Financial Accounting (MB131) : January 2004

Question Paper

Financial Accounting (MB131) : January 2004

Section A : Basic Concepts (30 Marks)• This section consists of questions with serial number 1 - 30.• Answer all questions.• Each question carries one mark.1. Which of the following represent(s) personal accounts in accounting parlance?a. Sundry creditorsb. Bank accountc. Outstanding wagesd. Prepaid insurancee. All of the above.< Answer >2. Which of the following methods of valuation of inventory is based on the assumption that costs arecharged against revenue in the order in which they occur?a. FIFO methodb. LIFO methodc. Weighted average methodd. Moving average methode. Base stock method.< Answer >3. Which of the following is not an item of revenue expenditure?a. Interest on deposits acceptedb. Annual insurance premium on inventoryc. Customs duty paid in connection with the import of equipmentd. Repairs and maintenance on machinerye. Expenditure on assets like paper weight and pin cushion.< Answer >4. Which of the following errors will cause a mismatch in the trial balance?a. Errors of complete omissionb. Compensating errorsc. Errors of principled. Recording dual aspects of a transaction more than oncee. Errors of partial omission.< Answer >

5. AB & Co. purchased a machine for Rs.10,00,000 on April 1, 2002. The salvage value of the machine isRs.40,000. The useful life of the machine is 8 years. If the firm intends to depreciate the machinery onstraight-line method, the rate of depreciation will bea. 16%b. 15%c. 14%d. 12.5%e. 12%.< Answer >6. If the purchases day book of a firm is overcast, it willa. Increase gross profit and reduce net profitb. Reduce gross profit and increase net profitc. Reduce gross profit as well as net profitd. Increase gross profit as well as net profite. Reduce gross profit but will not have any impact on net profit.< Answer >7. Which of the following is true when a debtor pays his dues?a. The asset side of the balance sheet will decreaseb. The asset side of the balance sheet will increasec. The liability side of the balance sheet will increased. The liability side of the balance sheet will decrease< Answer >e. There is no change in total assets or total liabilities.8. Withdrawal of goods from stock by the owner of the business for personal use should be recorded bydebitinga. Drawings account and crediting cash accountb. Drawings account and crediting purchases accountc. Capital account and crediting drawings accountd. Purchases account and crediting drawings accounte. Stock account and crediting capital account.< Answer >9. The cost price of a machine is Rs.1,20,000 and the depreciated value of the machine after 3 years willbe Rs.66,000. If the company charges depreciation under straight-line method, the rate of depreciationwill bea. 25%

b. 20%c. 18%d. 15%e. 12%.< Answer >10. Consider the following data pertaining to a firm:The balance as per pass book isa. Rs.20,600 (Dr. balance)b. Rs.18,500 (Dr. balance)c. Rs.18,500 (Cr. balance)d. Rs.15,600 (Dr. balance)e. Rs.20,600 (Cr. balance).Credit balance as per bank column of cash book Rs.13,500Bank interest on overdraft appeared only in the pass book Rs.2,100Cheques deposited but not collected by the bank Rs.5,000< Answer >11. Consider the following data pertaining to a company for the year 2002-2003:The bad debts of the company during the year area. Rs.40,000b. Rs.35,000c. Rs.30,000d. Rs.25,000e. Rs.20,000.Opening balance of sundry debtors Rs. 45,000Credit sales Rs.4,25,000Cash sales Rs. 20,000Cash collected from debtors Rs.4,00,000Closing balance of sundry debtors Rs. 50,000< Answer >12. The opening stock of a company is Rs.40,000 and the closing stock is Rs.50,000. If the purchasesduring the year are Rs.2,00,000 the cost of goods sold will bea. Rs.2,10,000b. Rs.2,00,000c. Rs.1,90,000d. Rs.1,80,000e. Rs.1,50,000.< Answer >13. The balance as per bank statement of a company is Rs.12,500 (Dr.). The

company deposited twocheques worth Rs.8,500, out of which one cheque for Rs.2,800 was dishonoured which was not enteredin the cash book. The credit balance as per cash book isa. Rs.21,000b. Rs.15,300c. Rs.23,800d. Rs. 9,700< Answer >e. Rs. 4,000.14. During the year 2002-03, the profit of a business before charging manager’s commission wasRs.1,89,000. If the manager’s commission is 5% on profit after charging his commission, then the totalamount of commission payable to manager isa. Rs.10,000b. Rs. 9,450c. Rs. 9,000d. Rs. 8,500e. Rs. 9,947.< Answer >15. Which of the following statements is true?a. The losses from the sale of capital assets need not be deducted from the revenue to ascertain netincomeb. Going concern concept requires that always non-monetary assets should be valued and recorded atmarket valuec. According to consistency concept, the results of one accounting period of a business cannot becompared with that of in the pastd. In terms of conservatism concept all probable losses must be considered in computation of incomee. The system of recording transactions based on dual concept is double accounting system.< Answer >16. Which of the following ratios indicates the short-term liquidity of a business?a. Inventory turnover ratiob. Debt-equity ratio

c. Acid test ratiod. Proprietary ratioe. Net profit ratio.< Answer >17. Which of the following should be deducted in the Balance Sheet of a company from the share capital tofind out paid-up capital?a. Calls-in-advanceb. Calls-in-arrearsc. Share forfeitured. Discount on issue of sharese. Share premium.< Answer >18. Which of the following statements is false?a. The forfeited shares should not be issued at a premiumb. At the time of forfeiture of shares, share premium should not be debited with the amount ofpremium already receivedc. Shares can be issued at a discount only after one year from the commencement of businessd. Share premium cannot be utilized to redeem preference sharese. The loss on re-issue of shares cannot be more than the gain on forfeiture of those shares.< Answer >19. Which of the following accounting treatments is/are true in respect of accrued commission appearingon the debit side of a trial balance?a. It is shown on the debit side of the profit and loss accountb. It is shown on the credit side of the profit and loss accountc. It is shown on the liabilities side of the balance sheetd. It is shown on the assets side of the balance sheete. Both (b) and (d) above.< Answer >20. The maximum amount beyond which a company is not allowed to raise funds by issue of shares isa. Issued capitalb. Reserve capitalc. Nominal capitald. Subscribed capitale. Paid-up capital.

< Answer >21. The discount allowed on re-issue of forfeited shares is debited to< Answer >a. Discount on re-issue of shares accountb. Profit and loss accountc. Share premium accountd. Discount on issue of shares accounte. Forfeited shares account.22. The interest on calls in advance is paid for the period from thea. Date of receipt of application money to the date of appropriationb. Date of receipt of allotment money to the date of appropriationc. Date of receipt of advance to the date of appropriationd. Date of appropriation to the date of dividend paymente. Date of appropriation to the date of receipt of final call.< Answer >23. Which of the following items should not appear under the head ‘unsecured loans’ in the Balance Sheetof a company?a. Sinking fundsb. Loans and advances from subsidiariesc. Short term loans and advances from banksd. Loans and advances from otherse. Fixed deposits.< Answer >24. Share premium cannot be used toa. Issue bonus sharesb. Redeem preference sharesc. Write-off preliminary expensesd. Write-off discount on issue of sharese. Provide for premium payable on redemption of debentures.< Answer >25. Rishi Ltd. issued 1,50,000 shares of Rs.100 each at a discount of 10%. Rama, to whom 300 shares wereallotted failed to pay the final call of Rs.30 per share and hence, all his shares were forfeited. At the timeof forfeiture, the amount transferred to share forfeiture account wasa. Rs. 9,000b. Rs.18,000c. Rs.21,000d. Rs.27,000

e. Rs.30,000.< Answer >26. Suma Ltd. announced a rights issue of four shares of Rs.100 each at a premium of 160% for every fiveshares held by the existing shareholders. The market value of the share at the time of rights issue isRs.440. The value of right isa. Rs.124b. Rs.352c. Rs. 80d. Rs.110e. Rs.180.< Answer >27. Which of the following statements is true?a. A company will be deemed to be a holding company of another if, it holds more than 50percent of both equity and preference share capitalb. The financial year of the holding company and its subsidiary company must end on the same datec. The share capital of the subsidiary company does not appear in the Consolidated Balance Sheetd. The inter company owing will be shown in the Consolidated Balance Sheete. Minority shareholders of the subsidiary are entitled to proportionate share in capital profits only.< Answer >28. On December 01, 2002 H Ltd. acquired 60% shares in S Ltd. The balance of profit and loss account ofS Ltd. on April 01, 2002 and March 31, 2003 was Rs.90, 000 and Rs.1, 50,000, respectively. The profit isearned evenly throughout the year. The share of capital profit ofH Ltd. in the profits of the subsidiary as on March 31, 2003 isa. Rs. 36,000b. Rs. 60,000c. Rs. 72,000< Answer >d. Rs. 78,000e. Rs.1,30,000.29. On April 01, 2002, Sura Chemicals Ltd. issued 10,000, 18% Debentures of Rs.100 each. The company

reserves the right to redeem its debentures in any year by purchase in open market. Interest ondebentures is payable on September 30, and March 31, every year.• On July 1, 2002, the company purchased 2,000 of its own 18% debentures at Rs.98 cuminterest.• The company cancelled its own 2,000 debentures on March 31, 2003.The profit on cancellation of debentures transferred to Capital reserve isa. Rs. 4,000b. Rs. 9,000c. Rs.36,000d. Rs.13,000e. Rs.27,000.< Answer >30. Consider the following profits pertaining to a company for the last 3 years:The weighted average profit of the company for the purpose of valuation of goodwill isa. Rs.4,50,000b. Rs.4,35,000c. Rs.4,10,000d. Rs.3,85,000e. Rs.3,50,000.Year Profit (Rs.)2000-01 Rs.3,30,0002001-02 Rs.4,20,0002002-03 Rs.4,80,000< Answer >

ANS—

1. Answer : (e)Reason : Personal accounts deal with accounts of individuals like creditors, debtors, banks etc. It shows thebalance due to these individuals or due from them on a particular date and representative personalaccounts represent the amounts due on account of accrual concept

like accrued expenses and prepaidexpenses or accrued incomes and pre-received incomes. By virtue of this, the accounts stated inalternatives (a) sundry creditors, (b) Bank account, (c) outstanding wages and (d) prepaid insurancerepresent personal accounts.< TOP >2. Answer : (a)Reason : The basis for pricing inventory is either cost of production or cost of acquisition. FIFO method ofidentifying inventory is based on the assumption that costs are charged against revenue in the order inwhich they occur. In case of other methods i.e. LIFO (b) method matches the most recent costs incurredwith current revenue, leaving the first cost incurred to be included as inventory. Weighted-Averagemethod (c) assumes that costs are charged against revenue based on an average of the number of unitsacquired at each price level. Moving average method (d) can be used only with a perpetual inventory.The cost per unit is recomputed after every addition to the inventory. The ending inventory is valued atthe last moving average unit cost for the period. Base stock method (e) wherein a minimal level of it isa permanent investment, which is necessary for the normal business activities. Base stock would becarried at historical cost. Thus, FIFO method is the correct answer.< TOP >3. Answer : (c)Reason : Revenue expenditure is incurred for day to day running of the business. Any item of expenditure whichimproves the earning capacity of a business entity or the expenditure incurred till the asset is ready foruse is capital expenditure. From the viewpoint of this, the customs duty paid in connection with theimport of equipment (c) is not revenue expenditure. The expenses mentioned in other alternativesInterest on deposits accepted (a) Annual insurance premium (b) repairs and maintenance (d)Expenditure on assets like paperweight etc. are items of revenue

expenditure.< TOP >4. Answer : (e)Reason : A trial balance in which the total of the debits does not equal to the total of credits due to errorscommitted in the process of accounting. One among the errors is Partial omission of an entry If thedebit or credit aspect of a transaction has been omitted to be recorded, the trial balance will disagree.For example, if a cash sales of Rs.800 is omitted to be recorded in the Sales account then the totaldebits will exceed the total credits by Rs.800. Thus, results in a mismatch in the trial balance. But, incase of errors mentioned in alternatives (a), (b), (c) and (d) the agreeing of trial balance is not affectedas explained hereunder:Omission of the recording of a transaction from the books of accounts: If the withdrawal of goodsworth Rs.1,200 by the proprietor is omitted to be recorded in the books, the trial balance will still agreeas both the debit and the credit aspects have been omitted to be recorded.Compensating errors: These are quite difficult to detect. If a cash discount of Rs.215 allowed to acustomer has been posted to the credit of his account as Rs.251 and a cash sale of Rs.2,851 has beenposted to sales account as Rs.2,815, then the excess credit caused by the first error would be exactlycompensated by the lower credit recorded by the second error and the trial balance will be inagreement.Errors of principle: If the machinery account is debited for an amount of repair charges incurred forthe machinery, the error will not be disclosed by the trial balance. This is because that both machineryaccount and repairs account are debit accounts and it is a question of principle that repair chargesshould not be debited to the machinery account. Hence, the total effect will be the same and hence thetrial balance will tally.

Recording both aspects of a transaction more than once in the books of accounts: If a sale ofRs.3,500 made to PQR Ltd. is entered in the sales book twice, the error will not cause a mismatch in thetotals of the trial balance.< TOP >5. Answer : (e)Reason : Value of machine Rs.10,00,000Less: Salvage value Rs. 40,000Depreciable value Rs. 9,60,000Life of the machine 8 yearsDepreciation = = Rs.1,20,0009,60,0008< TOP >Rate of depreciation = = 12%1, 20,000 10010, 00,000×6. Answer : (c)Reason : If purchase day book is overcast, it shows higher cost of production or goods sold. It reduces grossprofit which in turn reduces net profit. It cannot increase gross profit and net profit. Therefore, (c) is thecorrect answer.< TOP >7. Answer : (e)Reason : If a debtor pays his dues, debtors balance will decrease and cash balance will increase. Thus, thecomposition of assets will change. But there is no change in the total assets or liabilities and hence (e) istrue.< TOP >8. Answer : (b)Reason : If the owner withdraws goods from the business, journal entry will beDrawings account ……… DrTo Purcahses accountOther options, given in a, c, d and e, relating to drawings are not correct.

< TOP >9. Answer : (d)Reason : Let the rate of depreciation = xThe depreciated value of machine = Rs.1,20,000 (1 – 3x) = Rs.66,0001 – 3x = = 0.553x = 1 – 0.55 = 0.45x = 0.45 ÷ 3 = 0.15 or 15%.Thus, the rate of depreciation = 15%.AlternativelyCost Price Rs.1,20,000WDV Rs.66,000Total depreciation for 3 years 54,000; Depreciation per year Rs. = Rs.18,000Rate of Depreciation = Rs. = 15%Rs.1,20,000Rs.66,00054,000318, 000 x 1001, 20, 000< TOP >10. Answer : (a)Reason :and the amounts mentioned in other alternatives are not correct.Credit balance as per bank column of cash book Rs.13,500Add: Bank interest on overdraft debited in pass book Rs. 2,100Cheques deposited but not collected by bank Rs. 5,000Debit balance as per pass book Rs.20,600< TOP >11. Answer : (e)Reason :Opening balance of Sundry debtors Rs. 45,000Add: Credit sales Rs.4,25,000Rs.4,70,000Less: Cash collected Rs.4,00,000Rs. 70,000Less: Closing balance of sundrydebtors Rs. 50,000Bad debts Rs. 20,000< TOP >

12. Answer : (c) < TOP >Reason :Opening stock Rs. 40,000Add: Purchases Rs.2,00,000Rs.2,40,000Less: Closing stock Rs. 50,000Cost of goods sold Rs.1,90,00013. Answer : (d)Reason :Particulars Rs.Balance as per banks statement (overdraft) 12,500Less: Cheque returned but not entered in the cash book 2,800Balance as per cash book (overdraft) 9,700< TOP >14. Answer : (c)Reason : Let the profit = 100%Commission = 5%105%Amount of commission payable to manager = Rs.1,89,000 × 105% = Rs.9,0005%< TOP >15. Answer : (d)Reason : The conservatism concept states that the revenues are to be recognized when they are certain and lossesare to be considered when they are probable. Thus, the statement in alternative (d) is true. Thestatements in other alternatives are false since, The losses from the sale of capital assets are to bededucted from revenue to ascertain the net income (a) Going concern pre-supposes that the assets arecategorized into fixed and current and the non-monetary assets are to be recorded at the historical costand not at market value (b) The consistency concept facilitates the comparison of the results of oneaccounting period with that of the past (c) and the system of recording transactions based on dual aspectconcept is double entry system and not the double account system (e). Hence, the correct answer is (d).< TOP >

16. Answer : (c)Reason : Acid test ratio or quick ratio is a liquidity ratio which is an indicator of short term solvency of abusiness. Hence © is the correct answer. The ratios mentioned in other alternatives do not indicate theshort term solvency of a business and are not the correct answers.< TOP >17. Answer : (b)Reason : Called up capital is the amount on the shares which is actually demanded by the company to be paid.However, there may be some shareholders who may make default in the payment. The money due fromthem is called calls-in-arrears. This amount should be deducted from the called up capital to arrive atthe paid-up capital. Thus, (b) is the correct answer.< TOP >18. Answer : (a)Reason : Forfeited shares can be re-issued at a premium. Thus, the statement in alternative (a) is false. Thestatements in other alternatives are true-, if share premium is already received, share premium accountcannot be debited with the amount of premium on forfeiture of shares; Shares can be issued a discount,only after one year from the commencement of business; Share premium can be utilized only specificpurposes as per the provisions of section 78 of the Companies Act and it cannot be utilized to redeempreference shares; The forfeited shares cannot be reissued for a loss more than the gain on those shares.< TOP >19. Answer : (d)Reason : If accrued commission is shown on the debit side list of balances in the trial balance, it indicates that itis already adjusted in the commission received /receivable and it does not require any adjustment in theprofit and loss account. It directly appears as a current asset in the balance sheet. Hence (d) is true< TOP >20. Answer : (c)Reason : The maximum amount beyond which a company is not

allowed to raise funds by issue of shares iscalled nominal capital or authorized capital. The issued capital is that part of the nominal capital issuedto the public and subscribed capital is that part of the issued capital which is subscribed by the public.Paid up capital is the amount which is paid-up by the shareholders. Reserve capital is that capital which< TOP >will be called-up only in case of liquidation. Thus, alternative (c) is the correct answer.21. Answer : (e)Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It cannot bedebited to discount on re-issue of shares, since there is no such account maintained, it is not a usualdiscount to be debited to (b) Profit and loss account. The share premium account (c) can be debitedonly for the purposes as per the provisons of the Compnaies Act. The discount on issue of shares (d)can be debited only in the event of issue of shares at a discount originally. Thus, (e) is the correctanswer.< TOP >22. Answer : (c)Reason : The company may receive from the shareholders the amount uncalled on the shares held by them eventhough the amount is not called for. In such a case the company is compelled to pay interest on the callsin advance at prescribed rate from the date of receipt of advance to the date of appropriation i.e. the datewhen the call is made and the advance received is appropriated from calls in advance account to therelevant call account.< TOP >23. Answer : (a)Reason : Sinking fund is created out of profit. It is the part of profit and should be listed under the heading“Reserves and Surplus” and not under “unsecured loans”. Loans and advances from subsidiaries, shortterm loans and advances from banks, loans and advances from others

and fixed deposits are unsecuredloans.< TOP >24. Answer : (b)Reason : Share premium should not be used for redemption of preference shares whereas they can be used toprovide for premium on redemption of preference shares or debentures, to issue bonus shares, to writeoffpreliminary expenses and discount on issue of shares.< TOP >25. Answer : (b)Reason : The shares were issued at a discount of 10% i.e. they were issued for Rs.90 per share.Rama failed to pay the final call of Rs.30. Hence he has paid Rs.60 (Rs.90 – Rs.30).The amount to be credited to shares forfeited account is Rs.60 x 300 shares = Rs.18,000< TOP >26. Answer : (c)Reason : Value of right =Where r = No of rights issuedN = No. of existing sharesM = Market priceS = Issue price of rights= Rs.100 + 160% premium = Rs.100 + Rs.160 = Rs.260∴Value of rights = = Rs.80r (M S)N r − +

4 (440-260)4+5

< TOP >27. Answer : (c)Reason : The share capital of the subsidiary company does not appear in the Consolidated Balance Sheet (c) isthe correct statement and the share capital of the subsidiary company is not shown in the consolidated

balance sheet. and other statements are not true. A company will be deemed to be a holding company ofanother if it holds more than 50 percent of both equity and preference share capital is not true becauseit should hold share only in equity capital and preference share capital will not be considereed fordeciding the cost of control. and (a) is not the correct answer.b. The financial year of the holding company and its subsidiary company must end on the same dateis not the correct answer because it need not be on the same date.d. The inter company owing will be shown in the Consolidated Balance Sheet is incorrect becauseintercompany owing are eliminated in the consolidated balance sheet and hence it is not thecorrect answer.e. Minority of the subsidiary is entitled to proportionate share in capital profits only is incorrectbecause they are entitled for both capital profits and revenue profit and there is no differencebetween the two profits in computation of minority interest. Thus, alternative © is the correctanswer.< TOP >28. Answer : (d)Reason : Profit for the year 2002-2003 = Rs.1,50,000 – Rs.90,000 = Rs.60,000Profit for 8 months (from April 01, 2002 to December 01, 2002)=Share of capital profit of H Ltd. = (90,000 + 40,000) x 60% = Rs.78,000.60,000 8 Rs.40,00012× =< TOP >29. Answer : (d)Reason : The profit on cancellation of debentures transferred to capital reserve is Rs.13,000On purchase of debentures, the journal entry to be made isOn cancellation of the debentures, the journal entry to be made isRs. Rs.Own debentures a/c Dr 1,87,000

Interest on debentures a/c Dr 9,000To Cash a/c 1,96,000Rs. Rs.18% Debentures a/c Dr 2,00,000To Own debentures 1,87,000To Capital Reserve 13,000< TOP >30. Answer: (b)Reason: Weighted average profit∴Weighted average profit = Rs.26,10,000 ÷ 6 = Rs.4,35,000Year 1 Rs.3,30,000 × 1 Rs. 3,30,000Year 2 Rs.4,20,000 × 2 Rs. 8,40,000Year 3 Rs.4,80,000 × 3 Rs.14,40,0006 Rs.26,10,000< TOP >

Financial Accounting (MB131): April 2005

Financial Accounting (MB131): April 2005

• Answer all questions.• Marks are indicated against each question.1. Which of the following is a leverage ratio?(a) Debt-Equity ratio (b) Current ratio ( c) Quick ratio(d) Earning power (e) Inventory turnover ratio.(1 mark)< Answer >2. Amortization of unidentified intangible assets is in terms of(a) Conservatism concept (b) Going concern concept(c) Matching concept (d) Time period concept(e) Business entity concept.(1 mark)< Answer >3. The following Trial Balance pertaining to John Vicky as at March 31, 2005 was prepared by aninexperienced accountant:Trial Balance of John Vicky as at March 31, 2005Particulars Debit (Rs.) Credit (Rs.)Capital (1st April, 2004) 89,000

Drawings 10,000Stock (1st April, 2004) 37,000Purchases 2,31,250Sales 3,94,000Motor vehicles 14,500Cash in hand 1,350Sundry creditors 49,760Sundry debtors 1,39,700Bank overdraft 9,000Administrative expenses 76,360Office equipment 35,000Carriage outward 2,310Returns inward 2,050Provision for bad debts 4,250Returns outward 3,160Discount allowed 2,800Discount received 3,150Total 5,52,320 5,52,320Though the Trial Balance has tallied, it has certain errors which were subsequently rectified. The totalof the corrected Trial Balance as on March 31, 2005 is(a) Rs.5,52,320 (b) Rs.4,64,200 (c) Rs.5,55,510 (d) Rs.5,43,200 (e)Rs.5,03,440.(2 marks)< Answer >4. In contract accounting, the percentage of completion method is an exception to the(a) Matching principle (b) Going concern principle(c) Historical cost principle (d) Business entity principle(e) Revenue recognition principle.(1 mark)< Answer >5. In which of the following areas, will the accounting policies tend to be uniform among the enterprises?(a) Method of providing Depreciation(b) Valuation of Inventories (c) Treatment of Goodwill(d) Treatment of Contingent Liabilities (e) Accounting for Cash.(1 mark)< Answer >2

6. Consider the following data pertaining to Sun Ltd. for the month of March 2005:Particulars Rs.Purchase of goods for resale 2,10,000Freight in 30,000Freight out 25,000Returns outward 22,000Cost of goods available for sale is(a) Rs.1,88,000 (b) Rs.2,10,000 (c) Rs.2,18,000(d) Rs.2,35,000 (e) Rs.2,40,000.(1 mark)< Answer >7. Consider the following information pertaining to Blue Sky Ltd. for the year 2004-2005:Particulars 1st April 2004 31st March 2005Inventory Rs.52,200 Rs.65,800Sundry debtors Rs.37,000 Rs.60,000Total credit sales made during the year were of Rs.6,75,000. The amount of discount allowed to thesundry debtors during the period was Rs.2,800.Cash collected from the sundry debtors during the year was(a) Rs.7,22,000 (b) Rs.6,95,200 (c) Rs.6,75,000(d) Rs.6,49,200 (e) Rs.5,14,200.(2 marks)< Answer >8. On March 31, 2005, the overdraft balance as per the bank pass book of Mr. Suresh was Rs.13,880. Thebalance did not agree with the balance as per cash book. On scrutiny, the following discrepancies arenoticed:• Interest on overdraft for the quarter ended March ’05 is Rs.480 (not recorded in the cash book).• Cheques deposited in the bank, but not cleared aggregate to Rs.1,800.• Cheques issued but not presented are for Rs.2,350.• A cheque for Rs.1,000 which was discounted with the bank earlier was dishonoured. Mr. Sureshwas not aware of the dishonour.The balance as per cash book as on March 31, 2005 is(a) Rs.12,950 (Credit) (b) Rs.14,810 (Credit)(c) Rs.13,810 (Debit) (d) Rs.13,950 (Debit) (e) Rs.12,950 (Debit).

