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Test Series: May,2023
MOCK TEST PAPER II
FOUNDATION COURSE
PAPER – 1: PRINCIPLES AND PRACTICE OF ACCOUNTING
ANSWERS
1. (a) (i) False: Overhauling expenses incurred for the engine of a truck to derive better fuel efficiency
reduces the running cost in future and thus the benefit is in form of endurable long -term
advantage. So this expenditure should be capitalised.
(ii) True: In the early periods of useful life of a fixed assets, repairs and maintenance expenses
are relatively low because the asset is new. Whereas in later periods, as the asset become
old, repairs and maintenance expenses increase continuously. Under written down value
method, depreciation charged is high in the initial period and reduces continuously in the later
periods. Thus, depreciation and repair and maintenance expenses become more or less
uniform throughout the useful life of the asset.
(iii) False: The sale value of the by product is credited to Manufacturing Account so as to reduce
to that extent, the cost of manufacture of main product.
(iv) False: According to the Indian Partnership Act, in the absence of any agreement to the
contrary, profits and losses of the firm are shared equally among partners.
(v) False: Debenture interest is payable before the payment of any dividend on shares.
(vi) True: The capital fund represents the amount contributed by members through legacies,
special donations entrance fee and accumulated surplus over the years.
(b) Change in accounting policy may have a material effect on the items of financial statements. For
example, cost formula used for inventory valuation is changed from weighted average to FIFO.
Unless the effect of such change in accounting policy is quantified, the fin ancial statements may
not help the users of accounts. Therefore, it is necessary to quantify the effect of change on
financial statement items like assets, liabilities, profit/loss.
For Example, Omega Enterprises revised its accounting policy relating to valuation of inventories
to include applicable production overheads.
(c) Vinayak Ltd.
Bank Reconciliation Statement as on 31.3.2023

Particulars `
Balance as per cash book 4,80,000
Add : Cheque issued but not presented 2,72,000
Interest credited 6,000
7,58,000
Less : Bank charges (1,200)
Balance as per pass book 7,56,800
2. (a)
(i) Bills Receivables A/c Dr. 4,650
Bills Payable A/c Dr. 4,650
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To Krishan A/c 9,300
(Correction of error by which Bills Receivable account of
` 4,650 was wrongly posted through Bills Payable book)
(ii) Suspense A/c Dr. 32,000
To Manan A/c
To Suman A/c 16,000
(Removal of wrong debit to Suman and giving credit to 16,000
Manan from whom cash was received)
(iii) Suspense A/c Dr. 5,400
To P & L Adjustment A/c 5,400
(Correct of error by which general expenses of ` 3,900 was
wrongly posted as ` 9,300)
(iv) P&L Adjustment A/c Dr. 15,000
To Suspense A/c 15,000
(Correction of error by which Sales account was overcast
last year)
(v) P & L Adjustment A/c Dr. 23,010
To Mr. Badri 23,010
(Correction of error by which legal expenses paid to Mr.
Badri was wrongly debited to his personal account)
(vi) Neha A/c Dr. 75,000
To Megha A/c 75,000
(Correction of error by which sale of ` 75,000 to Neha was
wrongly debited to Megha’s account)
(vii) Suspense A/c Dr. 270
To P&L Adjustment A/c 270
(Correction of error by which Purchase A/c was excess
debited by `270 i.e. `1,960 – `1,690)
(vii) Trade Receivable A/c Dr. 21,000
To Suspense A/c 21,000
(` 21,000 due by Mr. Madan not taken into trial balance
now rectified)

Suspense A/c

Particulars ` Particulars `
To P & L Adjustment A/c 5,400 By P & L Adjustment A/c 15,000
To Manan 16,000 By Trade Receivable (Mr. Madan) 21,000
To Suman 16,000 By Difference in Trial Balance (Balancing 1,670
figure)
To P&L Adjustment A/c 270
37,670 37,670

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(b) Truck A/c

Date Particulars Amount Date Particulars Amount

2021 2021
Jan-01 To balance b/d 2,92,50,000 Oct-01 By Bank A/c 27,00,000
Oct-01 To Profit & Loss A/c Oct-01 By Depreciation on
(Profit on settlement 4,50,000 lost assets 6,75,000
of Truck)
Oct-01 To Bank A/c 50,00,000 Dec-31 By Depreciation A/c 83,50,000
Dec-31 By balance c/d 2,29,75,000
3,47,00,000 3,47,00,000
2022 2022
Jan-01 To balance b/d 2,29,75,000 Dec-31 By Depreciation A/c 91,00,000
Dec-31 By balance c/d 1,38,75,000

