Test Series: August, 2017

MOCK TEST PAPER - 1

INTERMEDIATE (IPC): GROUP – I
PAPER – 1: ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) The entity has charged depreciation using the straight-line method at Rs. 10,000 per
annum i.e. (1,00,000/10 years).
On 1st January 2017, the asset's net book value is [1,00,000 – (10,000 x 4)]
Rs. 60,000.
The remaining useful life is 4 years.
The company should amend the annual provision for depreciation to charge the
unamortized cost over the revised remaining life of four years.
Consequently, it should charge depreciation for the next 4 years at Rs. 15,000 per
annum i.e. (60,000 / 4 years).
(b) As per AS 7, when it is probable that total contract costs will exceed total contract
revenue, the expected loss should be recognized as an expense immediately
irrespective of the stage of completion.
In the given case the revenue that can be recognized for the contract i.e. Rs. 2 crore
and the expected expense on the contract is Rs. 2.4 cores. 60% of the contract has
been completed. Therefore as per AS 7 whole amount of expected loss i.e. Rs. 0.40
crores should be recognized as an expense immediately irrespective of the stage of
completion of the contract. Therefore the action of accountant of transferring only
Rs. 0.24 crores to the profit & loss a/c is wrong. He must transfer whole Rs. 0.40 crore
to profit & loss a/c as an expense.
(c) Calculation of cost of fixed asset
Rs.
Materials 16,00,000
Direct expenses 3,00,000
Direct labour (1/15th of Rs.6,00,000) 40,000
Office and administrative expenses (4% Rs.9,00,000) 36,000
Depreciation on assets 15,000
Cost of fixed asset 19,91,000
(d) Price revision was effected during the current accounting period 201 6-2017. As a
result, the company stands to receive Rs. 15 lakhs from its customers in respect of
sales made from 1st January, 2017 to 31st March, 2017. If the company is able to

© The Institute of Chartered Accountants of India

 assess the ultimate collection with reasonable certainty, then additional revenue
arising out of the said price revision may be recognised in 2016-2017 vide AS 9.
2. (a) Cash Flow Statement as per AS 3
Rs. in lacs
Cash flows from operating activities: 36,000
Net profit before tax provision
Add: Non cash expenditures:
Depreciation 24,000
Loss on sale of assets 48
Interest expenditure (non operating activity) 12,000 36,048
72,048
Less: Non cash income
Amortisation of capital grant received (10)
Profit on sale of investments (non operating (120)
income)
Interest income from investments (non operating (3,000) 3,130
income)
Operating profit 68,918
Less: Increase in working capital (67,290)
Cash from operations 1,628
Less: Income tax paid (5,100)
Net cash generated from operating activities (3,472)
Cash flows from investing activities:
Sale of assets (222 – 48) 174
Sale of investments (33,318+120) 33,438
Interest income from investments 3,000
Purchase of fixed assets (22,092)
Expenditure on construction work (41,688)
Net cash used in investing activities (27,168)
Cash flows from financing activities:
Grants for capital projects 18
Long term borrowings 55,866
Interest paid (13,042)