(2 marks)< Answer >9. Carriage inward refers to the cost of transportation for(a) Purchase of materials (b) Sale of products (c) Returns outward(d) Return of unsold goods (e) Newly acquired machinery.(1 mark)< Answer >10. Advance received from customers is an(a) Item of current liability (b) Item of non-current asset(c) Item of contingent liability (d) Item of non-cash transaction(e) Item of inventory.(1 mark)< Answer >11. T.M. & Co. a dealer in shares, purchased shares. This was debited to Investment account. This is a/an(a) Error of commission (b) Error of omission(c) Error of principle (d) Error of compensation(e) Correct recording of transaction (No error).(1 mark)< Answer >12. Consider the following data pertaining to M/s. Ramu Enterprises as on March 31, 2005:Particulars Rs.Credit sales 1,40,000< Answer >3Credit purchases 20,000Cash sales 20,000Cash purchases 70,000Wages paid 5,000Returns inward 3,000Returns outward 2,000Carriage inward 1,000Carriage outward 1,000Gas, water and fuel 2,000Raw materials destroyed by fire 2,000Additional Information:Particulars As on April 01, 2004 As on March 31, 2005Rs. Rs.Inventory 27,000 40,000

Outstanding wages 500 700Gross profit of M/s.Ramu Enterprises for the year ended March 31, 2005 is(a) Rs.73,800 (b) Rs.75,800 (c) Rs.74,800(d) Rs.76,200 (e) Rs.75,200.(2 marks)13. As per the Accounting Standard, which of the following is/are not extra-ordinary item/s to anenterprise?I. Attachment of its property. II. Destruction by fire of factory building.III. Insolvency of a debtor. IV. Factory building collapsed in earthquake.(a) Only (III) above (b) Both (II) and (III) above(c) Both (I) and (IV) above (d) Both (I) and (III) above(e) All (I), (II), (III) and (IV) above.(1 mark)< Answer >14. Which of the following is/are non-current liability(ies)?I. Long term loans. II. Declared dividend.III.Bank overdraft. IV.Sundry creditors. V. Debentures.(a) Only (V) above (b) Only (I) above(c) Both (I) and (V) above (d) (I), (II) and (IV) above(e) (I), (III) and (V) above.(1 mark)< Answer >15. Which of the following transactions does not change the total amount of liabilities in the balance sheet?(a) Purchase of office furniture on credit(b) Payment of bank loan (c) Issue of debentures(d) Acceptance of bills from creditors (e) Issue of preference shares.(1 mark)< Answer >16. Which of the following statements is false?(a) Prepaid expenses are shown on the asset side(b) Income received in advance is shown on the asset side(c) Income earned but not received is shown on the asset side(d) Income accrued but not due is shown on the asset side(e) Outstanding expenses are shown on the liability side.(1 mark)< Answer >17. Which of the following is not true about Fixed Assets?(a) They are acquired for using them in the conduct of business operations

(b) They are not meant for resale to earn profit(c) They can easily be converted into cash(d) Depreciation at specified rates is to be charged on most of the Fixed Assets(e) Their utility is not confined to one accounting period.(1 mark)< Answer >418. Which of the following is not an objective of maintaining books of accounts?(a) Maintaining a permanent, accurate and complete record of business transactions(b) Maintaining records of incomes, expenses and losses in such a way that the net profit or loss forany specified period may be ascertained(c) Increasing the profit or reducing the loss made by the enterprise(d) Maintaining records of assets and liabilities in such a way that the financial position of thebusiness at any point can easily be ascertained(e) Providing required information for legal and tax purposes.(1 mark)< Answer >19. In a manufacturing company, which of the following systems is called a product costing system?(a) Perpetual inventory system (b) Periodic inventory system(c) Accrual system (d) Weighted average system(e) Specific identification system.(1 mark)< Answer >20. Which of the following costs is not directly related to a specific contract?(a) Site labor cost(b) Cost of moving plant and equipment to and from a site(c) Research and Development cost(d) Supervision cost(e) Cost of materials used.(1 mark)< Answer >21. Which of the following methods of valuation of inventory is based on the assumption that costs are

charged against revenue in the order in which they occur?(a) FIFO method (b) LIFO method(c) Weighted average method (d) Moving average method (e) Base stock method.(1 mark)< Answer >22. Which of the following methods of depreciation takes into consideration the output from the asset?(a) Straight line method (b) Written down value method(c) Sum-of-the-years’ digits method (d) Units-of-production method(e) Double declining method.(1 mark)< Answer >23. Consider the following data pertaining to Lairs Ltd. for the month of March 2005:Date Purchases Issues BalanceQuantity (Kg.) Rate (Rs.) Quantity (Kg.) Quantity (Kg.) Rate (Rs.)01-03-2005 500 22.8002-03-2005 400 2410-03-2005 600 2525-03-2005 1,000If the company uses weighted average method for inventory valuation, the value of inventory as onMarch 31, 2005 is(a) Rs.11,967 (b) Rs.12,000 (c) Rs.12,500(d) Rs.11,400 (e) Rs.36,000.(2 marks)< Answer >24. The cost of goods sold does not include(a) Indirect labour (b) Power and light(c) Storage expenses (d) Advertising expenses (e) Excise duty.(1 mark)< Answer >25. Renewal fee for patents is a(a) Capital expenditure (b) Revenue expenditure(c) Deferred revenue expenditure (d) Development expenditure(e) Contingent expenditure.< Answer >5(1 mark)

26. Cost of raw-material is equal to its(a) Purchase price(b) Purchase price plus duties and taxes(c) Purchase price plus duties, taxes and freight inward(d) Purchase price plus duties, taxes and freight inward minus discount(e) Purchase price plus duties, taxes and freight inward minus discount and duty draw back.(1 mark)< Answer >27. Which of the following does not come under fixed assets?(a) Buildings (b) Furniture (c) Long term investment(d) Equipment (e) Machinery.(1 mark)< Answer >28. When goods are sold subject to the approval by the buyer, revenue should be recognized when the(a) Goods have been formally accepted by the buyer(b) Payment has been received from the buyer(c) Buyer has seen the sample and approved the same(d) Goods have been sent to the buyer(e) Goods have been received by the buyer, irrespective of his approval.(1 mark)< Answer >29. For a car manufacturing company, which of the following is not a fixed asset?(a) Land and Building (b) Machinery (c) Office furniture(d) Stock of cars (e) Patents.(1 mark)< Answer >30. Payment of Municipal taxes is a(a) Capital expenditure (b) Revenue expenditure(c) Capital receipt (d) Revenue receipt(e) Development expenditure.(1 mark)< Answer >31. Which of the following expenses is capital in nature?(a) Purchase of a truck (b) Replacement of old tyres and tubes(c) Repairs to furniture (d) Payment of Road tax(e) Payment of insurance premium.(1 mark)

< Answer >32. In a funds flow statement prepared on working capital basis, a short term loan repaid by theorganization(a) Is shown as a source of working capital(b) Is shown as an increase in cash(c) Is shown as a decrease in cash(d) Does not affect the working capital(e) Is not shown either as a source or a use of funds.(1 mark)< Answer >33. In accounting, window-dressing implies(a) Showing the real position of the business(b) Showing a worse position of the business(c) Showing a better position than the true and fair view of the business(d) Making excess provisions for the expenses of the business(e) Showing a true and fair view.(1 mark)< Answer >34. Dinakar operates a garment store in a hired premises at a rent of Rs.1,20,000 per annum. The owner ofthe premises, who has recently completed her fashion-designing course, wishes to purchase the garment< Answer >6the premises, who has recently completed her fashion-designing course, wishes to purchase the garmentstore. The details of the business of Dinakar are as under:• The profit for the year 2004-2005 is Rs.2,30,000.• The capital employed by Dinakar is Rs.20,00,000.• The value of the premises is Rs.4,00,000.If the normal return on capital employed is 12%, the super profit is(a) Rs.58,000 (b) Rs.62,000 (c) Rs.1,10,000(d) Rs.1,20,000 (e) Rs.1,78,000.(3 marks)35. Which of the following are not current assets?(a) Inventories (b) Bills receivable(c) Accounts receivable (d) Prepaid expenses (e) Incomes received in advance.(1 mark)

< Answer >36. Accounting Standard Board was set up by the(a) Government of India(b) Institute of Chartered Accountants of India(c) Institute of Costs and Works Accountants of India(d) Reserve Bank of India(e) Securities and Exchange Board of India.(1 mark)< Answer >37. RSV Ltd. acquires the following assets of BC Ltd. paying a sum of Rs.22,50,000:Particulars Rs.Cash at bank 23,750Cash on hand 12,250Accounts receivable 86,200Other identifiable assets 16,00,000If Accounts Receivable are believed to have a realizable value of Rs.80,000 and other identifiable assetsare estimated to have market value of Rs.18,50,000, the amount of goodwill to be recorded in the booksof RSV Ltd. is(a) Rs.5,34,000 (b) Rs.2,90,200 (c) Rs.2,84,000(d) Rs.5,40,200 (e) Rs.3,20,000.(2 marks)< Answer >38. An inexperienced book-keeper of M/s.Volga & Co. has drawn up the following trial balance of the firmfor the year ended March 31, 2005:Trial Balance as on March 31, 2005Particulars DebitRs.Particulars CreditRs.Provision for doubtful debts 2,000 Capital 45,910Bank overdraft 16,540 Sundry creditors 16,370Sundry debtors 29,830 Discount allowed 7,330Discount received 2,520 General expenses 8,290Drawings 12,000 Returns inward 3,300Office furniture 21,550 Cash sales 60,800Purchases 1,09,230 Credit sales 1,08,020

Rent and rates 3,140Salaries 25,200Opening stock 24,180Provision for depreciation onoffice furniture 3,640Total 2,49,830 Total 2,50,020Subsequently another trial balance was drawn and the residual difference was placed to a suspenseaccount. The amount debited/credited to suspense account was< Answer >7(a) Rs.190 (debit) (b) Rs.530 (credit)(c) Rs.11,750 (debit) (d) Rs.4,170 (debit) (e) Rs.11,750(credit).(2 marks)39. Silver Coats Ltd. invited applications for 1,00,000 equity shares of Rs.10 each at a premium of Rs.2 per share.The entire issue was underwritten by three underwriters in the following percentages:Anil 30%Vimal 40%Sunil 30%The details of marked and unmarked applications received are:Marked applications of Anil 22,000 sharesVimal 24,000 sharesSunil 28,000 sharesUnmarked applications 16,000 sharesThe final liability of Vimal in terms of number of shares is(a) Nil (b) 9,600 (c) 3,200 (d) 16,000 (e) 8,000.(2 marks)< Answer >40. Which of the following error will not be disclosed by a Trial Balance?(a) Posting of one aspect of a transaction twice(b) Omission of recording a transaction(c) Error in balancing of ledger accounts(d) Omission of listing an account balance(e) Overcasting / undercasting of a subsidiary book.(1 mark)< Answer >41. If the forfeited shares are issued at a discount, the amount of discount shall be debited to

(a) Profit and loss account (b) Capital reserve account(c) Share forfeiture account (d) Share premium account(e) Share capital account.(1 mark)< Answer >42. The primary means of communicating comprehensive accounting information to the users is(a) Prospectus (b) Trial balance (c) Bank Reconciliation Statement(d) Financial statements (e) Statement of cash flow.(1 mark)< Answer >43. After preparation of the Profit and Loss Account, the following are extracted from the books ofUniverse Ltd. as on March 31, 2005:Particulars Rs. Particulars Rs.Called-up share capital 5,00,000 Plant and machinery 2,20,000Land and building 4,90,000 Investments 60,000Secured loans 3,00,000 Calls-in-arrear 30,000Term loan from Syndicate Bank 1,00,000 Capital reserve 90,000Sundry creditors 90,000Sundry debtors 1,20,000Profit and loss account(credit balance) 50,000Stock 96,000 Outstanding expenses 500Loans to employees 50,000Provision for doubtful debts 10,000Insurance premium paid inadvance 1,200Interest received in advance 700 Cash 4,000Bank balance (Debit) 40,000 Preliminary expenses 30,000The total of the liabilities side of the balance sheet is(a) Rs.11,01,200 (b) Rs.11,00,200 (c) Rs.11,31,200(d) Rs.11,41,200 (e) Rs.11,01,900.< Answer >8(2 marks)44. The authorized capital of Chand Ltd. is 1,00,000 shares of Rs.10 each. On April 10, 2004, 50,000shares are issued for subscription at a premium of Rs.2 per share. The share money is payable as

follows:Rs.5 (including the premium of Rs.2) with applicationRs.3 on allotmentRs.2 on first callRs.2 on final call.The subscription list closed on May 11, 2004 and the directors proceeded with allotment on May 18,2004. The shares are fully subscribed and the application money (including the premium) is received infull. The allotment money is received by June 30, 2004, except as regards 500 shares.The first call and the final call money is received by September 30, 2004, and December 31, 2004,respectively, except the final call money on 200 shares which is not received.Assuming that there are no other transactions, the cash balance as on December 31, 2004 is(a) Rs.8,46,100 (b) Rs.6,00,000 (c) Rs.5,96,100(d) Rs.4,96,000 (e) Rs.5,96,000.(2 marks)< Answer >45. Which of the following statement(s) is/are false?I. An equity share always carries the voting right.II. In case of equity shares, the dividend is paid at a fixed rate during the lifetime of the company.III. The share premium received on issue of shares cannot be utilized in writing off the preliminaryexpenses of the company.(a) Only (I) above (b) Only (II) above(c) Both (I) and (II) above (d) Both (I) and (III) above(e) Both (II) and (III) above.(1 mark)< Answer >46. Rights shares are the shares(a) Issued by a newly formed company(b) Legally issued to the public at large(c) Offered to the existing equity shareholders(d) That have a right of redemption(e) That have a right to cumulative dividends.(1 mark)

< Answer >47. A company issued 14% debentures of Rs.10,00,000 at a discount of 10%. The discount on issue ofdebentures will be treated in the account books as(a) Capital expenditure (b) Revenue expenditure(c) Deferred revenue expenditure (d) Capital loss(e) Outstanding expenditure.(1 mark)< Answer >48. The Issued Share Capital of Marval Ltd. is Rs.12,00,000 divided into 1,20,000 shares which wereissued at a premium of 100%. The company offers two shares for every three shares held to its existingshareholders. If the rights issue price is Rs.410 per share and the market value at the time of rights issueis Rs.560 per share, the value of right is(a) Rs.60 (b) Rs.20 (c) Rs.150 (d) Rs.410 (e) Rs.560.(1 mark)< Answer >49. The difference between par value and issue price below the par value of share, is called(a) Share premium (b) Trade discount(c) Commission on issue of shares (d) Discount on issue of shares (e) Cash discount.(1 mark)< Answer >50. Debentures can be redeemedI. At par.II. At a premium.< Answer >9III. At a discount.IV. By conversion into stock.(a) Only (I) above (b) Both (I) and (II) above(c) Both (I) and (III) above (d) (I), (II) and (III) above(e) (I), (II), (III) and (IV) above.(1 mark)51. The balance of cash book signifies(a) Net income (b) Cash in hand (c) Net sales(d) Net purchases (e) Net expenditure.

(1 mark)< Answer >52. The profits earned by a subsidiary company before acquisition by a holding company are known as(a) Revenue profits (b) Capital profits (c) Super profits(d) Average profits (e) Future maintainable profits.(1 mark)< Answer >53. On April 01, 2004, the Profit and Loss Appropriation account of Wye Ltd. had a balance ofRs.2,30,000. During the year 2004-05, the company earned a net profit of Rs.6,62,800 and• The adjustment of income tax provision for the year 2003-04 amounted to Rs.58,800. Thecompany has a policy to transfer every year a sum of Rs.2,50,000 to general reserve.• The sinking fund for redemption of debentures is created on April 01,2002 and the annualinstallment is Rs.1,50,000.• The company declared a dividend of 20% on Equity Share Capital of 5,000 fully paid shares ofRs.100 each issued at Rs.90 each.After effecting the above, the balance in the Profit and Loss Appropriation account of the company ason March 31, 2005 is(a) Rs.3,24,000 (b) Rs.3,92,800 (c) Rs.3,34,000(d) Rs.3,82,800 (e) Rs.4,84,000.(2 marks)< Answer >54. Desktop Publishing Ltd. began its operations on July 01,2004. The following accounts and balanceswere contained in the adjusted trial balance of the company as on March 31, 2005:Equity Share Capital Rs.95,500Declared Dividends Rs.9,550Fees earned Rs.48,200Rent paid Rs.13,200Salaries paid Rs.5,750Income Tax paid Rs.1,100Electricity Rs.3,700

Pre paid rent Rs.1,800Cash on hand Rs.10,600Sundry assets Rs.1,17,650.The amount of profit earned by the company for the year ended March 31, 2005 was(a) Rs.13,100 (b) Rs.24,450 (c) Rs.22,650 (d) Rs.26,250 (e) Rs.16,700.(2 marks)< Answer >55. The Adams Ltd. paid a dividend of Rs.1,20,000 at the end of March 31, 2005. On April 01, 2004, therewas Rs.40,000 of dividends in arrears. The company’s capital structure consists of 5,000 9%,cumulative preference shares of Rs.100 each and 10,000 equity shares of Rs.30 each, both fully paid.How much did Adams Ltd. pay as dividends to its equity shareholders for the year 2004 - 05?(a) Percentage not given-Insufficient data (b) Rs.75,000(c) Rs.45,000 (d) Rs.35,000 (e) Rs.80,000.(2 marks)< Answer >56. The following information is extracted from the books of Sun Pharmacy Ltd.:Purchases made during the year Rs.7,80,000Sales made during the year Rs.13,22,000Opening stock Rs.1,90,000< Answer >10Closing stock Rs.2,17,000• Goods worth Rs.18,000 were distributed as free sample and no entry is made to this effect.• A sale of Rs.28,000 has been credited to purchases account.• Carriage outward amounted to Rs.2,000.Considering the above, gross profit of the company for the year was(a) Rs.5,85,000 (b) Rs.5,87,000 (c) Rs.5,89,000(d) Rs.6,15,000 (e) Rs.6,17,000.(2 marks)57. The system of accounting to be followed by a company(a) Must be the same as of all other companies(b) Can be different from the system followed by other companies(c) Must be disclosed if it is different from the recognized policy

(d) Must be on accrual basis and according to the double entry system of accounting(e) Can be on cash basis of accounting on the approval of the Registrar of Companies.(1 mark)< Answer >58. Pawan Ltd. has been incorporated with an Authorised Capital of Rs.10,00,000 divided into 1,00,000equity shares of Rs.10 each. The company issued 65,000 shares of Rs.10 each to the public forsubscription payable as under:On application Re.1On allotment Rs.2On first call Rs.2On second call Rs.2On final call Rs.3The public has subscribed for 60,000 shares. The directors of the company made first call of Rs.2 pershare to carry on the business of the company. Out of these, one shareholder holding 5,000 sharesfailed to pay the call money of Rs.2 per share.The company made profit of Rs.58,500 during the financial year and the directors declared a dividendof 6% to the shareholders.The amount of capital that is to be considered for paying dividends is(a) Rs.5,00,000 (b) Rs.6,50,000 (c) Rs.3,00,000(d) Rs.6,00,000 (e) Rs.2,90,000.(2 marks)< Answer >59. The following information is taken from the books of Splendid Ltd.:On April 4, 2005 the company issued 7% Debentures having a face value of Rs.12,00,000 at a discountof 2.5%. On April 12, the company further issued 25,000 8% Preference shares of Rs.100 each. OnApril 29, the company redeemed the existing 30,000 6% Preference shares of Rs.100 each at a premiumof 5% together with one month dividend thereon. Bank balance as on March 31, 2005 wasRs.29,25,000.The Bank balance as on April 30, 2005 will be

(a) Rs.32,30,000 (b) Rs.33,15,000 (c) Rs.33,30,000(d) Rs.33,45,000 (e) Rs.34,30,000.(2 marks)< Answer >60. Once the unclaimed dividend is transferred to General Revenue Account of the Central Government,any shareholder entitled to such dividend may claim it from(a) The Reserve Bank of India (b) The Central Government(c) The Company (d) The Registrar of companies(e) Any Scheduled Bank.(1 mark)< Answer >61. The balance in the creditors account of a company as at the beginning of the month of March 2005 wasRs.3,40,000. During the month,• A sum of Rs.1,85,000 was paid to the creditors .• Goods purchased from the suppliers amounted to Rs.2,47,000.< Answer >11• Goods returned to them as defective were of Rs.8,000.• They allowed a sum of Rs.4,800 as cash discount.• A bill for Rs.8,000 accepted by the company in favour of a creditor could not be honoured on thedue date and hence was dishonoured on March 20, 2005.The balance in the creditors account as on March 31, 2005 was(a) Rs.4,02,000 (b) Rs.3,94,200 (c) Rs.3,97,200(d) Rs.4,05,200 (e) Rs.4,50,020.(2 marks)62. The books of Sahara Ltd. revealed the following information:Particulars Rs.Opening inventory 6,00,000Purchases during the year 2004-2005 34,00,000Sales during the year 2004-2005 48,00,000On March 31, 2005, the value of inventory as per physical stock-taking was Rs.3,25,000. Thecompany’s gross profit on sales has remained constant at 25%. The management of the companysuspects that some inventory might have been pilfered by a new employee. What is the estimated costof missing inventory?

(a) Rs.75,000 (b) Rs.25,000 (c) Rs.1,00,000(d) Rs.1,50,000 (e) Rs.2,25,000.(2 marks)< Answer >63. ABC Ltd. maintains the inventory records under perpetual system of inventory. Consider the followingdata pertaining to inventory of ABC Ltd. held for the month of March 2005:Date Particulars Quantity Cost Per unit (Rs.)March 1 Opening inventory 15 4004 Purchases 20 4506 Purchases 10 460If the company sold 32 units on March 24, 2005, closing inventory under FIFO method is(a) Rs.5,200 (b) Rs.5,681 (c) Rs.5,800 (d) Rs.5,850 (e) Rs.5,950.(2 marks)< Answer >64. Consider the following data pertaining to Taurus Ltd.Average Trading Profit Rs.2,58,900Normal Profits Rs.2,23,800Where in the goodwill was valued on the basis of 3 years’ purchase of super profits. Further, it has beenresolved by the company to amortise the goodwill over a period of five years.The journal entry to be passed for amortisation of goodwill every year is(a) Profit and Loss a/c. Dr. Rs.21,060To Goodwill a/c. Rs.21,060(b) Depreciation a/c. Dr. Rs. 7,020To Goodwill a/c. Rs.7,020(c) Goodwill a/c. Dr. Rs.21,060To Profit and Loss a/c. Rs.21,060(d) Profit and Loss a/c. Dr. Rs. 7,020To Goodwill a/c. Rs.7,020(e) General Reserve a/c. Dr. Rs.21,060To Goodwill a/c. Rs.21,060.(2 marks)< Answer >65. Which of the following is false with respect to goodwill?(a) Goodwill though caused by factors which cannot be easily and accurately quantified, must beassigned a value

(b) It is the present value of a firm’s anticipated excess earnings(c) It is the extra saleable value attached to a prosperous business beyond the intrinsic value of netassets< Answer >12(d) It is an identifiable intangible asset(e) It is like any other asset, a store of prospective revenue.(1 mark)66. M/s.Sunder Ltd. issued 80,000 equity shares of Rs.10 each, payable as under:On application Rs.3On allotment Rs.4On first call Rs.2On final call Rs.1The applications received for 1,20,000 shares were dealt with as under:• Applicants of 20,000 shares were allotted in full.• Applicants of 80,000 shares were allotted 60,000 shares pro-rata.• Applications for 20,000 shares were rejected.The amount available for adjustment towards allotment money is(a) Rs.1,20,000 (b) Rs.2,40,000 (c) Rs.60,000(d) Rs.1,80,000 (e) Rs.3,20,000.(2 marks)< Answer >67. Needs Ltd. issued 20,000 equity shares of Rs.100 each at a premium of 20% payable as under:On application Rs.50 (inclusive of premium)On allotment Rs.30On first call Rs.20On second and final call Rs.20Applications were received for 24,000 shares and the company has resolved to reject 4,000 applicationsin full and allot to 20,000 applicants in full. The journal entry passed at the time of receipt ofapplication money is(a) Bank account Dr. Rs.12,00,000To Share application account Rs.12,00,000(b) Share application account Dr. Rs.12,00,000To Share Capital account Rs.12,00,000(c) Bank account Dr. Rs.12,00,000

To Share Capital account Rs.12,00,000(d) Bank account Dr. Rs. 6,00,000To Share Capital account Rs. 6,00,000(e) Bank account Dr. Rs.10,00,000To Share Capital account Rs. 6,00,000To Share premium account Rs. 4,00,000.(2 marks)< Answer >68. When redeemable preference shares are due for redemption, the entry passed is(a) Debit Redeemable preference share capital account and Credit Cash account(b) Debit Redeemable preference share capital account and Credit Redeemable Preferenceshareholders account(c) Debit Redeemable Preference shareholders account and Credit Cash account(d) Debit Redeemable Preference shareholders account and Credit Redeemable preference sharecapital account(e) Debit Redeemable preference share capital account and Credit Capital redemption reserveaccount.(1 mark)< Answer >69. Which of the following statements is/are true?I. Discount on issue of debentures can be shown in the books of the accounts even after the life ofthe debentures.II. Capital profits can be used for converting partly paid shares to fully paid-up.III. Bonus issue of shares is not permitted unless the partly paid up shares, if any existing, are madefully paid.< Answer >13fully paid.(a) Only (I) above (b) Only (II) above(c) Both (I) and (II) above (d) Both (I) and (III) above (e) Both (II) and (III) above.

