SUBJECT NAME: Corporate Accounting I

CHAPTER NAME: Issue of Equity Shares & Underwriting of Shares

UNIT I
ISSUE OF EQUITY SHARES
Calls-in-arrears:
Journal entry:
Particular Debit Credit
Calls-in-arrears A/c Dr. XXX
To Share allotment A/c XXX
To Share first call A/c XXX
To Share second & final call A/c XXX

Calls-in-advance:
Journal entry:
Particular Debit Credit
For calls in advance:
Bank A/c Dr. XXX
To Calls in advance A/c XXX
The amount of calls-in-advance adjusted:
Calls in advance A/c Dr. XXX
To Share call A/c XXX

Journal entry:
Particular Debit Credit
Share capital A/c Dr. XXX
To Share allotment A/c (amount due) XXX
To Share call A/c (amount due) XXX
To Forfeited share A/c (amount received) XXX

 Forfeiture of shares issued at a premium:

Particular Debit Credit

When the premium has been credited, but the amount has not been received:
Share capital A/c Dr. (called up amount) XXX
Securities Premium A/c Dr. (unpaid amount) XXX
To Share allotment A/c XXX
To Share call A/c XXX
To forfeited shares A/c XXX
When the premium has been received but forfeiture is due non payment of
subsequent calls:
Share capital A/c Dr. XXX
To Share call A/c XXX
To forfeited shares A/c XXX
 Forfeiture of shares originally issued at a discount:
Journal entry
Particular Debit Credit
Share capital A/c Dr. XXX
To Discount on issue of Share A/c XXX
To Share allotment A/c XXX
To Share call A/c XXX
To forfeited share A/c XXX

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Specimen journal entries for issue of shares at par, at premium or at discount:
Particular Dr. Cr. Particulars Dr. Cr.
For receiving share application money: Issue of share at premium:
Bank A/c Dr. Share allotment A/c Dr. XXX
To Share application A/c XXX To Share capital A/c XXX
XXX To Share premium A/c XXX
At the time of share allotment: Issue of shares at discount:
Share application A/c Dr. XXX Share allotment A/c Dr. XXX
To Share capital A/c XXX Discount on share A/c Dr. XXX
To Share capital A/c XXX
For return of rejected application money: When cash received for
Share application A/c Dr. allotment:
To Bank A/c XXX Bank A/c Dr. XXX
XXX To Share allotment A/c XXX

For transfer of excess application money to For first & final call amount
allotment: receivable:
Share application A/c Dr. XXX Share first & final call A/c
To Share allotment A/c XXX Dr. XXX
To Calls in advance XXX To share capital A/c XXX
For allotment money receivable: When cash is received for
Issue of share at par: first & final call:
Share allotment A/c Dr. Bank A/c Dr. XXX
To Share capital A/c XXX To Share First & Final
XXX Call A/c XXX
Issue of shares:
Issue of shares for immediate full consideration: (for cash consideration)
PROBLEM: 1
B Co., Ltd., issued 50,000 equity shares of Rs.10 each to the public on condition the full amount of shares will
be pid in a lumpsum. All these shares were taken up and paid by the public. Pass Journal entries in the books
of company when (a) Shares are issued at par; (b) Shares are issued at a premium of 10% and (c) Shares are issued
at a discount of 10%

PROBLEM: 2
Journalize the following transactions:
 A Ltd., issued 25,000 shares of Rs.10 each for cash. The whole amount is duly received.
 B Ltd., issued 7,500 shares of Rs.10 each for cash at a premium of Rs.2 each. The whole amount is duly
received.
 C Ltd., issued 1,50,000 shares of Rs.10 each for cash at a discount of 10 per cent. The whole amount is
duly received.
 ABC Ltd., issued 20,000 shares of Rs.10 each to a promoter, for service rendered.

Issue for consideration other than cash:

PROBLEM: 3
Ram Ltd., purchased assets of Rs.8,00,000 from Anil Bros. It issued equity shares of Rs.100 each fully paid up
in satisfaction of their claim. Make journal entries to record these transactions.

Issue for both cash and non cash:

PROBLEM: 4
A & Co., purchased Land & Buildings costing Rs.20,00,000 and in payment allotted 20,000 equity shares of
Rs.100 each as fully paid. Further the company issued 40,000 equity shares to the public. The shares were
payable as follows: On application Rs.20; On allotment Rs.40; On call Rs.40. The public applied for all the shares
which were allotted. All moneys were received. Give journal entries of the company.

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Issue of shares at par:
PROBLEM: 5
The authorized capital of A Ltd., Co., is Rs.2,00,000 divided into 20,000 equity shares of Rs.10 each. Out of
these 15,000 shares, have been issued to the public, payable as follows:
Rs.2 on application,
Rs.4 on allotment,
Rs.2 on first call and
Rs.2 on final call.
Pass necessary journal entries. All the amounts have been duly received.

PROBLEM: 6
Preeti Ltd. Invited applications for 5,000 shares of Rs.10 each payable as follows:
Rs.3 on Application,
Rs.2 on Allotment,
Rs.2 on First call and
Rs.3 on Final call
All these shares were subscribed and paid for. Pass journal entries.

Issue of shares at premium:

PROBLEM: 7
A limited company issued 1,00,000 equity shares of Rs.10 each at a premium of Rs.2 per share payable as
follows:
On application Rs.2
On allotment Rs.5 (including premium)
On first call Rs.3
On final call Rs.2
All the shares offered were subscribed by the public and cash duly received. Make the necessary journal and
cash book entries.

PROBLEM: 8
Sugumar ltd. Issued 60,000 shares of Rs.10 each payable at a premium of Rs.2 per share as below:
Rs.4 on Application,
Rs.5 on Allotment, (including premium)
Rs.3 on First call and Final call
Applications were received for 78,000 shares and directors made allotment in full to the applicants demanding
10 or more shares and returned money in full to the applicants’ 18,000 shares. All money was duly received
pass journal entries.

Issue of shares at a discount:

PROBLEM: 9
Sardar Ltd., issued 45,000 shares of Rs.10 each, at a discount of Rs.1 per share.
On application Rs.3
On allotment Rs.4 (with adjustment of discount)
On first call Rs.1
On final call Rs.1
Applications were received for 50,000 shares and the excess money was adjusted towards allotment. All the
share money was collected. Write journal entries and prepare a balance sheet.

PROBLEM: 10
Star Ltd., issued 35,000 equity shares of Rs.10 each at a discount of Rs.1 per share payable as follows:
On application Rs.2
On allotment Rs.2 (with adjustment of discount)
On final call Rs.5
Application were received for 40,000 shares. Excess application money was refunded. All the shares were
called and paid up. Write journal entries in the books of the company.

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Calls-in arrears:
PROBLEM: 11
Kevin Ltd., invited application for 25,000 shares of Rs.10 each payable:
Rs.2.50 on Application,
Rs.3 on Allotment, (including premium)
Rs.2 on First call and
Rs.2.50 on Second call
The public applied for 22,000 shares, which were allotted, the allotment-taking place on 1st April 2018. All
money due on allotment was received. Calls were duly made but a shareholder holding 500 shares failed to pay
the calls. Make journal entries.

Calls in advance:
PROBLEM: 12
Mari Ltd., issued 1,000 shares of Rs.100 each to the public at discount of Rs.5 payable as under:
Rs.20 on Application,
Rs.25 on Allotment, (with discount adjustment)
Rs.20 on First call and
Rs.30 on Final call
All the shares were applied for and allotted. Shanmugam, to whom 100 shares were allotted, paid the final call
amount due along with first call. All money was received. Pass journal entries.

Forfeiture & reissue:

PROBLEM: 13
A company forfeited 10 shares of Rs.10 each issued at a premium of 10% for nonpayment of the final call of Rs.3
per share. Out of these, 7 shares were reissued at Rs.8 per share as fully paid up. Give entries for forfeiture
and reissue.

PROBLEM: 14
A company issued shares of Rs.10 each at 10% premium payable Rs.2 on application; Rs.3 on allotment including
premium; Rs.3 on first call and Rs.3 on final call. ‘A’ who was holding 50 shares failed to pay his allotment and
first call and his shares were forfeited. ‘B’ who was holding 30 shares did not pay his first call and his shares
were also forfeited. Give journal entries for forfeiture shares.

Forfeiture & Reissue of shares, without pro-rata allotment

PROBLEM: 15
Ram & Co., issued 12,000 equity shares of Rs.10 each at a premium of Rs.2 per share payable as follows:
On application Rs.2; On allotment Rs.5 (including premium); On final call Rs.5
Applications were received for 20,000 shares. 5,000 applications were rejected and application money
refunded. Allotment was made pro-rata to the applicants of 15,000 shares and money overpaid on application
was applied towards amount due on allotment.
Mr. K to whom 1,200 shares were allotted failed to pay the final call money. His shares were forfeited. Give
entries in the books of the company and prepare the balance sheet.

Forfeiture & Reissue of shares, with pro-rata allotment

PROBLEM: 16
Arul Ltd., invited applications for 20,000 equity shares of Rs.100 each at a premium of Rs.10 per share.
Payment was to be made as follows:
Rs.20 on Application,
Rs.40 on Allotment, (including premium)
Rs.30 on First call and
Rs.20 on Final call
Application totaled for 26,000 shares. Applications for 4,000 shares were rejected and allotment of shares was
made proportionately to the remaining applicants. The directors made both the calls and all the moneys received
except the final call on 600 shares, which were forfeited after the required notices were served. Later
400 of the forfeited shares were reissued as fully paid @ Rs.85 per share. Journalize the transactions and
prepare the balance sheet.

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PROBLEM: 17
X Ltd., issued for public subscription 20,000 share of Rs.10 each at a premium of Rs.2 per share payable as
under:
Rs.2 on Application; Rs.5 on Allotment (including premium)
Rs.2 on First call; Rs.3 on Final call
Applications for 30,000 shares were received. Allotment was made pro-rata to the applicants for 24,000 shares,
the remaining applications being rejected. Money over paid was used towards allotment. ‘Y’ to whom 800 shares
were allotted failed to pay the allotment money, first and second calls and ‘Z’ to whom 1,000 shares were
allotted failed to pay the last two calls. These shares were subsequently forfeited after the second call was made.
All these forfeited shares were subsequently forfeited after the second call was made. All these forfeited shares
were reissued to ‘W’ as fully paid at Rs.8 per share. Give journal entries to record the above
transactions.
Underwriting of Shares
The following rates for payment of underwriting commission are in force with which SEBI also concurs and
allows commission on shares at a maximum of 2.5% only.
Particulars On amount developing On amount subscribed
on the underwriters by the public
(A) Equity shares 2.5% 2.5%
(B) Preference shares / convertible and
non-convertible debentures:
(i) For amounts up to Rs.5 Lakhs 2.5% 1.5%
(ii) For amounts in excess of Rs.5 lakhs 2% 1%

▪ When a part of the issue is underwritten by only one underwriter:

Particulars No. of shares
Total issue XXX
Less: The portion of the issue for which the company is responsible XXX
Gross liability of the underwriter XXX
Less: Marked applications XXX
Balance left XXX
Less: Surplus unmarked applications (if any) XXX
Net liability of the underwriter XXX
▪ When a part of issue is underwritten by two or more underwriters:
Particulars No. of shares
Gross liability XXX XXX
Less: Marked applications XXX XXX
Balance left XXX XXX
Less: Surplus unmarked applications in gross liability ratio XXX XXX
Balance left XXX XXX
Less: Surplus of one underwriter to other (in their gross liability ratio) XXX XXX
Net liability of underwriters XXX XXX
 Firm underwriting:
 When application for firm underwriting are treated like marked form:
Particulars No. of shares
Gross liability XXX XXX
Less: Firm underwriting XXX XXX
XXX XXX
Less: Marked applications XXX XXX
XXX XXX
Less: Unmarked application in gross liability ratio XXX XXX
XXX XXX
Less: Surplus of underwriter to the other in gross liability ratio XXX XXX
Net liability XXX XXX
Add: Firm underwriting XXX XXX
Total liability XXX XXX

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 When application for firm underwriting are treated like unmarked forms:
Particulars No. of shares
Gross liability XXX XXX
Less: Marked applications XXX XXX
XXX XXX
Less: Unmarked application in gross liability ratio XXX XXX
XXX XXX
Less: Surplus of underwriter to the other in gross liability ratio XXX XXX
Net liability XXX XXX
Add: Firm underwriting XXX XXX
Total liability XXX XXX
Underwriting of shares – Complete underwriting:
PROBLEM: 1 (When the entire issue is underwritten by one underwriter)
GL Ltd., issued 1,000 equity shares of Rs.100 each and 1,000 6% debentures of Rs.100 each. The debentures
were issued at a discount of 6%. The whole of the issue was underwritten by W Co., for a commission of 4%
on the issue price of share and 2% on the issue price of debentures. The public applied for 900 shares and 800
debentures. There were immediately paid for. The underwriters fulfilled their obligations.

PROBLEM: 2 (When the whole issue is underwritten by two or more underwriters)

Sahul Ltd., issued 5,000 12% preference shares of Rs.10 each. The issue was underwritten as follows: Anand
30%; Malan 30% ; Elango 20%. Application for 4,000 shares were received by the company in all. Determine
the liability of the respective underwriters.

PROBLEM: 3
Balu Ltd., issued 1,50,000 Equity shares. The whole of the issue was underwritten as follows: X – 50%; Y –
25%; Z – 25%. Applications for the 1,20,000 shares were received in all, out of which applications for 30,000
shares had the stamp of X, those for 15,000 shares that of Y and those for 30,000 share that of Z. The
remaining applications for 45,000 shares did not bear any stamp. Determine the liability of the underwriters.