© The Institute of Chartered Accountants of India

 Dividend paid (10,202)
Net cash from financing activities 32,640
Net increase in cash 2,000
Add: Cash and bank balance as on 1.4.2016 6,000
Cash and bank balance as on 31.3.2017 8,000
(b) Note 6 (B) given under Part I of Schedule III to the Companies Act, 2013 provides
that debit balance of Statement of Profit and Loss (after all allocations and
appropriations) shall be shown as a negative figure under the head ‘Surplus’.
Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of
surplus, shall be shown under the head ‘Reserves and Surplus’ even if the resulting
figure is in the negative. In this case, the debit balance of profit and loss i.e. Rs. 250
lakhs exceeds the total of all the reserves i.e. Rs. 230 lakhs. Therefore, balance of
‘Reserves and Surplus’ after adjusting debit balance of profit and loss is negative by
Rs. 20 lakhs, which should be disclosed on the face of the balance sheet. Thus the
treatment done by the company is incorrect.
3. In the books of M Ltd.
Journal Entries
Particulars Dr. Cr.
Amount Amount
(Rs.) (Rs.)
1. Equity Share Capital (Rs. 100) A/c Dr. 35,00,000
To Equity Share Capital (Rs. 25) A/c 8,75,000
To Capital Reduction A/c 26,25,000
(Being Equity shares of Rs. 100 each reduced to
Rs. 25 each and balance transferred to Capital
Reduction A/c)
2. 10% Preference Share Capital (Rs. 100) A/c Dr. 15,00,000
To 10% Preference Share Capital (Rs. 75) A/c 11,25,000
To Capital Reduction A/c 3,75,000
(Being Preference shares of Rs. 100 each reduced to
Rs. 75 each and balance transferred to Capital
Reduction A/c. Total Pref Shares = 15,000)
3. 10% Preference Share Capital (Rs. 75) A/c Dr. 11,25,000
To 13% Preference Share Capital (Rs. 50) A/c 7,50,000
To Equity Share Capital A/c (Rs. 25) 3,75,000

© The Institute of Chartered Accountants of India

 (Being one new 13% Preference share of Rs. 50 each
and one equity share of Rs. 25 each issued against
10% Preference Share of Rs. 75 each. Total Pref
Shares = 15,000)
4. Capital Reduction A/c Dr. 1,50,000
To Preference share dividend payable A/c 1,50,000
(Being arrear of Preference share dividend payable for
one year)
5. Preference share dividend payable A/c Dr. 1,50,000
To Equity Share Capital A/c 1,50,000
(Being Equity Shares of Rs. 25 each issued for arrears
of Preference Share dividend)
6. 7% Debentures A/c Dr. 5,00,000
To Debenture holders A/c 5,00,000
(Being balance of 7% Debentures transferred to
Debenture holders A/c)
7. Debenture holders A/c Dr. 5,00,000
To 13% Preference Share Capital A/c 2,50,000
To Bank A/c 2,25,000
To Capital Reduction A/c 25,000
(Being 50% of Debenture holders opted to take 13%
Preference shares at par and remaining took 90%
cash payment for their claims)
8. Loan from Director A/c Dr. 1,50,000
To Provision for Contingent Liability A/c 1,50,000
(Being provision for contingent liability of
Rs. 1,50,000 as it is payable and the same is adjusted
against Loan from director A/c)
9. Bank A/c Dr. 10,00,000
To Equity Share Application & Allotment A/c 10,00,000
(Being application money received on 40,000 Equity
shares @ Rs. 25 each)
10. Equity Share Application & Allotment A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000

© The Institute of Chartered Accountants of India

 (Being application money transferred to capital A/c, on
allotment)
11. Land & Buildings A/c Dr. 3,00,000
To Capital Reduction A/c 3,00,000
(Being value of Land & Buildings appreciated)
12. Expenses on Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of expenses on reconstruction)
13. Capital Reduction A/c Dr. 31,75,000
To Plant & Machinery A/c 4,00,000
To Inventory A/c 1,00,000
To Trade receivables A/c 1,50,000
To Profit & Loss A/c 23,00,000
To Expenses on Reconstruction A/c 15,000
To Capital Reserve A/c (bal fig) 2,10,000
(Being various losses written off and balance of
Capital Reduction A/c transferred to Capital Reserve
A/c)
4. (a) Receipts and Payments Account
For the year ended 31-3-2015

To Subscription A/c (W.N.1) 67,050 By Balance b/d

To Donation A/c 5,000 (Bank overdraft) 15,000
To Entrance Fees A/c 4,000 By Salary 19,500
To Furniture A/c (Sale of Add: Outstanding of last year 1,200
furniture) (7,000 – 2,500) 4,500 Less: Outstanding of this year (350) 20,350
By Rent 4,500
Add: Outstanding of last year 500
Less: Outstanding of this year (800) 4,200
By Printing 750
By Insurance 500
Add: Prepaid in this year 150 650
By Audit Fees 750
Add: Outstanding of last year 500

