BIAF101-1 - Compilation.pdf

A COMPILATION OF ILLUSTRATIVE PROBLEMS IN FINANCIAL ACCOUNTING FOR STUDENTS OF BIAF101-1 1ST SEMESTER, BACHELOR OF COMMERCE (INTERNATIONAL ACCOUNTANCY AND FINANCE) DEPARTMENT OF PROFESSIONAL STUDIES CHRIST (DEEMED TO BE UNIVERSITY) NAME: ___________________________________ REG. NO.: _______________ 1BCom-IAF ______ This compilation has been put together solely for the purpose of discussion and illustrative problem-solving in the classroom, and should not be considered exhaustive material for the purpose of preparation for examinations. Learners are advised to consult reference books for additional problems, and solve them for thorough practice for each topic under study. SYLLABUS UNIT TOPIC PAGES Unit 1 Overview of Accounting Principles and Procedure….....……………………….... 1 – 12 (i) Introduction to accounting; double-entry system; Ind AS 1: Financial statements, purpose, general features (true and fair view, going concern, accrual basis, materiality and aggregation, offsetting, frequency of reporting, comparative information, consistency); other assumptions and conventions (business entity, money measurement, conservatism) (ii) Basic accounting procedure: journal entries, ledgers, cash book, capital and revenue expenditure/ receipts, rectification of errors, trial balance, preparation of Statement of Profit and Loss and Balance Sheet: structure, contents; problems based on trial balance and adjustments Unit 2 Preparation of Financial Statements for Companies...……………...………..….. 13 – 23 (i) Meaning of financial statements; form and contents of Statement of Profit and Loss and Balance Sheet as per Schedule III to the Companies Act, 2013; general instructions for their preparation along with Notes to Accounts; problems based on Trial Balance and common year-end adjustments/ rectifications (ii) Treatment of taxes deducted at source, advance payment of tax, and provision for taxation (iii) Treatment of interim and final dividend, and corporate dividend tax; meaning of capital and revenue reserves; rules for declaration of dividend out of reserves; simple problems (iv) Computation and treatment of managerial remuneration, including computation of net profit under Section 198 of the Companies Act, 2013 Unit 3 Liquidation of Companies...…………………………………………...………..….. 24 – 29 Meaning of liquidation, types of liquidation, secured creditors (fixed/ floating charge); order of payment, computation of liquidator’s remuneration, preferential creditors, pro-rata settlement, preparation of Liquidator’s Final Statement of Account, treatment of capital surplus, return of capital to shareholders with different paid-up capitals, meaning of contributory, ‘B’ List of contributories Unit 4 Valuation of Goodwill and Shares………...…………...…………………………... 30 – 37 (i) Valuation of goodwill: meaning; circumstances for valuation of goodwill; factors influencing the value of goodwill; methods of valuation—average profit method, super profit method, capitalisation of average profit method, capitalisation of super profit method, annuity method (ii) Valuation of shares: meaning; need for valuation; factors affecting valuation; methods of valuation—intrinsic value method, yield method, earning capacity method, fair value of shares (iii) Rights issue and valuation of rights issue Unit 5 Fundamental International Acc. Standards and Recent Trends in Accounting 38 – 55 HR accounting, inflation accounting, green accounting, carbon accounting, forensic accounting, IASB—conceptual framework and regulatory framework, IAS-1: Presentation of Financial Statements, IAS-2: Inventories, IAS-16: Property, Plant and Equipment, IAS-38: Intangible Assets, IAS-15: Revenue from Contracts with Customers (Five step model), IAS-8: Accounting Policies, Changes in Accounting Estimates, and Errors, IAS-23: Borrowing Costs, IAS-36: Impairment of Assets Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure Introduction to Accounting Financial accounting is a specific branch of accounting involving a process of recording, summarising, and reporting the myriad of transactions resulting from business operations over a period of time. These transactions are summarised in the preparation of financial statements—including the balance sheet, income statement, and cash flow statement—that record a company’s operating performance over a specified period. Companies engage in financial accounting for a number of important reasons: a) Encouraging transparency: By setting rules and requirements, financial accounting forces companies to disclose certain information on how operations are going, and what risks the company is facing, painting an accurate picture of financial performance regardless of how well or poorly the company is doing. b) Enabling comparability: By delineating a standard set of rules for preparing financial statements, financial accounting creates consistency across reporting periods and different companies, thereby facilitating meaningful comparison. c) Decreasing risk: Financial accounting does this by increasing accountability. Lenders, regulatory bodies, tax authorities, and other external parties rely on financial information; financial accounting ensures that reports are prepared using acceptable methods that hold companies accountable for their performance. d) Aiding management: Though other methods such as managerial accounting may provide better insights, financial accounting can drive strategic concepts when a company analyses its financial results and makes investment decisions accordingly. e) Promoting trust: Independent governing bodies oversee the rules of financial accounting, making the basis of reporting independent of management and a highly reliable source of accurate information. Financial statements are used by a variety of groups and often required as part of agreements with the preparing company. In addition to management using financial accounting to gain information on operations, the following groups use such reporting: a) Investors: Before putting their money into a company, investors often seek reports prepared using financial accounting to understand how the company has been doing and set expectations about the company’s future. b) Auditors: Companies may be required to present their financial position to auditors, who analyse the financial statements and ensure that proper financial accounting guidance has been used and the reports are free from material misstatements. c) Regulatory agencies: Public companies are required to submit financial statements to governing bodies. These financial statements must be prepared in accordance with financial accounting rules, and companies face fines or exchange delisting if they do not comply with reporting requirements. Page 1 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure d) Suppliers: Vendors or suppliers may ask for financial statements as part of their credit application process. Suppliers may require a credit history or evidence of profitability before issuing or increasing credit to a requested amount. e) Banks: Lenders and other similar financial institutions will almost always require financial statements as part of the business loan process. Lenders will need to see verifiable proof via financial accounting that a company is in good operational health prior to issuing a loan. The statements may also be used for determining the cost, lending terms, or interest rate of the loan. Double-Entry System Double entry is a bookkeeping and accounting method, which states that every financial transaction has equal and opposite effects in at least two different accounts. It is used to satisfy the accounting equation: Assets = Liabilities + Equity. With a double-entry system, credits are offset by debits in a general ledger or T-account. In the double-entry accounting system, transactions are recorded in terms of debits and credits. A credit is an entry that increases a liability account or decreases an asset account. A debit is the opposite—it is an entry that increases an asset account or decreases a liability account. Since a debit in one account offsets a credit in another, the sum of all debits must equal the sum of all credits. Essentially, the representation equates all uses of capital (assets) to all sources of capital (where debt capital leads to liabilities and equity capital leads to shareholders’ equity). For a company to keep accurate accounts, every single business transaction will be represented in at least two of the accounts. Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting. This practice ensures that the accounting equation always remains balanced; that is, the left side value of the equation will always match the right side value. The double-entry system of bookkeeping standardises the accounting process and improves the accuracy of prepared financial statements, allowing for improved detection of errors. Indian Accounting Standard (Ind AS) 1 — Presentation of Financial Statements Purpose of financial statements Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management’s stewardship of the resources entrusted to it. Page 2 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure To meet this objective, financial statements provide information about an entity’s assets; liabilities; equity; income and expenses, including gains and losses; contributions by and distributions to owners in their capacity as owners; and cash flows. This information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty. A complete set of financial statements comprises: a) a balance sheet as at the end of the period; b) a statement of profit and loss for the period; c) a statement of changes in equity for the period; d) a statement of cash flows for the period; e) notes, comprising a summary of significant accounting policies and other explanatory information; and f) comparative information in respect of the preceding period. General features a) True and fair view: Ind AS 1 requires entities to present financial statements fairly, which means that the financial statements must be free from material misstatements and errors. Fair presentation also requires entities to provide adequate disclosures in the notes to the financial statements, which helps to ensure that users have a complete understanding of the financial statements. b) Going concern: An entity shall prepare financial statements on a going concern basis, i.e. on the assumption that the entity will continue to operate for the foreseeable future (unless the management intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so). This allows financial statements to be prepared on a basis that assumes the entity will continue to operate, which is important for making meaningful financial projections and evaluating an entity’s long-term viability. c) Accrual basis of accounting: An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting. Accrual accounting recognises revenues and expenses when they are earned or incurred, regardless of when cash is received or paid. This provides a more accurate picture of an entity’s financial performance and position. d) Materiality and aggregation: An entity shall present each material class of similar items separately. An entity shall present items of a dissimilar nature or function separately unless they are immaterial. Further, if a line item in the financial statements is not individually material, it is aggregated with other items either in those statements or in the notes. An item is material if its omission or misstatement could individually or collectively influence the economic decisions that users make on the basis of the Page 3 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure financial statements. This principle ensures that financial statements focus on information that is relevant and useful to users. e) Offsetting: An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Ind AS. An entity reports separately both assets and liabilities, and income and expenses. Offsetting in the statement of profit and loss or balance sheet, except when offsetting reflects the substance of the transaction or other event, detracts from the ability of users both to understand the transactions, other events and conditions that have occurred, and to assess the entity’s future cash flows. f) Frequency of reporting: An entity shall present a complete set of financial statements (including comparative information) at least annually. When an entity changes the end of its reporting period and presents financial statements for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements: (i) the reason for using a longer or shorter period, and (ii) the fact that amounts presented in the financial statements are not entirely comparable. g) Comparative information: An entity shall present comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements, except when Ind ASs permit or require otherwise. An entity shall include comparative information for narrative and descriptive information if it is relevant to understanding the current period’s financial statements. An entity shall present, as a minimum, two balance sheets, two statements of profit and loss, two statements of cash flows, and two statements of changes in equity, and related notes. h) Consistency: An entity shall retain the presentation and classification of items in the financial statements from one period to the next unless (i) it is apparent, following a significant change in the nature of the entity’s operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies; or (ii) an Ind AS requires a change in presentation. Other concepts and conventions a) Business entity concept: According to this concept, business is treated as a separate entity from its owners. The business records only those transactions which are not personal in nature. All the transactions are recorded in the books of accounts from the point of view of the business. For example, when capital is provided by the owner, the accounting record will show the business as having received so much money and as owing to the owner. Be it sole proprietorship, partnership, or joint stock company, the business is treated as a separate entity. Page 4 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure b) Money measurement concept: This accounting concept states that only financial transactions will find a place in accounting. So only those business activities that can be expressed in monetary terms will be recorded in accounting. Any other transaction, no matter how significant, will not find a place in financial accounting. c) Convention of conservatism: This accounting concept promotes prudence in accounting. It states that profit should not be included until it is actually realised. However, losses, even those not realised but likely to occur, should be recognised in the financial statements. In other words, the accountant should not anticipate future profits but provide for all possible future losses. The prime objective of this convention is to ensure that profit is not overstated. A higher disclosure of profit may lead to distribution of dividend, which leads to reduction of capital. This convention helps ascertaining the profit actually realised, and in conserving the entity’s capital. Basic Accounting Procedure The basic accounting procedure involves several steps to record and track financial transactions within a business. These steps include journal entries, ledgers, and the use of a cash book. Here’s an overview of each component: Journal entries Journal entries are the first step in the accounting process. They are used to record individual transactions in chronological order. Each journal entry consists of at least two parts: a debit entry and a credit entry. To decide which accounts to debit and credit in a transaction, consider the following basic rules: a) Increases in assets are debits; decreases are credits. b) Increases in liabilities are credits; decreases are debits. c) Increases in owner’s capital are credits; decreases are debits. d) Expenses and losses are debits; incomes and gains are credits. Ledgers After recording the journal entries, the next step is to transfer the information to the respective ledger accounts. A ledger is a collection of accounts that categorise and summarise similar transactions. Common ledger accounts include Cash/Bank, Trade Receivables, Trade Payables, Inventory, and various expense and revenue accounts. Each account in the ledger maintains a running balance of its respective transactions, which at any given point may be a net debit balance or a net credit balance. The ledger helps organise and present the financial information in a structured manner. Page 5 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure Cash book The cash book is a specialised ledger that focuses on recording cash transactions. It serves as a central repository for all cash inflows and outflows. Cash receipts from sales, loans, investments, or other sources are recorded as debit entries in the cash book, while cash payments for expenses, purchases, and other outflows are recorded as credit entries. The cash book provides an up-to-date record of the company’s cash position and helps reconcile cash balances with bank statements. Capital and revenue expenditure/ receipts Capital expenditure refers to the funds spent by a business to acquire, improve, or extend its capital assets. These assets are typically long-term in nature and provide benefits to the company over an extended period of time, beyond the current accounting period. Capital expenditures are not immediately consumed or exhausted, but rather they contribute to the long-term growth and operational efficiency of the business. Examples of capital expenditures include purchase of property, plant, and equipment; major repairs and improvements; and acquisition of intangible assets. Capital receipts represent funds received by a business that affect its capital structure or increase its long-term liabilities or equity. These receipts are not related to the regular operations of the business and have a long-term