2,29,75,000 2,29,75,000

Working Note:
1. To find out loss or Profit on settlement of truck `
Original cost as on 1.4.2019 45,00,000
Less: Depreciation for 2019 6,75,000
38,25,000
Less: Depreciation for 2020 9,00,000
29,25,000
Less: Depreciation for 2021 (9 months) 6,75,000
22,50,000
Less: Amount received from Insurance company 27,00,000
Profit on Settlement of Truck 4,50,000

3. (a) Journal Entries in the Books of Mr. X

Date Particulars L.F. Dr. Cr.
Amount ` Amount `
2022
August 1 Bills Receivable A/c Dr. 50,000
To Y 50,000
(Being the acceptance received from Y to settle his
account)
August 1 Bank A/c Dr. 49,000
Discount A/c Dr. 1,000
To Bills Receivable 50,000
(Being the bill discounted for ` 49,000 from bank)

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November 4 Y A/c Dr 50,000
To Bank Account 50,000
(Being the Y’s acceptance is to be renewed)
November 4 Y A/c Dr. 1,200
To Interest Account 1,200
(Being the interest due from Y for 3 months i.e.,
40,000x3/12 12%=1,200)
November 4 Cash A/c Dr. 11,200
Bills Receivable A/c Dr. 40,000
To Y A/c 51,200
(Being amount and acceptance of new bill received
from Y)
December 31 Y A/c Dr. 40,000
To Bills Receivable A/c 40,000
(Being Y became insolvent)
December 31 Cash A/c Dr. 16,000
Bad debts A/c Dr. 24,000
To Y A/c 40,000
(Being the amount received and written off on Y’s
insolvency)

(b) Taking 19.6.2022 as a Base date

Transaction Date Due Date Amount Days Amount

8.3.2022 11.7.2022 12,000 22 2,64,000
16.3.2022 19.6.2022 15,000 0 0
7.4.2022 10.9.2022 18,000 83 14,94,000
17.5.2022 20.8.2022 15,000 62 9,30,000
60,000 26,88,000
Total of Product
Average Due Date = Base date +
Total of Amount
= 19.6.2022 + ` 26,88,000/`60,000
= 19.6.2022 + 44.8 days (or 45 days approximately)
= 3.8.2022
Satyam wants to save interest of ` 471. The yearly interest is ` 60,000  9% = ` 5,400.
Assume that days corresponding to interest of ` 471 are Y.
Then, 5,400  Y/365 = ` 471 or Y = 471  365/5,400 = 31.8 days or 32 days (Approx.)
Hence, if Satyam wants to save ` 471 by way of interest, he should prepone the payment of amount
involved by 32 days from the Average Due Date. Hence, he should make the payment on 2.7.2022
(3.8.2022 – 32 days).

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(c) In the books of Y
X in Account Current with Y
(Interest to 31 st March, 2023 @ 10% p.a)
Date Particulars Amount Days Product Date Particulars Amount Days Product
2023 ` ` 2023 ` `
Jan.1 To Balance 5,000 90 4,50,000 Jan.24 By Promissiory Note 5,000 (27) (1,35,000)
b/d (due date 27 th April)
Jan. 11 To Sales 6,000 79 4,74,000 Feb. 1 By Purchases 10,000 58 5,80,000
Feb. 4 To Sales 8,200 55 4,51,000 Feb. 7 By Sales Return 1,000 52 52,000
Mar. 18 To Sales 9,200 13 1,19,600 Mar. 1 By Purchases 5,600 30 1,68,000
Mar. 31 To Interest 219 Mar. 23 By Purchases 4,000 8 32,000
Mar. 31 By Balance of Products 7,97,600
Mar. 31 By Bank 3,019
28,619 14,94,600 28,619 14,94,600