© The Institute of Chartered Accountants of India

 Less: Outstanding of this year (750) 500
By Games & Sports 3,500
By Miscellaneous Expenses 14,500
By Sports Equipment
(Purchased) (W.N. 2) 5,000
By Furniture (Purchased)(W.N.3) 8,000
By Balance c/d
Cash 850
Bank (bal. fig.) 7,250
80,550 80,550

Working Notes:
1. Calculation of subscription received during the year 2014-2015
Rs. Rs.
Subscription as per Income & Expenditure A/c 68,000
Less: Arrears of 2014-2015 3,700
Advance in 2013-2014 1,000 (4,700)
63,300
Add: Arrears of 2013-2014 2,600
Advance for 2015-2016 1,500 4,100
67,400
Less: Written off during 2014-2015 (350)
67,050
2. Calculation of Sports Equipment purchased during 2014-2015
Sports Equipment A/c
Rs. Rs.
To Balance b/d 25,000 By Income & Expenditure A/c 6,000

To Receipts & Payments A/c 5,000 (Depreciation)

(Purchases) (bal. fig.) By Balance c/d 24,000

30,000 30,000

© The Institute of Chartered Accountants of India

 3. Calculation of Furniture purchased during 2014-2015
Furniture A/c
Rs. Rs.
To Balance b/d 30,000 By Receipts & Payments A/c 4,500
To Receipts & Payments A/c 8,000 By Income & Expenditure A/c 2,500
(Purchases)(Bal.fig.) (Loss on sale)
By Income & Expenditure A/c
(Depreciation) 3,100
By Balance c/d 27,900
38,000 38,000

(b) The proposals will be evaluated and vendor will be selected considering the following
criteria:
1. Quantum of services provided and whether the same matches with the
requirements of the hospital.
2. Reputation and background of the vendor.
3. Comparative costs of the various propositions.
4. Organizational set up of the vendor particularly technical staffing to obtain
services without inordinate delay.
5. Assurance of quality, confidentiality and secrecy.
6. Data storage and processing facilities.
5. Revaluation Account
Particulars Rs. Particulars Rs.
To Provision for doubtful debts 600 By Unexpired insurance 2,000
To Machinery 2,400 By Land and building 10,000
To Outstanding repairs 3,000
To Profit t/f to:
A’s capital A/c 3,000
B’s capital A/c 2,000
C’s capital A/c 1,000
12,000 12,000

© The Institute of Chartered Accountants of India

 Capital Accounts of Partners
Particulars A B C Particulars A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To B’s capital 9,000 - 3,000 By Balance b/d 72,000 48,000 24,000
A/c By Revaluation A/c 3,000 2,000 1,000
(for goodwill)
(W. N 2)
To Bank A/c - 6,000 - By A’s capital
To B’s loan A/c - 68,000 - A/c (for goodwill)
To Balance c/d 90,000 - 30,000 (W.N. 2) - 9,000 -
By C’s capital A/c
(for goodwill) - 3,000 -
(W.N 2)
By Contingency 15,000 10,000 5,000
Reserve
By Work 3,000 2,000 1,000
Compensation
Reserve
By Bank A/c 6,000 - 2,000
(Bal. fig)
99,000 74,000 33,000 99,000 74,000 33,000
Balance Sheet of A and C at 31 st December 2016
Liabilities Rs. Assets Rs. Rs.
Creditors 20,000 Cash at bank (W.N 1) 18,000
Employees’ Provident Fund 1,600 Debtors 20,000
Liability for repairs 3,000 Less: Provision (1,000) 19,000
B’s loan A/c 68,000 Stock 18,000
A’s capital A/c 90,000 Machinery 45,600
C’s capital A/c 30,000 (48,000- 2,400)
Land & building 1,10,000
(1,00,000+10,000)
Unexpired insurance 2,000
2,12,600 2,12,600

© The Institute of Chartered Accountants of India

 Working Notes:
1. Bank Account
Particulars Rs. Particulars Rs.
To Balance b/d 16,000 By B’s capital A/c 6,000
To A’s capital A/c 6,000 By Balance c/d 18,000
To C’s capital A/c 2,000
24,000 24,000
2. Adjustment of goodwill
New ratio Old ratio Gaining ratio
A 3/4 3/6 18  12 6