impact. Capital receipts are typically generated from activities such as issue of share capital and long-term loans. Revenue expenditure refers to the expenses incurred by a business in its day-to-day operations to generate revenue and maintain its ongoing activities. These expenses are typically short-term in nature and are consumed or exhausted within the current accounting period. Revenue expenditures are necessary to sustain the regular operations of the business and do not result in the acquisition of long-term assets. Examples of revenue expenditures include salaries and wages, rent and utilities, advertising and marketing expenses, and cost of goods sold. Revenue receipts represent funds received by a business as a result of its regular operations or activities. These receipts are generated from the core revenue-generating activities of the business. Examples of revenue receipts include sales revenue, rental income, and interest income. Understanding the distinction between capital and revenue expenditures and receipts is crucial for proper classification in accounting and financial reporting. Capital expenditures and receipts are related to long-term investments and changes in the capital structure, while revenue expenditures and receipts are associated with day-to-day operational expenses and revenue generation. Page 6 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure Trial balance A trial balance is a statement that lists the balances of all the ledger accounts of a company at a specific point in time. It is prepared as a part of the accounting cycle and serves as a preliminary step before the preparation of financial statements. The trial balance summarises the debit and credit balances of each account to ensure that the accounting equation (Assets = Liabilities + Equity) is in balance. It's important to note that while a balanced trial balance indicates that the total debits equal the total credits, it does not guarantee that the financial statements are error-free or accurate. In other words, the trial balance is a useful tool for initial verification but is not a definitive proof of accuracy. Rectification of errors While recording transactions and events, various errors may be committed by an accountant unintentionally. Some of these errors affect the trial balance, and some of these do not have any impact on the trial balance although such errors may affect the determination of profit or loss or assets and liabilities of the business. There are two types of errors: a) Errors of principle: When a transaction is recorded in contravention of accounting principles, such as treating purchase of an asset as an expense, it is an error of principle. In this case, there is no effect on the trial balance since the amounts are placed on the correct side, though in a wrong account. b) Clerical errors: These errors arise because of mistakes committed in the ordinary course of accounting work. These are of three types: - Errors of omission: where a transaction is completely or partially omitted from the books of account, e.g. not recording a credit purchase of furniture or not posting an entry into the ledger. - Errors of commission: where an amount is posted in the wrong account, or is written on the wrong side, or the totals are wrong, or a wrong balance is struck. - Compensating errors: where the effect of the errors committed cancel out. Even if there is only a very small difference in the trial balance, the errors leading to it must be located and rectified. This should ideally be done before the final accounts are drawn. Preparation of Statement of Profit and Loss and Balance Sheet Final accounts are prepared to show the periodic performance of a business entity and its financial position at the end of such period. Profit and Loss Account and Balance Sheet are generally prepared for such purposes. In some cases, the Profit and Loss Account is sub- divided into various parts: Trading Account, Profit and Loss Account, and Profit and Loss Appropriation Account. Page 7 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure Question 1.1 Journalise the following transactions in the books of Mohan’s business: (a) Mohan commences a business with cash of ₹5,00,000. (b) Out of the above, ₹50,000 is deposited in the bank. (c) Furniture is purchased for cash of ₹20,000. (d) Goods are purchased for cash of ₹40,000. (e) Goods of ₹1,00,000 are purchased on credit from M/s Ram Narain Bros. (f) Goods are sold to M/s Iqbal & Co. for cash of ₹60,000. (g) Goods are sold to Stephen on credit for ₹30,000. (h) Cash of ₹30,000 is received from Stephen. (i) Cash of ₹1,00,000 is paid to M/s Ram Narain Bros. (j) Rent of ₹10,000 is paid in cash. (k) ₹20,000 is paid towards the clerk’s salary. (l) Interest of ₹2,000 is credited to the bank account. Question 1.2 Journalise the following transactions for April 2024 in the books of Mr. Singh’s business, and thereafter post them to the respective ledgers: April ₹ 1 Mr. Singh commences a business with cash 10,000 2 Paid into bank 7,000 3 Bought goods for cash 500 5 Drew cash from bank 100 13 Sold goods to Kaveri on credit 150 20 Bought from Salma goods on credit 225 24 Received from Kaveri 145 Allowed her discount 5 28 Paid Salma cash 215 Discount received 10 30 Cash sales for the month 800 Rent paid in cash 50 Salary paid in cash 100 Question 1.3 M/s Wise and Active have carried on business activities for a few weeks without maintaining any books of account. Record their position on 1 January 2024 and then journalise the following transactions during the month, and thereafter prepare the necessary ledger accounts and a trial balance as on 31 January 2024: Page 8 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure Jan. ₹ 1 Assets: Cash in hand ₹200; Cash at bank ₹6,800; Stock of goods ₹4,000; Machinery ₹10,000; Furniture ₹1,000; M/s Nandini owe ₹1,500; M/s K.B. Bose owe ₹2,500 Liabilities: Loan ₹5,000; Owed to Jacob Ltd. ₹2,000 2 Bought goods on credit from Samuel & Co. 1,000 3 Sold goods for cash to Dhiraj & Co. 400 4 Sold goods to M/s Nandini on credit 1,000 5 Received from M/s Nandini in full settlement of dues on 1.1.2024 1,450 6 Payment made to Jacob Ltd. by cheque 975 They allowed discount 25 9 Old furniture sold for cash 100 10 Bought goods for cash 750 11 M/s K.B. Bose paid cheque deposited in bank 2,500 Paid in cash for repairs to machinery 100 13 Bought goods from Jacob Ltd. on credit 1,000 Paid cartage on these goods 50 16 Cheque received from M/s Nandini deposited in bank 950 Discount allowed 50 17 Paid cheque to Jacob Ltd. 1,000 18 Bank intimates that M/s Nandini’s cheque is returned unpaid 19 Sold goods for cash to M/s Kay Bros. 600 21 Cash deposited in bank 500 24 Paid municipal taxes in cash 100 25 Borrowed from Urania Investment Co. Ltd. for erecting own premises; money deposited with bank for time being 10,000 26 Old newspapers sold 20 28 Paid for advertisements 100 31 Paid rent by cheque 150 Paid salaries for the month 300 Drew out of bank for private use 250 M/s Nandini became insolvent; 50% of dues received Recovered towards ₹2,000 earlier written off as bad debts 150 Closing stock of goods is ₹8,000 Question 1.4 Pass necessary journal entries to rectify the following errors found in M/s Junaid’s books. (a) ₹500 paid for furniture purchased has been charged to ordinary Purchases A/c. (b) Repairs made were debited to Building A/c for ₹50 (not depreciated since). (c) ₹100 drawn by the proprietor for personal use was debited to Trade Expenses A/c. (d) ₹100 paid for rent was debited to Landlord’s A/c. Page 9 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure (e) Salary of ₹125 paid to a clerk was debited to his personal account. (f) ₹100 received from Shah & Co. was wrongly entered as from Shaw & Co. (g) ₹700 paid in cash for a typewriter was charged to Office Expenses A/c. Question 1.5 Pass necessary journal entries to rectify the following errors: (a) ₹150 for purchase of goods on credit from Cyrus was recorded as a credit sale. (b) Credit sale of ₹120 to Jaspreet was recorded as a credit purchase. (c) No entry was passed for goods of ₹300 returned by Jenny and taken in stock. (d) ₹200 due from Mahesh Chand, which has been written off as bad debts in a previous year, was unexpectedly recovered, but was posted to his personal account. (e) A cheque of ₹200 received from Ramesh was dishonoured and posted to the debit of Sales Returns A/c. Question 1.6 From the following trial balance, prepare Trading and Profit and Loss Account for the year ended 31 March 2024 and a Balance Sheet as on that date. Debit balances ₹ Credit balances ₹ Sundry debtors 1,500 Capital 25,000 Stock on 1 April 2023 5,000 Interest 600 Land and buildings 10,000 Sundry creditors 7,000 Cash in hand 1,600 Sales 17,000 Cash at bank 4,000 Bills payable 4,000 Wages 3,000 Bills receivable 2,000 Interest 200 Bad debts 500 Repairs 300 Furniture and fixtures 1,500 Depreciation 1,000 Rent, rates, and taxes 800 Salaries 2,000 Drawings 2,000 Purchases 10,000 Office expenses 2,500 Plant and machinery 5,700 