PROBLEM: 4
ABC Ltd., incorporated on 1st January 1985, issued prospectus inviting applications for 6,00,000 equity shares
of Rs.10 each.
The whole issue was fully underwritten by A, B, C and D as follows:
A – 2,00,000 shares; B – 1,50,000 shares; C – 1,50,000 shares; D – 1,00,000 shares.
Applications were received for 6,50,000 shares of which marked applications were as follows:
A – 2,50,000 shares; B – 1,70,000 shares; C – 1,40,000 shares; D – 40,000 shares.
Find out the liabilities of individual underwriters.

PROBLEM: 5
Tamil Nadu Co., Ltd., was formed with a capital of Rs.10,00,000 in Rs.10 per shares, the whole amount being
issued to the public. The underwriting of these shares was done as follows:
A – 35,000 shares; B – 30,000 shares; C – 20,000 shares; D – 10,000 shares; E – 3,000 shares; F – 2,000 shares.
All the marked application forms were to go in relief of the underwriters whose name they bore. The
applications markets by the underwriters were:
A – 10,000 shares; B – 22,500 shares; C – 20,000 shares; D – 7,500 shares; E – 5,000 shares; F – Nil.
Applications for 20,000 shares were received on forms not marked. Draw up a statement showing the number
of shares each underwriter had to take up.

Partial underwriting
PROBLEM: 6 (When a part of the issue is underwritten by one underwriter)
Mari Ltd., issued 1,00,000 equity shares of which only 60% was underwritten by Gandhi. Applications for
90,000 shares were received in all out of which application for 52,000 were marked. Determine the liability of
Gandhi.

PROBLEM: 7
X Company Ltd., issued 60,000 shares of Rs.10 each at a premium of 10% and 3,000 6% debentures of Rs.100
each at a discount of 5%. 75% of the issue is underwritten
6 by M/s. Keval Singh & Co., at the maximum rate of
 commission allowed by law, on the issue price. Applications were received for 50,000 equity shares and 2,000
debentures which were accepted and payment for these was received in full. Journalize the above transactions
and show the entries in the balance sheet assuming that the amount due from the underwriter has been received.

PROBLEM: 8 (When a part of issue is underwritten by two or more underwriter)

Neeraj Ltd., issued 10,000 shares of Rs.100 each at premium of 10%. These shares were underwritten by
Joseph and Jaleel to the extent of 5,000 shares and 3,000 shares respectively. The total applications received by
the company were 8,000 of which the marked applications were: Joseph – 1,200 shares; Jaleel – 300 shares.
You are required to determine the liability of the underwriters.

PROBLEM: 9
A Company issued 40,000 shares of Rs.100 each for public subscription. The issue was underwritten as follows:
P – 25%; Q – 30% and R – 25%
The company received a total number of 28,000 applications of which marked applications were as follows:
P – 8,000 shares; Q – 6,000 shares and R – 8,000 shares.
Determine the liability of each of the underwriters.

Firm underwriting – Only one underwriter:

PROBLEM: 10
PQR Ltd. issued 25,000 shares of Rs.100 each. The whole issue was underwritten by D. In addition, there is a
firm underwriting of 3,000 shares by D. Applications for 17,000 shares were received by the company in all.
Calculate the liability of D.

PROBLEM: 11 (two or more underwriting the full issue)

T.T. Ltd., issued 50,000 equity shares of Rs.10 each at par. The entire issue was underwritten as follows:
A – 30,000 shares (firm underwriting 4,000); B – 15,000 shares (firm underwriting 5,000); C – 5,000 shares
(firm underwriting 1,000);
The total applications including firm underwriting were for 40,000 shares. The marked applications were as
follows: A – 10,000 shares; B – 7,000 shares; C – 3,000 shares.
The underwriting contract provides the credit for unmarked applications are given to the underwriters in
proportion to the shares underwritten. Determine the liability of each underwriter and amount of commission
payable to them assuming the rate to be 2% on issue price.

PROBLEM: 12
‘A’ Co. Ltd., has an authorized capital of Rs.50,00,000 divided into 1,00,000 equity shares of Rs.50 each. The
company issued for subscription 50,000 shares at a premium of Rs.10 each. The entire issue was underwritten
as follows: Calculate the liability of each underwriter.
X – 30,000 shares (firm underwriting 5,000); B – 15,000 shares (firm underwriting 2,000); C – 5,000 shares
(firm underwriting 1,000).
Out of the total issue 45,000 shares including firm underwriting were subscribed. The following were the
marked forms: X – 16,000 shares; Y – 10,000 shares; Z – 4,000 shares.

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SUBJECT NAME: Corporate Accounting I

CHAPTER NAME: Redemption of Shares, Issue and redemption of debentures

UNIT II
Redemption of Shares, Issue and redemption of debentures
Items appear in capital profit & revenue profit:
Revenue profit Capital profit
General reserve Capital reserve
Dividend equalization reserve Capital redemption reserve
Reserve fund Development rebate reserve
Profit on sale of investment & fixed asset Depreciation reserve
Workmen’s accident fund Profit prior to incorporation
Workmen’s compensation fund Forfeited shares account
Insurance fund Profit on sale of fixed assets
Debenture redemption fund Securities premium account
Debenture redemption account
Profit and loss account

Specimen journal entries for redemption of preference shares:

Particulars Debit credit

1. If the shares to be redeemed are to be made fully paid up:
Preference share final call A/c Dr. XXX
To Preference share capital A/c XXX
Bank A/c Dr. XXX
To Preference share final call A/c XXX
2. When equity shares are issued for the purpose of redemption (at par, at premium
& at discount:
Bank A/c Dr. XXX
Discount on issue of shares A/c Dr. XXX
To Equity share capital A/c XXX
To Securities premium A/c XXX
3. When accumulated profits are utilized for the purpose:
Profit & loss A/c (or) General reserve A/c Dr. XXX
To Capital Redemption Reserve A/c XXX
4. To provide for premium on redemption:
Security premium A/c Dr. (or) XXX
Profit & loss A/c Dr. (or) XXX
General reserve A/c Dr. XXX
To Premium on redemption A/c XXX
5. If liquid assets are not available, either current assets may be sold (or) bank
overdraft may be arranged. The entry is :
Bank A/c Dr. XXX
Profit & Loss A/c Dr. (loss) XXX
To Current assets A/c XXX
To Profit & loss A/c (profit) XXX
6. For the total amount payable:
Redeemable preference share capital A/c Dr. XXX
Premium on redemption A/c Dr. XXX
To Redeemable preference shareholder A/c XXX
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 7. On payment of amount due:
Redeemable preference shareholder A/c Dr. XXX
To Bank A/c XXX
8. For declaration of bonus:
Capital redemption reserve A/c Dr. XXX
General reserve A/c Dr. XXX
Profit & loss A/c Dr. XXX
To Bonus to shareholder A/c XXX
9. For issue of bonus shares:
Bonus to shareholders A/c Dr. XXX
To Equity share capital A/c XXX
Capital redemption reserve:
PROBLEM: 1
Redemption of 20,000 preference shares of Rs.100 each was carried out by utilization of reserves and by issue
of 8,000 equity shares of Rs.100 each at Rs.125. How much should be credited to capital redemption reserve
account?
PROBLEM: 2
Lakshmi Company Ltd., had decided to issue 2,000 equity shares of Rs.100 each at par and utilize the proceeds
to redeem 20,000 6% preference shares of Rs.10 each at a premium of 10%. The new issue was fully
subscribed and paid up. The redemption was completed as per schedule. Give journal entries.
PROBLEM: 3
‘Y’ Company Ltd., decides to redeem 50,000 11% preference shares of Rs.10 each at premium of 10%. For the
purpose of redemption, the company decides to issue 25,000 equity shares of Rs.10 each at a premium of 15%.
The balance in profit & loss account is Rs.14,50,000. Assume that the above decisions were implemented.
Give journal entries.
Redemption of preference shares:
PROBLEM: 4
The following balances appear in the ledger of a company as on 30.6.1995:
Share capital:
Equity shares (fully paid up) 6,00,000
Redeemable preference shares (fully paid up) 3,00,000
General reserve 2,00,000
Profit & loss A/c (Cr. Balance) 1,25,000
Securities premium account 50,000
The company decided to redeem the preference shares at a premium of 10% out of its general reserve and
undistributed profits. Give journal relating to redemption of the preference shares.
PROBLEM: 5
The following extract from the balance sheet of Vijay Ltd., as on 31st December 1997 is given to you and you
are asked to give journal entries.
Share capital:
2,00,000 equity shares of Rs.10 each 20,00,000
2,00,000 6% Redeemable preference shares of Rs.10 each 20,00,000
Capital reserve 10,00,000
General reserve 6,00,000
Profit & Loss account 17,00,000
PROBLEM: 6
The following is the balance sheet of Raman company Ltd., as on 31-12-96:
Liabilities Rs. Assets Rs.
Share capital: Fixed assets 3,10,000
1,000 6% Redeemable Pref. shares of Cash at bank 1,40,000
Rs.100 each fully paid 1,00,000
20,000 equity share of Rs.10 each 2,00,000
Profit & loss A/c 1,20,000
Sundry creditors 9 30,000
 4,50,000 4,50,000
The company resolved to redeem its preference shares at a premium of 2% out of profits. Give the necessary
journal entries.

Redemption of preference shares with new issue of equity shares:

PROBLEM: 7
Sam Ltd., had as part of the share capital 20,000 preference shares of Rs.100 each fully paid up. When the shares
became due for redemption, the company had Rs.12,00,000 in its Reserve fund. The company issued necessary
equity share of Rs.25 each specially for the purpose of redemption and carried out the redemption. Make necessary
journal entries to record the above transactions.
Redemption at a premium, partly out of profit and partly out of fresh issue:
PROBLEM: 8
A Company has 8,000 redeemable preference shares of Rs.100 each fully paid. The company decides to
redeem the shares on September 30, 1997 at a premium of 7%. The company has sufficient profits but in order
to augment liquid funds the following issues are made:
 1,000 equity shares of Rs.100 each at a premium of 10%
 1,000 5% debentures of Rs.100 each.
The issue was fully subscribed and all the amounts were received. The redemption was duly carried out. Give
journal entries to record the above.
PROBLEM: 9
XYZ Ltd., had to redeem the 5,000 6% redeemable preference shares of Rs.100 each at a premium of 4% on
December 31, 1990. The company made the following issues in the later half of December.
 2,000 equity shares of Rs.100 each @ Rs.130 per share.
 6% debentures of Rs.2,00,000 at a discount of 5%. The whole issue was subscribed and all the cash
against them was received. The company carried out the redemption satisfying the legal requirements.
Expenses in this respect came to Rs.5,000.
Show the journal entries covering the issue of shares and debentures and the redemption of preference shares.
PROBLEM: 10
Sri Ram Ltd., had the following balance sheet as on 1.4.1990:
Liabilities Rs. Assets Rs.
10,000 6% preference share of Rs.10 each 1,00,000 Buildings 2,00,000
30,000 equity share of Rs.10 each 3,00,000 Plant 2,00,000
General reserve 1,00,000 Stock 1,00,000
P & L A/c 80,000 Debtors 1,00,000
Creditors 1,20,000 Cash at bank 1,00,000
7,00,000 7,00,000
The company decided to redeem its preference shares at 10% premium. For this purpose, it issued new 5,000
equity shares of Rs.10 each at 10% premium. Show necessary journal entries and balance sheet.
PROBLEM: 11
The following is the summarized balance sheet of a company.
Liabilities Rs. Assets Rs.
Share capital: Sundry assets 8,10,000
1,000, 10% Red. Pref. shares of Rs.100 each 1,00,000 Cash at bank 90,000
50,000 equity shares of Rs.10 each fully paid 5,00,000
General reserve 1,00,000
Capital reserve 50,000
Creditors 1,50,000
9,00,000 9,00,000
For the purpose of redemption of preference shares, the company made a fresh issue of 4,500 equity shares of
Rs.10 each, at a premium of 10%. The preference shares were redeemed at a premium of 10%. Show journal
entries and prepare the balance sheet after redemption.

10
PROBLEM: 12
The balance sheet of ABC & Co., Ltd., on 31-12-1990 stood as follows:
Liabilities Rs. Assets Rs.
Equity shares of Rs.100 each 5,00,000 Fixed assets 8,00,000
9% redeemable pref. shares of Rs.100 each 3,00,000 Investments 1,00,000
Securities premium 50,000 Bank balance 2,00,000
Capital reserve 1,00,000 Other current assets 5,00,000
P & L A/c 2,00,000
10% Debentures 3,00,000
Creditors 1,50,000
16,00,000 16,00,000
Both the redeemable preference shares and debentures were due for redemption on 1-1-91. The company
arranged for the following:
 It issued 2,000 equity shares of Rs.100 at a premium of 10%.
 It sold the investments for Rs.90,000.
 It arranged a bank overdraft to the extent necessary.
The redemptions were carried out. Give entries for redemption of preference shares and debentures and balance
sheet after redemption.

Minimum fresh issue of shares:

PROBLEM: 13
The following is the summarized balance sheet of a company.
Liabilities Rs. Assets Rs.
Share capital: Assets 25,60,000
6,000, 8% Red. Pref. shares of Rs.100 each fully paid 6,00,000 Cash at bank 2,85,000
3,000, 9% Red. Pref. shares of Rs.100 each fully paid,
Rs.75 paid up 2,25,000
1,50,000 equity shares of Rs.10 each, fully paid 15,00,000
Capital reserve 1,00,000
Share premium 60,000
Current liabilities 3,60,000
28,45,000 28,45,000
It was decided to redeem both the classes of preference shares at a premium of 5%. The company issued equity
shares of Rs.10 each at a premium of 10% as were necessary to provide cash for redemption. The issue was fully
subscribed and all the money was received. You are required to give journal entries and prepare balance sheet.