(1 mark)70. Traditionally, human resource is not taken as asset in the Balance Sheet of a business in recognition of,(a) Cost concept (b) Money measurement concept(c) Consistency concept (d) Business entity concept(e) Going concern concept.(1 mark)< Answer >71. A transaction of purchase of stationery of Rs.400 for cash has not been entered in the cashbook. This isan example of(a) Error of partial omission (b) Error of commission(c) Error of principle (d) Compensating error(e) Error of complete omission.(1 mark)< Answer >72. A firm sells goods at a gross margin of 25% on sales. Opening Stock was Rs.40,000 and closing stockwas Rs.30,000. Purchases during the period were Rs.1,10,000. What is the amount of Sales?(a) Rs.1,60,000 (b) Rs.1,20,000 (c) Rs.2,00,000 (d) Rs.1,50,000 (e) Rs.96,000.(2 marks)< Answer >73. Net worth consists ofI. Equity.II. General reserve.III. Capital reserve.IV. Profit and Loss account balance.(a) Only (I) above (b) Both (I) and (IV) above(c) Both (I) and (III) above (d) Both (I) and (II) above(e) All (I), (II), (III) and (IV) above.(1 mark)< Answer >74. Damaged inventory should be valued at(a) Nominal value (b) Market value(c) Net realizable value (d) Cost price or market price, whichever is lower(e) Acquisition cost.(1 mark)< Answer >

75. Which of the following expenses is not included in the acquisition cost of a plant and equipment?(a) Cost of site preparation(b) Delivery and handling charges(c) Installation costs(d) Professional fees in connection with the equipment(e) Financing costs incurred subsequent to the period after plant and equipment is put to use.(1 mark)< Answer >14

Suggested AnswersFinancial Accounting (MB131): April 20051. Answer : (a)Reason : Debt-Equity ratio is also called as leverage ratio. Thus, alternative (a) is the correct answer.Current ratio (b) and Quick ratio (c) are liquidity ratios and not leverage ratios. Earning power (d)and Inventory turnover ratio (e) are not leverage ratios. Therefore, alternative (a) is the correctanswer.<TOP>2. Answer : (c)Reason : Intangible assets are amortized like tangible fixed assets. If costs benefit more than one accountingperiod, they should be systematically and rationally allocated to all accounting periods. Matchingconcept involves recognizing costs as expenses on the basis of direct association with assets. Thusamortization of intangible assets is the systematic allocation of costs over several periods inrecognition of matching concept. The other concepts do not recognize allocation of costs of fixed

assets. Conservatism concept is not meant to introduce a bias into financial reporting. It is aprudent reaction to uncertainty to try to ensure that inherent risks in business are adequatelyconsidered. Going concern concept (b) assumes that the business entity is assumed to be a goingconcern in the absence of evidence to the contrary. Time Period concept (d) requires accountinginformation to be reported at regular intervals to foster comparability. Business entity conceptexplains that in accounting business is to be considered as a separate entity from the owner. It doesnot speak about amortization.Thus, alternative (c) is the correct answer.<TOP>3. Answer : (a)Reason :Trial Balance of John Vicky as at March 31, 2005Sl.No Heads of AccountDebt Balance(Rs.)Credit Balance(Rs.)1. Capital (1st April, 2004) 89,0002. Drawings 10,0003. Stock (1st April, 2004) 37,0004. Purchases 2,31,2505. Sales 3,94,0006. Motor Vehicles 14,5007. Cash in Hand 1,3508. Sundry Creditors 49,7609. Sundry Debtors 139,70010. Bank Overdraft 9,00011. Administrative over head 76,36012. Office Equipment 35,00013. Carriage Outward 2,31014. Returns Inward 2,05015. Provision for Bad Debts 4,250

16. Returns Outward 3,16017. Discount Allowed 2,80018. Discount Received 3,150TOTAL 5,52,320 5,52,320<TOP>4. Answer : (e)Reason : In contract accounting, there is a reasonable certainty that the project would be completed and thereturn consideration is realized. In fact, return consideration may begin as soon as the work begins.So, revenue may be recognized at work-in-progress. This is the exception to the revenuerecognition principle. Other principles stated in (a), (b), (c) and (d) are not correct. Hence, (e) istrue.<TOP>5. Answer : (e)Reason : Method of providing depreciation ,valuation of inventories, treatment of Goodwill and treatment ofcontingent liabilities differ from enterprise to enterprise<TOP>15contingent liabilities differ from enterprise to enterprise >6. Answer : (c)Reason : Cost of goods = Purchases – Returns outward + Freight in= Rs.2,10,000 – Rs.22,000 + Rs.30,000 = Rs.2,18,000<TOP>7. Answer : (d)Reason :Particulars Rs.Opening balance of sundry debtors 37,000Add : Credit sales 6,75,000

7,12,000Less : Closing balance of Sundry debtors 60,0006,52,000Less : Discount allowed 2,800Cash collected from sundry debtors 6,49,200<TOP>8. Answer : (a)Reason : Bank reconciliation statement as on March 31, 2005:Particulars Rs. Rs.Overdraft as per bank pass book 13,880Less : Interest on overdraft not entered in cash book 480Cheques deposited not cleared 1,800Cheque discounted which was dishonoured 1,0003,28010,600Add : Cheques issued but not presented for payment 2,350Overdraft as per cash book 12,950<TOP>9. Answer : (a)Reason : Carriage inward expense is related to the carrying cost of material purchased. If it is incurred forcarrying new assets, it should be capitalized to the assets value. Carrying cost relating to sale ofproducts, returns outward and return of unsold goods will not be treated as carriage inwardexpenses. Hence, (a) is correct.<TOP>10. Answer : (a)Reason : Advance received from customers is a current liability till the goods are supplied or services arerendered.<TOP>

11. Answer : (c)Reason : Error of principle is the error of treating revenue items as capital and capital items as revenue. Thepurchase of shares by the share broker is to be debited to purchases account and not to investment.It is error of principle. (c) is the correct answer.<TOP>12. Answer : (b)Reason : Books of Ramu EnterprisesDr. Trading Account for the period ending March 31, 2005 Cr.Particulars Rs. Rs. Particulars Rs. Rs.To Opening stock 27,000 By Sales :To Purchases Cash 20,000Cash 70,000 Credit 1,40,000Credit 20,000 1,60,00090,000 (–) Returns inward 3,000 1,57,000(–) Goods lost due to fire 2,000 By Closing stock 40,000(–) Returns outward (–) 2,000 86,000To Wages 5,000(+) Outstanding as onMarch 31, 2005 7005,700(–) Outstanding as onApril 01, 2004 500 5,200To Carriage inward 1,000To Gas, water, fuel 2,000To Gross Profit 75,8001,97,000 1,97,000<TOP>1613. Answer : (a)Reason : Insolvency of a debtor is not an extra-ordinary event. Attachment of property, destruction by fire offactory building, factory building collapsed in earthquake etc. are extra-ordinary items.<

TOP>14. Answer : (c)Reason : The non-current liability is a liability which is not repayable in a period of 12 months or a businesscycle which ever is earlier. Thus, Long-term loans and Debentures are non current liabilities.(c) isthe correct answer.<TOP>15. Answer : (d)Reason : Acceptance of bills drawn by creditors will not result in any change in the amount of liabilities ofbalance sheet, because it will decrease the balance of creditors and increase the balance of billspayable by the same amount. So (d) is correct, other transactions change the total amount ofliabilities of the balance sheet.<TOP>16. Answer : (b)Reason : Income received in advance is a liability and should shown on the liability side and not on assetside. All other statements viz, prepaid expenses shown on asset side, income earned but notreceived shown on asset side, income accrued but not due shown on asset side and outstandingliabilities for expenses shown on liability side are true.<TOP>17. Answer : (c)Reason : Fixed assets cannot easily be converted into cash. They are acquired for using them in the conductof business operations They are not meant for resale to earn profit. Depreciation at specified rates isto be charged on most of the Fixed Assets. Their utility is not confined to one accounting period.

<TOP>18. Answer : (c )Reason : To increase the profit or reduce the loss made by the enterprise is not an object of keepingaccounts. All others are objects of maintaining accounts.<TOP>19. Answer : (a)Reason : In a manufacturing company, the perpetual inventory system is called product costing system. Insuch system, the cost of each product is accumulated as it flows through the production process.<TOP>20. Answer : (c)Reason : Research and Development cost cannot directly be attributed to a specific work. Site labor cost,cost of moving plant and equipment to and from a site , supervision cost and materials used can berelated to specific contract.<TOP>21. Answer : (a)Reason : The basis for pricing inventory is either cost of production or cost of acquisition. FIFO method ofidentifying inventory is based on the assumption that costs are charged against revenue in the orderin which they occur. In case of other methods i.e. LIFO (b) method matches the most recent costsincurred with current revenue, leaving the first cost incurred to be included as inventory. Weighted-Average method (c) assumes that costs are charged against revenue based on an average of thenumber of units acquired at each price level. Moving average method (d) can be used only with a

perpetual inventory. The cost per unit is recomputed after every addition to the inventory. Theending inventory is valued at the last moving average unit cost for the period. Base stock method(e) wherein a minimal level of it is a permanent investment, which is necessary for the normalbusiness activities. Base stock would be carried at historical cost. Thus, FIFO method is the correctanswer.<TOP>22. Answer : (d)Reason : The depreciation rate according to units-of-production method is applied to the number of unitsproduced during an accounting period. Hence, it is related to the usage of the asset. Straight linemethod, written down value method, sum-of-the-years’ digits method and double declining methodtakes into consideration the cost of the asset, salvage value and useful life but not the output fromthe asset. Hence the answer is (d).<TOP>1723. Answer : (b)Reason :Purchases Issues BalanceDate Quantity(Kg)Rateper kg.(Rs.)Amount(Rs.)Quantity(Kg)Rate perkg. (Rs.)

Amount(Rs.)Quantity(Kg)Rateper kg.(Rs.)Amount(Rs.)1-3-05 500 22.80 11,4002-3-05 400 24 9,600 900 23.33 21,00010-03-05 600 25 15,000 1,500 24.00 3600025-03-05 1,000 24 24,000 500 24.00 12,000<TOP>24. Answer: (d)Reason: Both direct and indirect labour as well as power and light form part of the manufacturing cost.Advertising expenses come under selling and distribution cost and hence not a manufacturing costto be included in the cost of goods sold.<TOP>25. Answer : (b)Reason : Although patent is a capital expenditure, renewal fee paid for patent is treated as revenueexpenditure.<TOP>26. Answer : (e)Reason : Cost of purchase of raw-material is purchase price plus duties and taxes plus freight inward minusdiscount and duty draw back.<TOP>27. Answer : (c)

Reason : Long term investment is not a fixed asset. Buildings, Furniture, Equipment and Machinery arefixed assets which also referred to as property.<TOP>28. Answer : (a)Reason : When goods are sold subject to approval by buyer, revenue should be recognized when goods havebeen formally accepted by the buyer.<TOP>29. Answer : (d)Reason : Stock of cars is a current asset for a car manufacturing company. Land and Building, machinery,office furniture and Patents are fixed assets.<TOP>30. Answer : (b)Reason : Payment of Municipal taxes is a revenue expenditure.<TOP>31. Answer : (a)Reason : Purchase of a truck is a capital expenditure. Replacement of old tyres and tubes, cost of repair, androad tax paid are revenue in nature.<TOP>32. Answer : (c)Reason : Repayment of short term loan is shown as a decrease in cash (c). Therefore, alternative (c) is thecorrect answer. It is not a source of working capital. Therefore, alternative (a) is not the correctanswer. It is shown as increase in cash (b), is also not a correct answer. Does not affect the workingcapital (d) is also not a correct answer, since it is affecting the working

capital. Is not shown eitheras a source or a use of funds (e) is also not the correct answer. Therefore, alternative (c) is thecorrect answer.<TOP>33. Answer : (c)Reason : Window-dressing implies showing a better position than the true and fair view of accounts.<TOP>34. Answer : (b)Reason :Rs.Profit for the year 2004-2005 2,30,000Add: Rent (not relevant if the owner of the premises operates the business) 1,20,000Adjusted maintainable profits 3,50,000Capital employed by Dinakar 20,00,000Add: Value of premises 4,00,000Total capital employed 24,00,000Normal profit (12% of Rs.24,00,000) 2,88,000Super profits (Rs.3,50,000 – Rs.2,88,000) 62,000<TOP>35. Answer : (e)Reason : Current assets include cash and cash equivalents, inventories, accounts receivable, bills receivable,and prepaid expenses. Income received in advance is a liability.<TOP>18and prepaid expenses. Income received in advance is a liability.36. Answer : (b)Reason : Accounting Standard Board was set up by the Institute of Chartered Accountants of India

<TOP>37. Answer : (c)Reason :Particulars Rs. Rs.Total Purchase price 22,50,000Less: Cash at bankCash on handAccounts receivableOther identifiable assets23,75012,25080,00018,50,00019,66,000Goodwill 2,84,000<TOP>38. Answer : (c)Reason : Corrected Trial BalanceParticulars Debit (Rs.) Credit(Rs.)Provision for doubtful debts 2,000Bank overdraft 16,540Sundry debtors 29,830Discount received 2,520Drawings 12,000Office furniture 21,550Purchases 1,09,230Rent and rates 3,140Salaries 25,200Opening stock 24,180Provision for depreciation on furniture 3,640Capital 45,910Sundry creditors 16,370Discount allowed 7,330General expenses 8,290Returns inward 3,300

Cash sales 60,800Credit sales 1,08,020Total 2,44,050 2,55,800Suspense (Debit) Rs.2,55,800 – Rs.2,44,050 = Rs.11,750.<TOP>39. Answer : (e)Reason : (No. of shares)Particulars Anil Vimal Sunil TotalLiability 30,000 40,000 30,000 1,00,000Less: Unmarked applications in theratio of 3:4:34,800 6,400 4,800 16,00025,200 33,600 25,200 84,000Less: Marked (Stamped) applications 22,000 24,000 28,000 74,0003,200 9,600 (2,800) 10,000Less: Division of Sunil’s surplus(in the ratio of 3:4) 1,200 1,600 2,800 –Final liability of each underwriter 2,000 8,000 Nil 10,000<TOP>40. Answer : (b )Reason : Since a transaction altogether has been omitted both debit and credit aspects have not beenrecorded. Hence the trial balance cannot disclose the existence of the above error.<TOP>41. Answer : (c)Reason : If a company reissues the forfeited shares at a discount, that discount amount will be debited toforfeited share account.<TOP>19According to the Companies Act, the company cannot debit share capital

account, profit and lossaccount, capital redemption reserve account and capital reserve account for the amount of discountallowed on reissue of forfeited shares.42. Answer : (d)Reason : The users of accounting information of a company are investors, bankers, creditors, shareholders,management, employees, customers, government and regulatory agencies who are interested in theaffairs of a company. The means of communicating information are financial statements; (d) i.e.profit and loss account and balance sheet. These are the means through which inferences like ratioanalysis are drawn. Prospectus (a) is the document inviting the public to subscribe to its securitiesand there may be certain accounting statistics, which are useful to the users. But it is notcomprehensive. Hence it is false. Trial balance (b) is a summary of all ledger accounts prepared ina tabular form from which no useful inference can be drawn. Hence, it is not the correct answer.Bank reconciliation statement (c) is a statement prepared by a business only in the event ofdifference between balance as per bank statement and bank column of cashbook, which has norelevance to the users. Hence, it is false. Statement of cash flow (e) is the statement depictinginflow and outflow of cash irrespective of nature of source and relevance of period. It is more orless of receipts and payments account of non-profit organization which has no significance to theusers and it is false.<TOP>43. Answer : (a)Reason : Balance Sheet of Universe Ltd. as on March 31, 2005Liabilities Rs. Assets Rs.Share capital 5,00,000 Land & building 4,90,000Less calls in arrears 30,000 4,70,000 Plant and machinery 2,20,000

Capital reserve 90,000 Investments 60,000P & L A/c 50,000 Sundry debtors 1,20,000Secured loans 3,00,000Less provision fordoubtful debts 10,0001,10,000Term Loan from Bank 1,00,000 Stock 96,000Sundry creditors 90,000 Loans to employees 50,000Outstanding expenses 500 Cash 4,000Interest received in advance 700 Bank 40,000Insurance premium paid inadvance1,200Preliminary expenses 30,00011,01,200 11,01,200<TOP>44. Answer : (c)Reason : In the books of the CompanyCash Book (Bank Column only)Date Particulars Rs. Date Particulars Rs.2004May 11To Share Application A/c (Beingapplication money received on 50,000shares @ Rs.5 each includingpremium of Rs.2 per share)2,50,000 2004Dec 31ByBalancec/d5,96,100June 30 To Share Allotment A/c(Being allotment money received on49,500 shares @ Rs.3 each)1,48,500Sept. 30 To Share First Call A/c(Being First call money received on

49,500 shares @ Rs.2 each)99,000Dec. 31 To Share Final Call A/c(Being Final Call money received on49,300 shares @ Rs.2 each)98,6005,96,100<TOP>45. Answer : (e)Reason : The equity shareholders get the dividend, depending on the income the company made and there isno fixed amount and the share premium received on issue of shares can be utilized in writing offthe preliminary expenses of the company. Hence, alternative II and III are not correct and theanswer is (e).<TOP>2046. Answer : (c)Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are notissued by a newly formed company (a) They are not the shares issued to the public at large. Theyare issued only to the existing shareholders. (b). It does not indicate the right of redemption ofshares issue (d). These are not the shares with cumulative dividend right.<TOP>47. Answer : (d)Reason : The discount on issue of debentures is a capital loss which will be written off over a period of time.(d) is the correct answer.<TOP>

48. Answer : (a)Reason : Value of right =r(M S)N r − +

Where r = No of rights issuedN = No of old sharesM = Market priceS = Issue price of rights∴ Value of rights =2(Rs.560 Rs.410)3 2 − + = Rs.60

<TOP>49. Answer : (d)Reason : When share is issued at less than par value, the difference is debited to an appropriately titleddiscount account, which is a contra equity share account. The discount account is not an expenseaccount nor does it appear on the income statement.<TOP>50. Answer : (e)Reason : Debentures can be redeemedI. At parII. At a premiumIII. At a discountIV. By conversion into stock.Thus, (e) the combination of (I), (II), (III) and (IV) is the correct answer.<TOP>51. Answer : (b )Reason : The cash book is to record all cash receipts and payments and the balance in cash book shows the

cash on hand.<TOP>52. Answer : (b)Reason : The profits earned by a subsidiary company before the holding company acquiring control over it isknown as capital profit. Any profit before acquisition date is the capital profit. Other profitsmentioned in (a), (c), (d) and (e) are not true.<TOP>53. Answer : (c)Reason : Profit and Loss Appropriation Account of Wye Ltd. for the year ended March 31, 2005Particulars Rs. Particulars Rs.To Income Tax Provision for the previous year 58,800 By Balance B/d 2,30,000To General Reserve 2,50,000 By Net Profit 6,62,800To Sinking Fund 1,50,000To Proposed dividend 1,00,000To Balance c/d 3,34,0008,92,800 8,92,800<TOP>54. Answer : (b)Reason: Net income is equal to revenues minus expenses. In this case, revenues equal Rs.48,200 andexpenses equal Rs.23,750 (Rs.13,200 + Rs.5,750 + Rs.1,100 + Rs.3,700). Net income is Rs.24,450(Rs.48,200 – Rs.23,750).<TOP>55. Answer : (d)Reason: Of the Rs.1,20,000 paid, Rs.40,000 was paid toward dividends in arrears and Rs.80,000 was paidtoward dividends for 2004-05. Of the Rs.80,000, Rs.45,000 was paid to

preference stockholders<TOP>21toward dividends for 2004-05. Of the Rs.80,000, Rs.45,000 was paid to preference stockholders(5,000 shares x Rs.100 per share x .09), leaving Rs.35,000 to be paid to common stockholders(Rs.80,000 – Rs.45,000).56. Answer : (b)Reason :Trading Account for the year endedDr CrParticulars Amount(Rs)Amount(Rs)Particulars Amount(Rs)Amount(Rs)1,90,0007,90,0005,87,00013,50,0002,17,000To Opening StockTo PurchasesLess: Distribution offree samplesAdd: Sale wronglycredited to purchasesTo Gross Profit7,80,00018,0007,62,00028,00015,67,000By Sales

Add: Amountwrongly creditedto purchasesBy Closing Stock13,22,00028,00015,67,000<TOP>57. Answer : (d)Reason : A company’s system of accounting for maintaining books of accounts must be on the accrual basisand according to the double entry system of accounting. The systems in other alternatives are nosystems at all or not recognized under the Act. Thus, alternative (d) is the correct answer.<TOP>58. Answer : (e)Reason : Called up capital The directors of the company called Rs.5 per share on 60,000 shares =Rs.3,00,000Less calls in arrear on 5,000 shares at the rate of Rs.2 = 10,000Paid-up capital to be considered for dividends = Rs.2,90,000Thus, (e) is the correct answer.<TOP>59. Answer : (e)Reason : Balance as on 31st March 2005 Rs.29,25,000Issue of debentures 12,000 Rs.12,00,000Less: discount 2.5% Rs. 30,000 Rs.11,70,000Issued preference shares 25,000 R s.25,00,000Rs.65,95,000Less: Redemption of 30,000 6% preference shares Rs.30,00,000Premium on redemption Rs. 1,50,000Dividend for one month R s. 15,000 Rs.31,65,000Balance as on 30 th April 2005 Rs.34,30,000

<TOP>60. Answer : (b)Reason : Once the unclaimed dividend is transferred to General Revenue a/c of the Central Government, anyshareholder entitled can claim such dividend from the Central Government.<TOP>61. Answer: (c)Reason: Dr. Creditors A/c Cr.Particulars Rs. Particulars Rs.To Cash 1,85,000 By Balance b/d 3,40,000To Purchases Returns 8,000 By Purchases 2,47,000To Cash Discount 4,800 By Bills Payable 8,000To Balance C/d 3,97,2005,95,000 5,95,000By Balance b/d 3,97,200<TOP>62. Answer : (a)Reason : Dr. Stock account Cr.<TOP>22Particulars Rs. Particulars Rs.To Opening balance 6,00,000To Purchases 34,00,000By Cost of goods sold(Rs.48,00,000 × 75%)36,00,000By Missing inventory (balancing figure) 75,000By Closing balance (physical count) 3,25,00040,00,000 40,00,000The estimated cost of missing inventory is Rs.75,000.63. Answer : (e)Reason : Under First in First out method of inventory valuation, the sale of

32 units will be accounted as,15 Units @ Rs.400 = Rs. 6,00017 Units @ Rs.450 = Rs. 7,65032 = Rs.13,650The balance of inventory is,3 Units @ Rs.450 = Rs. 1,35010 Units @ Rs.460 = Rs. 4,600Value of closing inventory Rs. 5,950<TOP>64. Answer : (a)Reason : Average Trading Profit Rs.2,58,900Normal Profits (-) Rs.2,23,800Super profits Rs. 35,100Value of goodwill = 3 x Rs.35,100 = Rs.1,05,300Amortisation – in five years = Yearly amortisation = Rs.1,05,300/5 = Rs.21,060.The journal entry will beProfit and Loss a/c. Dr. Rs.21,060To Goodwill a/c. Rs.21,060.<TOP>65. Answer : (d)Reason : Intangible assets are classified as either identifiable or unidentifiable. Goodwill (d), arising out ofpayment for reputation, brand name, location, loyality, etc. is an unidentifiable intangible asset.Hence, alternative (d) is false. It is described as a momentum or push (a) like the momentum of abody that continues its motion against a retarding force. It, though caused by factors which cannotbe easily and accurately quantified, must be assigned a value (a). It is a payment for somethingwhich places the payer in the position being able to earn more than he would be able to do by hisown unaided efforts (b). It is the difference between the value of a business as a whole and theaggregate of the fair value of its net assets (c). The basic characteristic of

an asset is said to haveproductivity. Since the goodwill helps in extra earnings, it is said to be a store of prospectiverevenue (e). Thus, alternatives (a), (b), and (e) are true.<TOP>66. Answer : (c)Reason :No of sharesAppliedNo ofSharesallottedAmountpaidAmount adjustedtowardsapplicationAmountavailableAmountrefundedRs. Rs. Rs. Rs.20,000 20,000 60,000 60,000 - -80,000 60,000 2,40,000 1,80,000 60,000 -20,000 - 60,000 - - 60,000<TOP>67. Answer : (a)Reason : The journal entry passed at the time of receipt of application money isBank account Dr. Rs.12,00,000To Share application account Rs.12,00,000<TOP>68. Answer : (b)Reason : When redeemable preference shares are due for redemption, the

entry passed is debit Redeemablepreference share capital account; Credit Redeemable Preference shareholders account.<TOP>2369. Answer : (e)Reason : After the life of the debenture no entry on account of discount on its issue should be shown in thebooks of accounts. Capital profit can be used to convert partly paid shares to fully paid shares andbonus shares cannot be made on partly paid-up shares. Hence, the answer is (e).<TOP>70. Answer: (b)Reason : In financial accountancy, a record is made only when the information can be expressed in monetaryterms. Recording, classification and summarization of business transactions requires a commonunit of measurement, which is taken as money. If events cannot be quantified in monetary terms,then they do not facilitate accounting. Hence, human resource cannot be taken as asset inaccounting books.<TOP>71. Answer : (e)Reason : If a transaction of cash purchase of stationery has not been entered in the cashbook it is an exampleof complete omission. (e) is the correct answer.<TOP>72. Answer : (d)Reason : Opening stock + Purchases = Cost of goods sold + closing stock= Rs.40,000 + Rs.1,10,000 = Rs.1,50,000