Working Note:
Calculation of interest:
7,97,600 10
Interest =  = ` 219 (approx.)
365 100
4. (i) Revaluation Account
` `
To Furniture 3,480 By Building 12,800
To Stock 8,560 By Sundry creditors 5,600
To Provision of doubtful debts By Investment 1,800
(` 7,000 – ` 800) 6,200
By Revaluation Loss 4,280
To Outstanding wages 6,240 ____
24,480 24,480
(ii) Partners' Capital Accounts
Atul Aman Atif Atul Aman Atif
` ` ` ` ` `
To Revaluation 2,568 1,712 By Balance b/d 1,76,000 1,44,000 –
Loss
To Goodwill 90,000 60,000 30,000 By Cash A/c – – 1,00,000
To Balance c/d 1,91,432 1,54,288 70,000
By Goodwill A/c 1,08,000 72,000
(Working Note)
2,84,000 2,16,000 1,00,000 2,84,000 2,16,000 1,00,000

(iii) Balance Sheet of New Partnership Firm

(after admission of Atif) as on 1.1.23

Liabilities ` Assets `
Capital Accounts:
Atul 1,91,432 Building (1,04,000 + 12,800) 1,16,800

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Aman 1,54,288 Furniture (23,200 – 3,480) 19,720
Atif 70,000 4,15,720 Stock-in-trade (85,600 – 8,560) 77,040
Bills Payable 16,400 Debtors 1,40,000
Bank Overdraft 36,000 Less: Provision for bad debts (7,000) 1,33,000
Sundry creditors (51,600-5,600) 46,000 Investment (10,000 + 1,800) 11,800
Outstanding wages 6,240 Cash (62,000 + 1,00,000) 1,62,000
5,20,360 5,20,360

Working Note:
Calculation of goodwill
Atif's contribution of ` 1,00,000 consists only 1/6th of capital.
Therefore, total capital of firm should be ` 1,00,000 × 6 = ` 6,00,000.
But combined capital of Atul, Aman and Atif amounts ` 1,76,000 + 1,44,000 + 1,00,000 = `
4,20,000.
Thus Hidden goodwill is ` 1,80,000 (` 6,00,000 – ` 4,20,000).
(b) In the Books of Mr. Zen
Manufacturing Account for the Year ended 31.03.2023
Particulars Units Amount Particulars Units Amount
` `
To Opening Work- 81,000 2,34,000 By Closing Work- in- 1,26,000 4,32,000
in-Process Process
To Raw Materials By Trading A/c – Cost 45,00,000 17,40,2400
Consumed: of finished goods
transferred
Opening 23,40,000
Inventory
Add: Purchases 73,80,000
97,20,000
Closing Inventory (28,80,000) 68,40,000
To Direct Wages
– W.N. (1) 36,50,400
To Direct expenses:
Hire charges on
Machinery – W.N. (2) 31,50,000
To Indirect expenses:
Hire charges of
Factory 23,40,000
Repairs &
Maintenance 16,20,000 ________
1,78,34,400 1,78,34,400

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Working Notes:
(1) Direct Wages – 45,00,000 units @ `0.80 = `36,00,000
1,26,000 units @ `0.40 = ` 50,400
` 36,50,400
(2) Hire charges on Machinery – 45,00,000 units @ `0.70 = `31,50,000
5. (a) Receipts and Payments Account for the year ended 31-03-2023
Receipts ` Payments `
To balance b/d By Salaries 30,000
Cash and bank 55,000 By Purchase of sports goods 5,000
To Subscription received (W.N.1) 1,22,500 ` (12,500-7,500)
To Sale of investments (W.N.2) 35,000 By Purchase of machinery 5,000
To Interest received on investment 7,000 ` (10,000-5,000)
To Sale of furniture 4,000 By Sports expenses 25,000
By Rent paid 11,000
` (12,000 -1,000)
By Miscellaneous expenses 2,500
By Balance c/d
Cash and bank 1,45,000
2,23,500 2,23,500

Income and Expenditure account for the year ended 31-03-2023

Expenditure ` ` Income ` `
To Salaries 30,000 By Subscription 1,50,000
Add: Outstanding for 9,000 By Interest on
2023 Investment
39,000 Received 7,000
Less: Outstanding for (7,500) 31,500 Accrued 1,750 8,750
2022 (W.N.5)
To Sports expenses 25,000
To Rent 12,000
To Miscellaneous exp. 2,500
To Loss on sale of 3,000
furniture (W.N.3)
To Depreciation (W.N.4)
Furniture 700