53,600 53,600 On 31 March 2024, stock was valued at ₹10,000. Page 10 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure Question 1.7 Following is the trial balance of K as on 31 March 2024. Debit balances ₹ Credit balances ₹ Purchases 15,000 Interest earned 400 Debtors 20,000 Sales 32,100 Salaries 3,000 Purchase returns 500 Wages 2,000 Creditors 12,000 Rent 1,500 Capital 10,000 Sales returns 1,000 Provision for doubtful debts 600 Bad debts written off 700 Provision for depreciation 200 Drawings 2,400 Printing and stationery 800 Insurance 1,200 Opening stock 5,000 Office expenses 1,200 Furniture and fittings 2,000 55,800 55,800 Prepare a Trading and Profit and Loss Account for the year ended 31 March 2024 and a Balance Sheet as on that date after making the following adjustments: (a) Depreciate Furniture and fittings by 10% on original cost. (b) Provision for doubtful debts is to be maintained at 5% of debtors. (c) Salaries for the month of March amounting to ₹300 were unpaid, which must be provided for. The balance in the account included ₹200 paid in advance. (d) Insurance is prepaid to the extent of ₹200. (e) Office expenses of ₹800, which were incurred but remain unpaid, have not been accounted for yet. (f) Stock of ₹600, which was put by K to her personal use, remains unaccounted. (g) Closing stock was valued at ₹6,000. (This space has been intentionally left blank.) Page 11 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 1: Overview of Accounting Principles and Procedure Question 1.8 The following balances were extracted from the books of Madan Lal as on 31 March 2024. ₹ ₹ Plant and machinery 40,500 Bad debts 2,200 Furniture and fittings 15,250 Bad debts recovered 1,250 Bank overdraft 1,60,000 Salaries 32,650 Capital account 1,15,000 Salaries outstanding 5,350 Drawings 15,000 Prepaid rent 500 Purchases 2,30,500 Rent 6,500 Opening stock 1,32,250 Carriage inward 2,350 Wages 22,325 Carriage outward 3,250 Provision for doubtful debts 5,700 Sales 2,90,600 Provision for discount on debtors 1,375 Advertisement expenses 6,750 Sundry debtors 1,52,500 Printing and stationery 2,200 Sundry creditors 77,500 Cash in hand 2,300 Cash in bank 7,250 Prepare a Trading and Profit and Loss Account for the year ended 31 March 2024 and a Balance Sheet as on that date after considering the following additional information: (a) Bank overdraft is secured against hypothecation of stock. The bank overdraft outstanding as on 31 March 2024 accounted for 80% of the drawing power. The total drawing power is ascertained by deducting a 20% margin from the value of stock as on that date. (b) Purchases include sales return of ₹5,500. Sales include purchase returns of ₹4,750. (c) Goods of ₹7,500 withdrawn by Madan Lal for own consumption remain unaccounted for. (d) Wages of ₹750 paid for installation of Plant and machinery were included in Wages. (e) Depreciation is to be provided on Plant and machinery @ 15% p.a. and on Furniture and fittings @ 10 p.a. (f) ₹2,500 paid as an advance to a supplier was included in the list of Sundry debtors due to the debit balance. (g) Provision for doubtful debts is to be maintained @ 5% and Provision for discount on debtors @ 2.5%. (h) Free samples of ₹1,250 distributed for publicity have not been accounted for. (i) The difference in the trial balance after rectification of errors, if any, can be taken as miscellaneous expenses or miscellaneous income. ◼◼◼ Page 12 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies PART I — BALANCE SHEET Name of the Company……………………. Balance Sheet as at ……………………… (Rupees in………) Particulars Note Figures as at the Figures as at the No. end of current end 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 II. ASSETS (1) Non-current assets (a) (i) Property, plant, and equipment (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long-term loans and advances (e) Other non-current assets Page 13 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies (2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets TOTAL PART II – STATEMENT OF PROFIT AND LOSS Name of the Company……………………. Profit and loss statement for the year ended ……………………… (Rupees in…………) Particulars Note Figures as at Figures as at the the end of end of the No. current previous reporting period reporting period 1 2 3 4 I. Revenue from operations Xxx Xxx II. Other income Xxx Xxx III. Total Revenue (I + II) Xxx Xxx IV. Expenses: Cost of materials consumed Xxx Xxx Purchases of stock-in-trade Xxx Xxx Changes in inventories of finished goods, work-in-progress and stock-in-trade Xxx Xxx Employee benefits expense Xxx Xxx Finance costs Xxx Xxx Depreciation and amortisation expense Xxx Xxx Other expenses Xxx___________ Xxx____________ Total expenses Xxx Xxx V. Profit before exceptional and Xxx Xxx extraordinary items and tax (III - IV) VI. Exceptional and extraordinary items Xxx Xxx VII. Profit before tax (V - VI) Xxx Xxx VIII. Tax expense Xxx Xxx IX. Profit (Loss) for the period (VII - VIII) Xxx Xxx Page 14 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies Question 2.1 You are required to prepare the Balance Sheet and Statement of Profit and Loss from the following Trial Balance of Haria Chemicals Ltd. for the year ended 31 March 2024. Debit balances ₹ Credit balances ₹ Inventory 6,80,000 Equity capital (₹10 each) 25,00,000 Furniture 2,00,000 11% debentures 5,00,000 Discount 40,000 Bank loans 6,45,000 Loan to directors 80,000 Trade payables 2,81,000 Advertisement 20,000 Sales 42,68,000 Bad debts 35,000 Rent received 46,000 Commission 1,20,000 Transfer fees 10,000 Purchases 23,19,000 Profit and loss account 1,39,000 Plant and machinery 8,60,000 Provision for depreciation Rentals 25,000 - Machinery 1,46,000 Current account 45,000 Cash 8,000 Interest on bank loans 1,16,000 Preliminary expenses 10,000 Fixtures 3,00,000 Wages 9,00,000 Consumables 84,000 Freehold land 15,46,000 Tools and equipment 2,45,000 Goodwill 2,65,000 Trade receivables 4,40,000 Dealer aids 21,000 Transit insurance 30,000 Trade expenses 72,000 Distribution freight 54,000 Debenture interest 20,000 85,35,000 85,35,000 Closing inventory on 31 March 2024 was valued at ₹8,23,000. Page 15 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies Question 2.2 Prepare a Statement of Profit and Loss and Balance Sheet from the following Trial Balance extracted from the books of the International Hotels Ltd. on 31 March 2024. Debit balances ₹ Credit balances ₹ Purchases Authorised capital - Wines, cigarettes, cigars 45,800 - 6% pref. shares (₹100 each) 5,00,000 - Foodstuff 36,200 - Equity shares (₹100 each) 10,00,000 Wages and salaries 28,300 Subscribed capital Rent, rates, and taxes 8,900 - 6% pref. shares (₹100 each) 5,00,000 Laundry 750 - Equity shares (₹100 each) 8,05,000 Coal and firewood 3,290 Sales Carriage 810 - Wines, cigarettes, cigars 68,400 Sundry expenses 5,840 - Food 57,600 Advertising 8,360 Rent of rooms 48,000 Repairs 4,250 Billiards 5,700 Land and building 8,50,000 Miscellaneous receipts 2,800 Furniture and fittings 86,300 Discount received 3,300 Inventory on 1 April 2023 Transfer fees 700 - Wines, cigarettes, cigars 12,800 6% debentures (₹100 each) 2,00,000 - Foodstuff 5,260 Profit and loss account 41,500 Cash in hand 2,200 Trade payables 42,000 Cash at bank 76,380 General reserve 2,00,000 Preliminary expenses 8,000 Trade receivables 19,260 Investments 2,72,300 Goodwill 5,00,000 19,75,000 19,75,000 Additional information: (a) Wages and salaries of ₹1,280 are outstanding on 31 March 2024. (b) Inventory on 31 March 2024: Wines, cigarettes, cigars ₹22,500; Foodstuff ₹16,400 (c) Depreciation: Furniture and Fittings @ 5% p.a.; Land and building @ 2% p.a. (d) The equity capital on 1 April 2023 stood at ₹7,20,000, that is 6,000 shares fully paid and 2,000 shares ₹60 paid. The directors made a call of ₹40 per share on 1 October 2023. A shareholder could not pay the call on 100 shares and his shares were then forfeited and reissued @ ₹90 per share as fully paid. Page 16 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies Question 2.3 The following is the Trial Balance of Omega Limited as on 31 March 2024: Debit balances ₹ ‘000 Credit balances ₹ ‘000 Land at cost 220 Equity capital (₹10 each) 300 Plant and machinery at cost 770 10% debentures 200 Trade receivables 96 General reserve 130 Inventories (31 March 2024) 86 Profit and loss account 72 Bank 20 Securities premium 40 Purchases (adjusted) 320 Sales 700 Factory expenses 60 Trade payables 52 Administration expenses 30 Provision for depreciation 172 Selling expenses 30 Suspense account 4 Debenture interest 20 Interim dividend paid (incl. DDT) 18 1,670 1,670 Additional information: (a) The authorised capital of the company is 40,000 shares of ₹10 each. (b) On the advice of an independent valuer, the land is to be revalued at ₹3,60,000. (c) Proposed final dividend @ 10%. (d) Suspense account of ₹4,000 represents cash received for the sale of machinery on 1 April 2023. The cost of the machinery was ₹10,000 and the accumulated depreciation thereon was ₹8,000. (e) Depreciation is to be provided