Cost of goods sold = Rs.1,50,000 less closing stock = Rs.1,50,000 – Rs.30,000 = Rs.1,20,000Sales are at a margin of 25% = 125 x Rs .1,20,000/100 = Rs.1,50,000.<TOP>73. Answer : (e)Reason : Net worth includes equity, general reserve, capital reserve and balance in Profit & Loss A/c.<TOP>74. Answer : (c)Reason : The damaged inventory should be valued at its net realizable value. Hence the answer is (c). Thecost price or market price whichever is lower is used in case of normal inventory but not in case ofdamaged inventory. The market value is not used in any case. The acquisition cost is used forvaluing fixed assets. The nominal value is not at all considered.<TOP>75. Answer : (e)Reason : AS-10 deals with the recognition of assets, determination of carrying amounts, depreciationimpairments to the carrying amounts. The cost should include expenses directly attributable to theasset and which result in an increase in the economic life of the asset. The financing costs relatingto deferred credits or to borrow funds are not capitalized to the extent that such costs relate toperiods after such assets are ready to put to use. All other expenses stated in other alternatives arecapitalized.<TOP

Financial Accounting (MB131): January 2005

Financial Accounting (MB131): January 2005

• Answer all questions.• Marks are indicated against each question.1. Under Hybrid system of accounting for revenues and expenses, the(a) Accrual basis for revenues and cash basis for expenses is used(b) Accrual basis for expenses and cash basis for revenues is used(c) Accrual basis is used both for revenues and expenses(d) Cash basis is used for both revenues and expenses(e ) Mercantile basis is used for both expenses and revenues.(1 mark)< Answer >2. If a concern proposes to discontinue its business from March 2004 and decides to dispose off all itsassets within a period of 4 months, the Balance Sheet as on March 31, 2004 should indicate the assets attheir(a) Historical cost (b) Net realizable value(c) Cost less depreciation (d) Cost price or market value, whichever is lower(e) Replacement cost.(1 mark)< Answer >3. Which of the following is not a use of fund?(a) Acquiring assets (b) Incurring expenses(c) Incurring losses (d) Incurring liabilities (e) Paying dividends.(1 mark)< Answer >4. Which of the following statements is true?(a) Capital of a firm is reduced by the outside borrowings(b) When there is no change in proprietor’s capital account, it is an indication of loss in the business(c) Nominal account refers to the tangible transactions(d) Real accounts relate to the assets of a business(e) Bills Payable is a nominal account.(1 mark)< Answer >5. Which of the following statements is false?(a) The convention of disclosure implies that all material information should be disclosed in theaccounts(b) The losses from the sale of capital assets need not be deducted from the revenue to ascertain the

net income(c) In recognition of the principle of materiality, unimportant items are either omitted or merged withother items(d) The convention of consistency facilitates, the comparison of the results of one accounting periodwith that of the other(e) The specific intervals of time for which the income or loss of the business is measuredperiodically, is called the accounting period.(1 mark)< Answer >6. The impact of prior period items is required to be shown as(a) Retained profits (b) Gross profits(c) Previous year profits (d) Current year profits (e) Notes to accounts.(1 mark)< Answer >7. Consider the following data pertaining to ABC Ltd. for the year 2003-2004:Opening balance of creditors Rs. 80,000Closing balance of creditors Rs. 90,000< Answer >2Total purchases during the year Rs.2,50,000If the creditors were paid to the tune of Rs.1,80,000 and discount received was Rs.8,000, the creditpurchases during the year 2003-2004 are(a) Rs.2,50,000 (b) Rs.1,98,000 (c) Rs.1,88,000 (d) Rs.1,70,000 (e) Rs.1,62,000.(1 mark)8. Consider the following information of Hyder Ltd. of Hyderabad for the year 2003-2004:Credit purchases during the year Rs. 9,25,000Payment made to creditors during the year Rs.10,00,000Closing balance of sundry creditors account Rs. 40,000Discount received Rs. 10,000The opening balance of sundry creditors account was(a) Rs.25,000 (b) Rs.45,000 (c) Rs.75,000 (d) Rs.2,05,000 (e) Rs.1,25,000.(1 mark)< Answer >

9. Consider the following data pertaining to Sun Ltd. for the month of December 2004:Particulars Rs.Purchase of goods for resale 2,10,000Freight in 30,000Freight out 25,000Returns outward 22,000Cost of goods available for sale is(a) Rs.1,88,000 (b) Rs.2,10,000 (c) Rs.2,18,000 (d) Rs.2,35,000 (e) Rs.2,40,000.(1 mark)< Answer >10. How does a mistake of overcasting of purchases day book affect the cost of sales and the profit?(a) Cost of sales is decreased and net profit is increased(b) Cost of sales is increased and net profit is not affected(c) Both cost of sales and gross profit are increased(d) Cost of sales is increased and gross profit is decreased(e) Both cost of sales and gross profit are decreased.(1 mark)< Answer >11. Which one of the following is a wrong entry in listing out the under mentioned accounts in the TrialBalance of a business?(a) Plant & machinery - debit column(b) Discount received - credit column(c) Sales - credit column(d) Carriage outward - credit column(e) Interest paid - debit column.(1 mark)< Answer >12. As on March 31, 2004, the overdraft balance of Mr.X as per bank pass book is Rs.20,000. The passbook balance did not agree with the balance as per cash book. On scrutiny, the following omissions andcommissions were noticed:• A cheque for Rs.4,000 issued to Mr.Y has not been presented for payment till date• Mr.Z, a tenant, directly deposited into the bank account an amount of Rs.10,000 towards rent and

the same is not accounted in the cash book.• A cheque for Rs.15,000 deposited in the bank is not yet realised• The interest on debentures for this year, directly collected by the bank, amounted to Rs.10,000.The bank balance as per cash book is(a) Debit balance of Rs.23,500 (b) Credit balance of Rs.29,000(c) Credit balance of Rs.16,500 (d) Debit balance of Rs.5,500(e) Debit balance of Rs.16,500.< Answer >3(2 marks)13. The withdrawal of cash from the bank will figure in both the bank and the cash columns of a threecolumn cash book. Such entries are called(a) Contra entries (b) Continuous entries(c) Credit entries (d) Contingent entries (e) Adjusting entries.(1 mark)< Answer >14. The following errors were made by the accountant of a company while preparing the profit and lossaccount for the year 2003–2004:Salaries were overstated by Rs.15,000Repairs were understated by Rs. 7,000Income from investments was understated by Rs. 7,000The impact of the errors on the net profit for the year was(a) Rs.22,000 (overstated) (b) Rs.22,000 (understated)(c) Rs.15,000 (understated) (d) Rs.7,000 (understated)(e) Rs.7,000 (overstated).(1 mark)< Answer >15. What is the net effect of the under mentioned errors on the trial balance of a firm?I. Total of sales was taken as Rs.58,726 instead of Rs.58,762.II. A discount of Rs.52 allowed to Mr.X was not posted in the discount account.III. Sale of old furniture of Rs.130 was credited to Machinery account.IV. A credit sale of Rs.250 to Mr.S was posted twice in his account.(a) Credit total of trial balance will be more than that of debit total by Rs.234(b) Debit total of trial balance will be more than that of credit total by

Rs.234(c) Credit total of trial balance will be more than that of debit total by Rs.104(d) Debit total of trial balance will be more than that of credit total by Rs264(e) Debit total of trial balance will be more than that of credit total by Rs.286.(2 marks)< Answer >16. A credit sale of Rs.2,000 was wrongly entered in the purchases book. The impact of the mistake onprofit is, it(a) Decreases the gross profit by Rs.2,000 (b) Increases the gross profit by Rs.2,000(c) Decreases the gross profit by Rs.4,000 (d) Increases the gross profit by Rs.4,000(e) Has no impact.(1 mark)< Answer >17. Goods worth Rs.750 have been purchased from S & Co. But while posting the entry, the credit wasgiven to R & Co. The total of credit side of the trial balance is Rs.43,570. Assuming that, this is the onlyerror, indicate the total of the debit side of the trial balance before rectification.(a) Rs.43,570 (b) Rs.44,420 (c) Rs.42,820 (d) Rs.44,320 (e)Rs.42,070.(1 mark)< Answer >18. Consider the following data pertaining to Joy Ltd. for the year ended March 31, 2004:Cash sales Rs 4,00,000Decrease in inventory Rs. 40,000Plant & Machinery Rs.1,70,000Rent received Rs. 55,000Purchases Rs 2,85,000Sales commission paid Rs. 12,000The company noticed the following:• An amount Rs.2,500 is the amount of rent received in advance.• A credit purchase of Rs.15,000 was wrongly recorded in sales day book as Rs.51,000.

• The company has the practice of depreciating the Plant and Machinery at the rate of 15% perannum on straight line method. The original cost of the Plant and Machinery was Rs.2,00,000.< Answer >4• Sales commission was paid only to the extent of two thirds of the amount payable.Considering the above data and the additional information, the net profit of the company for the periodended March 31, 2004 was(a) Rs.18,000 (b) Rs.19,500 (c) Rs.13,500 (d) Rs.28,000 (e)Rs.18,500.(2 marks)19. There was a fire in the factory of Mr. Anand and goods worth Rs.10,000 were lost. However, Mr.Anand who was far-sighted, already insured the goods and the insurance company accepted the claim tothe extent of Rs.8,000. The treatment of this isI. Debit Profit and Loss Account by Rs.2,000II. Debit insurance company account by Rs.8,000III. Credit Trading Account by Rs.10,000IV. Deduct Rs.2,000 from closing stock(a) Only (I) above (b) Only (II) above(c) Only (III) above (d) (I), (II), (III) and (IV) above(e) (I), (II) and (III) above.(1 mark)< Answer >20. X Ltd. was showing a balance of Rs.30,000 to the debit of building account. It was sold for Rs.45,000.The gain on the sale of building was transferred to the profit and loss account, thus making the net profitequal to Rs.1,70,000. The profit from operations will be(a) Rs.2,15,000 (b) Rs.1,70,000 (c) Rs.1,55,000 (d) Rs.2,00,000 (e)Rs.1,40,000.(1 mark)< Answer >21. Consider the following extracts of the trial balance of Nilgiri Ltd. as on March 31, 2004:Particulars Rs.

Share Capital 5,76,90012%Bank loan 1,50,000Sundry creditors 50,000Bills payable 10,000Land & building 4,36,000Cash at bank 23,500Office equipment 1,99,700Furniture 2,00,000Closing stock 38,000Bills receivable 9,000Sundry debtors 55,000Petty cash 210Cash on hand 9,400For the year ending March 31, 2004, the following adjustments were effected• Depreciation on – Office equipment: Rs.19,970, Furniture:Rs.30,000• Reserve for discount on Sundry creditors is Rs.720. Provision for discount on Sundry debtors isRs.779• Sundry creditors include a debt of Rs.8,000 due to Mr.Madhukar who is also in the list of Sundrydebtors for the same amount• Accrued commission receivable amounted to Rs.13,000 and prepaid printing charges aggregatedto Rs.1,850, Accrued interest on bank loan is of Rs.15,000.After effecting the above adjustments, the net profit was Rs.1,33,731.The total of the Balance Sheet of the company as at March 31, 2004 was(a) Rs.9,36,911 (b) Rs.9,27,631 (c) Rs.9,26,911 (d) Rs.9,13,911 (e)Rs.9,26,970.(3 marks)< Answer >22. Consider the following data pertaining to Jagriti Ltd. as on March 31, 2004:Particulars Amount (Rs.) Amount (Rs.)Opening stock 90,000< Answer >5Opening stock 90,000Sales 6,35,000Purchases 4,56,000

Salaries 86,000Other expenses 73,000Fixed assets 5,00,000Sundry debtors 45,000Sundry creditors 32,000Cash and bank 53,000Share capital 6,00,000Short term loan 36,00013,03,000 13,03,000The value of stock as on March 31, 2004 is Rs.75,000. The company has the practice of chargingdepreciation on the fixed assets at the rate of 15% on written down value method. The total of liabilitiesside of balance sheet as on March 31, 2004 is(a) Rs.7,38,000 (b) Rs.6,68,000 (c) Rs.6,73,000 (d) Rs.5,93,000 (e)Rs.7,43,000.(2 marks)23. The amount earmarked for distribution to the shareholders is known as(a) Profit after tax (b) Retained earnings(c) Dividends (d) Operating profit (e) Profit before tax.(1 mark)< Answer >24. AB Ltd. follows perpetual inventory system. On March 31 every year, the company undertakes physicalstock verification. On March 31, 2004, the value of stock as per the records differed from the value asper the physical stock. On scrutiny, the following differences were noticed:• Stock register was overcast by Rs.6,000.• Goods purchased for Rs.10,000 were received and included in the physical stock but noentry was made in the books.• Goods costing Rs.30,000 were sold and entered in the books but the stock is yet to bedelivered.• Goods worth Rs.5,000 are returned to the suppliers but the same is omitted to be recorded.If the inventory is valued in the books at Rs.1,50,000, the value of physical inventory is(a) Rs.1,11,000 (b) Rs.1,89,000 (c) Rs.1,79,000 (d) Rs.1,59,000 (e)Rs.1,19,000.

(2 marks)< Answer >25. The following information pertains to Whitestar Ltd. for the year 2003–2004:Particulars April 1, 2003 March 31, 2004Inventory Rs. 72,000 Rs. 67,000Sundry debtors Rs. 47,000 Rs. 70,000Sundry creditors Rs. 40,000 Rs. 38,000Total of credit sales made during the year was Rs.6,75,000. The cost of goods sold of the company was80% of the sales.Cash collected from the customers during the year was(a) Rs.7,22,000 (b) Rs.6,98,000 (c) Rs.6,75,000 (d) Rs.6,52,000 (e)Rs.5,37,000.(1 mark)< Answer >26. Consider the following data pertaining to Wren Ltd. for the year 2003-2004:Particulars Rs.Provision for doubtful debts as on April 1, 2003 4,000Sundry debtors as on March 31, 2004 1,50,000Bad debts to be written off 10,000If a provision equal to 5% is to be created on the debtors’ balances, the charge against profit and loss< Answer >6account for the year ended March 31, 2004 is(a) Rs.3,500 (b) Rs.7,000 (c) Rs.11,000 (d) Rs.13,000 (e)Rs.17,500.(1 mark)27. Consider the following information pertaining to XYZ Ltd.:On April 01, 2003, the provision for bad debts account showed a balance of Rs.30,000. As on March 31,2004, the status of the following debtors is• Mr. A had become insolvent and only 40 paise in a rupee is expected to be realized out of hisestate in full settlement. He owed a total amount of Rs.20,000• Mr. B who owes an amount of Rs.10,000 became bankrupt and it was understood that no amountwill be recovered from him.

• Mr. C has agreed to pay Rs.3,000 as final settlement against his dues of Rs.10,000 and thebalance is irrecoverable.If the company decided to maintain the provision at Rs.35,000 as on March 31, 2004, the amount to bedebited to Profit and loss account, after considering the above, is(a) Rs.34,000 (b) Rs.29,000 (c) Rs.26,000 (d) Rs.35,000 (e)Rs.64,000.(1 mark)< Answer >28. Among the various methods for valuation of inventory, Specific Identification method is the mostsuitable method for valuation of(a) Coal (b) Textiles (c) Chemicals(d) Diamond Jewellery (e) Food products.(1 mark)< Answer >29. Which of the following is not classified as inventory in the financial statements?(a) Finished goods(b) Work-in-process(c) Stores and spares(d) Raw-materials and components(e) Advance payment made to suppliers for raw materials.(1 mark)< Answer >30. Consider the following data pertaining to a company for the year 2003-2004:Opening balance of sundry debtors Rs. 45,000Credit sales Rs.4,25,000Cash sales Rs. 20,000Cash collected from debtors Rs.4,00,000Closing balance of sundry debtors Rs. 50,000The bad debts of the company during the year are(a) Rs.40,000 (b) Rs.35,000 (c) Rs.30,000 (d) Rs.25,000 (e)Rs.20,000.(2 marks)< Answer >31. The cost price of a machine is Rs.1,20,000 and the depreciated value of the machine after 3 years will be

Rs.66,000. If the company charges depreciation under straight line method, the rate of depreciation willbe(a) 25% (b) 20% (c) 18% (d) 15% (e) 12%.(1 mark)< Answer >

ANS—

Financial Accounting (MB131): January 20051. Answer : (b )Reason : Accrual basis is used under hybrid system of accounting for expenses and cash basis is used for revenueused.<TOP>2. Answer : (b)Reason : Financial accounting principles assume the going concern concept and hence the fixed assets will bevalued at cost less depreciation. However, in the given case, the concern decided to close its operations.Hence, the fixed assets should be indicated in the balance sheet at net realizable value. Hence the answeris (b). The assets are not recorded at historical cost. Cost or market value, whichever is lower is used torecord stock-in-trade but not fixed assets. The replacement cost is irrelevant when the firm is going todiscontinue its operations.<TOP>3. Answer : (d)Reason : Incurring liability is a source of fund but not a use of fund. Acquiring assets, incurring expenses,incurring losses and paying dividends are all uses of funds.<TOP>

4. Answer : (d)Reason : Real accounts represent the assets and properties of a business is the correct statement and (d) is thecorrect answer.<TOP>5. Answer : (b )Reason : The losses from sale of capital assets should be deducted fom the revenue to ascertain the net incomeThe convention of disclosure implies that all material information should be disclosed in the accountsIn keeping with the principle of materiality unimportant items are either left out or merged with otheritems. The comparison of the results of one accounting period with that in the past is possible when theconvention of consistency is adhered to by the business. The income or loss of business is alwayscomputed with relevance to a specific period called the accounting period.<TOP>6. Answer : (e )Reason : Prior period items are to be debited to Profit &Loss A/c and its impact on the current year profit shouldbe shown in the notes to the accounts.<TOP>7. Answer : (b)Reason : Dr. Sundry Creditors Cr.Date Particulars Rs. Date Particulars Rs.2003-2004 To Cash 1,80,000 April 01, 2003 By Balance b/d 80,000To discount 8,000March 31, 2004 To Balance c/d 90,0002003-2004 By Purchases(balancing figure)1,98,0002,78,000 2,78,000<

TOP>8. Answer : (e)Reason : Rs.Payment made to creditors 10,00,000Discount received 10,000Closing balance 40,00010,50,000Less : Credit purchases 9,25,000Opening balance 1,25,000<TOP>9. Answer : (c)Reason : Cost of goods = Purchases – Returns outward + Freight in= Rs.2,10,000 – Rs.22,000 + Rs.30,000 = Rs.2,18,000<TOP>10. Answer : (d)Reason : A mistake of overcasting of purchases day book increases cost of sales and decreases gross profit. (d) is<TOP>18the correct answer. >11. Answer : (d)Reason : The thumb rule is that all expenses and assets are showing debit balances and incomes and liabilitiescredit balances. Carriage outward being an expense should be listed in debt column of the Trial Balance.<TOP>12. Answer : (b)Reason : Bank Reconciliation StatementParticulars Rs. Rs.Overdraft balance as per Pass book 20,000Add : Cheques issued to Mr. Y but not

presented for payment 4,000Rent deposited by Mr. Z directly into the bank 10,000Interest on debentures directly collected by bank 10,000 24,00044,000Less :Cheque deposited, yet to be realised 15,000 15,000Overdraft balance as per cash book 29,000<TOP>13. Answer : (a)Reason : The withdrawal of cash from the bank will figure in both and cash columns of a cash book and suchentries are called contra entries. (a) is the correct answer.<TOP>14. Answer: (c)Reason :Particulars Profit increased(Rs.)Profit decreased(Rs.)Salaries overstated (Profit understated) 15,000Repairs understated (Profit overstated) 7,000Income of investment understated (Profitunderstated)7,0007,000 22,0000Net profit understated/decreased 15,000 --22,000 22,000<TOP>15. Answer : (b)Reason : i. Difference in sales a/c because of taking Rs.58,726 instead of Rs.58,762=Rs.36 whereby credit isless by the amountii. Discount not debited Rs.52 on account of which debit balance is less by the amount

iii. Sale of old furniture credited to machinery a/c instead of furniture is not affecting the agreement oftrial balanceiv. Sale twice debited to S a/c has increased the debit balance by Rs.250So excess debit Rs.250 plus short credit of Rs.36 minus short debit Rs.52 makes debit total more byRs.234 of the Trial balance<TOP>16. Answer : (c)Reason : A credit sale of Rs.2,000 was wrongly entered in the purchases book. This mistake will result in adecrease in the gross profit of Rs.4,000.<TOP>17. Answer : (a)Reason :The mistake of posting of an item to the correct side of a wrong account will not affect the agreement of atrial balance . Thus, the total of credit side will be the total of debit side too. Thus, before and afterrectification the total of the debit side will be Rs.43,570. (a) is the correct answer.<TOP>1918. Answer : (c)Reason : Net Profit of Joy Ltd. for the year ending March 31, 2004 :Dr. Cr.Particulars Rs. Rs. Particulars Rs. Rs.To Purchases 2,85,000 By Cash sales 4,00,000Add : Omitted to be recorded15,000 3,00,000Less : Wrong Credit 51,0003,49,000To Decrease in inventory 40,000To Gross Profit 9,0003,49,000 3,49,000

To Sales Commission 12,000 By Gross Profit 9,000+ Accrued 6,000 18,000 By Rent received 55,000To Depreciation 30,000 Less : received in advance 2,500 52,500To Net Profit 13,50061,500 61,500The net profit is Rs.13,500<TOP>19. Answer : (e)Reason : When goods are lost and insurance company accepts the claim only to a certain extent, profit and lossaccount should be debited with net loss, Trading account will be credited with cost of goods lost andinsurance company account will be debited with the amount of claim accepted. Thus the entry isProfit and Loss account Dr. Rs.2,000Insurance company account Dr. Rs.8,000To Trading account Rs. 10,000<TOP>20. Answer : (c)Reason : The net profit Rs.1,70,000 – Rs.15,000(Profit on sale of building which is carried to P& L account(Rs.45,000 –Rs.30,000) = Rs.1,55,000. The profit from operations will be Rs.1,55,000.<TOP>21. Answer : (c)Reason : Balance Sheet of Nilgir Ltd as on March 31, 2003.Liabilities Rs. Assets Rs.Share Capital 5,76,900 Land & building 4,36,000Profit and loss account 1,33,731 Office equipment 1,99,70012% Bank Loan 1,50,000 Less : depreciation 19,970 1,79,730Add : Outstanding interest15,0001,65,000Furniture 2,00,000

Sundry creditors 50,000 Less : depreciation 30,000 1,70,000Less : Closing stock 38,000Debtors set off 8,000 Sundry debtors 55,000Provision for discounton creditors 720 41,280Less : Provision for discounton debtors779Creditors set off 8,000 46,221Bills payable 10,000 Bills receivable 9,000Cash at bank 23,500Petty cash 210Accrued commission 13,000Prepaid printing charges 1,850Cash on hand 9,4009,26,911 9,26,911<TOP>22. Answer : (b)Reason : Dr. Trading and profit and loss account for the year ended March 31, 2004 Cr.<TOP>20Particulars Rs. Particulars Rs.To Opening stock 90,000 By Sales 6,35,000To Purchases 4,56,000 By Closing stock 75,000To Gross profit 1,64,0007,10,000 7,10,000To Salaries 86,000 By Gross profit 1,64,000To other expenses 73,000 By Net loss 70,000To Depreciation 75,0002,34,000 2,34,000Balance sheet as on March 31, 2003Liabilities Rs. Assets Rs.Share capital 6,00,000 Fixed assets5,00,000Less : depreciation

75,0004,25,000Sundry creditors 32,000 Sundry debtors 45,000Short tem loan 36,000 Closing stock 75,000Cash and bank 53,000Net loss 70,0006,68,000 6,68,00023. Answer : (c)Reason : Dividends represent the amount earmarked to distribute to the shareholders. Hence (c) is the answer.The amount of taxes is to be deducted from profit before tax and the amount to be transferred to reservesand other appropriations, if any, need to be made from profits after tax. Operating profit is the amount ofprofit other than non-operating surplus. Interest, taxes, other appropriations should be made to operatingprofit. Hence this is not the amount earmarked for distribution to shareholders.<TOP>24. Answer : (c)Reason : Computation of inventory :Particulars Rs. Rs.Inventory value as per books 1,50,000Add Purchases received but not accounted 10,000Sales yet to be delivered 30,000 40,0001,90,000Less Returns outward 5,000Amount overcast in stock sheet 6,000 11,000Inventory as per physical stock 1,79,000<TOP>25. Answer : (d)Reason :Particulars Rs.Opening balance of sundry debtors 47,000Add : Credit sales 6,75,0007,22,000

Less : Closing balance of Sundry debtors 70,000Cash collected from customers 6,52,000<TOP>26. Answer : (d)Reason :Particulars Rs.Opening Provision 4,000Bad debts to be written off 10,000Shortfall of provision 6,000Provision required 5% of Rs.1,40,000 (Rs.1,50,000 – Rs.10,000) 7,000<TOP>21Provision required 5% of Rs.1,40,000 (Rs.1,50,000 – Rs.10,000) 7,000Charge against profit and loss account 13,00027. Answer : (a)Reason : Dr. Provision for Bad debts Account Cr.Date Particulars Rs. Date Particulars Rs.March 31,2004 To A 12,000 April 01, 2003 By Opening balance 30,000To B 10,000 March 31, 2004 By P & L a/c 34,000To C 7,000To Closing balance 35,00064,000 64,000<TOP>28. Answer : (d)Reason : For valuation of relatively expensive items whose physical identification at various stages is possible,Specific Identification method is most suited. Where the inventories are vast and physical identificationis difficult, the method is not advisable.<TOP>29. Answer : (e)

Reason : Advance payment made to suppliers for materials is not classified as inventory. Other items mentionedin (a), (b), (c) and (d) are classified as inventory in the financial statements as they are the componentsof inventory.<TOP>30. Answer : (e)Reason :Opening balance of Sundry debtors Rs. 45,000Add : Credit sales Rs.4,25,000Rs.4,70,000Less : Cash collected Rs.4,00,000Rs. 70,000Less : Closing balance of sundry debtors Rs. 50,000Bad debts Rs. 20,000<TOP>31. Answer : (d)

Financial Accounting (MB131): January 2006

Financial Accounting (MB131): January 2006

• Answer all questions.• Marks are indicated against each question.1. Different valuation bases are used in accounting and in this context, present value means(a) The amount that needs to be paid if the asset is to be acquired currently(b) The amount collectible in the event of the asset’s disposal in the normal course of business(c) The amount realizable under distress sale(d) The present discounted value of the future inflows that an item is expected to generate in thenormal course of business(e) The written down value of an asset.