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Machinery 750
Sports goods 1,125 2,575
To Surplus 82,175
1,58,750 1,58,750

Working Notes:
1. Calculation of Subscription received during the year 2022-23

`
Subscription due for 2022-23 1,50,000
Add: Outstanding of 2022 70,000
Less: Outstanding of 2023 (1,00,000)
Add: Subscription of 2023 received in advance 15,000
Less: Subscription of 2022 received in advance (12,500)
1,22,500

2. Calculation of Sale price and profit on sale of investment

Face value of investment sold: ` 87,500 × 50% = ` 43,750
Sales price: ` 43,750 × 80% = ` 35,000
Cost price of investment sold: ` 70,000 × 50% = ` 35,000
Profit/loss on sale of investment: ` 35,000 - ` 35,000 = NIL
3. Loss on sale of furniture

`
Value of furniture as on 01-04-2022 14,000
Value of furniture as on 31-03-2023 7,000
Value of furniture sold at the beginning of the year 7,000
Less: Sales price of furniture (4,000)
Loss on sale of furniture 3,000

4. Depreciation

Furniture - `7,000 × 10% = 700

Machinery - `5,000 × 15% = 750
Sports goods - `7,500 × 15% = 1,125

5. Interest accrued on investment

`
Face value of investment on 01-04-2022 (87,500)
Interest @ 10% 8,750
Less: Interest received during the year (7,000)
Interest accrued during the year 1,750
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Note: It is assumed that the sale of investment has taken place at the end of the year.

(b) (i) Computation of Income for the year 2022-23:

`
Money received during the year related to 2022-23 15,00,000
Add: Money received in advance during previous years 4,50,000
Total income of the year 2022-23 19,50,000

(ii) Advance from Customers A/c

Date Particulars ` Date Particulars `
To Sales A/c 4,50,000 1.4.2022 By Balance b/d 6,00,000
(Advance related to
current year transferred
to sales)
By Bank A/c 3,60,000
31.3.23 To Balance c/d 5,10,000 (Balancing Figure)
9,60,000 9,60,000

So, total money received during the year is:

`
Cash Sales during the year 15,00,000
Add: Advance received during the year 3,60,000
Total money received during the year 18,60,000
6. (a) In the books of FCI Ltd.
Journal Entries
Dr. Cr.
` `
Bank A/c Dr. 18,00,000
To Equity Share Application A/c 18,00,000
(Being the application money received for 3,00,000 shares at
` 6 per share)
Equity Share Application A/c Dr. 18,00,000
To Equity Share Capital A/c (2,00,000 x ` 6) 12,00,000
To Share allotment A/c 6,00,000
(Being share allotment made for 2,00,000 shares and excess
adjusted towards allotment)
Equity Share Allotment A/c Dr. 20,00,000
To Equity Share Capital A/c 20,00,000
(Being allotment amount due on 2,00,000 equity shares at ` 10
per share as per Directors’ resolution no... dated...)
Bank A/c Dr. 14,00,000
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To Equity Share Allotment A/c 14,00,000
(Being balance allotment money received for 2,00,000 shares)
Equity Share first and final call A/c Dr. 8,00,000
To Equity Share Capital A/c 8,00,000
(Being first and final call amount due on 2,00,000 equity shares
at ` 4 per share as per Directors’ resolution no... dated...)
Bank A/c Dr. 7,76,000
Calls in arrears A/c 24,000
To Equity Share first and final call A/c 8,00,000
(Being final call received on 1,94,000 shares)
Share capital A/c (6,000 x ` 20) Dr. 1,20,000
To Forfeited shares A/c (6,000 x ` 16) 96,000
To Calls in arrears A/c (6,000 x ` 4) 24,000
(Being forfeiture of 6,000 shares of ` 20 each fully called-up for
non payment of first and final call @ ` 4 as per Directors’
resolution no... dated..)
Bank A/c (5,000 x `16) Dr. 80,000
Forfeited shares A/c (5,000 x `4) 20,000
To Equity Share Capital A/c (5,000 x ` 20) 1,00,000
(Being re-issue of 2,500 shares @ ` 16)
Forfeited share A/c (5,000 x ` 12) 60,000
To capital reserve A/c (5,000 x ` 12) 60,000
(Being profit on re-issue transferred to capital reserve)

Working Note:
Calculation of amount to be transferred to Capital reserve A/c `
Forfeited amount per share = 96,000/6,000 = 16
Loss on re issue (20-16) 4
Surplus per share 12
Transfer to capital reserve ` 12 x 5,000 ` 60,000
(b) Journal of Alpha Ltd.