on plant and machinery at 10% on cost. You are required to prepare Omega Ltd.’s Balance Sheet and Statement of Profit and Loss as on 31 March 2024. Assume Dividend Distribution Tax applicable @ 20%. Question 2.4 For the year ended 31 March 2023, a provision for income-tax was made for ₹30,00,000. Advance payment of tax for that year amounted to ₹28,00,000 and tax deducted at source on income earned by the company amounted to ₹23,000. On 10 December 2023, the assessment was completed and tax liability was determined at ₹35,45,000. Advance payment of tax for the year 2023-24 was ₹34,00,000. Show the necessary accounts for the year ending 31 March 2024 assuming a provision for income-tax at ₹38,00,000 for the year ending 31 March 2024. Page 17 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies Question 2.5 The Trial Balance of Complex Ltd. as at 31 March 2024 shows the following items: Dr. (₹) Cr. (₹) Advance payment of income-tax 2,20,000 — Provision for income-tax for the year ended 31 March 2023 — 1,20,000 The following additional information is provided to you: (a) Advance payment of income-tax includes ₹1,40,000 for FY 2022-23. (b) ₹1,52,000, the actual tax liability for FY 2022-23, has not been accounted for yet. (c) Provision for income-tax has to be made for 2023-24 for ₹1,60,000. You are required to prepare the following accounts and also show how they will appear in the company’s Balance Sheet and Statement of Profit and Loss: (a) Provision for income-tax account (b) Advance payment of income-tax account (c) Liability for taxation account Declaration of Dividend out of Reserves In the event of inadequacy or absence of profits in any year, a company may declare dividend out of General Reserve subject to the fulfilment of the following conditions: 1. Maximum dividend rate = average rate of dividend declared in the three preceding years (not applicable if no dividend declared during all three preceding years) 2. Maximum amount drawn = 10% of paid-up share capital and free reserves* 3. Amount drawn to be first used to set off current year loss before declaration of dividend 4. Balance of reserves after withdrawal cannot fall below 15% of paid-up share capital* * as per the latest audited financial statements Question 2.6 Due to inadequacy of profits during the year ended 31 March 2024, XYZ Ltd. proposes to declare 10% dividend out of general reserves. From the following particulars, ascertain the amount that can be utilised from general reserves. ₹ 17,500 9% preference shares of ₹100 each, fully paid-up 17,50,000 8,00,000 equity shares of ₹10 each, fully paid-up 80,00,000 General reserves as on 1 April 2023 25,00,000 Capital reserves as on 1 April 2023 3,00,000 Revaluation reserves as on 1 April 2023 3,50,000 Net profit for the year ended 31 March 2024 3,00,000 Average rate of dividend declared during the preceding five years was 12%. Page 18 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies Managerial remuneration payable by public companies having adequate profits Such net profit is calculated as per Section 198 of the Companies Act, 2013 (see next page) Managerial remuneration payable by public companies having no profit or inadequate profits (Without approval of the Central Government, under normal circumstances) Where the effective capital** is (₹) Limit of yearly remuneration payable shall not exceed* (₹) (i) Negative or less than 5 crores 60 lakhs (ii) 5 crores and above but less than 100 crores 84 lakhs (iii) 100 crores and above but less than 250 crores 120 lakhs (iv) 250 crores and above 120 lakhs plus 0.01% of the effective capital in excess of ₹250 crores * Remuneration above these limits may be paid if shareholders pass a special resolution ** Effective capital means: Paid-up share capital (excluding share application money or advances against shares) (+) Share premium account (+) Reserves and surplus (excluding revaluation reserve) (+) Long-term loans/ deposits repayable after one year (excluding working capital loans, overdrafts, interest on loans, bank guarantee, other short-term arrangements) (-) Investments (except in case of an investment company) (-) Accumulated losses and preliminary expenses not written off Page 19 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies Question 2.7 The following extract of the Balance Sheet of X Ltd. for the year ended 2024 was obtained: Authorised capital: ₹ 20,000 14% preference shares of ₹100 each 20,00,000 2,00,000 equity shares of ₹100 each 2,00,00,000 2,20,00,000 Issued and subscribed capital: 15,000 14% preference shares of ₹100 each full paid-up 15,00,000 1,20,000 equity shares of ₹100 each, ₹80 paid-up 96,00,000 Share suspense account 20,00,000 Capital reserves (₹1,50,000 is Revaluation reserve) 1,95,000 Securities premium 50,000 15% debentures (secured) 65,00,000 Public deposits (unsecured) 3,70,000 Cash credit loan from SBI (short-term) 4,65,000 Trade payables 3,45,000 Assets: Investment in shares, debentures, etc. 75,00,000 Profit and loss account 15,25,000 Share suspense account represents application money received on shares, the allotment of which is not yet made. You are required to determine the maximum managerial remuneration payable by the company assuming: (a) X Ltd. is not an investment company (b) X Ltd. is an investment company Computation of Net Profit under Section 198 GROSS PROFIT ADD: Credit allowed (+) bounties and subsidies received from any Government (+) profit on sale of depreciable asset limited to original cost less WDV Credits not allowed (x) capital profit (e.g. profit on sale of undertaking, profit on sale of investment) (x) revaluation profit (x) premium on issue or sale of shares/ debentures (x) profit on sale of forfeited shares Page 20 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies LESS: Debits allowed (-) usual working charges (-) directors’ sitting fee (-) bonus/ commission to company staff (-) interest on debentures, mortgages, loans and advances (-) repairs to property (excluding repairs of a capital nature) (-) loss on sale of depreciable assets limited to WDV less sale proceeds (-) charitable contribution (as allowed under Section 181) (-) depreciation (to the extent specified under Schedule II) (-) compensation/ damages as per law (excludes voluntary/ ex-gratia compensation) (-) insurance premium/ charges for meeting any legal liability (-) bad debts written off/ adjusted (-) prior period losses not yet deducted Debits not allowed (x) income-tax paid/ payable (x) managerial remuneration (x) provisions (e.g. tax provision, provision for doubtful debts, proposed dividend) (x) revaluation loss (x) capital loss (e.g. loss on sale of undertaking, loss on sale of investment, scientific research capital expenditure, preliminary expenses) Question 2.8 From the following particulars of Ganga Limited, you are required to calculate the maximum managerial remuneration payable in the following situations: (a) There is only one whole time director (b) There are two whole time directors (c) There are two whole time directors, a part time director and a manager ₹ Net profit before provision for income-tax and managerial remuneration, but after depreciation and provision for repairs 8,70,410 Depreciation provided in the books 3,10,000 Provision for repairs of machinery during the year 25,000 Depreciation allowable under Schedule II 2,60,000 Actual expenditure incurred on repairs during the year 15,000 Page 21 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies Question 2.9 Following is the draft Profit and Loss A/c of Mudra Ltd. for the year ended 31 March 2024: ₹ ₹ To Administrative, selling, and By Balance b/d 5,72,350 distribution expenses 8,22,542 By Balance from Trading A/c 40,25,365 To Directors’ fees 1,34,780 By Govt. subsidies received 2,73,925 To Interest on debentures 31,240 To Managerial remuneration 2,85,350 To Depreciation 5,22,543 To Provision for taxation 12,42,500 To General Reserve 4,00,000 To Investment reval. reserve 12,500 To Balance c/d 14,20,185 48,71,640 48,71,640 Depreciation on fixed assets as per Schedule II was ₹5,75,345. You are required to determine if the managerial remuneration charged by the company is within the legally permissible limit. Question 2.10 From the following information given by Swatantra Ltd. for the year ended 31 March 2024, calculate the commission payable to the Managing Director and the other directors of the company, 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 Govt. bounties and subsidies 1,00,000 Repairs and renewals 60,000 Profit on sale of fixed assets 80,000 Miscellaneous expenses 1,40,000 Premium on issue of shares 20,000 Workmen compensation (incl. Profit on sale of forfeited ₹10,000 legal compensation) 25,000 shares 10,000 Interest on bank overdraft 40,000 Interest on debentures 50,000 Directors’ fees 18,000 Donation 35,000 Depreciation 1,00,000 Loss on sale of investments 25,000 Development rebate reserve 1,00,000 Provision for taxation 10,00,000 Page 22 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 2: Preparation of Financial