(1 mark)< Answer >2. As per Accounting Standard a qualifying asset is(a) An asset which satisfies a particular condition(b) An asset that takes a long time to get ready for intended use or sale(c) An asset which qualifies for a particular rate of depreciation(d) An asset which qualifies to be a part of reconstruction(e) An asset that takes less than predicted time for intended use.(1 mark)< Answer >3. The total of all the current assets of Intelligent Limited is Rs.3,00,000. The following information is alsoavailable from the trial balance of the company.The only other current asset not included in the information above is closing stock. Its value must be(a) Rs.2,14,500 (b) Rs.2,04,500 (c) Rs.2,02,000(d) Rs.1,98,000 (e) Rs.2,41,050.(1 mark)Rs.Sundry debtors 30,500Current liabilities 16,400Provision for taxation 12,000Cash & bank balance 30,000Bills receivable 25,000Office typewriter 39,000< Answer >4. Which of the following branches of accounting primarily deals with processing and presenting data forinternal users?(a) Financial Accounting (b) Tax Accounting(c) Management Accounting (d) Inflation Accounting (e) Cost Accounting.(1 mark)< Answer >5. In which of the following areas the accounting policies tend to be uniform among enterprises?(a) Methods of Depreciation (b) Valuation of Inventories(c) Treatment of Goodwill (d) Treatment of Contingent Liabilities(e) Accounting for Cash.(1 mark)

< Answer >Suggested Answers with Examiner's Feedback Page 2 of 27file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/20066. Which of the following cost is not directly related to a specific contract?(a) Site labor cost(b) Cost of moving plant and equipment to and from a site(c) Research and Development cost(d) Supervision cost(e) Materials used.(1 mark)< Answer >7.The bank balance as per the bank statement on December 31, 2005 was(a) Rs.2,14,940 (credit) (b) Rs.1,34,940 (debit)(c) Rs.2,05,900 (debit) (d) Rs.2,05,240 (debit)(e) Rs.1,34,940 (credit).(2 marks)On December 31, 2005, the bank column of the cash book of Mercury Ltd. showed a creditbalance of Rs.1,62,000 which did not agree with the balance as per the bank statement. Onscrutiny the following omissions and commissions were noticed:• As per bank statement, a cheque of Rs.7,000 was deposited on December 24, 2005. Butno entry was made in the cash book• Receipt side of the cash column of the cash book was undercast by Rs.1,000• An amount of Rs.49,960 was credited by the bank on account of the proceeds of a chequefor Rs.50,000 deposited for collection. No entry was passed in the cash book for bankcharges• A cheque issued by a customer for Rs.5,300 was deposited in the bank on December24, 2005. But the same was dishonoured on December 29, 2005. No entry was passed inthe cash book for dishonour• The amount of bills receivable collected directly by the bank aggregated to Rs.35,000• The amount of bank charges of Rs.250 was recorded twice in the cash

book• A bill of Rs.80,000 discounted for Rs.70,960 was dishonoured by the bank, and notingcharges of Rs.150 was paid by the bank. No entry was made in the cash book.< Answer >8. ‘Outstanding salaries’ represents(a) A personal account (b) A real account(c) A nominal account (d) A deferred expense account (e) Anasset.(1 mark)< Answer >9. During the year 2004-2005 the opening stock and the closing stock of a company were Rs.1,20,000 andRs.1,00,000 respectively. If the cost of goods sold during the year was Rs.3,40,000, then the goodspurchased by the company were(a) Rs.4,60,000 (b) Rs.4,40,000 (c) Rs.3,60,000 (d) Rs.3,40,000 (e)Rs.3,20,000.(1 mark)< Answer >10. The following balances were extracted from the books of Silvergreen Ltd. during the year 2004 – 2005.The cost of goods sold during the year was Rs.9,00,000. The gross profit margin was 25%.Cash paid to creditors during the year was(a) Rs.9,20,000 (b) Rs.9,10,000 (c) Rs.8,90,000 (d) Rs.8,80,000 (e)Rs.8,70,000.(1 mark)Particulars April 1, 2004 March 31, 2005Sundry creditors Rs.80,000 Rs.100,000Inventory Rs.60,000 Rs. 50,000< Answer >Suggested Answers with Examiner's Feedback Page 3 of 27file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/200611. Consider the following information pertaining to Blue Sky Ltd. for the year 2004-2005:Total credit sales made during the year was Rs.6,75,000. The amount of discount allowed to the sundrydebtors during the period was Rs.2,800. The cost of goods sold of the

company was 80% of the sales.Cash collected from the sundry debtors during the year was(a) Rs.7,22,000 (b) Rs.6,95,200 (c) Rs.6,75,000 (d) Rs.6,49,200 (e)Rs.5,14,200.(2 marks)Particulars 1st April 2004 31st March 2005Inventory Rs.52,200 Rs.65,800Sundry debtors Rs.37,000 Rs.60,000Sundry creditors Rs.50,000 Rs.48,000< Answer >12. Carriage inward refers to the cost of transportation for(a) Purchase of materials (b) Sales of products (c) Return outwards(d) Return of unsold goods (e) Newly acquired machinery.(1 mark)< Answer >13. The process of transferring entries from journal to ledger is known as(a) Journalizing (b) Ledgerizing (c)Posting(d) Transferring (e) Appropriation.(1 mark)< Answer >14. The credit balance in the Bank account is(a) Current asset (b) A current liability (c)Capital(d) Profit (e) An expenditure.(1 mark)< Answer >15. From the point of view of a business concern which of the following A/c does not show credit balance?(a) Sales (b) Capital (c)Reserve(d) Commission paid (e) Rent Received.(1 mark)< Answer >16. The term “Imprest System” is used in relation to(a) Purchases book (b) Sales book (c) Petty cash book(d) Cash book (e) Returns inward book.(1 mark)< Answer >17. Which of the following journal entry passed in respect of the under

mentioned transactions is false?I. Pankaj commenced business with a capital of Rs.50000.II. Purchased goods from Krishna on credit Rs.40000.III. Purchased machinery from Rama on credit Rs.20000.IV. Paid to Krishna by cheque for purchases Rs.10000.V. Cash withdrawn from bank for office use Rs.5000.Rs. Rs.(a) Cash a/c Dr. 50,000To Pankaj’s capital a/c50,000(b) Purchase a/c Dr. 40,000To Krishna’s a/c< Answer >Suggested Answers with Examiner's Feedback Page 4 of 27file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/200640,000(c) Machinery a/c Dr. 20,000To Rama’s a/c20,000(d) Krishna’s a/c Dr. 10,000To Cash a/c10,000(e) Cash a/c Dr. 5,000To Bank a/c5,000.(1 mark)18. The total of debit side of trial balance of a company is Rs.2,45,000 and that of the credit side isRs.2,72,900. Subsequently the following mistakes are discovered.The total of the corrected trial balance is(a) Rs.2,74,900 (b) Rs.2,59,900 (c) Rs.2,75,100 (d) Rs.2,84,900 (e)Rs.2,82,800.(2 marks)ParticularsCorrect Amount(Rs.)Amount which appears in trialbalance (Rs.)Opening stock 40,500 40,600Advertisement expenses 15,000 15,000 (credit side)

Interest from investments 36,000 30,000Sundry creditors 76,000 80,000< Answer >19. Which of the following will not appear in Profit and Loss Account of a business?(a) Drawings (b) Bad debts(c) Provision for doubtful debts (d) Accrued expenses(e) Reserve for discount on sundry creditors.(1 mark)< Answer >20. Consider the following data pertaining to M/s. Ramu Enterprises as on March 31, 2005:Additional Information:Net profit of M/s. Ramu Enterprises for the year ended March 31, 2005 is(a) Rs.73,800 (b) Rs.72,300 (c) Rs.74,800 (d) Rs.76,200 (e)Rs.75,200.Particulars Rs.Credit sales 1,40,000Credit purchases 20,000Cash sales 20,000Cash purchases 70,000Wages paid 5,000Salaries paid 2,000Returns inward 3,000Returns outward 2,000Carriage inward 1,000Carriage outward 1,000Printing and stationery 600Gas, water and fuel 2,000Raw materials destroyed by fire 2,000ParticularsAs on April 01, 2004 As on March 31, 2005Rs. Rs.Inventory 27,000 40,000Outstanding wages 500 700Outstanding salaries 400 300< Answer >Suggested Answers with Examiner's Feedback Page 5 of 27file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/2006(2 marks)

21. The opening balance in the Provision for Bad & Doubtful A/c of a company is Rs.8,500 and bad debtswritten off in the year is Rs.1000. If the company wants to maintain the Provision for Bad & DoubtfulDebt @5% on its S. Debtors balance of Rs.1,10,000, the Profit & Loss A/c will be(a) Debited by Rs.6500 (b) Debited by Rs.2000(c) Credited by Rs.2000 (d) Credited by Rs.3000(e) Debited by Rs.3000.(2 marks)< Answer >22. When sale is Rs.4,80,000 gross loss is 25% on cost. Purchase of goods is Rs.3,50,000 and closing stockis Rs.60,000. The stock at the beginning would be(a) Rs.70,000 (b) Rs.94,000 (c) Rs.1,34,000 (d) Rs.3,50,000 (e)Rs.30,000.(1 mark)< Answer >23. If the profit is 25% of the cost price then it is(a) 25% of the sales price (b) 33% of the sales price(c) 20% of the sales price (d) 15% of the sales price(e) 17 % of the sales price.(1 mark)< Answer >24. A building standing in the books at Rs.30,000, was sold for Rs.45,000. The gain on the sale of buildingwas transferred to the profit and loss account, thus making the net profit to Rs.1,70,000. The profit fromoperations will be(a) Rs.2,15,000 (b) Rs.1,70,000 (c) Rs.1,55,000 (d) Rs.2,00,000 (e)Rs.1,40,000.(1 mark)< Answer >25. The book value of stock as on March 31, 2005 was Rs.130000.Goods worth Rs.6000 was destroyed infire on 15.3.’05 against which claim for Rs.4000 admitted by the Insurance Company. Which of thefollowing is the appropriate accounting treatment for the above transaction?(a) Debit Rs.4000 to Profit & Loss A/c and show Rs.4000 as claim receivable

on the asset side of B/S(b) Debit Rs.6000 to Profit &loss A/c and show Rs.4000 as claim receivable on the asset side of B/S(c) Deduct Rs.6000 from the value of closing stock; Debit Rs.2000 to P&L A/c and show Rs.4000 asclaim receivables on the asset side of B/S(d) Deduct Rs.6000 from the value of closing stock ; debit Rs.6000 to P&L A/c and show Rs.4000 asclaim receivables on the asset side of B/S(e) Debit Rs.2000 to P&L A/c and show Rs.4000 as claim receivables on the asset side of B/S.(2 marks)< Answer >26. Consider the following data pertaining to Jagriti Ltd. as on March 31, 2005:The value of stock as on March 31, 2005 is Rs.75,000. The company has the practice of chargingParticulars Amount (Rs.) Amount (Rs.)Opening stock 90,000Sales 6,35,000Purchases 4,56,000Salaries 86,000Other expenses 73,000Fixed assets 5,00,000Sundry debtors 45,000Sundry creditors 32,000Cash and bank 53,000Share capital 6,00,000Short term loan 36,00013,03,000 13,03,000< Answer >Suggested Answers with Examiner's Feedback Page 6 of 27file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/2006depreciation on the fixed assets at the rate of 15% on written down value method. The Net Profit/Lossand total of balance sheet as on March 31, 2005 is(a) Rs 70,000(Dr)- Rs.7,38,000 (b) Rs.70,000(Dr)- Rs.6,68,000(c) Rs 75,000(Cr) -Rs.6,73,000 (d) Rs75,000(Dr) - Rs.5,93,000(e) Rs.Nil -Rs.7,43,000.(2 marks)

27. Regarding adjustment for expenses and incomes in Balance-Sheet, which of the following statements isfalse?(a) Prepaid expenses are shown on the asset side(b) Income received in advance is shown on the asset side(c) Income earned but not received is shown on the asset side(d) Income accrued but not due is shown on the asset side(e) Outstanding liabilities for expenses are shown on the liability side.(1 mark)< Answer >28. Which of the followings is false?(a) Plant and machinery is a fixed asset(b) Bank balance is a current asset(c) Debentures is a current liability(d) Short term investment is a current asset(e) Fixtures is a fixed asset.(1 mark)< Answer >29. In retail inventory method, original selling price may be modified. If the selling price is lowered belowthe original selling price, it is known as(a) Markup (b) Markup cancellation (c) Net markup(d) Markdown (e) Net markdown.(1 mark)< Answer >30. If depreciation is calculated on the basis of formula, n(n+1)/2, then which one of the following methodsis adopted?(a) Diminishing value method (b) Annuity method(c) Sum of years digits method (d) Sinking fund method(e) Straight line method.(1 mark)

ANS—

1. Answer : (d)Reason : Present value is the discounted value of all future inflows an asset is expected to generate.2. Answer : (b)Reason : Accounting Standard 16 defines a qualifying asset as an asset that takes a long time to get ready for intended

use or sale3. Answer: (a)Reason: Total of all current assets = Rs. 3,00,000/-Total of current assets excluding stock= Sundry Debtors + Bills Receivable + Cash & Bank Balance= 30,500 + 25,000 + 30,000 = Rs. 85,500Value of closing stock = Rs. 3,00,000 – Rs. 85,500 = Rs. 2,14,5004. Answer : (c)Reason : Management accounting is the branch of accounting which primarily deals with processing and presentingdata for internal users. (c) is the correct answer.Suggested Answers with Examiner's Feedback Page 16 of 27file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/20065. Answer : (e)Reason : Methods of depreciation ,valuation of inventories, treatment of Goodwill and treatment of contingentliabilities differ from enterprise to enterprise6. Answer : (c)Reason : Research and Development cost cannot directly be attributed to a specific work. Site labor cost, cost ofmoving plant and equipment to and from a site , supervision cost and materials used can be related to specificcontract.7. Answer : (d)Reason : Bank Reconciliation Statement as on December 31, 2005Rs. Rs.Bank overdraft per the cash book 1,62,000Add : Cheque for Rs.50,000 deposited butcollection as per bank statement Rs.49,960 i.e.bank charges 40Cheque dishonoured as per the bank statement 5,300Bill for Rs.80,000 discounted for Rs.70,960dishonoured by the bank, noting charges beingRs.150 80,150 85,4902,47,490Less : Cheque deposited but not recorded inthe cash book 7,000Bills collected directly by the bank 35,000Bank charges recorded twice in the cash book 250 42,250Bank overdraft as per the pass book (Dr.) 2,05,240

8. Answer : (a)Reason : Outstanding salaries is the amount payable during a particular period which is not yet paid. It is PersonalAccount representing salaries due to employees. It is a representative personal account.9. Answer : (e)Reason :Particulars Rs.Closing stock 1,00,000Add : Cost of goods sold 3,40,0004,40,000Less : Opening stock 1,20,000Goods purchased 3,20,00010. Answer : (e)Reason :Note:Particulars Rs.Opening sundry creditors 80,000Add : Purchase during the year (Note) 8,90,0009,70,000Less : Closing sundry creditors 1,00,000Cash paid 8,70,000Suggested Answers with Examiner's Feedback Page 17 of 27file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/2006Rs.Cost of Goods sold 9,00,000Add: Closing stock 50,0009,50,000Less: Opening stock 60,000Purchases 8,90,00011. Answer : (d)Reason :Particulars Rs.Opening balance of sundry debtors 37,000Add : Credit sales 6,75,0007,12,000Less : Closing balance of Sundrydebtors60,0006,52,000

Less : Discount allowed 2,800Cash collected from sundry debtors 6,49,20012. Answer : (a)Reason : Carriage inward expense is related to the carrying cost of material purchased. If it is incurred for carryingnew assets, it should be capitalized to the assets value. Carrying cost relating to sales of products, returnoutwards and return of unsold goods will not be treated as carriage inward expenses. Hence, (a) is correct13. Answer : (c)Reason : The process of transferring entries from journal to ledger is known as posting. Hence the answer is (c). Theprocess of recording the transaction in the book of original entry is journalizing. Taking over the balance innominal accounts to profit and loss account is transferring. The allocation of profit to reserves is known asappropriation. There is no term called ledgerizing.14. Answer : (b)Reason : A credit balance in a bank account denotes a current liability. (b) is the correct answer.15. Answer : (d)Reason : Commission paid is an expense and should show a debit balance16. Answer : (c)Reason : The term “imprest system” is used in relation to petty cash book. (c) is the correct answer.17. Answer : (d)Reason : Paid to Krishna by cheque for purchases Rs.10000- the correct journal entry is to debit Krishna’s a/c andcredit bank a/c. All the other journal entries are correctly passed.18. Answer : (b)Reason :Particulars Rs.Total of debit side of trial balance 2,45,000Add : Advertisement expenses 15,000Less : Opening stock (excess taken) 100Total of trial balance (Debit side) 2,59,900Particulars Rs.Total of credit side of trial balance 2,72,900Add : Interest on investments (less taken) 6,000

Less : Sundry creditors (excess taken) 4,000Less : Advertisement expenses (wrongly taken) 15,000Total of trial balance (credit side) 2,59,900Suggested Answers with Examiner's Feedback Page 18 of 27file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/200619. Answer : (a)Reason : Profit and loss account is an income statement which depicts all incomes/gains and expenses/losses during anaccounting period. Drawings are neither an income nor an expense to be recorded in profit and loss account.Thus, (a) is the correct answer. The items in other alternatives are either expenses or accrued expenses orprobable expenses for which provision is to be created and probable income of discount on sundry creditors.The depreciation, bad debts and provision for doubtful debts and accrued expenses appear in the profit andloss account and provision for income i.e. provision for discount on sundry creditors. Hence, (a) is the correctanswer.20. Answer : (b)Reason : Books of Ramu EnterprisesDr. Trading Account for the period ending March 31, 2005 Cr.Particulars Rs. Rs. Particulars Rs. Rs.To Opening stock 27,000 By Sales :To Purchases Cash 20,000Cash 70,000 Credit 1,40,000Credit 20,000 1,60,00090,000 (–) Returnsinward3,000 1,57,000(–) Goods lost 2,000 By Closingstock40,000(–) Returns outward 2,000 86,000To Wages 5,000(+) Outstanding as on March31, 2005 7005,700(–) Outstanding as on April 01,2004

500 5,200To Carriage inward 1,000To Gas, water, fuel 2,000To Gross Profit 75,8001,97,000 1,97,000By Grossprofit75,800Carriage outward 1,000Printing and stationery 600Salaries paid 2,000Less outstanding on 1.4.2004 4001,600Add outstanding on 31.3.2005 3001,900Net Profit 72,30075,800 75,80021. Answer : (c)Reason : The formula for passing adjusting entry in respect of bad & doubtful debt is bad debt written off plusrequired provision minus old provision. Required provision @5% on 110000=5500 plus bad debtRs.1000=6500. The old provision is Rs.8500.The excess of provision already made can be reversed bycrediting Rs.2000 to the Profit & Loss A/c.22. Answer : (d)Reason : The cost of goods sold at a gross sale of 25% = Rs.4,80,000 x 100 / 75 = Rs.6,40,000Opening stock + Purchases = Cost of goods sold + Closing stock= Rs.3,50,000 = Rs.6,40,000 + Rs.60,000 = Rs.3,50,000Opening stock Rs.3,50,000. (d) is the correct answer.Suggested Answers with Examiner's Feedback Page 19 of 27file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/200623. Answer : ( c)Reason : If the profit is 25% of the cost price then it is 20% of the sales price. Suppose the cost price is Rs.100, profitis Rs.25 and sales price is Rs.125. Profit in percentage is 25/125=20% of sales price24. Answer : (c)Reason : The net profit Rs.1,70,000 – Rs.15,000(Profit on sale of

building which is carried to P& L account(Rs.45,000 –Rs.30,000) = Rs.1,55,000. The profit from operations will be Rs.1,55,000.25. Answer : (c)Reason : Deduct Rs.6000 from the value of closing stock; Debit Rs.2000 to P&L A/c and show Rs.4000 as claimreceivables on the asset side of B/S –To estimate the actual stock held, value of stock destroyed in fire to bededucted. As against the loss of Rs.6000 claim admitted is only Rs.4000.The difference of Rs.2000 to betreated as a loss and taken to P&L A/c. As the claim amount is receivable it is to be taken on the asset side ofB/s26. Answer : (b)Reason : Dr. Trading and profit and loss account for the year ended March 31, 2005 Cr.Balance sheet as on March 31, 2005Particulars Rs. Particulars Rs.To Opening stock 90,000 By Sales 6,35,000To Purchases 4,56,000 By closing stock 75,000To Gross profit 1,64,0007,10,000 7,10,000To Salaries 86,000 By Gross profit 1,64,000To other expenses 73,000 By Net loss 70,000To Depreciation 75,0002,34,000 2,34,000Liabilities Rs. Assets Rs.Share capital 6,00,000 Fixed assets 4,25,000Sundry creditors 32,000 Sundry debtors 45,000Short tem loan 36,000 Closing stock 75,000Cash and bank 53,000Net loss 70,0006,68,000 6,68,00027. Answer : (b)Reason : Income received in advance is a liability and shown on the liability side. All other statements viz, prepaidexpenses shown on asset side, income earned but not received shown on asset side, income accrued but notdue shown on asset side and outstanding liabilities for expenses shown on liability side are true.

28. Answer : (c )Reason : Debenture issued is a long term liability.29. Answer : (d)Reason : Markdown means selling price being lowered below the original selling price. Selling price below theoriginal selling price cannot be mark-up, markup cancellation, net mark-up or net markdown. Hence (d) iscorrect.30. Answer : (c)Reason : Under, Sum of Digits method of depreciation, depreciation is calculated on the basis of formula n(n+1)/2. (c)is the correct answer.