Issue of bonus shares out of capital redemption reserve:

PROBLEM: 14
The balance sheet of Suraj as on 31-12-1997 was as under:
Liabilities Rs. Assets Rs.
5,000, 6% Red. Pref. shares of Rs.10 each fully paid 50,000 Fixed assets 1,00,000
6,000 equity shares of Rs.10 each fully paid 60,000 Investments 20,000
Securities premium 20,000 Cash at bank 18,000
General reserve 40,000 Other current assets 62,000
Profit & loss A/c 5,000
Sundry creditors 25,000
2,00,000 2,00,000
The company passed the following resolution on 1st January 1998.
 To redeem the entire preference share capital at a premium of 10%.
 To issue 2,000 equity shares of Rs.10 each at a premium of Rs.2 per share, this has been fully subscribed.
 To sell the investment at Rs.15,000.
 To issue bonus shares as fully paid in the ratio of 2:1 to the existing shareholders including the fresh issue.
Draft the journal entries and prepare the balance sheet as on 1st January 1998.

PROBLEM: 15
The balance sheet of M/s. Ajanta Ltd., as at 31-12-1992 was as under.

Liabilities 11 Rs. Assets Rs.

 10,000 6% Red. Pref. shares of Rs.10 each 1,00,000 Land & building 2,50,000
50,000 equity shares of Rs.10 each 5,00,000 Plant & machinery 1,50,000
General reserve 1,10,000 Stock 3,00,000
P & L A/c 2,00,000 Debtors 1,60,000
15% Debentures 50,000 Bank 2,40,000
Sundry creditors 1,40,000
11,00,000 11,00,000
The directors decide to
 Redeem preference shares at a premium of 5%
 Redeem debentures at a premium of 10%.
 Make a bonus issue to the equity shareholders of one Rs.10 equity share for every five Rs.10 shares held
in order to capitalize a part of the undistributed profit.
The appropriate resolution having been passed, the above transactions were completed. You are required to
show – (i) Journal entries and (ii) Balance sheet after redemption.

Untraceable shareholders:
PROBLEM: 16
The following is the balance sheet of Manish Ltd., as on 31-12-1996.
Liabilities Rs. Assets Rs.
16,000 6% Redeemable Pref. shares of Rs.10 each 1,60,000 Fixed assets 5,20,000
39,000 Equity shares of Rs.10 each fully paid 3,90,000 Current assets 3,22,000
Profit & Loss A/c 2,00,000
Sundry Creditors 92,000
8,42,000 8,42,000
The preference shares were redeemed on 1-1-1997 at a premium of Rs.2 per share, the whereabouts of the
holders of 1,200 such shares not being known. At the same time, a bonus issue of equity shares was made at par
one share being. Draw up the journal entries to record the above transactions and show the balance sheet after
redemption.

Redemption by conversion:
PROBLEM: 17
What entries can be made for the following redemptions made by the company?
 In 1996 X Ltd., redeemed Rs.3,50,000 preference shares by converting them into equity share of Rs.10 each
issued at 25% premium.
 In 1997 X Ltd., redeemed Rs.3,32,500 preference shares by converting them into equity shares issued at 5%
discount.
 In 1998 X Ltd., redeemed 10,000 preference shares of Rs.10 each at a premium of Rs.1.25 per share by
converting into equity shares of Rs.10 each issued at discount of 10%

Issue and Redemption of Debentures

Issue of debentures
Q: What do you mean debenture? Define debenture. Explain the features of debenture. (2/5/10 Marks)

Debenture issued as collateral security can be treated in either of the following ways:
 First method: Under this method, no entries are made in the companies books and only a note giving
details of debenture offered as securities is appended to the loan account in the ledger on the liability
side of the balance sheet details of debenture offered as a security is given as a note below the item
‘loan’.
 Second method: Under this method, the company passes the following journal entry at the time
of issuing debenture as collateral security.

Particulars Debit Credit

All the time of issuing the debenture:
Debenture suspense A/c Dr. XXX
To % Debenture A/c XXX

12
 When the loan is repaid and the debenture are returned by
the lender, the following entry is passed:
% Debenture A/c Dr. XXX
To Debenture Suspense A/c XXX

Specimen journal entries:

Issue of debenture for cash

Particulars Debit Credit
If full amount received in one lump sum:
Bank A/c Dr XXX
To _ % Debentures A/c XXX
If cash is receivable in two or more stages:
Bank A/c Dr. XXX
To Debenture application A/c XXX
Debentures application A/c Dr. XXX
To % Debentures A/c XXX
Debenture application A/c Dr. XXX
To Bank A/c XXX
To Debentures allotment A/c XXX
Debentures allotment A/c Dr. XXX
To % Debentures A/c XXX
Bank A/c Dr. XXX
To Debentures allotment A/c XXX
Debenture call A/c Dr. XXX
To % Debentures A/c XXX
Bank A/c Dr. XXX
To Debenture call A/c XXX

Issue of debentures for debentures for consideration other than cash:

Particulars Debit Credit
When assets are acquired:
Sundry assets A/c Dr. XXX
To Vendors A/c XXX
When assets & liabilities are acquired:
Sundry assets A/c Dr. XXX
Goodwill A/c Dr. XXX
To Sundry liabilities A/c XXX
To Vendor A/c XXX
When debentures are issued to the vendor:
Vendors A/c Dr. XXX
To % Debentures A/c XXX

▪ Redemption out of profit: When debentures are redeemed out of profit, profits of the company are
utilized for the purpose of redemption with holding the same for dividend. In such a case the following
journal entries will be passed.
Particulars Debit Credit
For repayment of debentures:
% Debentures A/c Dr. XXX
To Bank A/c XXX
For transfer of profits:
P & L Appropriation A/c Dr. XXX
To Debenture Redemption Reserve A/c XXX

13
 For closing debentures Redemption Reserve, when all the debenture are
redeemed: XXX
Debenture Redemption reserve A/c Dr. XXX
To General Reserve A/c

▪ Redemption out of capital: If debenture are redeemed out of capital no amount of divisible profit is
kept aside for redeeming debenture profit are not utilized for redemption of debenture and may go to the
shareholders by way of dividend. Redemption out of capital reduces the liquid resources available to
the company. Therefore, a company may adopt this method only when it has sufficient surplus funds.
Particulars Debit Credit
Debentures A/c Dr. XXX
To Bank A/c XXX
 Redemption in installments: When debentures are issued, the terms of issue may provide for
the repayment of the debts. The following different method can be adopted for redemption in installments.
▪ Drawing by lot:
The redemption may be at par at premium, as per the term of the debentures issue agreement.
Particulars Debit Credit
For debentures repayable:
Debenture A/c Dr. XXX
Premium on redemption A/c Dr. XXX
To Debenture holder A/c XXX
For payment of cash:
Debenture holders A/c Dr. XXX
To Bank A/c XXX
If redemption is out of profit:
P & L Appropriation A/c Dr. XXX
To Debenture Redemption Reserve A/c XXX

Conversion on the date of redemption:

Particulars Debit Credit
% Debenture A/c Dr. XXX
Premium on redemption of debenture A/c Dr. XXX
To Debenture holder A/c XXX
For conversion into shares: XXX
Denture holders A/c Dr. XXX
To Share Capital A/c XXX
To Security Premium A/c

Sinking fund and insurance policy

 Sinking fund method:

Particulars Debit Credit

At the end of the first year, for making annual transfer to sinking fund:
P & L Appropriation A/c Dr. XXX
To Sinking fund A/c XXX

14
For making investment:
Sinking fund investment A/c Dr. XXX
To Bank A/c XXX
For receiving interest to sinking fund A/c:
Bank A/c Dr. XXX
To Interest on Sinking fund investment XXX
For transferring interest to sinking fund A/c:
Interest on sinking fund investment A/c Dr. XXX
To sinking fund A/c XXX
For annual transfer to sinking fund:
P & L Appropriation A/c Dr XXX
To sinking fund A/c XXX
For making investment, including the interest received:
Sinking fund investment A/c Dr. XXX
To Bank A/c XXX
For sale of investment:
Bank A/c Dr. XXX
Sinking fund A/c Dr. XXX
To Sinking fund investment A/c XXX
For redemption of debentures:
% Debenture A/c Dr. XXX
To Bank A/c XXX
For closing the Sinking fund:
Sinking fund A/c Dr. XXX
To General reserve A/c XXX
 Insurance policy method:
Particulars Debit Credit
For the amount of premium paid:
Debenture redemption policy A/c Dr. XXX
To Bank A/c XXX
At the end of the accounting year:
P & L Appropriation A/c Dr. XXX
To Debenture redemption Policy A/c XXX
In the last year, on realizing the policy:
Bank A/c Dr. XXX
To Debenture redemption policy A/c XXX
For any profit on realization of policy.
Debenture redemption policy A/c Dr. XXX
To Debenture redemption Fund A/c XXX
For redemption of the debentures:
Debentures A/c Dr. XXX
To Bank A/c XXX
For closing the debenture redemption fund:
Debenture redemption fund A/c Dr. XXX
To General Reserve XXX
When own debentures are purchased in the market and immediately cancelled:
Particulars Debit Credit
% Debentures A/c Dr. XXX
Debentures interest A/c Dr. XXX
To Bank A/c XXX
To Profit on cancellation A/c XXX
When own debentures are purchased in the market and retained as investment:
Particulars Debit Credit
When own debenture are purchased:
Own debentures A/c Dr. XXX
Debentures interest A/c Dr. XXX
To Bank A/c 15 XXX
 On the date of interest payment:
Debenture interest A/c Dr. XXX
To Interest on own debentures A/c XXX
To Bank A/c XXX
When own debentures are resold:
Bank A/c Dr. XXX
To Own debentures A/c XXX
To Interest on own debentures A/c XXX
When own debentures are cancelled:
Particulars Debit Credit
% Debenture A/c Dr. XXX
To own debenture A/c XXX
To Profit on cancellation of debenture A/c XXX

PROBLEM: 1
Pass necessary journal entries in the following cases, when debenture issue price is Rs.1,00,000.
 Issued at par and redeemable at par.
 Issued at a discount of 10% and redeemable at par.
 Issued at premium of 5% and redeemable at par.

PROBLEM: 2
You are required to set out the journal entries relating to the issue of the following debentures in the books of X
Ltd.,
 8% 120 Rs.1,000 debentures are issued at 5% discount and are repayable at par.
 Another 7% 150 Rs.1,000 debentures are issued at 5% discount and repayable at 10% premium.
 Further 80, 9% Rs.1,000 are issued at 5% premium.
 In addition another 400, 8% Rs.100 debentures are issued as collateral securities against a loan of
Rs.40,000.

PROBLEM: 3
Excel Ltd., made the following issues of debentures on 1-4-1997:
 200 10% debentures of Rs.100 each to settle a creditor who supplied a machine on credit some time ago at a
price of Rs.18,000.
 300 10% debentures of Rs.100 each for cash at a discount of 5%.
 1,000 10% debentures of Rs.100 each to the bankers as collateral security for a loan of Rs.80,000.
All the above issues are redeemable at par. Pass journal entries to record the above in the books of the company
and show how these items are to be shown when the company’s balance sheet is prepared.

PROBLEM: 4
Give journal entries in the books of ‘A’ Co. Ltd., if
 It purchased assets of Rs.5,00,000 and agreed to pay the price by issuing 9% debentures of Rs.100 each at
premium of 25%.
 It purchased assets of Rs.3,00,000 and acquired liabilities of Rs.30,000. It issued 8% debentures of Rs.100
each at a discount of 10% to satisfy the net purchase price.
 It purchased assets and liabilities of a firm for Rs.4,00,000. The assets acquired were valued at Rs.6,00,000
and the liabilities taken over were Rs.2,40,000. The purchased price is to be satisfied by issue of 10%
debentures of Rs.100 each at par.

PROBLEM: 5 (For consideration other than cash)

A company purchased Building of the book value of Rs.1,98,000 from another firm. It was agreed that the
purchase consideration be paid by issuing 10%debentures of Rs.100 each. Give journal entries if the debentures
have been issued: (i) at par; (ii) at discount of 10%; and (iii) at a premium of 10%.

PROBLEM: 6 (Writing off discount on issue of debentures)

On 1-1-2000, Exe Ltd., issued Rs.1,10,000, 9%debentures at a discount of 5% repayable as follows: On 31-12-
2000 – Rs.20,000; On 31-12-2001 – Rs.40,000; On 31-12-2002 – Rs.50,000. Calculate the amount of discount
to be written off in each of the three years.
16
PROBLEM: 7
Jones Co. Ltd., issued 2,000 8% debentures of Rs.100 each at a discount of 6%. The debentures are repayable
by annual drawings at the end of each year, from the first year onwards at the rate of Rs.40,000 per year. You
are required to ascertain the discount amount to be written off each year under (a) Fluctuating installment
method (b) Fixed installment method.

PROBLEM: 8 (Redemption in installment)

Rashid Ltd., has Rs.10,00,000 8% debentures outstanding on 1-1-96. The company has been redeeming every
year on January 1st Rs.1,00,000 debentures by drawings by lot, at par. Give necessary journal entries: (a) If the
redemption is out of profits; (b) If the redemption is out of capital.

PROBLEM: 9 (Redemption out of profit)

G Ltd., issued 2,000 12% Debentures of Rs.100 each on 1-1-98 at a discount of 10%, redeemable at premium of
15% in equal annual drawings in 4 years out of profits. Give journal entries both at the time of issue and
redemption of debentures. (Ignore the treatment of loss on issue of debentures and interest.

PROBLEM: 10 (Redemption out of capital)

A company on 31st December, 1994 redeemed Rs.10,000 6% debentures out of capital by drawing a lot.
Similarly, the company on 31st December. 1995 redeemed Rs.15,000 6% debentures out of profit by drawing a
lot. You are required to pass journal entries in the books of a company.