Date Particulars Dr. Cr.

2022 Sundry Assets A/c Dr. 4,50,000
April,1 Goodwill A/c (Bal. fig) Dr. 50,000
To Beta Ltd. A/c 4,40,000
To Sundry Liabilities A/c 60,000
(Being Asset and liabilities taken over for a net
Consideration of ` 4,40,000)
Beta Ltd. A/c Dr. 4,40,000
To 8% Debentures A/c 4,00,000

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To Securities Premium Reserve A/c 40,000
(Being 4,000; 8% Debenture of ` 100 each Issued at a
premium of 10%)
Bank A/c Dr. 90,000
To Debenture Application A/c 90,000
(Being the application money receive for 3000, 8%
Debenture)
Debenture Application A/c Dr. 90,000
To 8% Debenture A/c 90,000
(Being 3,000; 8% Debenture allotted)
Debentures allotment A/c Dr. 1,80,000
Loss on issue of debenture A/c Dr. 45,000
To 8% Debentures A/c 2,10,000
To Premium on redemption of debentures A/c 15,000
(Being allotment money due on 3000; 8% Debentures at
10% discount and redeemable at 5% premium)
Bank A/c Dr. 1,80,000
To Debentures Allotment A/c 1,80,000
(Being the allotment money received)
2023 Securities Premium Reserve A/c Dr. 40,000
March, Profit and Loss A/c Dr. 5,000
31 To Loss on issue of Debenture A/c 45,000
(Being the Loss on issue of debenture written off)
(c) (i) Double entry system may be defined as that system which recognizes and records both the
aspects of a transaction.
Every transaction has two aspects and according to this system, both the aspects are
recorded. This system was developed in the 15 th century in Italy by Luca Pacioli. It has proved
to be systematic and has been found of great use for recording the financial affairs for all
institutions requiring use of money.
(ii) Banks are essential to modern society, but for an industrial unit, it serves as a necessary
instrument in the commercial world. Most of the transactions of the business are done through
bank whether it is a receipt or payment. Rather, it is legally necessary to operate the
transactions through bank after a certain limit. All the transactions, which have been operated
through bank, if not verified properly, the industrial unit may not be sure about its liquidity
position in the bank on a particular date. There may be some cheques which have been
issued, but not presented for payment, as well as there may be some deposits which has
been deposited in the bank, but not collected or credited so far. Some expenses might have
been debited or bills might have been dishonoured. It is not known to the industrial unit in
time, it may lead to wrong conclusions. The errors committed by bank may not be known
without preparing bank reconciliation statement. Preparation of bank reconciliation statement
prevents the chances of embezzlement. Hence, bank reconciliation stateme nt is very
important and is a necessity of an industrial unit as it plays a key role in the liquidity control
of the industry.

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(iii) Del-credere commission is an additional commission paid by the consignor to the consignee
for undertaking responsibility of collection of debts. Generally, the consignee gets ordinary
commission for sales made by him as a percentage of gross sales, over and above, he may
get del-credere commission for the additional responsibility of debt collection. Sometimes it
is agreed that del-credere commission shall be allowed on credit sales only. However, in the
absence of any such agreement the consignor allows del-credere commission on total sales
and not merely on credit sales. If the consignee is entitled to del-credere commission, he has
to bear the bad debts; if any, arising, out of credit sale of consignment goods
(iv) Under FIFO method of inventory valuation, inventories purchased first are issued first. The
closing inventories are valued at latest purchase prices and inventory issues are valued at
corresponding old purchase prices. In other words, under FIFO method, costs are assigned
to the units issued in the same order as the costs entered in the inventory. During periods of
rising prices, cost of goods sold are valued at older and lower prices if FIFO is followed and
consequently reported profits rise due to lower cost of goods sold.
On the other hand, under LIFO method of inventory valuation, units of inventories issued
should be valued at the prices paid for the latest purchases and closing inventories should be
valued at the prices paid for earlier purchases. In other words, closing inventories are valued
at old purchase prices and issues are valued at corresponding latest purchase prices .

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