Financial Accounting (MB131): July 2005

Financial Accounting (MB131): July 2005

· Answer all questions.· Marks are indicated against each question.1. The retirement of the chairman of a company, even though has far reaching consequences on the healthof the company, is not accounted for in the books of account in recognition of(a) Conservatism concept (b) Business entity concept(c) Money measurement concept (d) Going concern concept (e) Materiality concept.(1 mark)< Answer >2. Which of the following statements is prepared as of a particular date?(a) Profit and loss account (b) Balance sheet(c) Cash flow statement (d) Income and expenditure statement(e) Profit and loss appropriation account.(1 mark)< Answer >3. The fixed assets are recorded at their cost, in recognition of(a) Matching concept (b) Money measurement concept(c) Cost concept (d) Accrual concept (e) Materiality concept.(1 mark)< Answer >

4. If the sales day book of a business is undercast, it will(a) Decrease gross profit but will not have any impact on net profit(b) Decrease gross profit as well as net profit(c) Decrease gross profit and increase net profit(d) Increase gross profit as well as net profit(e) Increase gross profit but will not have any impact on net profit.(1 mark)< Answer >5. Which of the following accounts is closed at the end of the financial year?(a) Salaries account (b) Plant and machinery account(c) Debentures account (d) Sundry debtors account (e) Investments account.(1 mark)< Answer >6. Which of the following is a liability of a firm?(a) Debit balance of discount column of cashbook(b) Credit balance of bank passbook(c) Debit balance of bank column of cashbook(d) Debit balance of cash column of cashbook(e) Credit balance of bank column of cashbook.(1 mark)< Answer >7. Consider the following information of Hyder Ltd. of Hyderabad for the year 2004-2005:Credit purchases during the year Rs. 9,25,000Payment made to creditors during the year Rs.10,00,000Closing balance of sundry creditors account Rs. 40,000< Answer >Discount received Rs. 10,000The opening balance of sundry creditors account was(a) Rs.25,000 (b) Rs.45,000 (c) Rs.75,000(d) Rs.2,05,000 (e) Rs.1,25,000.(1 mark)8. Consider the following data pertaining to RSV & Co. for the year 2004-2005:Opening stock Rs.1,00,000Closing stock Rs. 90,000Opening stock and closing stock includes stock of stationery, amounting to Rs.4,000 and Rs.3,000respectively. General expenses include payment for stationery of Rs.36,000. Credit purchases of

stationery for Rs.9,000 recorded as ordinary purchases. Stationery of Rs.5,000 is consumed by theproprietor.The amount of stationery consumed to be charged to Profit and Loss account of RSV & Co. for the yearending March 31, 2005 is(a) Rs.46,000 (b) Rs.41,000 (c) Rs.47,000 (d) Rs.23,000 (e) Rs.39,000.(2 marks)< Answer >9. A credit sale of goods to Shivendra should be debited to(a) Sales account (b) Goods account(c) Shivendra’s account (d) Purchases account (e) Cash account.(1 mark)< Answer >10. Consider the Balance Sheet of Net Services Ltd. as on March 31, 2005:Liabilities Rs. Assets Rs.Share capital 1,00,000 Cash at bank 42,000Profit and Loss account 19,000 Sundry debtors 90,000Sundry creditors 25,000 Closing stock 10,000Prepaid Rent 2,000Total 1,44,000 Total 1,44,000Following is the summary of transactions that occurred during the month of April 2005:Rs.· Collections from debtors 88,000· Payments to creditors 24,000· Purchase of inventory on credit 80,000· Sale of inventory on credit (cost Rs.70,000) 85,000· Recognition of rent expenses in the month of April 2005 1,000· Salaries paid by cheque in the month of April 2005 8,000The company has the practice of routing transactions through bank account.Considering the above Balance Sheet and the additional information, the cash at bank as on April 30,2005 was(a) Rs.97,000 (b) Rs.1,02,000 (c) Rs.98,000 (d) Rs.90,000 (e) Rs.1,06,000.(2 marks)< Answer >11. Which of the following errors causes a mismatch in trial balance?(a) Omission of an entry in the journal

(b) Recording of wrong amount in the journal(c) Recording of wrong account in the journal< Answer >(d) Posting of wrong amount in the ledger in one account concerned(e) Posting of correct amount to the correct side of wrong account.(1 mark)12. Consider the following data pertaining to Lairs Ltd. for the month of June 2005:Purchases Issues BalanceDate Quantity(Kg.)Rate(Rs.)Quantity(Kg.)Quantity(Kg.)Rate(Rs.)01-06-2005 500 22.8002-06-2005 400 2410-06-2005 600 2525-06-2005 1,000If the company uses weighted average method for inventory valuation, the value of inventory as on June30, 2005 is(a) Rs.11,967 (b) Rs.12,000 (c) Rs.12,500 (d) Rs.11,400 (e) Rs.36,000.(2 marks)< Answer >13. The following is the trial balance of Mythili Ltd. as on March 31, 2005:Particulars Debit (Rs.) Particulars Credit (Rs.)Land & building 3,65,000 Equity share capital(Face value Rs.10 each)5,00,000Plant & machinery 6,72,000 Sundry creditors 1,50,000Furniture & fixtures 2,85,000 Sales 16,15,000Sundry debtors 1,80,000 Purchases returns 49,000Purchases 6,72,000Bank overdraft(Rate of Interest-13% per annum) 3,00,000

Sales returns 22,000 Discount received 21,000Opening stock(as on April 01, 2004) 48,000 Reserves & Surplus 3,12,000Bad debts 19,000 12% Debentures 2,80,000Salaries and wages 5,10,000Interest on bank overdraft 30,000Advertisement 1,20,000Annual fire insurancepremium (with effect fromMay 01, 2004)18,000Investments (8% p.a.) 2,00,000Discount allowed 12,000General expenses 54,000Cash at bank 20,000Total 32,27,000 Total 32,27,000The company has furnished the following additional information:< Answer >§ Closing stock as on March 31, 2005 was Rs.50,000.§ Depreciation is to be provided on plant & machinery at the rate of 20% per annum and on furnitureand fixtures at the rate of 12% per annum.§ A provision for discount on debtors is to be made at the rate of 5% on sundry debtors.§ Goods worth Rs.5,000 are distributed as samples.Considering the above trial balance and the additional information, the net profit of the company for theyear ended March 31, 2005 was(a) Rs.58,900 (b) Rs.27,300 (c) Rs.37,300 (d) Rs.41,300 (e) Rs.49,900.(3 marks)14. On April 01, 2004, Sneha Limited showed a balance of Rs.5,600 to the credit of Provision for bad anddoubtful debts. On March 31, 2005, the Sundry Debtors showed a balance of Rs.2,50,400. Out of thetotal debtors, the status of the following debtors is as follows:Sinha Rs.3,800 - identified as bad debt and is to be written offGupta Rs.9,000 - expected to realize only 80%Patel Rs.8,000 - expected to realize only 60%Iyer Rs.5,500 - filed insolvency petition and the recovery chances are remote.

All other debts as on the date of finalisation of accounts are estimated to be good. The companymaintains a suitable provision for doubtful debts. The amount debited to the profit and loss account inrespect of provision for bad and doubtful debts for the year ended March 31, 2005 was(a) Rs.14,300 (b) Rs.8,700 (c) Rs.15,700 (d) Rs.10,500 (e) Rs.4,900.(2 marks)< Answer >15. The capital account of Mr. Ganesh showed a balance of Rs.2,50,000 on April 01, 2004. During the year2004-05, Mr. Ganesh brought in fresh capital of Rs.50,000 and withdrew Rs.10,000 by way of cash. Healso took goods worth Rs.5,000 for personal use. If capital account of Mr. Ganesh showed a balance ofRs.3,10,000 on March 31, 2005, the profit for the year was(a)Rs.30,000 (b) Rs.35,000 (c) Rs.40,000 (d) Rs.25,000 (e) Rs.27,000.(1 mark)< Answer >16. Current liabilities are such obligations which are to be satisfied within a period of(a) Three months (b) Six months (c) One year(d) Two years (e) Three years.(1 mark)< Answer >17. Consider the following data pertaining to AB Ltd.:Particulars Rs.Cost of the machinery purchased on April 01, 2004 6,60,000Installation charges 40,000Market value as on March 31, 2005 8,00,000While finalizing the annual accounts, if the company values the machinery at Rs.8,00,000, which of thefollowing concepts is violated by the company?(a) Cost (b) Matching (c) Realisation(d) Periodicity (e) Business Entity.(1 mark)< Answer >18. Which of the following statement is false?(a) Capital Reserve arises out of capital profits(b) Revenue Reserves are available for distribution as profit

(c) Specific Reserve is created out of capital profit(d) General Reserves are not created for any specific purpose(e) Credit balance in Profit & Loss Account is a Revenue Reserve.< Answer >(1 mark)19. Which of the following is not a contingent liability?(a) Claims against the company not acknowledged as debts(b) Arrears of fixed cumulative dividends(c) Prolonged illness of Chairman(d) Liability on account of bills discounted(e) Uncalled liability on shares partly paid.(1 mark)< Answer >20. Consider the following data pertaining to Wren Ltd. for the year 2004-2005:Particulars Rs.Provision for doubtful debts as on April 01, 2004 4,000Sundry debtors as on March 31, 2005 1,50,000Bad debts to be written off 10,000If a provision equal to 5% is to be created on the sundry debtors, the charge against profit and lossaccount for the year ended March 31, 2005 is(a) Rs.3,500 (b) Rs.7,000 (c) Rs.11,000 (d) Rs.13,000 (e) Rs.17,500.(1 mark)< Answer >21. The opening inventory is(a) Net purchases minus closing inventory(b) Net purchases minus the cost of goods sold(c) Total goods available for sale minus net purchases(d) Total goods available for sale minus the cost of goods sold(e) Total goods available for sale minus closing inventory.(1 mark)< Answer >22. Consider the following data with regard to plant and equipment pertaining to Mittal Ltd.:Cost of the plant (Rs.) 5,00,000Installation charges (Rs.) 30,000Estimated useful life (years) 8Scrap value (Rs.) 50,000If the firm follows the straight line method of depreciation, the rate of

depreciation is(a) 5.25% (b) 6.00% (c) 9.50% (d) 10.10% (e)11.32%.(2 marks)< Answer >23. Which of the following is a capital expenditure?(a) Salaries (b) Purchase of computer for office use(c) Salaries to computer staff (d) Depreciation on computer(e) Royalty paid.(1 mark)< Answer >24. The profits of Karunya Ltd. for the past 5 years are as under:Year Rs.2000-2001 75,0002001-2002 3,00,0002002-2003 3,46,5002003-2004 4,53,000< Answer >2004-2005 7,42,500The company noticed the following errors, while computing the weighted average profits for thepurpose of valuation of goodwill:· The profit for the year 2004-2005 includes profit of Rs.22,500 on sale of plant.· The depreciation charged for the year 2004-05 was excess by Rs.3,000.The weighted average profit of the company to be considered for valuation of goodwill is(a) Rs.4,76,100 (b) Rs.4,82,600 (c) Rs.3,83,400(d) Rs.5,00,100 (e) Rs.4,74,100.(2 marks)25. When purchase consideration is greater than Net Asset Value, it is to be adjusted against(a) Capital Reserve (b) Goodwill (c) Profit & Loss Account(d) Preliminary Expenses (e) Promoters’ funds.(1 mark)< Answer >26. The Balance Sheet of Snigdha Ltd. as on March 31, 2005 is as under:Liabilities Rs. Assets Rs.Share capital: Land and building 4,00,000Equity shares of Rs.100 each 5,00,000 Plant and machinery 3,00,000

12% Preference shares of Rs.10 each(issued at a discount of 10%)3,00,000 Furniture and fixtures 2,50,000Reserves and surplus: Investments 2,25,000General reserve 1,50,000 Sundry debtors 1,00,000Profit and loss account 2,50,000 Inventories 1,50,00018% Debentures 2,00,000 Cash 50,000Sundry creditors 50,000Bank overdraft 25,00014,75,000 14,75,000The 12% preference shares are redeemable at a premium of 10% during the month of April 2005. Thecompany wishes to maintain the cash balance at Rs.25,000. For the purpose of redemption of preferenceshares, it proposed to sell the investments for Rs.2,00,000. The company proposes to issue sufficientnumber of equity shares of Rs.100 each at a premium of 5% to raise required cash resources. Thenumber of equity shares to be issued is(a) 1,500 (b) 1,000 (c) 685 (d) 2,000 (e) 750.(2 marks)< Answer >27. Great Tyres Ltd. issued 80,000 shares of Rs.10 each at a premium of 25% payable Rs.2 on application,Rs.4.50 (including premium) on allotment and the balance on call. Applications were received for1,92,800 shares and allotment was made as under:· Applicants for 50,800 shares were allotted 30,480 shares pro-rata.· Applicants for 96,000 shares were allotted 28,400 shares pro-rata.· Applicants for 46,000 shares were allotted 21,120 shares pro-rata.The surplus money, if any, would be refunded only after utilizing the excess received on applicationtowards the payment of allotment dues. The amount refunded to the applicants is(a) Rs.Nil (b) Rs.7,400 (c) Rs.1,92,800(d) Rs.1,34,400 (e) Rs.2,25,600.(2 marks)< Answer >28. Consider the following information pertaining to M/s.Rainbow Ltd. as on March 31,2005: < Answer >

Liabilities Rs. Assets Rs.Share capital 5,00,000 Land and building 3,60,000(5,000 shares Rs .100 each) Plant and machinery 2,70,000Reserves and surplus 4,60,600 Furniture 1,75,000Sundry creditors 50,000 Inventories 90,000Short term loan 80,000 Sundry debtors 60,000Loans and advances 75,000Cash on hand 10,000Cash at bank 35,000Preliminary expenses 15,60010,90,600 10,90,600The assets are to be revalued as under for the purpose of valuation of shares:· Plant and machinery is to be revalued downwards by 10%.· Furniture is to be valued at Rs.1,80,000.· Provision of 5% is to be provided for doubtful debts.The value of share of M/s.Rainbow Ltd. is(a) Rs.220 (b) Rs.197 (c) Rs.184 (d) Rs.223 (e)Rs.192.(2 marks)29. The authorized share capital of Growth Ltd. is 10,00,000 shares of Rs.10 each. The company isplanning to raise funds by making rights issue of equity shares to finance its expansion. TheIssued/Called-up/Paid-up share capital of the company is 5,00,000 shares of Rs.10 each. The value ofits share is Rs.42. The company offers to its shareholders the right to buy 2 shares at Rs.11 each forevery 5 shares held by them.The share capital outstanding after the rights issue is(a) Rs.70,00,000 (b) Rs.1,34,00,000 (c) Rs.50,00,000(d) Rs.72,00,000 (e) Rs.1,00,00,000.(2 marks)< Answer >30. The share capital of Jade Ltd. consists of 2,000 equity shares of Rs.10 each, Rs.5 paid -up and 500 6%cumulative preference shares of Rs.10 each fully paid. It is proposed that the Wye Ltd. shall purchasethe whole of the capital of Jade Ltd.The Balance Sheet of Jade Ltd. shows assets (exclusive of goodwill)

Rs.30,000, outside liabilitiesRs.8,000, profit and loss account credit Rs.7,000 and paid-up capital Rs.15,000.The assets and liabilities are accepted at Balance Sheet figures and there are no arrears of preferencedividend.The value of equity share in Jade Ltd. is(a) Rs.11.00 (b) Rs .8.50 (c) Rs.5.00(d) Rs.10.00 (e) Rs.12.50.(2 marks)< Answer >31. Tantrum Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per share payableas follows:On application – Rs.5 (including premium)On allotment – Rs.4On final call – Rs.3Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. Beejay to whom 60 shareswere allotted, failed to pay allotment money and call money. Mr. Raj, the holder of 100 shares, failed topay call money. All these shares were forfeited after proper notice.On forfeiture, the amount debited to share capital account and share premium account respectively is(a) Rs.1,600; Rs.320 (b) Rs.1,400; Rs.nil(c) Rs.1,600; Rs.nil (d) Rs.1,120; Rs.320< Answer >(e) Rs.1,400; Rs.320.(2 marks)32. Lotus Ltd. has issued 10% Debentures at a discount of 10% redeemable at a premium of 10% after fiveyears. Which of the following statements is true with regard to the debentures?(a) 10% of the outstanding amount is redeemed every year(b) The debentures are issued at a premium of 10%(c) The debentures are issued at a discount of 30%(d) 10% of the outstanding amount shall not be redeemed(e) The debentures carry interest rate of 10%.(1 mark)< Answer >

33. Which of the following is false?(a) A company can issue convertible debentures(b) A company can issue debentures with voting rights(c) A company can buy its own shares(d) A company can buy its own debentures(e) There are legal restrictions on use of premium collected on issue of shares.(1 mark)< Answer >

ANS---

1. Answer : (c)Reason : The retirement of the chairman of a company, even though it has far reaching consequences on thehealth of the company, is not accounted in recognition of money measurement concept. This conceptenvisages that a record is made only of information that can be expressed in monetary terms. Asretirement of the chairman cannot be expressed in monetary terms, the same is not accounted.Conservatism concept envisages that recognition of revenue requires better evidence than recognitionof expenses. According to business entity concept, business is treated separately from its owners. Abusiness entity is assumed to carry on its operations forever under going concern concept. All materialitems should be separately disclosed under materiality concept. Alternative (a) is the correct answer.< TOP >2. Answer : (b)Reason : Balance sheet is prepared as on a particular date whereas profit and loss account, cash flow statement,income and expenditure account are prepared for a particular period.< TOP >3. Answer : (c)Reason : The fixed assets are recorded at their cost and not at their market value in recognition of cost concept.(c) is the correct answer.

< TOP >4. Answer : (b)Reason : If sales day book is undercast, gross profit will be decreased, simultaneously net profit will bedecreased with the same amount. Therefore (b) is true.< TOP >5. Answer : (a)Reason : Salaries account is a nominal account which is closed at the end of the year by transfer to profit and lossaccount. Hence the answer is (a). The other alternatives i.e. plant and machinery account, debenturesaccount, sundry debtors account, investments account are real or personal accounts which will not beclosed at the end of the financial year.< TOP >6. Answer : (e)Reason : Credit balance of bank column of cashbook represents bank overdraft and is a liability. Hence theanswer is (e). Credit balance of bank passbook, Debit balance of bank column of cashbook and Debitbalance of cash column of cashbook represents favorable balance. The debit balance of discountcolumn of cash book represents an expense.< TOP >7. Answer : (e)Reason :Rs.Payment made to creditors 10,00,000Discount received 10,000Closing balance 40,00010,50,000Less : Credit purchase 9,25,000Opening balance 1,25,000< TOP >8. Answer : (b)Reason : Amount of stationery to be charged to profit and loss account for the year ended March 31, 2005:Particulars Rs.Opening balance of stationery 4,000Add: Cash purchases of stationery included

in general expenses 36,000Credit purchases of stationery included in purchases 9,00049,000< TOP >Less: Closing balance of stationery 3,00046,000Less: Stationery consumed by the proprietor 5,000Stationery debited to profit and loss account 41,0009. Answer : (c)Reason : A credit sale to Shivenra should be recorded asShivndra’s account Dr. To Sales account. Thus, shivendra’s account is debited.< TOP >10. Answer : (c)Reason :Cash at Bank Rs.Opening Cash 42,000Add : Collections from debtors 88,0001,30,000Less : Paid to creditors 24,000Salaries paid 8,000Closing cash balance at Bank 98,000< TOP >11. Answer : (d)Reason : Posting of wrong amount in the ledger in one account concerned leads to mismatch in trial balance asthe wrong amount is recorded only in one account. Omission of an entry in the journal, recording ofwrong amount in the journal, recording of wrong account in the journal, posting of wrong amount in allthe accounts affected will not cause a mismatch in trial balance because the mistake is effected on bothsides.< TOP >12. Answer : (b)Reason :Purchases Issues BalanceDateQuantity(Kg)

Rateperkg.(Rs.)Amount(Rs.)Quantity(Kg)Rate per kg.(Rs.)Amount(Rs.)Quantity(Kg)Rateperkg.(Rs.)Amount(Rs.)01-06-05 500 22.80 11,40002-06-05 400 24 9,600 900 23.33 21,00010-06-05 600 25 15,000 1,500 24.00 36,00025-06-05 1,000 24 24000 500 24.00 12,000< TOP >13. Answer : (b)Reason : Trading and profit & loss account of Mythili Ltd. for the year ended March 31, 2005Dr. Cr.Particulars Rs. Rs. Particulars Rs. Rs.To Opening stock 48,000 By Sales 16,15,000To Purchases 6,72,000 Less: Returns 22,000 15,93,000Less : Returns 49,000 6,23,000By Advertisement (freesamples)5,000To Gross profit c/f 9,77,000 By Closing stock 50,00016,48,000 16,48,000To Bad debts 19,000 By Gross Profit 9,77,000To Salaries and wages 5,10,000

By Interest oninvestments16,000To Intereston bank overdraft 30,000 (Accrued Income @ 8%< TOP >on Rs.2,00,000)Add:Outstanding 9,000 39,000 By Discount received 21,000To Advertisement 1,20,000Add : Free samples 5,000 1,25,000To Fire insurance premium 18,000Less : Prepaid 1,500 16,500To Discount allowed 12,000To General expenses 54,000To Outstanding interest on debentures 33,600To DepreciationPlant & machinery (20%) 1,34,400Furniture & fixtures (12%) 34,200To Provision for discount on debtors 9,000To Net profit 27,30010,14,000 10,14,00014. Answer : (b)Reason : The amount debited to profit and less account in respect of provision for doubtful debts is Rs.8,700.Dr. Provision for bad and doubtful debts Cr.Particulars Rs. Particulars Rs.To Bad debts (Sinha) 3,800 By balance b/f 5,600To Provision c/f 10,500 By Profit and loss account 8,70014,300 14,300Computation of suitable provision for the year ending March 31,2003Particulars Rs.Gupta Rs.9,000 Expected to realize only 80% hence doubt full part 1,800PatelRs.8,000 Expected to realize only 60%. 3,200Iyer Rs.5,500 Filed Insolvency petition and the recovery chances are remote 5,500< TOP >15. Answer: (d)Reason: Amount (Rs.)Balance in capital account on 31.3.95 3,10,000Less : Fresh capital brought in 50,0002,60,000

Add : Drawings 10,000Add : Goods taken for personal use 5,0002,75,000Less : Capital at the beginning 2,50,000Profit for the year 25,000< TOP >16. Answer : (c )Reason : Current liabilities are such obligations which are to be satisfied within one year.< TOP >17. Answer : (a)Reason : In terms of cost concept the value of an asset is to be determined on the basis of acquisition cost.Valuation of machinery at market value is in violation of cost concept unless the machine is actuallysold, realizable value will give only a hypothetical figure. Market value is highly subjective because toknow the value of the asset one has to chase the uncertain future. The other concepts matching concept(b) deals with matching costs with revenue, Realization concept (c) deals with recognition of income atvarious levels of production, Periodicity concept (d) explains how the accounting information is to be< TOP >reported at regular intervals to foster comparability, Business entity concept (e) explains the owner isdifferent from the business entity. Thus, the concepts (b), (c), (d), and (e) do not explain how the fixedassets are to be recorded.18. Answer : (c)Reason : Specific Reserve comes under Revenue Reserve and is created out of revenue profits. Capital Reservearises out of capital profits. Revenue Reserves are available for distribution as profit General Reservesare not created for any specific purpose. Credit balance in Profit & Loss A/c is a Revenue Reserve< TOP >19. Answer : (c)Reason : Prolonged illness of Chairman is not a contingent liability. All other options viz, claim against the firm

not acknowledged as debt, arrears of fixed cumulative dividend, liability on account of bills discountedand uncalled liability on shares partly paid are contingent liabilities.< TOP >20. Answer : (d)Reason :Particulars Rs.Opening Provision 4,000Bad debts to be written off 10,000Shortfall of provision 6,000Provision required 5% of Rs.1,40,000(Rs.1,50,000 – Rs.10,000) 7,000Charge against profit and loss account 13,000< TOP >21. Answer : (c)Reason : Total goods available for sale includes opening inventory and net purchases. Hence the openinginventory is total goods available for sale minus net purchases. Hence (c) is the answer. Net purchasesminus closing inventory indicates the cost of goods sold. Net purchases minus the cost of goods soldgives the difference of closing stock and opening stock. Total goods available for sale minus the cost ofgoods sold is the closing inventory. Total goods available for sale minus closing inventory is the cost ofgoods sold.< TOP >22. Answer : (e)Reason : Depreciation =Plant value-ScrapvalueLife of theplant=(Rs.5,00,000+Rs.30,000) Rs.50,0008years-=Rs.5,30,000 Rs.50,0008years-=

Rs.4,80,000Rs.60,0008years==Rs.60,0001005,30,000´= 11.32%< TOP >23. Answer : (b)Reason : Purchase of computer for office use is a capital expenditure. Salaries to computer staff, Depreciation oncomputer, Royalty paid etc. are items of revenue expenditure.< TOP >24. Answer : (a)Reason :< TOP >2000-2001Rs.2001-2002Rs.2002-2003Rs.2003-2004Rs.2004-2005Rs.TotalRs.Profit 7,42,500Add: Depreciationexcess provided3000

Less: profit on saleof plant 22,500Adjusted profits 75000 300000 346500 453000 723000Weights 1 2 3 4 5Profits × weights 75000 600000 1039500 1812000 3615000 7141500Weighted average profits = Rs.71,41,500 / 15 = Rs.4,76,10025. Answer : (a)Reason : If the purchase consideration in more than net asset value, it is as be adjusted to capital reserve account,therefore (a) is correct.< TOP >26. Answer : (b)Reason : Dr. Cash account Cr.Particulars Rs. Particulars Rs.To Balance b/d. 50,000 By Preference shareholders(Rs.3,00,000 x 110%)3,30,000To Investments 2,00,000 By Balance c/d. 25,000To Equity shares(including premium) 1,05,0003,55,000 3,55,000No. of equity shares = Rs.1,05,000 / Rs.105 = 1,000 shares.< TOP >27. Answer : (b)Reason :SharesappliedSharesallottedApplicationmoneyreceivedRs.Applicationmoney dueRs.Excess moneyRs.Allotmentmoney due