PROBLEM: 11 (Redemption by conversion)

Eastern Plastics Ltd., issued fully convertible 10%debentures of Rs.100 each for Rs.10,00,000. The following
were the terms of issue:
 Date of issue January 1, 1993
 60% of the debentures issued will be converted into equity shares of Rs.10 each at a premium of 20% on
31-12-95.
 Balance of 40% of the debentures will be converted into equity shares of Rs.10 each at a premium of Rs.6
per share on 31-12-1996.
Pass journal entries in the books of the company for conversion of the debentures.

PROBLEM: 12 (Open market buying method)

Krishna Ltd., which had Rs.50,00,000 10% debentures outstanding, made the following purchases in the open
market for immediate cancellation:
 1-4-1997 1,000 debentures of Rs.100 each at Rs.99
 1-9-1997 2,000 debenture of Rs.100 each at Rs.97
You are required to give the journal entries for purchase and cancellation of the debentures. (a) If the above
purchase rates is ‘Ex-interest’ (b) If the above purchase rates are ‘Cum-interest’. Assume that interest is
payable every year on 30th June and 31st December.
PROBLEM: 13
On 1st January, XYZ Ltd., has Rs.1,00,000 10% debentures. In accordance with the power under the deed, the
directors have the powers to acquire the debentures in the open market for immediate cancellation. The
following purchases, of own debentures were made by the company:
 March 1, Rs.20,000 debentures at Rs.98 cum-interest
 August 1, Rs.40,000 debentures at Rs.99 ex-interest
Debenture interest is payable half-yearly on 30th June and 31st December every year. Show journal entries for
purchase and cancellation of the debentures.
PROBLEM: 14
On 1st January, X Ltd., has Rs.1,00,000 6% debentures. In accordance with the power under the deed, the
directors have the powers to acquire the debentures in the open market for immediate cancellation. The
following purchases, of own debentures were made by the company:
 March 1, Rs.20,000 debentures at Rs.98 cum-interest
 August 1, Rs.40,000 debentures at Rs.100.25 cum-interest
 December 15, Rs.10,000 at Rs.98.5 ex-interest
Debenture interest is payable half-yearly on 30th June and 31st December every year. Show journal entries for
purchase and cancellation of the debentures.

17
PROBLEM: 15 (Sinking fund method)
On 1st January 1986 XYZ Ltd., issued 4,000, 12% debentures of Rs.100 each repayable at the end of four years
at a premium of 5%. It has been decided to institute a sinking fund for the purpose, the investments being
expected to realize 4% net. Sinking fund table shows that 0.235490 amounts to Rs.1 at 4% in four years.
Investments were made in multiples of hundred only.
On 31st December 1989 the bank balance was Rs.1,18,000 and investments realized Rs.3,13,600. The
debentures were paid off. Give the appropriate ledger accounts.
PROBLEM: 16 (Insurance policy method)
Zee Co., Ltd., issued 1,000 12% Debentures of Rs.100 each at par on 1-4-1998, repayable at par after 3 years on
31-3-2001. The directors decided to take out an insurance policy to provide necessary cash for the redemption
of the debentures. The annual premium of the policy, payable on 1st April every year was Rs.31,410. You are
required to show the journal entries in the books of the company relating to the issue and redemption of debentures.

UNIT III Final Accounts

PART I – Form of BALANCE SHEET
Name of the Company_
Balance sheet as at (Rupees in )

Particulars Note Figures as at the Figure as at the end

No. end of current of the previous
reporting period reporting period
1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholders' funds
(a) Share capital
(b) Reserves and surplus
(c) Money received against share
warrants
(2) Share application 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
IL. ASSETS
Non-current assets
(1) (a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress

18
 (iv) Intangible assets under
development
(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
TOTAL
See accompanying notes to the financial statements

PART II – Form of STTEMENT OF PROFIT AND LOSS

Name of the Company_
Profit and loss statement for the year ended (Rupees in )

Particulars Note Figures as at the Figure as at the end

No. end of current of the previous
reporting period reporting 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
Employee benefits expense
Finance costs
Depreciation and amortization expense
Other expenses
Total expenses
V. Profit before exceptional and extraordinary
items and tax (III-IV)
VI. Exceptional items
VII. Profit before extraordinary items and tax (V
-VI)
VIII. Extraordinary Items
IX. Profit before tax (VII-VIII)
X. Tax expense:
(1) Current tax
(2) Deferred tax
XI. Profit (Loss) for the period from continuing
operations (VII-VIII)
XII. Profit/(loss) from discontinuing operations
XIII Tax expense of discontinuing operations
XIV Profit/(loss) from Discontinuing operations
(after tax) (XIl - XIII)
XV Profit (Loss) for the period (XI + XIV)
XVI Earnings per equity share:
(1) Basic
(2) Diluted
19
 CHART SHOWING OVERALL PICTURE OF MANAGERIAL REMUNERATION
Different categories of managerial personnel entitled to remuneration Maximum percentage of net profit
1. Total managerial remuneration to all directors, director(s) or 11% and if there are no profits or
manager and/or whole-time director(s) inadequate profits Rs.30 lakhs to
Rs.60 lakhs per year per person
depending on the effective capital
of the company
2. All directors when there is no manager or managing director or 3%
whole-time director
3. All directors when there is a manager or managing director or 1%
whole-time director
4. Whole-time director (when there is one such director) 5%
5. Managing director (when there is one such director) 5%
6. Managing director and whole-time directors taken together or when 10%
number of whole-time directors or managing directors is two or more
than two.
7. Manager (there is no provision of having more than one manager). 5%

Methods of calculating net profit for the purposes of calculating the managerial remuneration
There are two methods of calculating the net profit for the purpose of calculating the managerial
remunerations: (1) Gross Profit Approach; (2) Net Profit Approach.

(1) Gross Profit Approach:

Under this approach gross profit is taken as the starting point. Income to be taken in Statement of Profit
& Loss are added. Expenses allowable are to be deducted. This will be more clear from the following format:
Particulars Rs.
Gross Profit (Sales - Cost of Goods Sold) XXX
Add: Income to be taken into account XXX
Bounties and subsidies received from Government XXX
Capital Profit on the Sale of Fixed Asset (Sale Proceeds - Original Cost) XXX
Less: Expenses Allowable
(i) Salaries & Wages XXX
(ii) Rent, Rates & Taxes XXX
(iii) Repairs and Renewals XXX
(iv) Misc. Expenses XXX
(v) Workmen Legal Compensation (not Voluntary Compensation) XXX
(vi) Interest on Bank Loan XXX
(vii) Interest on Debentures XXX
(viii) Directors' Fees XXX
(ix) Donations as per the Act XXX
(x) Depreciation to the extent specified under Schedule II of the Companies Act, 2013 XXX
Net Profit for the purpose of calculating commission XXX

20
(2) Net Profit Approach:
Under this approach, profit (as calculated as per Statement of Profit & Loss) is taken as the starting
point. All items not to be deducted (i.e. not allowable) from computing profit for the purpose of commission are
added. Items allowable are deducted for the purpose of calculating commission. It will be non-clear from the
following format.
Particulars Rs.
Net Profit as per Statement of Profit & Loss XXX
Add: Items not allowable:
Managing Director's Remuneration XXX
Scientific Research Expenditure XXX
Provision for Doubtful Debts XXX
Tax Provision XXX
Preliminary Expenses XXX
Depreciation (Already taken in Statement of P/L - Depreciation Allowable as
per Section 123 of the Companies Act) XXX
Loss on the Sale of Investment XXX
Proposed Dividend XXX
Ex-Gratia Payment to Employees XXX
Manager's Salary XXX
Commission to Manager (on Account) XXX
Capital Expenditure XXX XXX
XXX
Less: Items Allowable
Bonus (Liability as per Payment of Bonus Act--Bonus already debited to XXX
Statement of P & L)
Capital Profit on Sale of Fixed Asset (in excess of original cost) (Sale Price i.e. XXX
Book Value + Profit - Original Cost)
Profit on Sale of Investment (Capital Profit) XXX XXX
Profit for the Purpose of Managerial Commission XXX

Final account of companies:

Calculation of Managerial remuneration
PROBLEM: 1
From the following information provided by MNC Ltd., for the year ended 31st March, 2021, calculate
the overall (maximum) managerial remuneration:
Particulars Rs. Particulars Rs.
To Salaries and Wages 65,000 By Gross Profit 16,70,000
To Repairs 30,000 By Profit on Sale of Plant (Cost 1,70,000
To Depreciation (including Rs.3,00,000; Written down value
Development Rebate Rs.15,000) 1,10,000 Rs.1,50,000 Amount realised on Sale
To General Expenses 25,000 Rs.3,20,000)
To Loss on Sale of Investment 20,000 By Subsidy from Government 40,000
To Scientific Research (new Laboratory
setup) 1,03,000
To Donation to Charitable Institutions 35,000
To Interest on Debentures 35,000
To Debenture Trustees Remuneration 15,000
To Directors' Fees 12,000
To Income Tax 5,10,000
To Proposed Dividend 5,10,000
To Balance c/d 4,10,000
18,80,000 18,80,000

21
PROBLEM:2
Calculate the managerial remuneration from the following particulars of Ankit and Company Ltd., due to
managing director of the company at the rate of 5% of the profits. Also determine the excess remuneration paid,
if any:
Particulars Rs.
Net Profit 2,00,000
Net profit is calculated after considering the following:
(i) Depreciation 40,000
(ii) Tax provision 3,20,000
(iii) Directors' fees 8,000
(iv) Bonus 15,0200
(v) Profit on sale of fixed assets (original cost Rs.20,000 written down value Rs.11,000). 15,500
(vi) Provision for doubtful debts 9,000
(vii) Scientific research expenditure (for setting up new machinery) 20,000
(viii) Managing director's remuneration paid 30,000
Other information:
(a) Depreciation allowable according to the Companies Act, 2013 35,000
(b) Bonus liability as per Payment of Bonus Act, 1965 18,000

PROBLEM:3
Pagadiwala Containers Ltd., having three whole-time directors, on its board, the others being part-time
directors, earned profits during the year ended 31st March, 2021 to the tune of Rs.2,50,000 after taking into
consideration the following:
Particulars Rs.
Depreciation of fixed assets (Depreciation admissible 47,800
as per income tax rules Rs.32,800)
Provision for income-tax 1,22,500
Capital expenditure included in general expenses
charged to profit and loss account 12,500
Calculate the maximum remuneration payable to the whole-time directors assuming that the remuneration
payable to the whole-time directors is to be calculated on net profits remaining after payment of commission to
part-time directors and the commission to part-time directors is to be calculated on net profits remaining after
payment of remuneration to whole-time directors.

PROBLEM:4
From the following information of Swatantra Ltd., for the year ended 31st March, 2021, calculate the
commission payable to the Managing Director and other Directors of the company whose commission was
fixed @5% and 2% respectively on the profit of the company before charging their commission.
Salaries and wages 20,00,000 Gross Profit 51,00,000
Rent, Rates and Taxes 4,50,000 Bounties and Subsidies received from 1,00,000
Repairs and Renewals 60,000 Govt.
Miscellaneous Expenses 1,40,000 Profit on Sale of Fixed Assets 80,000
Workmen Compensation including Premium on Issue of Shares 20,000
Rs.10,000 legal compensation 25,000 Profit on Sale of forfeited Shares 10,000
Interest on Bank Overdraft 40,000
Interest on Debentures 50,000
Directors’ Fees 18,000
Donation 35,000
Depreciation on Fixed Assets 1,00,000
Loss on Sale of Investment 25,000
Reserve for Redemption of Redeemable
Preference Shares 1,50,000
Development Rebate Reserve 1,00,000
Provision for Taxation 10,00,000
Balance c/d 11,17,000
53,10,000 53,10,000

22
Notes:
S. No. Particulars Rs.
1 Original cost of the fixed assets sold 1,90,000
Written down value of the fixed assets sold 1,40,000
Sales proceeds of the fixed assets 2,20,000
2 Donation allowable under the Income Tax Act 25,000
3 Depreciation allowable for income tax purposes 80,000
PROBLEM: 5
Determine the maximum remuneration payable to the part-time directors and manager of B Ltd., (a
manufacturing company) under the Companies Act, 2013 from the following particulars:
Before charging any such remuneration, Statement of Profit and Loss showed a credit balance of Rs.23,10,000
for the year ended 31st March, 2021 after taking into account the following matters:
Particulars Rs.
Capital expenditure 5,25,000
Subsidy received from Government 4,20,000
Special depreciation 70,000
Multiple shift allowance 1,05,000
Bonus to foreign technicians 3,15,000
Provision for taxation 28,00,000
Compensation paid to injured workman 70,000
Ex-gratia to an employee 35,000
Loss on sale of fixed assets 70,000
Profit on sale of investment 2,10,000
Company is providing depreciation as per Section 123 of the Companies Act, 2013.
PROBLEM: 6
Prepare the Balance Sheet as at 31.3.2021 from the particulars furnished by M/s Pran Ltd., as per Schedule III
of the Companies Act:
Particulars Rs. Particulars Rs.
Share capital 7,50,000 Capital Redemption Reserve 20,000
Calls in arrear 5,000 Investment in 6% GP Notes (Tax Free) 3,00,000
Land 2,20,000 Surplus account 65,000
Building 2,00,000 Cash in hand 25,000
General reserve 50,000 Debtors 10,000
Loan from IDBI 1,00,000 Stock 1,00,000
Sundry creditors 1,50,000 Goodwill 25,000