Statements for Companies Transfer to general reserve 1,50,000 Balance c/d 11,17,000 53,10,000 53,10,000 Additional information: ₹ Original cost of the fixed assets sold 1,90,000 Sale proceeds of the fixed assets sold 2,20,000 Donation allowable under Section 181 25,000 Depreciation allowable under Schedule II 80,000 ◼◼◼ Page 23 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 3: Liquidation of Companies Liquidator’s Final Statement of Account Receipts Payments (in prescribed order) (i) Amount realised on sale of assets, (i) Secured creditors including surplus from securities (ii) Legal charges/ liquidation expenses pledged in favour of secured (iii) Liquidator’s remuneration creditors (iv) Creditors having floating charge on the (ii) Amount from delinquent directors/ assets [typically debentures, including other officers interest up to: (iii) Calls-in-arrears - Date of winding up (if insolvent) (iv) Uncalled equity capital - Date of payment (if solvent)] (v) Uncalled preference capital (v) Preferential creditors (unsecured)* (vi) ‘B’ List contributories’ contribution (vi) Other unsecured creditors (see page 28) (vii) Calls-in-advance on preference shares (vii) Trading receipts, net of: (viii) Arrears of preference dividend - Cost of redemption of securities (ix) Preference share capital - Cost of execution (x) Calls-in-advance on equity shares - Trading payments (xi) Equity share capital * Preferential creditors (a) Taxes, cesses/ rates payable to Govt. or local authority within 12 months before the date of winding up (b) Employee’s wages, salaries & commission for 4 months’ service within above 12-month period (excludes director, manager, secretary, assistant secretary, etc.) (c) Accrued holiday remuneration payable to employees (d) Contributions under Employees’ State Insurance Act within the 12-month period (e) Compensation due under Workmen’s Compensation Act (f) Sums due to employees from a provident/ pension/ gratuity/ other welfare fund (g) Expenses of any investigation payable by the company Question 3.1 From the following particulars of creditors other than secured creditors of a company in liquidation, calculate the amount of unsecured and preferential creditors: ₹ ₹ Trade creditors 4,26,600 Peon’s salary for 4 months 18,000 Workers’ PF 33,000 Director’s fee for 4 months 24,000 Gas board for gas supplied 1,260 Income-tax due 30,000 Local taxes (city corporation) 30,000 Compensation under Clerk’s salary for 6 months 90,000 Workmen’s Compensation Act 27,000 Page 24 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 3: Liquidation of Companies Liquidator’s remuneration as a % of amount paid to unsecured creditors (i) If amount available is sufficient to make full payment of unsecured creditors Liquidator’s remuneration = Amount due to unsecured creditors x Commission % 100 (ii) If amount available is not sufficient to make full payment of unsecured creditors Liquidator’s remuneration = Amount available for unsecured creditors x Commission % 100 + Commission % For the purpose of computing such commission, preferential creditors are also regarded as unsecured creditors, unless otherwise specified. Question 3.2 The Liquidator of a company is entitled to remuneration of 2% on assets realised and 3% on the amount distributed to unsecured creditors. The assets realised ₹10,00,000. Amount available for distribution to unsecured creditors before paying Liquidator’s remuneration is ₹2,06,000. Calculate Liquidator’s remuneration, and also specify the pro-rata payment percentage to unsecured creditors (where applicable), if: (a) The aggregate unsecured creditors amount to ₹1,60,000. (b) The aggregate unsecured creditors amount to ₹5,00,000. Question 3.3 A Liquidator is entitled to receive remuneration at 2% on the assets realised, and 3% on the amount distributed among unsecured creditors. The assets realised ₹70,00,000 against which payment was made as follows: (a) Liquidation expenses ₹50,000 (b) Preferential creditors ₹1,50,000 (c) Secured creditors ₹40,00,000 Amount due to other unsecured creditors was ₹30,00,000. Calculate the total remuneration payable to the Liquidator and specify how payment to unsecured creditors will be made. Question 3.4 A limited company went into voluntary liquidation with the following liabilities: ₹ Trade creditors 12,000 Bank overdraft 20,000 Page 25 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 3: Liquidation of Companies 10,000 preference shares of ₹10 each, ₹7 called-up 70,000 10,000 equity shares of ₹10 each, ₹9 called-up 90,000 Less: Calls-in-arrears (2,000) 88,000 Calls-in-advance on preference shares 24,000 Calls-in-advance on equity shares 4,000 28,000 The assets realised ₹2,00,000 and the calls-in-arrears were collected in full. Expenses of liquidation amounted to ₹2,000 and Liquidator’s remuneration was ₹3,000. Prepare the Liquidator’s Final Statement of Account and indicate the amount payable on each share. Question 3.5 The following particulars relate to a limited company which has gone into voluntary liquidation. You are required to prepare the Liquidator’s Final Statement of Account allowing for his remuneration @ 2% on the amount realised on assets and 2% on the amount distributed to unsecured creditors other than preferential creditors. Particulars ₹ Preferential creditors 70,000 Other unsecured creditors 2,24,000 Debentures 75,000 The assets realised the following sums: ₹ Cash in hand 20,000 Land and buildings 1,30,000 Plant and machinery 1,10,500 Fixtures and fittings 7,500 The liquidation expenses amounted to ₹2,000. A call of ₹2 per share on the partly paid 10,000 equity shares was made and duly received except in case of one shareholder owning 500 shares. Question 3.6 Following are the ledger balances of Unfortunate Limited as on 31 December 2023: Credit balances ₹ Debit balances ₹ 4,000 6% Pref. shares of ₹100 each 4,00,000 Land and buildings 2,00,000 2,000 shares of ₹100 each, ₹75 paid-up 1,50,000 Plant and machinery 5,00,000 6,000 shares of ₹100 each, ₹60 paid-up 3,60,000 Patents 3,20,000 5% Debentures (floating charge) 2,00,000 Stock 1,10,000 Interest outstanding (floating charge) 10,000 Sundry debtors 2,20,000 Creditors 2,90,000 Cash at bank 60,000 14,10,000 14,10,000 Page 26 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 3: Liquidation of Companies The company went into liquidation on that date. The dividends on preference shares were in arrears for two years, which are payable on liquidation. Creditors include a loan of ₹1,00,000 with mortgage on land and building. The assets realised as under: ₹ Land and buildings 2,40,000 Plant and machinery 4,00,000 Patents 60,000 Stock 1,20,000 Debtors 1,60,000 The expenses of liquidation amounted to ₹21,800. The Liquidator is entitled to a commission of 3% on all assets realised (except cash at bank) and 2% on the amount distributed among unsecured creditors. Preferential creditors amount to ₹30,000. All payments were made on 30 June 2024. Prepare the Liquidator’s Final Statement of Account. Question 3.7 Following are the ledger balances of Asco Limited as on 31 March 2024: Credit balances ₹ Debit balances ₹ 1,000 6% Pref. shares of ₹100 each 1,00,000 Machinery 4,90,000 2,000 shares of ₹100 each, fully paid 2,00,000 Furniture 10,000 2,000 shares of ₹100 each, ₹75 paid-up 1,50,000 Stock 1,20,000 Bank loan (secured on stock) 1,00,000 Debtors 2,40,000 Creditors 3,50,000 Cash at Bank 50,000 Income-tax payable 10,000 9,10,000 9,10,000 The company went into liquidation on 1 April 2024. The assets realised as under: ₹ Machinery 1,66,000 Furniture 8,000 Stock 1,10,000 Debtors 2,30,000 The expenses of liquidation amounted to ₹4,000. The Liquidator is entitled to a commission of 2% on the amount paid to unsecured creditors excluding preferential creditors. Calls on partly paid shares were made based on the expectation of full receipts except on 200 shares belonging to a shareholder who is no longer traceable. Prepare the Liquidator’s Final Statement of Account. Page 27 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 3: Liquidation of Companies Question 3.8 Bekar Ltd. went into voluntary liquidation. It has the following equity share capital: (a) Class A—2,000 shares of ₹100 each, ₹75 paid-up (b) Class B—1,600 shares of ₹100 each, ₹60 paid-up (c) Class C—1,400 shares of ₹100 each, ₹50 paid-up The amount available for equity shareholders after payment of preference share capital and other dues is only ₹61,000. Compute the amount receivable or returnable per equity share. Question 3.9 A company went into liquidation with the following details. Assets realised ₹7,00,000; Liquidation expenses ₹12,600; Creditors (including salaries of staff ₹8,400) ₹95,200; Share capital consists of 7,000 6% preference shares of ₹30 each (one year dividends are in arrears) ₹2,10,000; 14,000 equity shares of ₹10 each, ₹9 called up and paid up, ₹1,26,000; Commission is 3% on assets realised and 2% on amount paid to shareholders. Under the articles, in addition to arrears of dividend, preference shareholders are entitled to receive