24 24
C 1/4 1/6 64 2

24 24
Therefore, gaining ratio of A & C = 3:1
B’s share of goodwill of Rs.12,000 will be shared by A & C in 3:1 = Rs.9,000:
Rs.3,000
6. (a) Sales Ledger Adjustment Account
2016 Rs. 2016 Rs.
Jan. 1 To Balance b/d 6,41,600 June 30 By General ledger
adjustment A/c-
June 30 To General ledger 11,26,000 Cash 3,68,400
adjustment A/c- Returns inward 33,600
Sales Bills receivable 3,20,000
Bad debts 24,000
Discounts allowed 21,600
_______ June 30 By Balance c/d 10,00,000
17,67,600 17,67,600

Purchases Ledger Adjustment Account

2016 Rs. 2016 Rs.
June 30 To General ledger Jan. 1 By Balance b/d 3,72,800
adjustment June 30 By General ledger
A/c: 3,60,000 adjustment A/c:
Cash

© The Institute of Chartered Accountants of India

 Returns 15,200 Purchases 6,44,000
outward
Bills payable 2,40,000
Discounts
received 8,400
June 30 To Balance c/d 3,93,200
10,16,800 10,16,800

(b) Statement showing calculation of profits for pre and post incorporation periods
for the year ended 31.3.2017
Particulars Pre-incorpo- Post- incorpo-
ration period ration period
Rs. Rs.
Gross profit (1:3) 80,000 2,40,000
Less: Salaries (1:2) 16,000 32,000
Stationery (1:2) 1,600 3,200
Advertisement (1:3) 4,000 12,000
Travelling expenses (W.N.3) 4,000 8,000
Sales promotion expenses (W.N.3) 1,200 3,600
Misc. trade expenses (1:2) 12,600 25,200
Rent (office building) (W.N.2) 8,000 18,400
Electricity charges (1:2) 1,400 2,800
Director’s fee - 11,200
Bad debts (1:3) 800 2,400
Selling agents commission (1:3) 4,000 12,000
Audit fee (1:3) 1,500 4,500
Debenture interest - 3,000
Interest paid to vendor (2:1) (W.N.4) 2,800 1,400
Selling expenses (1:3) 6,300 18,900
Depreciation on fixed assets (W.N.5) 3,000 6,600
Capital reserve (Bal. Fig.) 12,800 -
Net profit (Bal. Fig.) - 74,800

10

© The Institute of Chartered Accountants of India

 Working Notes:
1. Time Ratio
Pre incorporation period = 1 st April, 2016 to 31 st July, 2016
i.e. 4 months
Post incorporation period is 8 months
Time ratio is 1: 2.
2. Sales ratio
Let the monthly sales for first 6 months (i.e. from 1.4.2016 to 30.09.16) be =
Then, sales for 6 months = 6x
2 5
Monthly sales for next 6 months (i.e. from 1.10.16 to 31.3.2017) = x + x= x
3 3
5
Then, sales for next 6 months = x X 6 = 10x
3
Total sales for the year = 6x + 10x = 16x
Monthly sales in the pre incorporation period = Rs.19,20,000/16 = Rs.1,20,000
Total sales for pre-incorporation period = Rs.1,20,000 x 4 = Rs.4,80,000
Total sales for post incorporation period = Rs.19,20,000 – Rs.4,80,000 =
Rs.14,40,000
Sales Ratio = 4,80,000 : 14,40,000= 1 : 3
3. Rent
Rs.
Rent for pre-incorporation period (Rs.2,000 x 4) 8,000 (pre)
Rent for post incorporation period
August,2016& September,2016 (Rs.2,000 x 2) 4,000
October,2016 to March,2017 (Rs.2,400 x 6) 14,400 18,400 (post)
4. Travelling expenses and sales promotion expenses
Pre Post
Rs. Rs.
Traveling expenses Rs. 12,000 (i.e. Rs.16,800-Rs.4,800)
distributed in 1:2 ratio 4,000 8,000
Sales promotion expenses Rs. 4,800 distributed in 1:3 ratio 1,200 3,600