PROBLEM: 7
Rising Engineers Ltd., have authorized capital of Rs.50 lakhs, divided into 5,00,000 equity shares of Rs.10
each. Their books show the following balances as on 31st March, 2021:
Particulars Rs. Particulars Rs.
Stock as on 1.4.2020 6,65,000 Bank Current A/c 20,000
Discount & Rebates 30,000 Cash in hand 8,000
Carriage Inwards 57,500 Debenture Interest (for ½ year to 30.09.2020) 10,000
Patterns 3,75,000 Interest – Bank 91,000
Rates, Taxes and Insurance 55,000 Calls in arrears 10,000
Furniture & Fixtures 1,50,000 Equity Share Capital (2,00,000 shares of Rs.10 each) 20,00,000
Materials Purchased 12,32,500 4% Debentures (repayable after 10 years) 5,00,000
Wages 13,05,000 Bank overdraft 7,57,000

23
 Coal & Coke 63,000 Sundry Creditors (for goods) 2,40,500
Freehold land 12,50,000 Sales 36,17,000
Plant and Machinery 7,50,000 Rent (Cr.) 30,000
Engineering Tools 1,50,000 Transfer Fees 6,500
Goodwill 3,75,000 Surplus A/c (Cr.) 67,000
Sundry debtors Bills 2,66,000
Receivable Advertisement 1,34,500
Commission & Brokerage 15,000
Business Expenses 67,500
Repairs 61,000
Bad Debts 46,500
25,500
The stock (valued at cost or market value whichever is lower) as on 31st March, 2021 was Rs.7,08,000.
Outstanding liability for wages Rs.25,000 and business expenses Rs.25,000.
Dividend declared @10% on paid up capital. To charge depreciation: Plant & Machinery @5%, Engineering tools
@20%; Patterns @ 10%; and furniture & fixture @ 10%.
Provide 2% on debtors as doubtful debts after writing off Rs.21,500 as bad debts and create debenture redemption
reserve Rs.10,000. Provide Rs.2,40,000 for income-tax.
You are required to prepare (i) Statement of Profit and Loss for the year ended 31st March, 2021; and (ii)
Balance Sheet as on that date; in accordance with Companies Act, 2013 giving as much information as necessary,
Ignore previous year’s figures. [Net Profit Rs.1,85,610; B/S Total Rs.40,40,110]

PROBLEM: 8
Moon and Star Co., Ltd., is a company with an authorized capital of Rs.5,00,000 dividend into 5,000 equity share
of Rs.100 each on 31.12.2020 of which 2,500 shares were fully called up. The following are the balances extracted
from the ledger as on 31.12.2020.
Trail Balance of Moon & Star Co., Ltd.,
Debit Rs. Credit Rs.
Opening stock 50,000 Sales 3,25,000
Purchases 2,00,000 Discount received 3,150
Wages 70,000 Profit & loss A/c 6,220
Discount allowed 4,200 Creditors 35,200
Insurance (up to 31.3.2021) 6,720 Reserves 25,000
Salaries 18,500 Loan from managing directors 15,700
Rent 6,000 Share capital 2,00,000
General expenses 8,950
Printing 2,400
Advertisements 3,800
Bonus 10,500
Debtors 38,700
Plant 1,80,500
Furniture 17,100
Bank 34,700
Bad debts 3,200
Calls-in-arrears 5,000
6,60,270 6,60,270
You are required to prepare Statement of Profit & Loss for the year ended 31.12.2020 and a balance sheet as on
that date. The following further information is given:
(a) Closing stock was valued at Rs.1,91,500.
(b) Depreciation on Plant at 15% and on furniture at 10% should be provided.
(c) A tax provision of Rs.8,000 is considered necessary.
(d) The directors declared an interim dividend on 15.8.2020 for 6 months ending June 31, 2020 @ 6%.
(e) Provide for corporate dividend tax @ 17%.

24
PROBLEM: 9
A Ltd., registered with an authorized capital of Rs.6,00,000 in equity shares of Rs.10 each. The following is its
Trial Balance on 31st March 2020.
Trail Balance of A Ltd.,
Particulars Debit Credit
Goodwill 25,000 -
Cash 750 -
Bank 39,900 -
Purchases 1,85,000 -
Preliminary expenses 5,000 -
Share capital - 4,00,000
12% debentures - 3,00,000
P & L A/c (Cr.) - 26,250
Calls-in-arrears 7,500 -
Premises 3,00,000 -
Plant & Machinery 3,30,000 -
Interim dividend 39,250 -
Sales - 4,15,000
Stock (1.4.2019) 75,000 -
Furniture & fixtures 7,200 -
Sundry Debtors 87,000 -
Wages 84,865 -
General expenses 6,835 -
Freight and carriage 13,115 -
Salaries 14,500 -
Directors’ fees 5,725 -
Bad debts 2,110 -
Debenture interest paid 18,000 -
Bills payable Sundry - 37,000
creditors General - 40,000
reserve Provision for - 25,000
bad debts - 3,500
12,46,750 12,46,750
Prepare statement of Profit & Loss and Balance Sheet in proper form after making the following
adjustments:
(a) Depreciate plant and machinery by 15%.
(b) Writ off preliminary expenses.
(c) Provide for 6 months interest on debentures.
(d) Leave bad and doubtful debts provision at 5% on sundry debtors.
(e) Provide for income tax at 50%.
(f) Stock on 31.3.2020 was Rs.95,000.
(g) Provide for corporate dividend tax @ 17%.

25
 Profit Prior to Incorporation
Profit prior to incorporation:
PROBLEM: 1
Kalpana Ltd., was incorporated on 1-4-1992 to take over the business of Natu Brothers from 1-1-92. From the
following information, calculate sales ratio and gross profit:

 Sales during the period January – December 1992 amounted to Rs.72,000. The trend of the sales was as under
 January and February – half the average sales in each month
 May, June and July – average sales in each month
 October – average sales
 November and December – half the average sales in each month.
 Cost of goods sold Rs.18,000.

PROBLEM: 2
S & R Co., Ltd., was incorporated on 1st July 1992 to purchase the business of Nish Bros as on 1-4-1992.
Certificate of commencement of business was received on 1-8-1992. The accounts for the year ended 31-3-
1993 disclosed net profit of Rs.80,000 after charging the following:
 Director’s salary Rs.10,000
 Salary Rs.20,000 (4 employees in pre incorporation period and 6 employees in post incorporation
period)
 Wages Rs.10,200 (5 workers at Rs.80 p.m. in pre acquisition period and 10 workers at Rs.100 p.m. in
post acquisition period)
 The sales were Rs.3,00,000 of which Rs.75,000 were in pre incorporation period.
Calculate the profit of pre and post incorporation periods. How will you treat pre incorporation profit?

PROBLEM: 3
A company was incorporated on 1st May 1984 to take over a business as a going concern from 1st January of the
same year. The turnover for the year ended 31st December was Rs.2,00,000, namely Rs.60,000 for the first
period up to 1st May and Rs.1,40,000 for the following period. From the profit and loss account given below
for the year ended 31st December 1984, you are required to ascertain profits prior to incorporation.
Profit & loss Account for the year ended 31-12-84
To Rent & rates 3,240 By Gross profit 70,000
To Insurance 720
To Lighting 2,040
To Salaries 7,800
To Director’s fees 2,000
To Sales discount 5,000
To Sales commission 10,00
To General expenses 2,400
To Carriage outwards 3,000
To Bank charges 420
To Repairs 1,380
To Bad debts 600
To Loan interest 1,200
To Net profit 30,200
70,000 70,000

26
PROBLEM: 4
From the following particulars, ascertain profit prior to and after incorporation.
 Time ratio – 3:5
 Sales ratio – 4:6
 Gross profit – Rs.10,00,000
 Expenses debited to profit and loss account were:
Salaries 96,000 Preliminary expenses 70,000
General expenses 12,000 Rent and rates 15,000
Discount on sales 40,000 Printing and stationary 65,000
Advertisement 50,000
 Income credited to profit and loss account were:
Rent received 18,000 Interest received 50,000

PROBLEM: 5
X Company purchased a business on 1-4-1993. The company obtained certificate of incorporation on 31-7-
1993. From the following particulars for the year ending 31-3-94, ascertain profit prior to incorporation and
divisible profits.
 Total sales up to 31-3-1994 to Rs.10,00,000; Sales from 1-4-1993 to 31-7-1993 Rs.2,50,000.
 Gross profit for the year Rs.2,12,000.
 Expenses debited to profit and loss account were as under:

Rent 6,000 Directors’ fees 2,600

Insurance 1,500 Preliminary expenses 7,200
Salaries 27,000 Interest paid to vender up to 1st Sep. 93 5,000
Selling expenses 9,000 Interest on debentures 4,000
Advertisement 8,000 Printing & stationery 4,200
Audit fees 1,200 Depreciation on machinery 30,000
Bad debts (Rs.850 related to pre incorporation) 2,400 Commission on sales 12,600
General expenses 4,800

PROBLEM: 6
A public limited company was formed to take over a running business with effect from 1-4-2006. The
company was incorporated on 1-8-2006 and the certificate of commencement of business was received on 1-10-
2006. The following is the profit and loss account for the period 1-4-2006 to 31-3-2007:
Particulars Rs. Particulars Rs.
To Salaries 12,000 By Gross profit b/d 80,000
To Printing & stationery 1,200
To Advertisement 4,200
To Traveling expenses 4,000
To Trade expenses 9,450
To Rent 6,600
To Electricity charges 1,050
To Directors’ fees 2,800
To Bad debts 800
To Commission to selling agents 4,000
To Audit fees 1,500
To Debenture interest 750
To Interest paid to vendors 1,050
To Selling expenses 6,300
To Depreciation 2,400
To Net Profit 21,900
80,000 80,000
Additional information:
 Total sales for the year amounted to Rs.4,80,000. This was even up to the date of certificate of
commencement, where after they recorded an increase of 2/3rd during the rest of the year.
 Rent was paid @ Rs.500 per month up to September 2006 and thereafter it was increased by Rs.200 p.m.

27
 Traveling expenses include Rs.1,200 towards sales promotion.
 Depreciation included Rs.150 for assets acquired in the post incorporation period.
 Purchase consideration was discharged by the company on 30th August 2006 by issuing equity shares of
Rs.10 each.

PROBLEM: 7
The following trial balance was extracted from the books of Heera Pvt., Ltd., formed by Mr. Chand of
Faizlabad on 1st April, 1989 but was incorporated on 1st July 1989. No entries relating to the transfer of the
business were entered in the books, which was carried on until 31st March 1990.
Trial balance as on 31st March 1990
Stock (1-4-1989) 42,940 Sales 2,79,300
Purchases 1,96,780 Capital A/c of Chand (1-4-89) 2,00,000
Carriage outwards 1,650 Current liabilities 31,660
Travelers’ commission 6,150
Office salaries 16,640
Rent & taxes 1,640
Office expenses 2,400
Directors’ salary 15,000
Fixed assets 1,25,000
Current assets (other than stock) 1,01,200
Preliminary expenses 1,560
5,10,960 5,10,960
 Stock on 31 march, 1990 amounted to Rs.35,420
st

 Purchase consideration Rs.2,50,000 to be paid by the issue of 25,000 equity shares of Rs.10 each.
 Gross profit percentage is fixed, turnover is double in April, November and December
 Preliminary expenses are to be written off.
 Carriage outward and travelers’ commission vary in direct proportion to sales.
Prepare trading and profit and loss account for the year ended 31 st March 1990 appropriating between the pre
and post incorporation periods and a balance sheet as on 31st March 1990.

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Coimbatore – 641014.

SUBJECT NAME: Corporate Accounting I

CHAPTER NAME: Valuation of Goodwill & Shares and Liquidation of Companies

UNIT IV Valuation
of goodwill
Q: What is goodwill? Define goodwill. What is the need for valuation of goodwill?
Meaning & definition
Goodwill is simple words, means the ‘good name’ or the ‘reputation’ of the business which attracts
more customers and therefore, helps in earning more profit in future. It is an intangible real assets and not a
fictitious one. “It is perhaps the most intangible of intangibles”
Goodwill is a valuable assets it the concern is profitable, on the other hand, it is value less if the concern
is an losing one. Therefore, it can be stated that goodwill represents the value of the reputation of a firm.
However, some of the definitions are discussed here under.
In the words of Spicer and Pegler, “Goodwill may be said to be that element arising from the reputation,
connection, or other advantages possessed by a business which enables it to earn greater profits than the return
normally to be expected on the capital represented by the net tangible assets employed in the business”.
According to Braden & Allyn, “Goodwill is an intangible asset compounded from a variety of
successful business ingredients – component and energetic management, customer acceptance, a favorable
location, a quality and profitable product, efficient production methods, an outstanding reputation, plus the
expectation that these ingredients, will continue to produce an above normal rate of return for an indefinite
period of time”.
28
 According to Hendrickson, “If the expected future earnings are less than a satisfactory return, the
capitalization of this deficiency is sometime thought of a negative goodwill.
Methods of valuation of goodwill
Simple profit method: The goodwill can be expressed in terms of a number of years of average profit.
Here there are two important methods in the computation.
 Average profit method: Under this method, goodwill is calculated as under
▪ The profit for an agreed number of years proceeding the valuation year is taken.
▪ Find the simple average / weighted average of the profit taken.
▪ Now, this average profit is multiplied by the number of years of purchase. Thus, the method of valuing
goodwill is
Goodwill = Average profit X Number of years of purchase

 Capitalization of average profit method: Here, the following steps are to be followed:
▪ Ascertain the average profit, as above.
▪ Capitalize this average profit at the normal rate of return resultant is net worth.
▪ Find the value of net tangible assets of the business
▪ Deduction of (iii) from (ii) gives the value of goodwill.

Goodwill = Capitalized net worth – Net tangible assets

Capitalized net worth = Average profit X Normal rate of return

 Super profit method: Super profit is the difference between expected future profit and normal profit.
Expected profit is average profit of the business adjusted for future changes. Normal profit is average
capital employed multiplied by normal rate of return. The normal rate is the profit earned by similar firms
in the industry. Average capital employed is net assets minus 50% of current year profit. Here super profit
is computed.