one-third of the surplus remaining after repaying the equity capital. Prepare the Liquidator’s Final Statement of Account. Contributory: every person liable to contribute to the assets of a company in the event of its being wound up, and includes a holder of fully paid-up shares (included for procedural/ documentation purposes only; financial liability is nil). ‘A’ List of contributories includes present members. ‘B’ List of contributories includes shareholders who transferred partly paid shares (otherwise than by operation of law or by death) within one year prior to the date of winding up, who may be called upon to pay an amount (not exceeding the amount not called up when the shares were transferred) to pay off such creditors as existed on the date of transfer of shares. Their liability will crystallise only: (a) When the existing assets available with the liquidator are not sufficient to cover the liabilities; and (b) When the existing shareholders fail to pay the amount due on the shares to the liquidator. Question 3.10 Pessimistic Ltd. went into liquidation on 10 May 2024. The details of members who have ceased to be members within the year ended 31 March 2024 are given below. The debts that could not be paid out of realisation of assets and contribution from present members (‘A’ contributories) are also given with their date-wise break up. Page 28 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 3: Liquidation of Companies Name of No of Date of transferor Creditors transferor shares ceasing to be a remaining unpaid shareholder transferred member & outstanding* (₹) P 1,000 20 April 2023 3,000 Q 1,200 15 May 2023 5,000 R 1,500 18 September 2023 9,200 S 800 24 December 2023 10,500 T 500 12 March 2024 11,000 * At the time of the transferor ceasing to be a member Shares are of ₹10 each, ₹6 per share paid up. You are required to determine the amount realisable from each person. Question 3.11 Liquidation of YZ Ltd. commenced on 2 April 2024. Certain creditors could not receive payments out of the realisation of assets and out of the contributions from ‘A’ List contributories. Following are details of certain transfers which took place in 2023 and 2024: Name of No of Date of transferor Creditors transferor shares ceasing to be a remaining unpaid shareholder transferred member & outstanding* (₹) A 2,000 1 March 2023 5,000 B 1,500 1 May 2023 3,300 C 1,000 1 October 2023 4,300 D 500 1 November 2023 4,600 E 300 1 February 2024 6,000 * At the time of the transferor ceasing to be a member All the shares were of ₹10 each, ₹8 per share paid-up. You are required to determine the amount realisable from each person. ◼◼◼ Page 29 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 4: Valuation of Goodwill and Shares Goodwill Goodwill is an intangible asset that represents the present value of a firm’s anticipated excess earnings. In the words of Spices 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.” The two common circumstances in which the valuation of goodwill takes place are: a) Acquisition of a business: When one company purchases another company, any excess payment made over the fair value of the acquired company’s identifiable net assets is recognised as goodwill; and b) Consolidation of subsidiaries: When a parent company owns controlling interest in one or more subsidiaries, the value of the subsidiaries' net assets is consolidated; if the consolidated value exceeds the price paid for acquiring the subsidiaries, the excess is recognised as goodwill. Since goodwill of a business represents its capacity to earn above normal profits, all factors that contribute to such profits influence the value of goodwill. Key factors include: a) Favourable location; b) Brand recognition (a strong and recognisable brand that commands customer loyalty); c) Customer relationships (a loyal customer base and long-term customer relationships); d) Ownership of intellectual property (patents, copyrights, trademarks, or proprietary technology that provide a competitive advantage); e) Experienced and efficient management, talented and skilled workforce; f) Record of past profits; g) Other factors such as favourable market position, industry trends, overall economic climate, political stability, government policies, trade cycle, future prospects, etc. Goodwill—Average Profit Method a) Adjusted profits* of agreed no. of pre-valuation years are averaged (simple/ weighted) b) Goodwill = ‘x’ years’ purchase of average profit (multiplication) (‘x’ represents no. of years’ benefit from past association expected to be derived) * Computation of adjusted/ future/ maintainable profit Profits xxx (+) Abnormal losses/ expenses not likely to recur xx (+) Likely future profits, e.g. from new line of business xx (-) Expenses not provided earlier but to be incurred in the future (xx) (-) Profits not likely to recur (xx)_ Adjusted profit xxx_ Page 30 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 4: Valuation of Goodwill and Shares Question 4.1 P Ltd. proposed to purchase the business carried on by Mr. R. For this purpose, goodwill is agreed to be valued at three years’ purchase of the (i) simple average profits and (ii) weighted average profits of the past four years. The appropriate weights to be used are: 2021—1 2022—2 2023—3 2024—4 The profits (in ₹) for these years are: 2021—1,01,000 2022—1,24,000 2023—1,00,000 2024—1,50,000 On a scrutiny of the accounts, the following observations were made: (a) On 1 September 2023, a major repair of ₹30,000 was made to the plant, the amount being charged to revenue. Plant is depreciated at 10% using the WDV method. (b) The closing stock for 2022 was over-valued by ₹12,000. (c) Additional management cost of ₹24,000 p.a. is expected to be incurred from 2025. Compute the value of goodwill of Mr. R’s firm. Goodwill—Capitalisation of Average Profit Method a) Ascertain average adjusted/ future/ maintainable profit b) Capitalise this profit at the suitable rate of return for the business under consideration c) Compute net tangible assets (assets, excluding fictitious assets, less outside liabilities) d) Goodwill = difference between (b) and (c) Question 4.2 Ascertain the value of goodwill of Q Ltd. carrying on business as retail traders from the following information (as on 31 December 2023) according to capitalisation method: Credit balances ₹ Debit balances ₹ Equity shares (₹100 each) 2,50,000 Goodwill 25,000 Surplus account 56,650 Land and building 1,10,000 Bank overdraft 58,350 Plant and machinery 1,00,000 Sundry creditors 90,500 Stock 1,50,000 Provision for taxation 19,500 Book debts 90,000 4,75,000 4,75,000 The company’s profits before tax (in ₹) were as follows: 2019: 61,000 2020: 64,000 2021: 71,500 2022: 78,000 2023: 85,000 You may assume that income-tax at the rate of 50% was payable on these profits. The average dividend paid by the company for the four years is 10%, which is considered a reasonable return on the capital invested in the business. Page 31 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 4: Valuation of Goodwill and Shares Goodwill—Super Profit Method a) Capital employed = Fixed assets + Trade investments + Current assets – Debentures – Current liabilities = Paid-up capital + Reserves and surplus – Fictitious assets – Non-trading investments b) Average capital employed = 1/2 (capital employed at the beginning + capital employed at the end of the year) = Capital employed at the end of the year – 1/2 (current year’s profit after tax) = Capital employed at the beginning of the year + 1/2 (current year’s profit after tax) c) Normal profit = Normal rate of return x Capital employed or Average capital employed d) Super profit = Average profit – Normal profit e) Goodwill = ‘x’ years’ purchase of super profit (multiplication) Question 4.3 Compute the average capital employed from the following information as on 31 March 2024: Credit balances ₹ lakhs Debit balances ₹ lakhs Equity shares (₹10 each) 50.00 Land and building 25.00 9% preference shares 10.00 Plant and machinery 80.25 General reserve 12.00 Furniture and fixtures 5.50 Surplus account 20.00 Vehicles 5.00 16% debentures 5.00 Investments 10.00 16% term loan 18.00 Stock 6.75 Cash credit 13.30 Debtors 4.90 Sundry creditors 2.70 Cash and bank 10.40 Provision for taxation 6.40 Preliminary expenses 0.50 Proposed dividend 10.90 148.30 148.30 Non-trade investments were 20% of the total investments. Balances as on 1 April 2023 were as follows: Surplus account—₹8.70 lakhs; General reserve—₹6.50 lakhs Question 4.4 Following particulars are available in respect of the business carried on by a trader: (a) Profits earned for three years (in ₹): 2021-22: 2,00,000 2022-23: 2,40,000 2023-24: 2,20,000 (b) Normal rate of return = 10% (c) Capital employed = ₹12,00,000 (d) Profit of 2022-23 included non-recurring income of ₹6,000. (e) Profit of 2021-22 was reduced by ₹10,000 due to stock destroyed by fire. (f) Profit of 2023-24 includes income of ₹4,000 from non-trading investment. (g) During 2022-23, closing stock was under-valued by ₹10,000. Page 32 