Inventories /Current Assets
(5) Cheque Cash & cash equivalent/Current Assets
(6) General reserve Reserve and surplus

(7) Stock of finished goods Inventory/Current Assets

(8) 9% debenture repayable after three years Long term borrowings

21. From the following information related to Naveen Ltd. calculate (a) Return on investment
and (b) Total assets to Debt Ratio.
Information: Fixed assets `75,00,000; Current assets `40,00,000; Current Liabilities
`27,00,000; 12% debentures `80,00,000 and Net profit before interest, tax and dividend
`14,50,000. [4]

Net Profit before Interest,Tax and Dividend

Ans. (a) Return on Investment = ×100
Capital Employed
Capital Employed = Fixed assets + Current Assets – Current liabilities
= 75,00,000 + 40,00,000 – 27,00,000 = 88,00,000
14,50,000
Return on investment = 100 16.48%
88,00,000

(b) Total assets to debt ratio = Total

As
se
ts
De
bts
Total assets = Fixed assets + Current
assets = 75,00,000 + 40,00,000 =
1,15,00,000 Debt = 12% Debentures =
80,00,000

1,15,00,000
Total assets to debt ratio = 80,00,000 = 1.4375 : 1 = 1.44 : 1

Accountancy XII 217

1 The motto of Yash Ltd., an advertising company is ‘Service with dignity’. Its management
and work force is hard-working, honest and motivated. The net profit of the company
doubled during the year ended 31-3-2014. Encouraged by its performance company
decided to give one month extra salary to all its employees. Following is the comparative
statement of Profit and

Loss of the company for the years ended 31st March, 2013 and 2014.
Yash Ltd.
Comparative Statements of Profit and Loss

Particulars Note 2012-13 (`) 2013-14 Absolute %

No. (`) change (`) change
Revenue from operations 10,00,000 15,00,000 5,00,000 50
Less employees benefit expenses 6,00,000 7,00,000 1,00,000 16.67
Profit before tax 4,00,000 8,00,000 4,00,000 100
Tax rate 25% 1,00,000 2,00,000 1,00,000 100
Profit after tax 3,00,000 6,00,000 3,00,000 100

(a) Calculate Net Profit ratio for the years ending 31st March, 2013 and 2014.
(b) Identify any two values which Yash Ltd. is trying to propagate. [4]
Net Profit after Interest and Tax
Ans. Net profit Ratio = 100
Revenue From Operation

For 2012-13
3,00,000
Net Profit Ratio = 100 30%
10,00,000
For 2013-14
6,00,000
Net Profit Ratio = 100 40%
15,00,000
Values being propagated: (any two)
(i) Generosity
(ii) Hard work
(iii) Honesty

Accountancy XII 218

23. Following is the Balance Sheet of Thermal Power Ltd. as at 31-3-2014:
Thermal Power Ltd.

Balance Sheet as at 31st March, 2014

Particulars Note 2013-14 (`) 2012-13 (`)
No.
I. Equity and Liabilities
(1) Shareholders Funds
(a) Share capital 12,00,000 11,00,000
(b) Reserves and surplus 1 3,00,000 2,00,000
(2) Non current Liabilities
Long term borrowings 2,40,000 1,70,000
(3) Current Liabilities
(a) Trade payables 1,79,000 2,04,000
(b) Short term provisions 50,000 77,000
19,69,000 17,51,000
II. Assets
(1) Non-current assets
(a) Fixed assets 2 10,70,000 8,50,000
(i) Tangible
3 40,000 1,12,000
(ii) Intangible
(2) Current assets
(a) Current investments 2,40,000 1,50,000
(b) Inventories
1,29,000 1,21,000
(c) Trade receivables
(d) Cash and cash equivalents 1,70,000 1,43,000
3,20,000 3,75,000
19,69,000 17,51,000

Notes to Accounts:
S. No. Particulars 2013-14 (`) 2012-13 (`)
1. Reserves and surplus
Surplus (balance in statement of Profit and 3,00,000 2,00,000
Loss)
2. Tangible assets
Machinery 12,70,000 10,00,000
Less: Accumulated depreciation (2,00,000) (1,50,000)
3. Intangible assets
Goodwill 40,000 1,12,000
Additional information:
During the year a piece of machinery, costing `24,000 on which accumulated

Accountancy XII 219

 depreciation was `16,000, as sold for `6,000.
Prepare cash flow statement.

Ans. In the books of ….

Particulars Detail (`)
A. Cash Flow from operating activity
Net profit before tax 1,50,000
Add: Non operating expenses
Depreciation on machinery 66,000
Loss on sale of machinery 2,000
Goodwill written off 72,000

Non operating Income — 1,40,000

Operating profit before working capital changes 2,90,000
Add: Increase in current liability and decrease in current —
assets
Less: Increase in current assets and decrease in current
liability
Inventories (8,000)
Trade receivable (27,000)
Trade payable (25,000) (60,000)
Cash generated from operating activity 2,30,000
Less: Tax paid (77,000)
Cash flow from operating activity 1,53,000
B. Cash Flow from investing activity
Purchase of machinery (2,94,000)
Sale of machinery 6,000
Cash used in investing activity (2,88,000)
C. Cash flow from financing activity
Issue of share capital 1,00,000
Borrowing of loan 70,000 1,70,000
Cash flow from financing activity 1,70,000

Net decrease in cash and cash equivalent

1,53,000 + (2,88,000) + 1,70,000 35,000
Add: Cash and cash equivalent in the beginning
3,75,000 + 1,50,000 5,25,000
Cash and cash equivalent at the end of year
3,20,000 + 2,40,000 5,60,000
Working Note:
(i) Net profit before tax.
Surplus – 1,00,000
Provision for tax – 50,000
1,50,000
(Note: It is assumed that short term provision is provision for tax.)

Accountancy XII 220

 Dr. Machinery Account Cr.
Particular (`) Particular (`)

To Balance b/d 10,00,000 By Bank 6,000

To Bank (Bal. fig.) 2,94,000 By P/L A/c 2,000
(Purchase) By Accumulated depreciation 16,000
By Balance c/d 12,70,000
12,94,000 12,94,000
Dr. Accumulated Depreciation Account Cr.

Particular (`) Particular (`)

To Machinery A/c 16,000 By Balance b/d 1,50,000

To Balance c/d 2,00,000 By depreciation (Bal. Fig) 66,000
2,16,000 2,16,000

*****

Accountancy XII 221