Super profit = Average profit – normal profit

Normal profit = Capital employed X Normal rate of return

Normal rate of return: It is the rate of earning which the investors in general expects on his / her investments
in a particular types of industry. It varies depending upon some general factors like bank rate, political stability
etc.

Average capital employed: (Assets side approach)

Particulars Rs. Rs.
Assets at market value:
Fixed assets less depreciation XXX
Current assets (other than goodwill, non trading assets, etc.,) XXX
Less: External liabilities (at revised value, if any) XXX
Creditors XXX
Bills payable XXX
Debtors XXX
Taxes XXX
Outstanding bills etc., XXX XXX
Capital employed at the end of the year XXX
Less: Half the profit earned during the year XXX
Average capital employed for the year XXX

29
 Average capital employed: (liabilities side approach)
Particulars Rs. Rs.
Equity share capital XXX
Preference share capital XXX
Reserve XXX
Profit & loss A/c XXX
Profit on revaluation of assets and liabilities XXX XXX
XXX
Less: Goodwill (book value) XXX
Losses and past expenses not yet written off XXX
Loss on revaluation XXX XXX
Capital employed at the end XXX
Less: ½ of current year profit XXX
Average capital employed XXX

There are four methods available for the valuation of goodwill based on super
profit method:
 Purchase of super profit method:
Goodwill = Super profit X Number of year of purchase
 Sliding scale valuation of super profit method: This method is a variation of the first method. It is based
on the logic that the greater the amount of super profit, the more difficult it would be to maintain. Generally
higher profit will naturally attract competition and soon the firm’s ability to make super profit is curtailed.
 Annuity of super profit method: Under this method, goodwill is calculated by multiplying super profit
and annuity table value. Usually reference to the annuity table will give the present value of annuity for the
given number of years and at the given rate of interest.
Goodwill = Super profit X Annuity table value
 Capitalization of super profit method: Under this method, the super profit when capitalized at the normal
rate of return will give the value of goodwill.
Super profit
Goodwill = X 100
Normal rate of return

Valuation of goodwill:
PROBLEM: 1 (Average profit or purchase of average profit)
Net profit for the six years on 31st December was as follows:
Year Rs. Year Rs. Year Rs.
1992 15,000 1994 25,000 1996 27,000
1993 20,000 1995 15,000 1997 43,000
Goodwill should be calculated on the basis of five years purchase of average net profits of the preceding six
years.

PROBLEM: 2
From the following calculate the value of goodwill on the basis of 5 years purchase of average profits of the
preceding 7 years.
Year Rs. Year Rs. Year Rs. Year Rs.
1991 85,000 1993 Loss: 50,000 1995 1,00,000 1997 80,000
1992 Loss 60,000 1994 1,10,000 1996 90,000

PROBLEM: 3
The following particulars are available in respect of business carried on by Mrs. Nandhini.
 Profits earned 1991 – 60,000; 1992 – 48,000; 1993 – 57,000.
 Profit of 1992 is reduced by Rs.5,000 due to stock destroyed by fire and profits of 1991 included a non-
recurring income of Rs.3,000.
 Profits of 1993 include Rs.2,000 income on investment.
 The stock is not insured and it is thought prudent to insure the stock in future. The insurance premium is
estimated to Rs.1,500 per annum.
 Fair remuneration to the proprietor is Rs.15,000 per annum.
You are required to compute the value of goodwill on the basis of 2 years purchase of average profit of the last
3 years. 30
 PROBLEM: 4
The following particulars are available in respect of the business carried on by Bal Thakrey Ltd.
 Profit earned: 1996 – Rs.50,000; 1997 – Rs.48,000; and Rs.52,000.
 Profit of 1997 is reduced by Rs.5,000 due to stock destroyed by fire and profit of 1996 included a non-
recurring income of Rs.3,000.
 Profit of 1998 include Rs.2,000 income on investment.
 The stock is not insured and it is thought prudent to insure the stock in future.
 The insurance premium is estimated at Rs.500 p.a.
 Fair remuneration to the proprietor (not taken in the calculation of profits) is Rs.10,000 p.a.
You are required to calculate the value of goodwill on the basis of 2 years purchase of average profits of the last
three years.

Weighted average profit method:

PROBLEM: 5
Mr. X Proposed to purchase the business from Mr. Lal. Goodwill for this purpose is agreed to be valued at 5
years purchase of the average of the past six years. The weights and profit are as follows:
Year Weights Profit Year Weights Profit Year Weights Profits
1991 1 1,00,000 1993 3 75,000 1995 5 1,10,000
1992 2 2,50,000 1994 4 1,25,000 1996 6 90,000

Capitalization of average profit method:

PROBLEM: 6
 Average profit Rs.2,50,000 per year
 Return on investment 10%
 Net assets Rs.20,00,000
 Expenses not to be incurred in future – Rent Rs.15,000;
 Directors fees Rs.20,000
Calculate the value of goodwill under capitalization of average profit method.
Super profit method:
PROBLEM: 7
A partnership firm earned net profits during the last three years are as follows: 1986 – Rs.17,000; 1987 –
Rs.20,000; 1999 – Rs.23,000. The capital investment 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.
Calculate the value of goodwill on the basis of 2 years’ purchase of average super profits earned during the above
mentioned three years.

PROBLEM: 8
From the following information calculate the value of goodwill on the basis of three years purchase of the super
profit:
 Average capital employed in the business Rs.7,00,000.
 Net trading profit of the firm for the past three years Rs.1,07,600; Rs.90,700 and Rs.1,12,500.
 Rate of interest expected from capital having regard to the risk involved 12%.
 Fair remuneration to the partner for their services Rs.12,000 per annum.
 Sundry assets of the firm – Rs.7,54,762.
 Sundry liabilities of the firm – Rs.31,329.

PROBLEM: 9
From the following particulars relating to the business of Mr. Rahul, compute the value of goodwill on the basis
of 3 years purchase of super profits taking average of last four years:
Capital invested – Rs.1,20,000; Market rate of return on investment – 12%;
Rate of risk return on capital invested – 3%;
Managerial remuneration of the proprietor, if employed elsewhere Rs.30,000 p.a. trading results:
1995 (profit) – 60,000; 1996 (profit) – 72,000; 1997 (loss) – 8,000; 1998 (profit) – 88,000

31
 PROBLEM: 10
The balance sheet of a partnership firm is as follows:
Liabilities Rs. Assets Rs.
Capital: X 1,20,000 Goodwill 68,000
Y 1,20,000 Buildings 1,46,000
Sundry creditors 1,20,000 Stock 90,000
Bills payable 40,000 Debtors 58,000
Cash and bank 38,000
4,00,000 4,00,000
J.J. Co., Ltd., is to be formed to take over this firm. For this purpose, assets are revalued as under: Stock –
Rs.94,000; Debtors – Rs.40,000; Buildings – Rs.1,28,000.
Profit of the firm of the past five years before charging anything in respect of the partners were Rs.40,000;
Rs.60,000; Rs.72,000; Rs.64,000; Rs.74,000. Included in these profits were non-recurring items averaging
Rs.3,000, but from the nature of the business casual non-recurring items were found to arise every year and the
promoters agreed that Rs.2,400 should be allowed as profit from this source. Similar businesses paid a dividend
of 8% per annum on their equity shares and the partners who would be the directors of the company were to be
paid remuneration X – Rs.18,000 and Y – Rs.12,000 p.a. Calculate goodwill on five years purchase of super
profits.

PROBLEM: 11 (Capitalization of super profit method)

Find out goodwill by capitalizing super profit:
 Normal rate of return 12%
 Profits for the last four years are: Rs.30,000; Rs.40,000; Rs.50,000 and Rs.45,000.
 Non-recurring income of Rs.3,000 is included in the above mentioned profit of Rs.30,000
 Average capital employed is Rs.3,00,000.
PROBLEM: 12
The following information is given:
 Capital employed – Rs.3,00,000; Normal rate of profit 10%.
 Net profit for five years: 1991 – Rs.28,800; 1992 – Rs.30,800; 1993 – Rs.33,800; 1994 – Rs.34,800 and
1995 – Rs.35,800. The profits included non-recurring profits on an average basis of Rs.2,000 out of
which it was deemed that even non-recurring profits had a tendency of appearing at the rate of Rs.1,400 p.a.
 Normal rate of profit 10%
You are required to calculate the value of goodwill as per capitalization of super profit method.

PROBLEM: 13 (Annuity
method)
The net profits of a company after providing for taxation, for the past five years are Rs.40,000; Rs.42,000;
Rs.45,000; Rs.46,000 and Rs.47,000. The capital employed in the business is Rs.4,00,000 on which a
reasonable rate of return of 10% is expected. It is expected that the company will be able to maintain its super
profits for the next five years. Calculate the value of goodwill of the business on the basis of an annuity of
super profits, taking the present value of annuity of one rupee for 5 years @ 10% interest as Rs.3.78.

PROBLEM:
14
From the following particulars, find out the value of goodwill as per annuity method:
 Capital employed: Rs.3,00,000;
 Normal rate of return: 10%
 Present value of Rs.1 for 5 years at 10% at 3.78.
 Normal profit for 5 years: 1st year – Rs.30,000; 2nd year – Rs.32,000; 3rd year – Rs.34,000; 4th year –
Rs.36,000; 5th year – Rs.38,000.
 Non-recurring income – Rs.1,600; Non-recurring expenses – Rs.1,000.

32
 PROBLEM:
15
Ascertain the value of goodwill of Imran Co. Ltd., carrying on business from the following:
Liabilities Rs. Assets Rs.
2,500 shares of Rs.100 each fully paid 25,00,000 Goodwill at cost 2,50,000
Bank overdraft 4,80,000 Land & Building at cost 11,00,000
Sundry creditors 8,05,000 Plant & machinery at cost less depreciation 10,00,000
Provision for taxation 4,25,000 Stock in trade 15,00,000
Profit & Loss Appropriation A/c 6,00,000 Book debts less provision for bad debts 9,60,000
48,10,000 48,10,000
The company started operations in 1989 with a paid up capital as afforested of Rs.25,00,000. Profit earned
before providing for taxation have been as follows: (year ended 30th June) 1990 – Rs.6,00,000; 1991 –
Rs.7,50,000; 1992 – Rs.8,50,000; 1993 – Rs.9,50,000; 1994 – Rs.8,50,000. Income tax @50% has been
payable on these profits. Dividend have been distributed form the profits of the first three years @10% and
from those of the next two years @15% of the paid up capital.

Methods of valuation of shares

Net assets, Yield and Fair value methods
Q: Explain the various methods of valuation of shares? What is fair value?
Usually value of preference share depends on their rate of dividend. But equity share are valued in
different ways. There are three methods of valuation of shares.
 Net assets method (or) intrinsic value method: The assets of the company of market value are added up.
The liabilities including debenture and preference shares are reduced. The balance is net assets. It is
divided by the number of shares to find the value of each share. This method ignores the earning capacity
of a business and is considered as suitable only for sale of business.
Formula:
Net assets = Total assets (realisable value) - Outside liability
Net assets
Value per equity share =
Number of equity shares

 Yield method (or) Market value method: Small investors are generally interested in the income they earn
from the company and hence the price they will be prepared to pay will depend upon the yield or the size of
the dividends that can be expected.
Formula:
Calculation the expected rate of earnings :
Expected profit
Expected rate = X 100
Equity capital
Note: Expected profit is the profit after deducting taxes payable, transfer to any reserve, transfer to various
funds such as debenture redemption fund etc., and the preference dividend payable.
Expected rate
Yield value = X Paid up value per share
Normal rate
If the dividend per share is known, the rate of dividend will be calculated as follows:
Dividend per share
Rate of dividend = X 100
Paid up value per share

 Dual method (or) Fair value method: Under this method, the valuation depends upon the comparison of
the company’s earning capacity and the normal rate of return on capital employed. Fair value is the average
of net assets value per share and yield value per share. This is a compromise method to bridge the gap between
the values shown by both the methods.
Formula:
Intrinsic value +Yield value
Fair value per share =
2
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 The fair value method takes the average of the values obtained in net assets basis and earnings basis; it
makes an attempt to minimize the demerits of both net assets and earnings basis methods.

Valuation of shares:
PROBLEM: 1 (Net assets method (or) intrinsic value method)
The following is the summarized balance sheet of X Company as at December 31, 1995:
Liabilities Rs. Assets Rs.
10,000 5% Pref. Shares of Rs.10 each fully paid 10,00,000 Fixed assets 38,00,000
2,00,000 Equity shares Rs.10 each fully paid 20,00,000 Investments 10,25,000
General reserve 15,00,000 Stock 5,72,000
Profit and loss A/c 12,00,000 Sundry debtors 12,78,000
6% Debentures Sundry 8,00,000 Cash and bank balance 2,25,000
creditors Liabilities for 2,75,000
expenses 1,25,000
69,00,000 69,00,000
For purpose of valuation of shares, fixed assets are to be depreciated by 10% and investments are to revalued at
Rs.10,80,000. Debtors will realize Rs.12,14,100. Interest on debentures is accrued due for 9 months and
preference dividend for 1995 is also due: neither of these has been provided for in the balance sheet. Calculate
the value of each equity share.

PROBLEM: 2
Crystal Ltd., started its business on 1st April 1996. On 31st March 1999, its balance sheet in a summarized from
was as follows:
Liabilities Rs. Assets Rs.
15,000 10% Pref. shares of Rs.100 each, fully paid 15,00,000 Fixed assets 45,00,000
4,50,000 equity shares of Rs.10 each fully paid 45,00,000 Current assets 60,00,000
Capital reserve 37,500 Preliminary expenses 75,000
Profit & loss A/c 8,25,000
13% debentures Sundry 7,50,000
creditors Provision for 27,00,000
income tax 2,62,500
1,05,75,000 1,05,75,000
The company is yet to declare its maiden dividend on 31-3-1999. The fixed assets are revalued at
Rs.48,00,000. Calculate the value of the two classes of shares.