(includingpremium)Rs.Surplus /(deficit)Rs.(1) (2) (3)=(1)×Rs.2 (4)=(2) ×Rs.2(5)=(3) –(4) (6)=(2)×Rs.4.5 (7) = (5)–(6)50,800 30,480 1,01,600 60,960 40,640 1,37,160 (96,520)96,000 28,400 1,92,000 56,800 1,35,200 1,27,800 7,40046,000 21,120 92,000 42,240 49,760 95,040 (45,280)1,92,800 80,000 3,85,600 1,60,000 2,25,600 3,60,000Hence the amount of refund is Rs.7,400< TOP >28. Answer : (c)Reason :Particulars Rs. Rs.Land and building 3,60,000Plant and machinery (Rs.2,70,000 ´ Rs.90%) 2,43,000Furniture 1,80,000Inventories 90,000< TOP >Sundry debtors (Rs.60,000 ´ 95%) 57,000Loans and advances 75,000Cash 10,000Bank 35,000Less: 10,50,000Sundry creditors 50,000Short term loan 80,000 1,30,000Net assets 9,20,000Value of share =Rs.9,20,000 Rs.1845,000=29. Answer : (a)Reason : Present capital Rs.50,00,000Rights issue 5,00,000 x2

5 x Rs.10 = Rs.20,00,000Total share Capital Rs.70,00,000< TOP >30. Answer : (b)Reason:Particulars Rs.Assets 30,000Less: Liabilities 8,000Net Assets 22,000Less: Preference shares capital 5,000Amount available for equity shares 17,000Value of each equity share Rs.17,000 ¸ 2000 = Rs.8.50.< TOP >31. Answer: (c)Reason: The journal entry isShare capital account (160 x 10) Dr. Rs.1,600To Share allotment account (60 x 3) Rs. 180To Share final call account (160 x 3) Rs. 480To Share forfeiture account (240 + 100 x 7) Rs. 940(Forfeiture of 160 shares on which 60 shares paid only Rs.4 per share and 100 shares paid only Rs.7 pershare.)Shares allotted = 60Shares applied =6,00060 725,000´ == 72 x 5 = Rs.360 – 120 = 240.Amount debited to share capital is Rs.1,600 and share premium account is Rs.Nil.< TOP >32. Answer : (e)Reason : The debentures carry rate of interest of 10%.< TOP >33. Answer : (b)Reason : No company shall, after the commencement of the Companies Act, 1956, issue any debentures carryingvoting rights at any meeting of the company, whether generally or in respect of particular classes of

business.< TOP >

Financial Accounting - I (MB131): April 2006

Financial Accounting - I (MB131): April 2006

• Answer all questions.• Marks are indicated against each question.1. In the event of conflict between the International Accounting Standards and the local standards, whichamong the following will prevail?(a) The rule of the Company Law will prevail(b) The rule of the Securities Exchange Board of India prevails(c) The rule of the International Accounting Standards prevails(d) The rule of local standards, laws and regulations shall prevail(e) The rule of the Central Government will prevail.(1 mark)<Answer>2. Under which of the following conditions is a balance sheet said to be window dressed?(a) When income is accounted for on accrual basis(b) When prepaid expenses are considered and accounted for in the preparation of final accounts(c) When an adequate provision for expenses and potential losses is not made(d) When a provision for the probable loss is made in advance of its occurrence(e) When the assets and liabilities in the Balance Sheet are reflected at Historical cost.(1 mark)<Answer>3. The transactions pertaining to purchase of fixed assets and investments on credit, are recorded in

(a) Simple cash book (b) Double cash book (c) Purchasebook(d) Journal proper (e) Bills payable book.(1 mark)<Answer>4. An asset, the value of which depends on the earning capacity of the business concern is(a) Investments (b) Debtors (c) Fixedasset(d) Goodwill (e) Cash at Bank.(1 mark)<Answer>5. Rights shares are the shares(a) Issued by a newly formed company(b) Legally issued to the public at large(c) Offered to the existing equity shareholders(d) That have a right of redemption(e) That have a right to cumulative dividends.(1 mark)<Answer>6. The maximum amount beyond which a company is not allowed to raise funds by issue of shares is(a) Issued capital (b) Reserve capital (c) Authorisedcapital(d) Subscribed capital (e) Paid-up capital.(1 mark)<Answer>27. Which of the following methods of valuation of goodwill uses the present value factor?(a) Capitalization of average profits methods(b) Capitalization of super profits method

(c) Annuity method of super profits(d) Number of years’ purchase of average profits method(e) Super profits method.(1 mark)<Answer>8. The process of converting cost of intangible assets to expense is called(a) Depreciation (b) Amortization (c)Depletion(d) Deterioration (e) None of the above.(1 mark)<Answer>9. Which of the following methods is/are followed for amortization of intangible assets?(a) Straight-line method (b) Written down method(c) Sum of the years’ digits method (d) Annuity method(e) Both (a) and (b) above.(1 mark)<Answer>10.When depreciation appears in the Trial balance, in which of the following statements will it be shown?(a) Trading Account (b) Profit and loss account(c) Profit and loss appropriation account (d) Balance Sheet(e) Notes to accounts.(1 mark)<Answer>11.The method of inventory valuation which enables the firm to even out the erratic movements in thepurchase prices to the best extent possible, is(a) Last in first out method (b) First-in-first out method(c) High-in-low out method (d) Simple average method(e) Weighted Average Method.(1 mark)

<Answer>12.Certain fundamental accounting assumptions underlie the preparation and presentation of financialstatements and hence are not specifically stated because their acceptance and use are assumed. Whichamong the following is not a fundamental accounting assumption?(a) Going concern concept (b) Consistency (c) Accrual(d) Conservatism (e) Both (a) and (b) above.(1 mark)<Answer>13.The discount allowed on re-issue of forfeited shares is debited to(a) General reserve account (b) Capital reserve account(c) Revaluation reserve account (d) Capital redemption reserve account(e) Forfeited shares account.(1 mark)<Answer>14.Which of the following cannot be utilized for the redemption of Preference Shares of a company?(a) Proceeds of fresh issue of shares(b) Securities premium on fresh issue of shares(c) General reserve(d) Profit and loss account(e) Dividend equalization reserve.(1 mark)<Answer>315.Which of the following data is essential for calculation of value of an equity share under the intrinsicvalue method?(a) Normal rate of return (b) Expected rate of return(c) Market value per share (d) Dividend per share(e) Net equity.

(1 mark)<Answer>16.The cum-interest/cum-dividend quotation implies(a) The purchaser pays a higher price than the normal price(b) The right of receiving accrued interest/dividend is retained by the seller(c) The seller charges a higher price(d) The right of receiving accrued interest/dividend is passed on to the purchaser(e) (a), (c) and (d) above.(1 mark)<Answer>17.The cumulative preference shareholders enjoy preferential treatment over equity shareholders withregard to(a) Priority in payment of dividend (b) Return of capital(c) Voting rights (d) Cumulation of dividends(e) (a), (b) and (d) above.(1 mark)<Answer>18.The accounting based on Real capital maintenance concept (which considers the general price rise) iscalled the(a) Current purchasing power Accounting(b) Current Cost Accounting(c) Cost accounting(d) Financial Accounting(e) Managerial Accounting.(1 mark)<Answer>19.Share allotment denotes a stage subsequent to(a) Share Application (b) Share forfeiture (c)Share redemption

(d) Share First call (e) Share second call.(1 mark)<Answer>20.The accounting entry involved, for issue of shares to promoters for the services rendered by them is(a) Debit goodwill account and credit share capital account(b) Debit cash account and credit share capital account(c) Debit promoters’ account and credit share capital account(d) Debit share capital account and credit cash account(e) Debit goodwill account and credit calls in arrear account.(1 mark)<Answer>21.Premium on redemption of debentures account is(a) A real account (b) A nominal account (c) A personalaccount(d) An asset (e) A capital reserve.(1 mark)<Answer>422.Which of the following statements is true?(a) Going concern concept assumes that business will be carried on for a definite period(b) Time period concept facilitates the comparison of the results of one accounting period of abusiness with that in the past(c) The capital losses need not be deducted to ascertain net income(d) Provision for bad and doubtful debts is created in recognition of conservatism concept(e) Materiality concept states that all business transactions are to be recorded how so everinsignificant they may be.(1 mark)<Answer

>23.Which of the following accounts appear(s) in the Balance Sheet of a business?I. Stock at the end of the financial year.II. Stock at the beginning of the financial year.III. Drawings.IV. Prepaid Rent.V. Interest received but not yet earned.(a) Only (I) above (b) Only (III) above(c) Both (I) and (III) above (d) (I), (III), (IV) and (V) above(e) All (I), (II), (III), (IV) and (V) above.(1 mark)<Answer>24.Underwriting commission will not be paid on the amount of shares taken by(a) Promoters (b) Directors (c)Employees(d) Directors’ friends (e) All of the above.(1 mark)<Answer>25.The portion of the acquisition cost of the asset yet to be allocated is known as(a) Written down value (b) Accumulated value(c) Realisable value (d) Salvage value (e) Residualvalue.(1 mark)<Answer>26.Which of the following items is/are covered under Accounting Standard-2 with regard to accountingfor inventory?I. Financial instruments held as stock-in-trade.II. Work in progress arising under construction contracts.III. Work in progress of service providers.IV. Work in progress of a manufacturing industry.

(a) Only (I) above (b) Only (IV) above(c) Both (I) and (II) above (d) Both (III) and (IV) above(e) (II), (III) and (IV) above.(1 mark)<Answer>27.Which of the following statements is false?(a) Bonus issue can be made out of share premium account(b) Bonus issue shall not be made within 12 months of any public issue(c) Bonus issue shall not be made in lieu of dividend(d) Reserves created out of revaluation of fixed assets can be used for bonus issue(e) Bonus shares should not be issued unless partly paid shares are made fully paid.(1 mark)<Answer>528.The money received on reissue of forfeited shares is inadvertently credited to ‘Capital Suspense’account. The adjustment entry involved in reversing the capital suspense account is(a) Debit to Capital Suspense account (b) Credit to Share Capital account(c) Debit to Share forfeiture account (d) Both (a) and (b) above(e) (a), (b) and (c) above.(1 mark)<Answer>29.Which of the following assets is/are to be valued at the lower of cost and net realizable value?(a) Goodwill (b) Inventories (c) Investments(d) Sundry debtors (e) Fixed Assets.(1 mark)<Answer>30.Which of the following statements is true?

(a) Bank charges increase debit balance shown as per bank column of the cash book(b) Bank charges increase debit balance as per bank pass book(c) A cash sale of a non-trading asset is recorded in the journal proper(d) Cash discount allowed by the business will appear on the debit side of the debtor’s account(e) Bank reconciliation statement is prepared by a bank.(1 mark)<Answer>31.The balances of which of the following accounts do not disappear, once they are debited/credited toTrading Account.(a) Sales (b) Purchases (c) Inward returns(d) Closing stock (e) Outward returns.(1 mark)<Answer>32.On issue of shares, the application money should not be less than(a) 2.5% of the nominal value of shares (b) 2.5% of the issue price ofshares(c) 5.0% of the nominal value of shares (d) 5.0% of the issue price ofshares(e) 10.0% of the nominal value of shares.(1 mark)<Answer>33.Which of the following methods is not a practical way of realizing revenue?(a) Delivery method (b) Percentage-of-completion method(c) Production method (d) Installment method(e) Moving average method.(1 mark)<Answer>34.According to the SEBI guidelines, before the redemption of debentures

having a maturity of more than18 months, the debenture redemption reserve created, should be at least equivalent to(a) 10% of the debenture issue (b) 25% of the debenture issue(c) 30% of the debenture issue (d) 50% of the debenture issue(e) 75% of the debenture issue.(1 mark)<Answer>35.The periodical total of a purchase returns book is recorded to the(a) Debit side of the purchases account(b) Debit side of the purchases returns account(c) Credit side of the purchases account(d) Credit side of the purchases returns account(e) Credit side of creditors account.(1 mark)<Answer>636.In Retail Inventory Method, if the markup selling price is decreased but not below the original sellingprice, it is known as(a) Markup cancellation (b) Markdown (c) Markdown cancellation(d) Net markup (e) Net markdown.(1 mark)<Answer>37.According to which of the following accounting concepts, are the shareholders treated as creditors forthe amount they pay on shares?(a) Cost concept (b) Duality concept (c) Going concern concept(d) Money measurement concept (e) Business entity concept.(1 mark)<Answer>38.The profit or loss on own debentures is to be accounted for at the time of

(a) Purchase of own debentures (b) Subsequent interest payment(c) Cancellation of own debentures (d) Original issue of debentures(e) Liquidation of the company.(1 mark)<Answer>39.The statement which helps an accountant to assess the arithmetical accuracy of the accounting processis the(a) Balance sheet (b) Profit and loss account(c) Cash book (d) Trial balance (e) Bank reconciliation statement.(1 mark)<Answer>40.Which of the following is a liability of a firm?(a) Debit balance of discount column of cash book(b) Credit balance of bank pass book(c) Debit balance of bank column of cash book(d) Debit balance of cash column of cash book(e) Credit balance of bank column of cash book.(1 mark)<

ANSWER-

Financial Accounting - I (MB131): April 20061. Answer : (d)Reason : If there is a conflict between the International Accounting Standards and the local standards or thelocal laws and regulations, the local standards, laws and regulations will prevail.<TOP>2. Answer : (c)Reason : Options (a), (b), (d) and (e) are a part of the accounting principles and concepts which need to beadhered to in the preparation of Financial statements. Hence the adherence to these concepts does not

result in window dressing the financial statements. However, provision for expenses and potentiallosses is to be made as per accounting concept of ‘conservatism’. Not providing such provision leadsto window dressing since the profits get inflated.<TOP>3. Answer : (d)Reason : Journal proper is used to record all transactions which cannot be included in the Cash book or anyother subsidiary books. Eg. Purchase or sale of fixed assets and investments on credit, adjustingentries and rectification entries.<TOP>4. Answer : (d)Reason : The value of investments, debtors, Fixed assets and cash at bank are not dependent on the earningcapacity of the firm. Goodwill an intangible asset, depends on the earning capacity of the firm. Thehigher the profits or earnings expected the higher the value of goodwill.<TOP>5. Answer : (c)Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are notissued by a newly formed company (a) They are not the shares issued to the public at large. They areissued only to the existing shareholders. (b). It does not indicate the right of redemption of shares issue(d). These are not the shares with cumulative dividend right.<TOP>6. Answer : (c)Reason : The maximum amount beyond which a company is not allowed to raise funds by issue of shares is

called nominal capital or authorized capital. The issued capital is that part of the nominal capitalissued to the public and subscribed capital is that part of the issued capital which is subscribed by thepublic. Paid up capital is the amount which is paid-up by the shareholders. Reserve capital is thatcapital which will be called-up only in case of liquidation.<TOP>7. Answer : (c)Reason : Annuity Method of super profits © of valuation of goodwill uses the present value factor since there isheavy loss of interest. Capitalisation of average profits method (a) is not the correct answer since thereis not such method through which goodwill can be assigned a value. Capitalisation of super profitsmethod (b) tries to find out the amount of capital needed for earning the super profit and it does notconsider the present value factor and hence is not the correct answer. No. of years’ purchase ofaverage profits method (d) is also known as simple profit method where in the goodwill is calculatedwith the help of the average annual profit expected to accrue in future based on past profits and thenumber of years of purchase as agreed by the parties and is not the correct answer. Number of years ofpurchase of super profits method (e) where in super profits are computed taking into account theaverage profits and the normal rate of return in the similar type of industry based on the capitalemployed in the business the difference between the average profit and the normal return is the superprofit an is multiplied with the number of years’ purchase as agreed by the parties. And it is not thecorrect answer. Thus, alternative (c) is the correct answer.<TOP>17

8. Answer : (b)Reason : Amortization is the method of converting cost of intangible assets to expense. Intangible assets likepatents, trademarks, franchises are amortized over a period of time.The other alternatives(a) Depreciation is the process of allocating to expense the cost of fixed assets over its useful life ina rational and systematic manner.(c) Depletion is the process of allocating the cost of natural resources like coal petroleum etc. toexpense in a rational and systematic manner.(d) Deterioration is the physical process of wearing out.Thus, the alternatives (a), (c), (d) and (e) are not relevant to intangible assets.<TOP>9. Answer : (a)Reason : Amortization of intangible assets signifies, the systematic writing down of the value of the intangibleassets over its life. The method adopted is straight line method. The other alternatives written downvalue method, sum of the years’ digits method and Annuity method are used for depreciating the valueof tangible fixed assets.<TOP>10. Answer : (b)Reason : When depreciation appears in the Trial balance, it is taken in the Profit and loss account only. Ifdepreciation does not appear in the Trial balance but appears as an adjustment it appears in the Profitand loss account and is also reduced from Fixed assets to give double effect to the transaction.<TOP>11. Answer : (e)Reason : The advocates of this method feel that the ‘smoothing’ of purchase

costs achieved by the weightedaverage method enable them to even out the erratic movements in the purchase prices to the bestpossible extent.<TOP>12. Answer : (d)Reason : AS -1 discusses this issue where it lists out going concern concept, consistency concept, and accrualconcept as fundamental accounting assumptions. Conservatism is a concept under GAAP but its usecannot be assumed.<TOP>13. Answer : (e)Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It cannot bedebited to general reserve account, capital reserve account, revaluation reserve account and capitalredemption reserve account.<TOP>14. Answer : (b)Reason : Securities Premium on fresh issue of shares (b) cannot be utilized for the redemption of PreferenceShares of a company. As per the Companies Act, the redemption may be done from the proceeds offresh issue of shares or undistributed profits which would otherwise be available for dividend. Thus,proceeds of fresh issue of shares (a), General reserve (c), Profit and loss account credit balance andDividend equalization reserve are not the correct answers since they can be utilized for redemption ofpreference shares.<TOP>

15. Answer : (e)Reason : Under intrinsic value method the value per share is arrived by valuing the assets of a company anddeducting there from all the liabilities and claims of preference shareholders and dividing the netassets by the number of shares. The value of net assets is nothing but the net equity.<TOP>16. Answer : (e)Reason : The cum-interest/cum-dividend quoting price of securities implies that interest accrued or dividendaccrued is added to the value of the securities. Thus, it is more than the ex-interest price. Thepurchaser pays a higher price than the normal price, the seller charges a higher price and the right ofreceiving dividend/interest is passed on to the buyer. Thus, alternatives (a), (c) and (d) are correct. Thealternative (b) the right to receive the interest/dividend is retained by the seller is false.<TOP>17. Answer : (e)Reason : Cumulative Preference shareholders enjoy preferential treatment with regard to priority in payment ofdividend, (a) repayment of capital (b) and also in case of insufficient profits their dividends(undeclared) are cumulated (d) unlike equity shareholders. Equity shareholders enjoy voting rights (c)but not the preference shareholders. Thus, the alternatives (a), (b), and (d) are true in case ofcumulative preference shareholders.<TOP>1818. Answer : (a)Reason : The accounting based on Real capital maintenance concept (which

considers the general price rise) iscalled the Current Purchasing Power Accounting.<TOP>19. Answer : (a)Reason : Only when the share applications are received and the allotment is finalized is the share allotmentmoney called for from the shareholders to whom share allotment is made.<TOP>20. Answer : (a)Reason : The accounting entry involved for issue of shares to promoters for the services rendered by them isdebit goodwill account and credit share capital account (a). Since in recognition of the vale of servicesrendered by the promoters certain number of shares are allotted to them for which no consideration iscoming forth and is debited to goodwill and credited to share capital account. Since no cash is comingforth and no obligation form the promoters to pay in future the entries in alternatives (b) and (c) areincorrect. It is issue of shares in lieu of the services rendered and hence share capital account is notdebited and no payment of cash is involved and cash account cannot be credited and alternative (d) isincorrect. Since no payment from the directors is expected the question of calls in arrears does notarise and the alternative (e) is incorrect.<TOP>21. Answer : (c)Reason : Premium on redemption of debentures account represents the additional amount payable to debentureholders at the time of redemption of debentures and is a personal account.<TOP>

22. Answer : (d)Reason : According to the conservatism concept, ‘anticipate no profit and provide for all possible losses’.Thus, in recognition of conservatism concept, provision for bad and doubtful debts is created inanticipation of actual bad debts. The statements in other alternatives are incorrect because Goingconcern concept assumes that business will be carried on for a indefinite period and not for definiteperiod (a). The capital losses are to be deducted to ascertain net income (c). Materiality concept statesthat insignificant events need not be recorded and the statement in alternative (e) is incorrect. Thus,the correct answer is (d).<TOP>23. Answer : (d)Reason : Stock at the end of the financial year is the closing stock, drawings are the amounts withdrawn by theowner of the business for personal use; and prepaid rent is the amount of rent which is paid in advanceof the current financial year and interest received but not yet earned is the amount of interest receivedwhich does not pertain to the current year are the items that appear in the balance sheet of a business.Stock at the beginning of the financial year is the opening stock that appears in Trading Account of abusiness and not in the balance sheet. Thus,(d), the combination of all the accounts in alternatives (I),(III), (IV) and (V) is the correct answer.<TOP>24. Answer : (e)Reason : According to Section.76 of the Companies Act, a company is authorized to pay underwritingcommission only if the shares or debentures are offered to the general public. No underwritingcommission can be paid, if the issue is privately placed. The shares taken by

Promoters, Directors,employees and directors’ friends cannot be considered as shares offered to the general public. As suchno underwriting commission is payable on these shares.<TOP>25. Answer : (a)Reason : The portion of the acquisition cost of the asset yet to be allocated is known as written down value (a)Accumulated value (b) is the value of a thing accumulated over a period of time and not the correctanswer. Realizable value (c) is the value which can be realized in the event of sale and is not correctanswer. Salvage value (d) is the value of an asset that remains as scrap value after its usage over aperiod of time and is not the correct answer. Residual value (e) is the value remaining residue and isnot the correct answer. Alternative (a) is the correct answer.<TOP>26. Answer : (b)Reason : The Accounting Standard-2 deals with regard to accounting for inventory. According to thestatement, Work in progress of a manufacturing industry is covered. Thus, the alternative (b) is thecorrect answer. The items of inventory stated in other alternatives are not covered under AS-2Financial instruments held as stock-in-trade: Work in progress arising under construction contractsand Work in progress of service providers. Hence, alternatives (a) reflecting statement (I); (c)combination of statements (I) and (II); alternative (d) combination of statements (III) and (IV) andalternative (e) combination Of statements II, III and IV are incorrect.<TOP>19

27. Answer : (d)Reason : Reserves created out of revaluation of fixed assets should not be capitalized and hence should not beused for bonus issue. Bonus issue can be made out of share premium account. Bonus issue shall not bemade within 12 months of any public issue and it shall not be made in lieu of dividend. Bonus sharesshould not be issued unless partly paid shares are made fully paid.<TOP>28. Answer : (e)Reason : The adjustment entry involved in reversing ‘Capital Suspense’ account which is created, while placingthe amounts received on reissue of forfeited shares at a discount is (a) Debit to Capital Suspenseaccount (b) Credit to Share Capital account (c)Debit to Share forfeiture account and thus, thecombination of alternatives (a), (b) and (c) the alternative (e) is the correct answer.<TOP>29. Answer : (b)Reason : Inventories (b) are to be valued at the lower of cost and net realizable value. All the other assets statedin other alternatives are valued as per the cost concept. Goodwill (a) is a fixed intangible asset and isshown at the cost of its acquisition. Investments (c) are valued at cost or market value which is everless. Sundry debtors (d) are shown at deducting any amount of bad debts and the provision created forbad and doubtful debts. Fixed Assets are valued at Cost only. Thus, the correct answer is (b).<TOP>30. Answer : (b)Reason : Bank charges increase debit balance as per bank pass book (b) is the correct answer. The debit

balance as per bank pass book indicates the overdraft balance and the bank charges being theexpenditure increase the debit balance. The alternative (a) is incorrect because, the Bank chargesdecrease the debit balance shown as per bank column of the cash book and do not increase the debitbalance as debit balance as per cash book signifies the favourable balance. A cash sale of a nontradingasset is recorded in the journal proper is incorrect (c) because all in transactions involving cashreceipts and payments are recorded in the cash book Cash discount allowed by the business willappear on the debit side of the debtor’s account (d) is incorrect because, the cash discount allowed is areduction in the balance of a debtor’s account which appears on the credit side. Bank reconciliationstatement is prepared by a bank (e) is incorrect because bank reconciliation statement is prepared bythe business and not by the bank. Thus, (b) is the correct answer.<TOP>31. Answer : (d)Reason : The closing stock(d) is the value of goods which remain unsold at the end of the period whose balanceappears once in trading account and once in balance sheet of the business. All other accounts sales (a),purchases (b), inward returns (c) and outward returns (e) are closed once they are absorbed by thetrading account. Thus, (d) is the correct answer.<TOP>32. Answer : (c)Reason : According to the provisions of the Companies Act, the application money should not be less than 5%of nominal value of the shares. The other options given in a, b, d and e are not correct.<TOP

>33. Answer : (e)Reason : The following methods are the practical ways of realizing revenue applying the conservatism conceptand realization concept and the (a)Delivery method in case of sale of goods, (b)Percentage-ofcompletionmethod in case of rendering of services,(c) Production method in case of agricultureproduce and (d) Installment method in case of sale of goods on installments. Thus, these are thevarious ways of recognizing revenue and the methods adopted to recognize revenue. Moving averagemethod (e) is the method of valuing inventory and it is not the method adopted to recognize revenue.Thus, (e) is the correct answer.<TOP>34. Answer : (d)Reason : According to SEBI guidelines, a debenture issue having a maturity of more than 18 monthsnecessitates the creation of a special reserve known as debenture redemption reserve. Such debentureredemption reserve should be equivalent to at least 50% of the amount of debenture issue prior to thecommencement of the redemption. Thus, (d) is the correct answer.<TOP>35. Answer : (d)Reason : Purchases account is a debit balance and purchase returns is a credit balance and the total of purchasereturns will be recorded to the credit side of the purchase returns account.<TOP>36. Answer : (a)Reason : In retail inventory method, if the markup selling price is decreased but not below the original sellingprice, it is known as markup cancellation.