11

© The Institute of Chartered Accountants of India

 5. Interest paid to vendor till 30 th September, 2016
Pre Post
Rs. Rs.
 Rs. 4,200  2,800
Interest for pre-incorporation period  4
 6 
Interest for post incorporation period i.e. for
 Rs. 4,200  1,400
August, 2016& September, 2016=  2
 6 
6. Depreciation
Pre Post
Rs. Rs.
Total depreciation 9,600
Less: Depreciation exclusively for post incorporation period 600 600
9,000
 4 3,000
Depreciation for pre-incorporation period 9,000  
 12 
 8 6,000
Depreciation for post incorporation period 9,000  
 12 
3,000 6,600
7. (a) As per Rule 5 of the Companies (Accounting Standards) Rules, 2006, an existing
company, which was previously not an SMC and subsequently becomes an SMC,
shall not be qualified for exemption or relaxation in respect of accounting standards
available to an SMC until the company remains an SMC for two consecutive
accounting periods. Therefore, the management of the company cannot avail the
exemptions available with the SMCs for the year ended 31 st March, 2015.
(b) As per AS 9, "Revenue Recognition" is the inflow of cash, receivable or other
consideration arising in the course of ordinary activities of an enterprise from the sale
of Goods. However, the above is subject to trade discount and volume rebates
received in the course of carrying on business which shall be deducted in ascertaining
revenue since they represent a reduction of cost. Revenue is also subject to certain
risks like damages on transfer of goods to the buyers' end.
In the given case, trade discount is to be deducted from Rs. 13,00,000 and gross sale
shall be recognized at (Rs. 13,00,000 - Rs. 1,06,000) = Rs. 11,94,000 and goods
returned Rs. 1,34,000 are to be recorded in the form of sales return.
Thus the contention of the Accountant to book sale of Rs. 10,60,000 is not correct.

12

© The Institute of Chartered Accountants of India

 (c) Journal Entries
Rs. Rs.
Capital Redemption Reserve A/c Dr. 70,000

Securities Premium A/c Dr. 40,000

General Reserve A/c Dr. 1,05,000

P & L A/c Dr. 10,000

To Bonus to Shareholders 2,25,000

(Being issue of bonus shares by utilization of

various Reserves, as per resolution dated …….)

Bonus to Shareholders A/c Dr. 2,25,000

To Equity Share Capital 2,25,000

(Being capitalization of Profit)

(d) Calculation of number of days from base date

Transaction Due date Amount No. of days from Base date Product
date Rs. (Base date 19.6.2017)
8.3.2017 11.7.2017 4,000 22 88,000
16.3.2017 19.6.2017 5,000 0 0
7.4.2017 10.9.2017 6,000 83 4,98,000
17.5.2017 20.8.2017 5,000 62 3,10,000
20,000 8,96,000
Total of Pr oduct
Average due date = Base date 
Total of Amount
= 19.6.2017 + Rs. 8,96,000 / Rs. 20,000
= 19.6.2017 + 45 days approximately = 3.8.2017
(e) As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy
which has a material effect should be disclosed in the financial statements. The
amount by which any item in the financial statements is affected by such change
should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. Thus Prashant Ltd.
should disclose the change in valuation method of inventory and its effect on financial

13

© The Institute of Chartered Accountants of India

 statements. The company may disclose the change in accounting policy in the
following manner:
‘The company values its inventory at lower of cost and net realisable value. Since net
realisable value of all items of inventory in the current year was greater than
respective costs, the company valued its inventory at cost. In the present year i.e.
2014-15, the company has changed to weighted average method, which better
reflects the consumption pattern of inventory, for ascertaining inventory costs from
the earlier practice of using FIFO for the purpose. The change in policy has reduc ed
current profit and value of inventory by Rs. 16,000.

14

© The Institute of Chartered Accountants of India