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 4: Valuation of Goodwill and Shares (h) The stock is not insured and it is thought prudent to insure the stock in future at an annual premium of ₹3,000. Compute the value of goodwill at five years’ purchase of super profits. Question 4.5 From the following particulars as on 31 March 2024, compute the value of goodwill on the basis of three years’ purchase of super profits: Credit balances ₹ Debit balances ₹ Equity shares (₹10 each) 2,50,000 Buildings 1,50,000 10% preference shares 50,000 Plant and machinery 2,00,000 Surplus account (1.4.2023) 30,000 Investment @ 8% p.a. 50,000 Profit for FY 22-23 (before tax) 1,70,000 Stock 40,000 Creditors 20,000 Debtors 60,000 Cash 20,000 5,20,000 5,20,000 (a) The building is worth ₹3,00,000. (b) Profits before tax for the last three years have shown an increase of ₹30,000 annually. (c) Investments are non-trading in nature. (d) Normal rate of return is 12.5% p.a. (e) Taxation may be assumed at 40%. Question 4.6 Negotiations are on for transfer of X Ltd. on the basis of its Balance Sheet as on 31 March 2024 and the additional information that follows: Credit balances ₹ Debit balances ₹ Equity Shares (₹10 each) 10,00,000 Goodwill 1,00,000 Reserves and surplus 4,00,000 Land and building 3,00,000 Creditors 3,00,000 Plant and machinery 8,00,000 Investment 1,00,000 Stock 2,00,000 Debtors 1,50,000 Cash and bank 50,000 17,00,000 17,00,000 Profit before tax for 2023-24 was ₹6,00,000 including ₹10,000 as interest on non-trading investment. Henceforth, an additional amount of ₹50,000 p.a. shall be required to be spent for smooth running of the business. Market values of Land and buildings and Plant and machinery are estimated at ₹9,00,000 and ₹10,00,000 respectively. In order to match the above figures, further depreciation to the Page 33 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 4: Valuation of Goodwill and Shares extent of ₹40,000 should be taken into consideration. Income-tax rate may be taken at 50%. Return on capital at the rate of 20% before tax may be considered normal for this business at the present stage. It has been agreed that four years’ purchase of super profit shall be taken as the value of goodwill for the purpose of the deal. Compute the goodwill of the company. Goodwill—Capitalisation of Super Profit Method Goodwill = ____Super Profit_____ x 100 Normal Rate of Return Goodwill—Annuity Method Goodwill = Super profit x Present value of an annuity of Re. 1 for ‘x’ no. of years at the normal rate of return Question 4.7 Consider question 4.4 and re-compute goodwill under the following methods: (a) Capitalisation of super profit method (b) Annuity method It is provided that the present value of an annuity of ₹1 for five years at 10% is 3.78. Valuation of Shares There are many circumstances in which a valuation of shares (other than par value) may be required, especially when such shares are not quoted on a stock exchange, such as: a) When amalgamation or absorption of companies takes place; b) When a private company decides to offer its shares to the public for the first time; c) When a company establishes a plan to provide stock ownership to its employees; d) When one class of shares is converted into another class; e) When a company is nationalised or privatised; f) When shares are to be provided as security for loans and advances; g) For shareholder disputes or legal proceedings involving shares; h) When a block of shares is purchased or sold; or i) For tax computation or regulatory reporting purposes. Valuation of shares is influenced by various factors that can vary depending on the specific company and market conditions. General factors include profitability, revenue growth, earnings stability, future cash flows, dividend policy, industry factors (market demand, competition, regulatory environment, and economic trend), management reputation, risk factors (volatility, debt, and operational risks), investor sentiment, and market perception. Page 34 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 4: Valuation of Goodwill and Shares Shares—Intrinsic Value Method a) Intrinsic value of equity share = Net value of assets available for equity shareholders Number of equity shares b) Net value of assets available for equity shareholders = Net value of assets available to shareholders – Amounts payable to preference shareholders c) Net value of assets available to shareholders = Market value of assets – external liabilities (excludes fictitious assets) Question 4.8 On 31 March 2024, ledger balances taken from the books of Menon Ltd. were as follows: Credit balances ₹ Debit balances ₹ Equity capital (₹100 each) 5,00,000 Land and buildings 2,20,000 Surplus account 1,03,000 Plant and machinery 95,000 Bank overdraft 20,000 Stock 3,50,000 Creditors 77,000 Sundry debtors 1,55,000 Provision for taxation 45,000 Proposed dividend 75,000 8,20,000 8,20,000 In view of the nature of the business, it is considered that 10% is a reasonable return on tangible capital. However, the net profits of the company after taxation were as under: 2019-20: 85,000 2020-21: 96,000 2021-22: 90,000 2022-23: 1,00,000 2023-24: 95,000 On 31 March 2024, Land and building was valued at ₹2,50,000 and Plant and machinery at ₹1,50,000. After considering goodwill based on five years’ purchase of the super profits, value the shares of the company. Question 4.9 Your client intends to invest not more than ₹15,000 in equity shares of Iron Foundry Ltd. and wants you to advise him the maximum number of shares he can expect to acquire with the said amount on the basis of the following information available with him: ₹ 6% preference shares of ₹100 each 5,00,000 Equity shares of ₹10 each 3,00,000 The average net profit of the business is ₹57,000. Expected normal yield is 7% in case of such equity shares. Total tangible assets (other than goodwill) are ₹9,49,000 and total outside liabilities are ₹95,000. Goodwill is calculated at five years’ purchase of the super profits, if any. Page 35 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 4: Valuation of Goodwill and Shares Shares—Yield Method/ Earnings Capacity Method a) Value of share = Expected/ possible rate of return x Paid-up value of share Normal rate of return b) Rate of return could be the rate of dividend (suitable for acquiring a non-controlling portion of shares) or the rate of earning (for acquiring a controlling portion of shares) = Profit available for equity shareholders x 100 Paid-up equity capital Shares—Fair Value Method Value of share = Value of share on net asset basis + Value of share on earnings basis 2 Question 4.10 Compute the value of an equity share of each of the following companies: (a) when a few shares are sold and (b) when controlling interest is sold. Following information is furnished: Company A (₹) Company B (₹) Profit after tax 10,00,000 10,00,000 12% Preference Shares of ₹100 each 10,00,000 20,00,000 Equity shares of ₹10 each 50,00,000 40,00,000 Assume that market expectation is 15%, and 80% of profits are distributed. Question 4.11 Following are the liabilities and assets of Desai Pvt. Ltd. as on 31 December 2023: Credit balances ₹ Debit balances ₹ Equity capital (₹10 each) 1,00,000 Land and buildings 70,000 General reserve 50,000 Plant and machinery 70,000 Surplus account 30,000 Trademarks 20,000 Provision for taxation 20,000 Stock 20,000 Workmen’s compensation fund 20,000 Debtors 48,000 Creditors 40,000 Cash 25,000 Preliminary expenses 7,000 2,60,000 2,60,000 The Plant and machinery is worth ₹60,000 and Land and buildings are worth ₹1,30,000 as valued by an independent valuer. ₹5,000 of the debtors is taken to be bad. The profits of the company were: 2021: 50,000 2022: 60,000 2023: 70,000 It is the practice of the company to transfer 20% of the profits to reserve. Page 36 of 55 Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance) Unit 4: Valuation of Goodwill and Shares Compute the value of the company’s shares under the fair value method if shares of similar companies quoted in the stock exchange yield a return of 12%. Goodwill of the company may be taken at ₹1,00,000. Right Issue Right issue means offering shares to existing members in proportion to their existing shareholding. The objective of a right issue is to ensure equitable distribution of shares. Shares under a right issue are usually offered at a price lower than the prevalent market price. A shareholder who is short of funds can renounce his right to a specified number of shares by selling his right to a third-party subscriber of shares. Value of Right = Cum-right market price – Issue price of new share__ No. of existing shares required for one right share + 1 Value of Ex-Right Share = (Cum-right market price x No. of shares required) + Issue price No. of existing shares required for one right share + 1 = Cum-right market price – Value of right Question 4.12 A company offers to its shareholders the right to buy one share of ₹20 each at ₹41 for every two shares

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