PROBLEM: 3
The following is the balance sheet of ‘S’ company limited as on 31st December 1998.
Liabilities Rs. Assets Rs.
3,000 equity shares of Rs.100 each 3,00,000 Cash in hand 2,000
1,500 8% preference shares of Rs.100 each 1,50,000 Cash at bank 20,000
General reserve 40,000 Sundry debtors 80,000
Profit & loss A/c 10,000 Stock-in-trade 1,40,000
Bank loan 50,000 Land & buildings 2,05,000
Sundry creditors 15,000 Furniture 30,000
Goodwill 70,000
Discount on shares 18,000
5,65,000 5,65,000
The value of assets is assessed as follows:
 Value of stock-in-trade, land and buildings and goodwill is estimated at Rs.1,20,000; Rs.2,50,000 and
Rs.80,000 respectively. Furniture to be depreciated at 10%
 Debtors are expected to realize 80% of book value. Find out the value of equity shares.

PROBLEM: 4
The summarized Balance sheet of BK Ltd., as at 31st March 1997, is as follows:
Liabilities Rs. Assets Rs.
34
 30,000 Equity shares of Rs.10 each fully paid 3,00,000 Goodwill 70,000
10,000 Equity share of Rs.10 each Rs.8 paid up 80,000 Fixed assets 4,50,000
Reserves 1,80,000 Current assets 2,20,000
11% Debentures 1,00,000 Preliminary expenses 10,000
Current liabilities 90,000
7,50,000 7,50,000
The goodwill is independently valued at Rs.50,000 and fixed assets at Rs.4,20,000 there was a contingent
liability of Rs.20,000 which has become payable. Determine the value of both the categories of shares under the
Net assets method.

PROBLEM: 5 (Net assets or intrinsic value method (with goodwill valuation))

From the following information, find out the value of each share:
Liabilities Rs. Assets Rs.
20,000 equity shares of Rs.10 each 2,00,000 Goodwill 1,90,000
Reserves 2,50,000 Investment 3,00,000
Profit & loss A/c 30,000 Current assets 50,000
Unsecured loans 80,000 Loans & advances 30,000
Current liabilities 20,000 Miscellaneous expenditure 10,000
5,80,000 5,80,000
For the purpose of valuation of shares goodwill shall be taken at two years purchase of the average profit of the
last five years. The profits for the last five years are – Rs.60,000; Rs.70,000; Rs.40,000; Rs.50,000 and
Rs.50,000.

Valuation under net asserts method with claims of participating preference shares on surplus
assets: PROBLEM: 6
From the following details, calculate the value of each equity share and preference share:

Liabilities Rs. Assets Rs.

80,000 equity shares of Rs.10 each 8,00,000 Land & building at cost 3,00,000
4,000 7% preference shares of Rs.100 4,00,000 Plant & Machinery at cost 5,00,000
General reserve Profit 1,00,000 Stock at market value 5,00,000
& loss A/c Workmen’s 80,000 Book debts 2,40,000
savings A/c Provident 40,000 Cash at bank 1,50,000
fund Depreciation fund 50,000 Prepaid expenses 30,000
Creditors 1,60,000
90,000
17,20,000 17,20,000
Additional information:
 Goodwill is valued at Rs.1,60,000
 Depreciation fund is excess to the extent of Rs.60,000.
 Debtors of Rs.20,000 are likely to prove bad.
 There is a dispute liability of Rs.30,000 (not provided in the accounts) out of which Rs.20,000 is likely to
materialize.
 On liquidation preference shareholders have a right to participate in surplus.
PROBLEM: 7
From the following information, calculate the value per equity share:
1,000, 9% Preference shares of Rs.100 each 1,00,000
1,00,000 Equity shares of Rs.5 each, Rs.2 per share paid up 2,00,000
Expected profit per year before tax 1,09,000
Rate of tax 50%
Normal rate of return 15%
Transfer to general reserve 20% of Net profits.

35
PROBLEM: 8
Mr. Share Wallah holds 12,000 equity share in Bharath Ltd., the nominal and paid up capital of which consists
of:
 40,000 equity shares of Rs.1 each.
 10,000 preference shares of Rs.1 each, rate of dividend 12%.
 Preference shares do not further participate in profits.
 Usual transfer to reserve 10% of the profits.
It is ascertained that: (a) Normal annual profit is Rs.12,000; (b) Normal rate of return 15%. Mr. Share Wallah
requests you to value his holdings based upon the above figures.

PROBLEM: 9
S. Vinoth holds 5,000 equity shares in Hindustan Ltd. The paid up capital of which is 30,000 shares (equity) of
Re.1 each. It is ascertained that
 The normal annual net profit of such company is Rs.5,000, and transfer to reserve is 20%.
 The normal return for the type of business carried out by the company is 8%.
Mr. S. Vinoth requires you to value his shareholdings based upon the above figures.

PROBLEM: 10
The following is the summarized balance sheet of ABC Ltd., as at 31st December 1998.
Liabilities Rs. Assets Rs.
1,00,000 equity shares of Rs.10 each 10,00,000 Plant & machinery 4,80,000
Share premium 2,00,000 Furniture 2,00,000
General reserve 4,78,800 Stock 12,40,000
Profit & loss A/c 3,15,200 Debtors 4,12,000
Sundry creditors 8,18,800 Cash at bank 8,74,800
Provision for taxation 3,74,000
32,06,800 32,06,800
The company transfer 20% of its profit (after tax to general reserve. Net profits before taxation of the last three
years have been as follows: 1996 – Rs.6,70,000; 1997 – Rs.7,32,000; and 1998 – Rs.7,88,000. Machinery is
valued at Rs.6,40,000. Average yield in this type of business is 20%. The rate of tax is 50%. Find out the
value of each equity share on the basis of (a) net assets method (b) yield method and (c) Fair value.
LIQUIDITION
PROBLEM: 1 (Liquidator’s remuneration)
Ascertain the remuneration payable to Liquidator from the data given below:
Secured creditors Assets Rs.50,000 (Securities realized: Rs.60,000)
realized Liquidator’s Rs.80,000
remuneration 3% on the amount realized

PROBLEM: 2
Find out the remuneration payable to liquidator with the help of the following information:
Preferential creditors Rs.1,400
Unsecured creditors Rs.81,000
Amount available for unsecured creditors
after paying preferential creditors, before
paying liquidator’s remuneration Rs.74,154
Liquidator’s remuneration 2% on amount distributed to unsecured creditors

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 PROBLEM: 3
The liquidators of SR & Co., Ltd., is entitled to get a remuneration of 3% on the amount realized from the
assets and 2% on the amount distributed to the unsecured creditors. From the following particulars calculate the
remuneration payable.

Cash realized from assets 3,00,000

Preferential creditors 10,000
Amount due to unsecured creditors 3,00,000

Liquidator’s final statement:

PROBLEM: 4
The following particulars related to a company which went into voluntary liquidation. Prepare liquidators final
statement of account. At that time allow 2% remuneration to liquidator on the amount realized and 3% on the
amount distributed to unsecured creditors.
Unsecured creditors 2,80,000 Assets realized: Cash in hand 21,500
Preferential creditors 20,000 Land & building 1,30,000
Debentures 1,90,000 Plant & machinery 1,80,000
Share capital 2,00,000 Furniture 20,000

PROBLEM: 5
A Ltd., went into liquidation with the following liabilities:
Secured creditors (securities realized Rs.25,000) Rs.20,000
Preferential creditors 600
Unsecured creditors Rs.30,500

37
 Liquidation expenses are Rs.252. Liquidator is entitled to a remuneration of 3% on the amounts realized
(including securities with creditors) and 1½% on the amount distributed to unsecured creditors. The various
assets realized Rs.26,000 (excluding securities in the hands of secured creditors). Prepare the liquidator’s final
statement of account.
PROBLEM: 6
The Ultra Optimist Ltd., went into liquidation. Its assets realized Rs.3,50,000 excluding amount realized by
sale of securities held by the secured creditors. The following was the position:
Share capital: 1,000 shares of Rs.100 each
Secured creditors (securities realized Rs.40,000) 35,000
Preferential creditors 6,000
Unsecured creditors 1,40,000
Debentures having a floating charge on the assets of the company 2,50,000
Liquidation expenses 5,000
Liquidator’s remuneration 7,500
Prepare the liquidator’s final statement of account.
PROBLEM: 7
The following particulars are related to a company which has gone into liquidation. You are required to prepare
liquidator’s final statement of account allowing for his remuneration at 2% on the amounts realized on assets
and 2% on the amounts distributed to unsecured creditors other than preferential creditors.
Preferential creditors 2,24,000 The assets realized: Cash in hand 20,000
Unsecured creditors 70,000 Land & buildings 1,30,000
Debenture 75,000 Plant & machinery 1,10,500
Fixtures and fittings 7,500
The liquidation expenses amounted to Rs.2,000. A call of Rs.2 per share on the partly paid 10,000 equity shares
was made and duly paid except in case of one shareholder owning 500 shares.
PROBLEM: 8
X Ltd., went into liquidation on 31.3.1989 when the following balance sheet was prepared:
Liabilities Rs. Assets Rs.
Share capital: 19,500 equity shares of Rs.10 each 1,95,000 Goodwill 50,000
Sundry Creditors: Building 48,000
Partly secured creditors (secured on building) 55,310 Machinery 65,500
Unsecured creditors 99,790 Stock 56,800
Preferential creditors 24,200 Sundry debtors 64,820
Bank overdraft (unsecured) 12,000 Cash 2,500
Profit & loss A/c 98,680
3,86,300 3,86,300
Assets realized as follows:
Building – Rs.35,000; Machinery – Rs.51,000; Stock – Rs.39,000; Sundry debtors – Rs.58,500; Cash –
Rs.2,500. The expenses on liquidation amounted Rs.1,000.
The liquidator’s remuneration was agreed at 2.5% on the amount realized (including cash) and 2% on the
amount paid to unsecured creditors. You are required to prepare the liquidators final statement of account.
PROBLEM: 9
K Ltd., went into voluntary liquidation on 30.10.1991. The below given is its balance sheet on that date:
Liabilities Rs. Assets Rs.
2,000 equity shares of Rs.100 each 2,00,000 Land & buildings 1,40,000
6% Debentures 1,00,000 Machinery 60,000
Mortgage loan (secured on machinery) 50,000 Stock 1,22,500
Sundry creditors 1,50,000 Debtors 1,10,000
Cash 2,500
P & L A/c 65,000
5,00,000 5,00,000
 Sundry creditors include Rs.6,000 payable as preferential creditors. Liquidation expenses amounted
to Rs.1,800.
 Assets realized as follows: Land & buildings Rs.60,000; Machinery Rs.63,500; Stock Rs.90,000;
Debtors 40% of book value.
67
 Liquidator’s remuneration: 3% on assets realized including cash and 2% on the amount paid to
unsecured creditors including preferential creditors.
 Debenture holders were repaid on 31.12.91 along with two months interest.
Prepare liquidator’s final statement of account.
PROBLEM: 10
Kannan Ltd., was liquidated on 31-12-96.
Liabilities Rs. Assets Rs.
Share capital 1,00,000 Land & buildings 60,000
8% debentures 1,00,000 Plant & machinery 60,000
Mortgage loan (secured on land& building) 50,000 Stock 60,000
Sundry creditors 80,000 Cash in hand 5,000
Debtors 70,000
Profit & loss A/c 75,000
3,30,000 3,30,000
Adjustments:
 Land & building Rs.55,000; Stock Rs.20,000; Plant & machinery Rs.25,000
 Half of the debtors were bad and the balance realized 60% of book value.
 Liquidator was entitled to a commission of 3% on amount realized other than cash and 2% of the
amount paid to unsecured creditors. Preferential creditors amounted to Rs.10,000 (included in sundry
creditors)
 Liquidation expenses amounted to Rs.970. Prepare liquidator’s final statement of accounts.

PROBLEM: 11
The Fast Foods Ltd., went into voluntary liquidation on 31st December 2004. The balance in its books on that
date was:
Liabilities Rs. Assets Rs.
5,000 6% Pref. Shares of Rs.100 each 5,00,000 Land & buildings 2,50,000
2,500 Equity shares of Rs.100 each, Rs.75 paid 1,87,500 Plant & machinery 6,25,000
7,500 Equity shares of Rs.100 each, Rs.60 paid 4,50,000 Patents 1,00,000
5% Mortgage debentures 2,50,000 Stock 1,37,500
Interest outstanding 12,500 Debtors 2,75,000
Creditors 3,62,500 Cash at bank 75,000
P & L A/c 3,00,000
17,62,500 17,62,500
The liquidator is entitled to a commission of 3% on all assets realized except cash and 2% on amounts
distributed among unsecured creditors other than preferential creditors. Creditors include preferential creditors
Rs.37,500 and a loan for Rs.1,25,000 secured by a mortgage on Land & buildings. The preference dividends were
in arrears for two years. The assets realized as follows: Land & buildings Rs.3,00,000; Plant & machinery
Rs.5,00,000; Patents Rs.75,000; Stock Rs.1,50,000; Debtors Rs.2,00,000. The expenses of liquidation
amounted to Rs.27,250. Prepare the liquidator’s final statement of account.

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Final Accounts under Double Account Systems:

(1) A Revenue A/c:

It is in the nature of Profit & Loss Account. All the expenses are shown on the debit side of this account
and all the incomes are shown on the credit side of this account.
Revenue A/c. for the year ended.......
Particulars Rs. Particulars Rs.
To Staff salaries XXX By Income (except interest
To Rent, rates & taxes XXX earned and Government subsidy) XXX
To Printing & stationery XXX By Net Revenue A/c. (Loss - if
To postage & telegrams XXX any, transferred) (Bal. fig.) XXX
To Repairs & Renewals XXX
To Depreciation on Fixed assets XXX
To Discount allowed XXX
To Miscellaneous expenses XXX
To Net Revenue A/c (Bal. Fig.) XXX
XXX XXX
(2) Net Revenue Account:
It is similar to the ordinary Profit & Loss Appropriation Account. This accounts starts with the balance of
the net revenue account brought forward from the last year.
Net Revenue A/c. for the year ended.......
Particulars Rs. Particulars Rs.
To Balance B/d (if any) XXX By Balance B/d (Balance from last year)
To Revenue A/c (Loss of current year By Revenue A/c (Profit of current year XXX
transferred from Revenue A/c) XXX transferred from Revenue A/c)
To Interest on debentures XXX By Government subsidy XXX
To Interest on Loans XXX By Interest earned XXX
To Interest on Security deposits XXX By Transfer from Reserve XXX
To Contingency Reserve XXX By General Balance sheet (Loss - if any,
To Dividend Control Reserve XXX transferred to general balance sheet - Bal. fig) XXX
To General Balance Sheet (Bal. fig.) XXX
XXX XXX

(3) Capital Account (or) Receipts and Expenditure on Capital Account:

This account is mainly prepared to show as to how much fixed or long term capital has been raised by a public
utility concern and how it has been utilized. The account is usually prepared in a three columnar form on either side.
On the left side is recorded the Capital expenditure and on the right side Capital Receipts.

41
 Receipts and Expenditure on Capita A/c for the year ending.......
Expenditure Upto the During Total Receipts Upto the During Total
end of the year end of the year
previous Rs. previous Rs.
To Preliminary expenses XXX XXX XXX By Equity Shares XXX XXX XXX
To Land XXX XXX XXX By Pref. Shares XXX XXX XXX
To Building XXX XXX XXX By Debentures XXX XXX XXX
To Plant XXX XXX XXX By Loans XXX XXX XXX
By Calls-in-arrears XXX XXX XXX
Total Expenditure XXX XXX XXX Total Receipts XXX XXX XXX
To Balance transferred to XXX
General Balance sheet
XXX XXX XXX XXX XXX XXX

(4) General Balance sheet:

In the general balance sheet the balance of the capital account, the current assets and liabilities are recorded.
General Balance sheet
Liabilities Rs. Assets Rs.
Capital A/c. (Bal. B/f. from Capital A/c.) XXX Stores XXX
Sundry creditors for capital A/c XXX Sundry debtors XXX
Sundry Creditors on Open A/c XXX Cash at bank XXX
Net Revenue A/c (Bal. B/f. from Net Revenue A/c.) XXX Cash in hand XXX
Reserve fund XXX Securities XXX
Depreciation fund XXX Special items XXX
Sinking fund XXX Other assets XXX
Investment fluctuation fund XXX
Other liabilities` XXX
XXX XXX

FINAL ACCOUNTS OF ELECTRICITY SUPPLY COMPANIES

Electricity supply being a public utility service, the business is controlled by the government. These
undertakings are governed by the Indian Electricity Act 1910 and the Electricity (Supply) Act 1948. The published
accounts of electricity companies are to be prepared in accordance with the Provisions of Companies Act 1956 to
ensure greater transparency and maximum disclosure. The electricity companies are required to present their final
accounts according to the Double account system. The preparation final accounts involves preparation of 'Revenue
A/c', 'Net Revenue A/c', ' Capital A/c' and 'General Balance Sheet'. However, the Revenue account of electricity
companies is different from the generalized Revenue Account given earlier.
The specimen form of Revenue Account of Electricity companies is as follows:
Revenue A/c. for the year ended.......
Particulars Rs. Particulars Rs.
A. Generation: By Sale of energy for lighting XXX
To Fuel XXX By Sale of energy for power XXX
To Oil, Wastage, Water etc. XXX By Sale of energy under special contracts XXX
To Salary of engineers XXX By Public lighting XXX
To Wages and gratuities XXX By Rent receivable XXX
To Repairs & Maintenance XXX By Transfer fees XXX
B. Distribution: By Other items XXX
To Salary of engineers XXX By Miscellaneous receipts XXX
To Wages & gratuities XXX By Sale of Ashes XXX
To Repairs & Maintenance XXX By Reconnection and disconnection fees XXX
C. Public lamps:
To Attendance & repairs XXX
42
 To Repairs XXX
D. Rent, Rates & Taxes:
To Rent payable XXX
To Rates & Taxes XXX
E. Management Expenses:
To Directors remuneration XXX
To General establishment XXX
To Auditors of the company XXX
F. Law charges:
To Law charges XXX
G. Depreciation:
To Lease XXX
To Building XXX
To Plant & Equipment XXX
H. Special charges:
To Bad debts XXX
To Net Revenue A/c. (Bal. fig. transferred) XXX
XXX XXX

PROBLEM: 1
From the following details relating to an electricity undertaking, you are required to draw up the Capital Account
and General Balance Sheet as at 31st March, 2021, under the Double Account System.
Authorized capital: 8,000 shares of Rs.100 each
Issued Capital: 4,000 shares of Rs.100 each fully paid (out of which 500 share were issued during the year)
13% Debentures Rs.2,00,000; Trade Creditors Rs.50,000, Reserve fund Rs.1,00,000; Trade Debtors Rs.90,000 and
Cash at Bank Rs.50,000. Reserve fund Investment (cost) Rs.1,00,000; Market Value Rs.1,10,000; Stock
Rs.60,000.
Fixed asses - spent up to 31.3.2020; Machinery Rs.3,00,000; Building Rs.2,00,000; Additions during the year
Machinery Rs.60,000; Building Rs.10,000. Depreciation Fund: Machinery Rs.70,000; Building Rs.10,000. Profit
& Loss Account Rs.40,000

PROBLEM: 2
From the following particulars draw up (1) Capital Account and (2) General Balance Sheet as on 31st March, 2021
on Double Account System.
Authorized Capital Rs.30,00,000; Subscribed Capital Rs.26,00,000; 11% Debentures Rs.4,00,000; Trade Creditors
Rs.1,60,000; Reserves Rs.1,50,000; Trade Debtors Rs.3,80,000; Cash in hand and at Bank Rs.3,50,000;
Investments Rs.1,50,000; Stock Rs.2,40,000.
Expenditure to 31st March, 2020:
Land Rs.1,20,000; Shafting etc., Rs.13,50,000; Machinery Rs.4,00,000; Buildings Rs.1,30,000.
The expenditure during the year ended 31.3.2020 was Rs.2,50,000; Rs.2,50,000 and Rs.1,00,000 respectively on
the last three items and a renewal fund of Rs.2,50,000 had been created. The balancing item of Rs.1,60,000 may be
taken as profit of the company.

PROBLEM: 3
Following are the balances of the Central Railway for the year ended 31st March, 2021. Make out in the prescribed
form (i) Revenue Account, (ii) Net Revenue Account, and (iii) General Balance Sheet:
Particulars Rs. Particulars Rs.
Interest on debenture Stock 14,500 Expended upon: Locomotive
Rent paid on leased lines, guarantees, etc. 26,000 Power Maintenance of ways 7,92,000
Balance to credit to net revenue A/c on stations Carriage and wagon 4,10,000
1.4.2020 32,000 repairs Traffic expenses 98,000
General Interest A/c, Credit Balance 500 2,00,000

43
Capital A/c, balance on 31.3.2021 4,75,000 Shipping expenses 90,000
Cash in hand and at bank 1,10,000 General charges 1,50,000
General stores - Stock in hand 82,000 Docks and harbour expenses and repairs 40,000
Sundry debtors 25,000 Rates and taxes 75,000
Traffic A/c due to the company 1,08,000 Law charges 10,000
Amounts due from other companies 55,000 Preliminary expenses (not to be
Amounts due from post office 30,000 capitalised) 16,000
Amount due to clearing house 18,000 Compensation 2,000
Sundry creditors and suspense A/c 1,00,000 Government duty 4,000
Unpaid dividend and interest 25,000 Received from: Passengers 13,80,000
Debt due to other companies 30,000 Merchandise 5,00,000
Fire insurance fund 1,20,000 Docks and harbour 1,40,000
Reserve fund 2,00,000 Shipping 50,000
Employees’ savings Bank deposits 32,000 Parcels 80,000
Rents 30,000
Mails 75,000

PROBLEM: 4 (Disposal of profit)

Compute reasonable return from the following information given below:

Particulars Rs.
Capital base 34,00,000
Loan from Electricity board 30,00,000
Development reserve 10,00,000
10% Debentures 8,00,000
Reserve Fund Investment (6%) 60,00,000
Assume the bank rate to be 8%
PROBLEM: 5
Compute reasonable return from the following information given below:

Particulars Rs.
Capital base 15,39,000
Loan from Electricity board 11,40,000
Development reserve 2,85,000
12% Debentures 5,70,000
Reserve Fund Investment (4%) 14,25,000
Assume the bank rate to be 5%
PROBLEM: 6
City Electricity Ltd., earned a profit of Rs.4,22,500 during the year ended 31st March 2004 after debenture interest
@ 7½ % on Rs.1,25,000. With the help of the figures given below, show the disposal of profit.

Particulars Rs.
Original cost of fixed assets 50,00,000
Formational and other expenses 2,50,000
Monthly average of current assets (net) 12,50,000
Reserve fund (represented by 4% Govt. Securities) 5,00,000
Contingencies Reserve fund investments 1,25,000
Loan from electricity board 7,50,000
Total depreciation written off to date 10,00,000
Tariff and dividend control reserve 25,000
Security deposits received from customers 1,00,000
Assume bank rate to be 6%
44
PROBLEM: 7
Following information is extracted from the accounting records of ECT Electricity Supply Ltd.,for the financial
year ended 31st March, 2021:

Particulars Rs. In Crores

Share capital 60
Fixed assets (tangible) at cost 116
Accumulated depreciation 40
Intangible assets 6
Investments:
Depreciation Reserve Fund 40
Contingencies Reserve 4
Loan from State Electricity Board 10
12% Debentures 20
Tariff and dividend Control Reserve 6
Net Profit after Tax Customers’ 12.2
Security Deposits Monthly average 6
of Current Assets 7
The monthly average of current assets includes Rs.1,00,00,000 (one crore) due from customers. Investment yield
10% return p.a. The applicable bank rate is 9% p.a. You are required to determine: (I) The Capital base; (ii) The
reasonable return; (iii) The disposal of Profit.

PROBLEM: 8
Following balances have been extracted at the end of the year from the books of an electricity company:

Particulars Rs.
Share Capital 2,00,00,000
Fixed Assets 5,00,00,000
Depreciation reserve on fixed assets 60,00,000
Reserve fund (Invested in 8% Govt. Securities (at Par) 1,20,00,000
Contingency reserve invested in 7% State loan amount 24,00,000
Consumers’ Contribution towards fixed assets 4,00,000
Consumers’ deposit 80,00,000
Tariffs and dividends control reserve 20,00,000
Development reserve 16,00,000
12% Debentures 40,00,000
Loan from State Electricity Board 50,00,000
Intangible Assets 16,00,000
Current Assets (monthly average) 30,00,000

The company earned a profit of Rs.56,00,000 (after tax) for the year. Show how profits have to be dealt with by
the company assuming the bank rate was 10%. All working should form part of your answers.

PROBLEM: 9 (Replacement of an Asset)

Ratnakar Electricity Supply Co., Ltd., (which adopts the Double Account System) rebuilt and re-equipped a power
station and the connecting lines during the year 2021. For the purpose they purchased materials of Rs.10,85,000
and used store worth Rs.4,90,000 from their existing stock. The cost of labour came to Rs.5,22,000. The estimated
supervisory overheads attributed to this project were Rs.13,000. The station was erected in 1993 at a cost of
Rs.5,00,000 and the index of costs in the line stood in 2021 @ 385, taking 2000 as the base year. Discarded
materials from the old station fetched Rs.12,000. Show journal entries to record the entries relating the new
station.

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The Indian Gas Company rebuilt their works with double the capacity at a cost of Rs.8,00,000. The cost of the part
of old work was Rs.3,50,000. In working the new works old material of Rs.15,000 was reused and material worth
Rs.25,000 was sold away. The costs of labour and materials are 50% higher now than when the old works were built.
Your are required to make necessary calculations and give journal entries.

PROBLEM: 11 (Final Account)

The following are the balances on 31.03.2004 in the books of the Ernakulam Power and Light Company Ltd.,
Particulars (Dr.) Rs. (Cr.) Rs.
Land on 31.03.03 60,000 --
Land expended during 2003-04 2,000 --
Machinery on 31.3.03 2,40,000 --
Machinery expended during 2003-04 2,000 --
Mains including cost of laying 80,000 --
Mains expended during 2003-04 20,400 --
Equity shares -- 2,19,600
Debentures -- 80,000
Sundry creditors -- 400
Depreciation fund A/c -- 1,00,000
Sundry debtors for current supplied 16,000 --
Other debtors 200 --
Cash 2,000 --
Cost of generation of electricity 14,000 --
Cost of distribution of electricity 2,000 --
Rent rates and taxes 2,000 --
Management expenses 4,800 --
Depreciation 8,000 --
Sales of current -- 52,000
Rent of meters -- 2,000
Interest on debentures 4,000 --
Interim dividend 8,000 --
Net Revenue A/c balance on 31.03.03 -- 11,400
4,65,400 4,65,400
From the above Trial Balance, Prepare Revenue A/c, Net Revenue A/c, Capital A/c

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