<TOP>2037. Answer : (e)Reason : Shareholders are treated as creditors for the amount they have paid on shares subscribed by themaccording to the business entity concept. According to cost concept, all transactions are recorded atcost. The duality concept emphasizes that assets = owner’s equity + outside liability. A business entityis assumed to carry on its operations forever under going concern concept. According to moneymeasurement concept, only those transactions that can be expressed in monetary terms are recorded.<TOP>38. Answer : (c)Reason : The profit or loss on own debentures is to be calculated at the time of cancellation of own debenturesand not at the time of purchase or next interest payment or original issue of debentures or liquidationof the company.<TOP>39. Answer : (d)Reason : The trial balance is prepared to assess the arithmetical accuracy. Hence the answer is (d). The profitand loss account is prepared to know the profit or loss of the concern. The balance sheet is prepared toknow the financial position as on a particular date. The cashbook indicates the cash receipts andpayments. The bank reconciliation statement is prepared to reconcile the bank balance as per cashbook and pass book.<TOP

>40. Answer : (e)

Financial Accounting – II (MB132) : April 2006

Financial Accounting – II (MB132) : April 2006

• Answer all questions.• Marks are indicated against each question.1. Which of the following will not form a part of ‘Miscellaneous Expenditure’ of the Balance Sheet of a company?(a) Preliminary expenses (b) Underwriting expenses(c) Loss on sale of fixed assets (d) Discount on issue of shares(e) Interest paid out of capital during construction.(1 mark)< Answer >2. Which of the following is/are subjective method(s) of sales forecasting?(a) Jury of executive opinion (b) Sales force estimate(c) Regression Method (d) Time Series Projection Method(e) Both (a) and (b) above.(1 mark)< Answer >3. In accordance with AS -14, purchase consideration is the aggregate of shares and other securities issued and thepayment made in the form of cash or other assets by the transferee company to the __________ of the transferorcompany.(a) Equity holder (b) Preference holders(c) Debenture holders (d) Shareholders(e) All (a), (b), (c) and (d) above.(1 mark)< Answer >4. In the Consolidated Balance Sheet of a Holding Company, the value of minority interest consists of theproportionate share of minority shareholders in theI. Nominal value of share capital of subsidiary company.II. Reserves of the holding company.III. Reserves and profits of the subsidiary company at the time of acquisition by the holding company.

IV. Income of the holding company after its acquisition.V. Income of the subsidiary company after its acquisition by the holding company.(a) Only (I) above (b) Both (I) and (II) above(c) Both (I) and (IV) above (d) (I), (III) and (IV) above(e) (I), (III) and (V) above.(1 mark)< Answer >5. Which of the following ratios measures the liquidity of a company?(a) Debt-equity ratio (b) Interest coverage ratio(c) Net profit margin (d) Acid-test ratio(e) Return on equity.(1 mark)< Answer >6. Under the Net Assets Method of calculating purchase consideration, assets and liabilities of the transferorcompany are taken over by the transferee company at(a) Book value (b) Fair value(c) Market value (d) Replacement value(e) Agreed value.(1 mark)< Answer >7. Which of the following is not shown by a funds flow statement on cash basis?(a) The sources of cash (b) The uses of cash(c) Decrease in cash (d) The net change in working capital(e) Increase in cash.(1 mark)< Answer >28. Which of the following is false with regard to Economic Value Added (EVA)?(a) The computation of EVA involves a complex procedure(b) EVA can be improved by downsizing profitable operations(c) EVA is a residual income measure that subtracts the cost of capital from the operating profit generated by abusiness(d) EVA can be used for making day-to-day decisions as well as for strategic planning(e) EVA is one variation of residual income with adjustments in the method

of calculation.(1 mark)< Answer >9. Which of the following points can be considered as the starting point of financial forecasting?(a) Forecasting material requirements(b) Forecasting man power requirements(c) Forecasting financial requirements(d) Forecasting sales volume(e) Forecasting assets requirements.(1 mark)< Answer >10. Dividend paid by a subsidiary company out of pre-acquisition profits is(a) Adjusted against investment in subsidiary account at the time of consolidation of accounts(b) Adjusted against general reserve at the time of consolidation of accounts(c) Credited to profit and loss account as revenue receipts at the time of consolidation of accounts(d) Ignored for consolidation purposes(e) The claim of the shareholders of the holding company.(1 mark)< Answer >11. When the identity of the specific statutory reserve created under the Purchase Method of accounting foramalgamation is no longer required to be maintained, the following entry is to be made(a) Statutory Reserves A/c Dr.To Amalgamation A/c(b) Statutory Reserves A/c Dr.To Amalgamation Adjustment A/c(c) Amalgamation Adjustment Dr.To Statutory Reserves A/c(d) Share Capital A/c Dr.To Statutory Reserves A/c(e) Statutory Reserves A/c Dr.To Profit and Loss A/c(1 mark)< Answer >12. Which of the following should be deducted from the share capital to find out paid-up capital?

(a) Calls-in-advance (b) Calls-in-arrears(c) Share forfeiture (d) Discount on issue of shares(e) Share premium.(1 mark)< Answer >13. A funds flow statement is also known as(a) Balance sheet (b) Profit and loss statement(c) Income statement (d) Proforma statement(e) Statement for the changes in financial position.(1 mark)< Answer >14. Which of the following is not shown under the head ‘Share Capital’ in the Balance Sheet of a company?(a) Preference share capital (b) Equity share capital(c) Calls-in arrear (d) Share forfeiture(e) Preference dividend.(1 mark)< Answer >15. Which of the following ratios indicates the ability of a firm to service the financial charges? < Answer >3(a) Dividend pay-out ratio (b) Fixed charges coverage ratio(c) Net profit margin ratio (d) Inventory turnover ratio(e) Acid test ratio.(1 mark)16. As per schedule VI of the Companies Act, 1956, which of the following is not shown in the Balance Sheet of acompany under the head ‘Fixed Assets’?(a) Lease hold property (b) Development of property(c) Railway sidings (d) Designs(e) Unadjusted development expenditure.(1 mark)< Answer >17. According to schedule VI of the Companies Act, 1956, which of the following assets is/are shown under the head‘investments’ in the balance sheet of a company?I. Investments in the capital of partnership firms.II. Investment in trust securities.III. Investment in shares.IV. Investment in debentures.

(a) Only (I) above (b) Only (II) above(c) Both (III) and (IV) above (d) (II), (III) and (IV) above(e) All (I), (II), (III) and (IV) above.(1 mark)< Answer >18. In addition to the Managing Director or Manager of the company, who among the following is/are responsiblefor keeping proper books of accounts of a company?I. Every legal advisor of the company.II. Every banker of the company.III. Every officer and other employee and agent in default.IV. Every auditor of the company.V. Every member of the company.(a) Only (III) above (b) Both (I) and (IV) above(c) Both (III) and (IV) above (d) Both (IV) and (V) above(e) All (I), (II), (III), (IV) and (V) above.(1 mark)< Answer >19. In which of the following situations, price earnings ratio is applied?(a) To determine the financial risk of a business entity(b) To determine the expected market value of the shares of a company(c) To assess the earning potential of a company in the near future(d) To examine the operational efficiency of a company(e) To check how efficiently the assets are utilized by a firm.(1 mark)< Answer >20. Dividends are usually paid as a percentage of(a) Authorized share capital (b) Net profit(c) Paid-up capital (d) Called-up capital(e) Called-up share capital plus calls-in-advance less un-paid calls.(1 mark)< Answer >21. As per schedule VI of the Companies Act, 1956, under which of the following heads is ‘Premium on issue ofdebentures’ shown in the balance sheet of a company?(a) Miscellaneous expenditure (b) Debentures(c) Reserves and surplus (d) Current liabilities and provisions(e) Current assets.(1 mark)< Answer >

22. While preparing proforma financial statement by using budgeted expense method(a) The method of extrapolation is applied to assess the total expenses of the company in proportion to increasein sales(b) The items related to various expenses are projected on the basis of the anticipated changes< Answer >4(c) The future cost-sales ratio is assumed to be prevailed as per historical relationship(d) A regression equation may be framed to project the costs during the future years(e) All the expenses are increased by a fixed percentage.(1 mark)23. Declared dividend should be classified in the balance sheet as a(a) Provision (b) Current liability (c) Reserve(d) Current asset (e) Miscellaneous expenditure.(1 mark)< Answer >24. According to which of the following accounting concepts consolidated financial statements are prepared when aparent-subsidiary relationship exists?(a) Going concern (b) Business entity(c) Materiality (d) Cost (e) Periodicity.(1 mark)< Answer >25. The profit and loss appropriation section of the profit and loss account shows the appropriation of profit and ispopularly known as(a) Below the line (b) Above the line(c) Profit and loss adjustment account (d) Specific reserve(e) General reserve.(1 mark)< Answer >26. According to the Companies Act, 1956, the companies have to compulsorily maintain their books of accountonly on(a) Accrual basis (b) Cash basis(c) Accrual basis or cash basis whichever is followed consistently

(d) Hybrid basis (e) Tax basis.(1 mark)< Answer >27. No disclosure is required in consolidated financial statements in respect of(a) Remittances-in-transit (b) Capital reserve(c) Intra-group transactions (d) Goodwill(e) Minority interest.(1 mark)< Answer >28. Which of the following is/are true regarding the effect on return on equity, other things remaining constant?(a) Greater the amount of sales, lower the return on equity(b) Lower the equity multiplier, lower the return on equity(c) Higher the assets turnover, lower the return on equity(d) Lower the debt-assets ratio, higher the return on equity(e) Higher the return on assets, lower the return on equity.(1 mark)< Answer >29. Which of the following increases the external funds required?(a) An increase in the spontaneous liabilities to sales ratio(b) A decrease in the retention ratio(c) An increase in the assets turnover ratio(d) A decrease in the short-term bank borrowings(e) Both (b) and (d) above.(1 mark)< Answer >30. In which of the following circumstances, subscribed capital is equal to issued capital?(a) When the board of directors have called up the total amount payable by the shareholders(b) When the maximum share capital which the company is authorized to issue is offered to public(c) When there are no calls-in-arears(d) When all the shares offered to the public are taken up by the public(e) Subscribed capital and issued capital are one and the same.(1 mark)< Answer >31. Which of the following results in an increase in working capital of a company?

(a) An increase in outstanding rent (b) An increase in investments< Answer >5(c) A decrease in depreciation (d) A decrease in the amount of provision for tax(e) An increase in gross fixed assets.(1 mark)32. Which of the following statements is/are true regarding inventory turnover ratio?I. If the inventory turnover ratio has decreased from past, it means that either inventory is decreasing or costof goods sold is increasing.II. If a firm has an inventory turnover that is slower than for its industry, then the inventory stocks may be low.III. Low inventory turnover has impact on the liquidity of the business.(a) Only (I) above (b) Only (II) above(c) Only (III) above (d) Both (I) and (III) above(e) All (I), (II) and (III) above.(1 mark)< Answer >33. Which of the following cannot be inferred from a funds flow analysis?(a) Liquidity (b) Acquisition of non current assets(c) External funds utilized (d) Pattern of financing(e) None of the above.(1 mark)< Answer >34. If the proposed dividend appears in the balance sheet of subsidiary company, while preparing the ConsolidatedBalance Sheet, the share of minority shareholders should be(a) Shown under proposed dividend in the Consolidated Balance Sheet(b) Credited to Investment account(c) Credited to Consolidated Profit and Loss account(d) Added to minority interest in Consolidated Balance Sheet(e) Credited to Goodwill account.(1 mark)< Answer >35. Which of the following equations is equal to Net Value Added?(a) Gross Value Added + Depreciation (b) Gross Value Added + Interest(c) Gross Value Added – Depreciation (d) Gross Value Added – Inventory(e) Gross Value Added – Net Inventory.

(1 mark)< Answer >36. The item ‘Interest Accrued on Investments’ appears in the balance sheet of a company under the category of(a) Loans and advances (b) Current assets(c) Investments (d) Current liabilities(e) Reserves and surplus.(1 mark)< Answer >37. As per Accounting Standard 18, if two or more companies are subsidiaries of the same holding company, eachsubsidiary is known as ___________ of the other subsidiary.(a) Fellow subsidiary (b) Co-subsidiary (c) Subsidiary(d) Associate (e) Sub-subsidiary.(1 mark)< Answer >38. Which of the following denotes the dividend declared by the directors between two annual general meetings?(a) Proposed dividend (b) Final dividend(c) Interim dividend (d) Declared dividend(e) Unpaid dividend.(1 mark)< Answer >39. Which of the following ratios indicates the capital structure?(a) Debt-assets ratio (b) Inventory turnover ratio(c) Total asset turnover ratio (d) Return on equity (e) Return on assets.(1 mark)< Answer >40. Economic value addition can be computed as(a) Gross profit – Cost of capital(b) Gross profit – Average cost of capital< Answer >6(c) Net operating profit before tax – Cost of capital(d) Net operating profit after tax – Weighted average cost of capital(e) Net operating profit before tax – Depreciation.(1 mark)

ANS—

Suggested AnswersFinancial Accounting – II (MB132): April 20061. Answer : (c)Reason: The loss on sale of fixed assets (c) is debited to profit and loss account and is not carried over underMiscellaneous expenditure in the balance sheet of a company and alternative (c) is the correctanswer. the following will form part of ‘Miscellaneous Expenditure’ of the Balance Sheet of acompany till they are adjusted/written off completely Preliminary expenses (a), Underwritingexpenses (b), Discount on issue of shares (d) and Interest paid out of capital.(e) are not the correctanswers.<2. Answer : (e)Reason: In Jury of Executive opinion method, the personal judgements of many senior executives fromdifferent fields are taken into account while in sales force estimates method, the personal judgementof the sales personnel operating at the ground level are considered. But mathematical tools andtechniques are applied in the methods mentioned in the options (c) and (d). Hence, the option (e) isanswer.<3. Answer : (d)Reason: Para 3(g) of AS-14 clearly states that purchase consideration is the aggregate of shares and othersecurities issued and the payment made in the form of cash or other assets by the transfereecompany to the shareholders of the transferor company.<4. Answer : (e)Reason: In the Consolidated Balance Sheet of a Holding Company, the value of minority interest consists ofthe proportionate share of minority shareholders in the (I) Nominal value of share capital ofsubsidiary company (III) Reserves and profits of the subsidiary company at the time of acquisition

by the holding company and (V). Income of the subsidiary company after the acquisition by theholding company Hence, the alternative (e) the combination of the these statements is the correctanswer. (II) Reserves of the holding company and (IV) Income of the holding company after itsacquisition are entirely the share of the share holders of the holding company and do not belong tothe minority share holders of the subsidiary company and the alternatives (b), (c) and (d) with thesestatements are incorrect. The alternative (a) is incorrect because it does not represent the entireshare of the minority share holders. Thus, alternative (e) is the correct answer.<5. Answer : (d)Reason: The liquidity of a company is measured by the acid-test ratio as it is a liquidity ratio. The otherratios, as mentioned in the other options, do not convey anything in relation to the liquidity of acompany.<6. Answer : (e)Reason: Under the Net Assets method of calculating purchase consideration, assets and liabilities of thetransferor company are taken over by the transferee company at agreed values. In the absence ofagreed values, book values of the assets and liabilities is considered.<7. Answer : (d)Reason: A funds flow statement on cash basis does not show the net change in working capital.<8. Answer : (b)Reason: EVA can be improved by downsizing non-profitable operations, units or by selling off sub-standardassets. Hence (b) is false. The computation of EVA involves a complex procedure. Stern andStewart suggested 175 different assumptions and adjsutments on the basic measure. EVA is a

residual income measure that subtracts the cost of capital from the operating profit generated by abusiness. In other words, EVA measures whether the operating profit is enough compated to thetotal cost of capital. EVA is simply after-tax operating profit minus the total annual cost of capital.EVA is one variation if residual income with adjustments in the method of calculation. Unlike the<14traditional measure of accounting profit where only part of the cost of capital (cost of debt) isdeducted, EVA requires deduction of full cost of capital (Cost of debt as well as cost of equity).EVA can be used for making day-to-day decisions as well as for strategic planning. For thispurpose, EVA points have to be identified. An EVA point is one which has revenue, expenditureand capitl issue attached to it. EVA destroyers for each EVA point are identified and steps are takento improve them.EVA analysis is made for each and every EVA point for decision-making. Thus(a), (c), (d) and (e) are true.9. Answer : (d)Reason: Forecasting sales volume is the first step in the exercise of financial forecasting. Based on theamount of sales target to be achieved by the company, forecasting for the other requirements aremade.<10. Answer : (a)Reason: Dividends paid by a subsidiary company out of pre-acquisition profits are adjusted againstInvestment A/c for the purpose of arriving at cost of control at the time of consolidation of accounts(a) since they form part of capital profits they are adjusted against the cost of control and alternative(a) is the correct answer. Since, they are capital profits, they cannot be adjusted against generalreserve at the time of consolidation (b) is the incorrect answer. They are not

revenue receipts to betransferred to Profit and Loss account at the time of consolidation of accounts and alternative (c) isthe incorrect answer. Since they are part of capital profits, they cannot be ignore for consolidationpurposes. And alternative (d) is incorrect. The dividends declared out of post-acquisition profits arethe claims of the shareholders of the holding company. and do not form part of cost of control. Thealternative (e) is not the correct answer. Thus, alternative (a) is the correct answer.<11. Answer : (b)Reason: When Statutory Reserves are incorporated in the financial statements of the transferee company byway of the following entry.Amalgamation Adjustment A/c Dr.To Statutory Reserves A/cThis ENTRY is reversed when the statutory reserve is no longer required. Hence the journal entry isStatutory Reserves A/c Dr.To Amalgamation Adjustment A/c<12. Answer : (b)Reason: Called up capital is the amount on the shares which is actually demanded by the company to bepaid. However, there may be some shareholders who may make default in the payment. The moneydue from them is called calls-in-arrears. This amount should be deducted from the called up capitalto arrive at the paid-up capital. Thus, (b) is the correct answer.<13. Answer : (e)Reason: A funds flow statement is known through different terms one of them is mentioned in the givenoption (e). A balance sheet states the financial position of a company as on a particular date whileprofit and loss statement or income statement shows the financial performance of a company duringa year or a particular time period. Proforma statements are prepared to

project the financial position(proforma balance sheet) of a company and the financial performance (proforma income statement)of a company in future.<14. Answer : (e)Reason: Preference share capital, equity share capital, calls-in arrear and share forfeiture should be shownunder the head ‘Share capital’ in the balance sheet. However the preference dividend will be shownunder provisions if it is proposed and under current liabilities if declared. The unclaimed dividendalso will be shown under the head current liabilities, Thus the answer is (e).<15. Answer : (b)Reason: Dividend pay out ratio indicates the amount of dividend paid out of net profit earned by thecompany. Net profit margin represents the amount of profit as a percentage of total sales. Inventoryturnover ratio implies how efficiently the inventories are used by a company while acid test ratioshows the liquidity status for a company. But fixed chares coverage ratio represents the ability of a<15firm to meet its financial obligations to make service the debts as well as to pay the lease rentals.16. Answer : (e)Reason: As per schedule VI of the Companies Act, 1956, Unadjusted development expenditure (e) is shownunder Miscellaneous expenditure and is the correct answer. It is not shown under the head fixedassets. The other assets stated in alternatives Lease hold property (a), Development of property(b), Railway sidings (c) and Designs (d) are the fixed assets and not the correct answers. Thus,alternative (e) is the correct answer.<17. Answer : (e)Reason: According to the Schedule VI of the Companies Act, 1956, the

following assets is/are shown underthe head ‘investments’ in the balance sheet of a companyI Investments in the capital of partnership firmsII Investment in Trust securitiesIII Investment in sharesIV Investment in debentures.<18. Answer : (a)Reason: (III) Every officer and other employee and agent in default is/are held responsible for keepingproper books of accounts of a company in addition to the Managing Director or Manager of thecompany Thus, alternative (a) is the correct answer. The other persons mentioned in otherstatements and alternatives (b), (c), (d) and (e) are incorrect because they are not the persons heldliable for proper keeping books of accountsI Every legal advisor of the companyII Every banker of the companyIV Every auditor of the companyV Every member of the company. Thus, the correct answer is (a).<19. Answer : (b)Reason: The financial risk of a firm may be estimated by using the leverage and coverage ratios while theearning potential of a company may be evaluated through the profitability ratios. The operationaland the level of efficiency in utilizing the assets may measured by using the turnover ratios. Butprice-earnings ratio is used to determine the expected market price per share of the company. Onemay project the EPS of a company for the next few years and thereafter by assuming the continuityof the same P/E multiple, the future market price per share may be calculated.<20. Answer : (c)Reason: Dividends are usually paid as a percentage of called-up capital less calls-in-arrear (c).It is not paidon authorized capital (a) unless it is fully called-up and paid-up. Net profit

(b) is the basis fordeclaring dividends but the computation is as a percentage of paid-up capital. And is not the correctanswer. No dividend is payable on calls-in-advance hence the alternative (d) which states paid-upshare capital plus calls-in-advance is incorrect. The alternative (e) is also incorrect because, it alsoincludes calls-in-advance. Thus, alternative (c) is the correct answer.<21. Answer : (c)Reason: As per the Schedule VI of the Companies Act, 1956, ‘Premium on issue of debentures’ is shownunder head Reserves and Surplus in the balance sheet of a company. It is unlike share premiumwhich is to be utilized as per section 79 of the Companies Act. The premium on issue of debenturesis treated as profit and placed under Reserves and Surplus in the balance sheet of a company.Thus, (c) is the correct answer.<22. Answer : (b)Reason: The trend analysis, through the method of extrapolation and regression analysis are used for theprojection of sales volume of the company. The future relationship between various costs to sales isassumed to follow historical relationship in case of percent of sales method. But in budgetedexpense method, the estimation of the various items is considered on the basis of the expectedchanges to be happened in the market for the preparation of the proforma income statement. Hence,the option (b) is the answer.<23. Answer : (b)Reason: The proposed dividend is classified as a provision and shown on the liability side of the balancesheet. The dividend finally decided by the shareholders in the annual general meeting as payable is<16

termed as Declared Dividend. Any dividend declared must be paid with thirty days from the date ofdeclaration. Hence, a declared dividend must be classified as a current liability in the balance sheetof the company. Thus the answer is (b).24. Answer : (b)Reason: Consolidated financial statements should reflect the economic activities of a business enterprisemeasured without regard to the boundaries of the legal entity. A parent and subsidiary are legallyseparate but are treated as a single business enterprise in consolidated statements, in recognition ofBusiness entity concept (b). The other concepts do not explain about consolidation of financialstatements. The Going concern concept (a) assumes that the business entity will continue to operatein the absence of evidence to the contrary. Materiality (c) requires reporting the information that hasa value significant enough to affect decisions of those using the financial statements. Cost concept(d) explains how the assets are to be recorded in the books of accounts. According to this, fixedassets are to be recorded at cost less accumulated depreciation. Periodicity (e) explains that thefinancial accounting process is meant to provide the information about the economic activities of thebusiness enterprise at regular intervals. It does not speak about consolidation of financial statements.<25. Answer : (a)Reason: In case of a company, it is not necessary to split the profit and loss account into three sections i.e.Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account. Only Profitand Loss Account may be prepared covering items appearing in Trading Account and Profit andLoss Appropriation Account. The Profit and Loss Appropriation section of the profit and Lossaccount shows the appropriation of profit and is popularly known as ‘below the line’ (a) is the

correct answer. There is no term ‘above the line’ (b) in accounting in this context. Profit and lossadjustment account (c) is the final account depicting rectification of errors that are found afterpreparation of final accounts. Specific reserve (d) is appropriation of profit for specific purposeeither for acquisition of an asset or amortization of expenditure or redemption of a liability and hasno relevance. General reserve (e) is the reserve created out of net profits, which is not the correctanswer.<26. Answer : (a)Reason: According to the Companies Act, 1956, the companies have to compulsorily maintain their books ofaccount only on accrual basis. Cash basis should not be followed.<27. Answer : (c)Reason: No disclosure is required in consolidated financial statements in respect of Intra-group transactions.The other items, Remittances-in-transit, capital reserve/Goodwill and minority interest are disclosedin consolidated financial statements.<28. Answer : (b)Reason: Du Pont equation for return on equity is:Return on Equity (ROE)Net profit Sales Average assetsSales Average assets Average equity× ×The third component of the equation is called equity multiplier.Thus, higher the assets turnover ratio, higher the equity multiplier, higher the debt-assets ratio,higher the return on assets, higher will be the return on equity. Hence, (c), (d) and (e) are not correctand (b) is correct. Return on equity does not depend on sales. Hence, (a) is also not true.<29. Answer : (b)Reason: A decrease in the retention ratio implies an increase in the dividend

payment and less amount offunds available for investment and hence increases the external funds required. Hence, (b) is true.An increase in the spontaneous liabilities to sales ratio, an increase in assets turnover ratio (i.e. adecrease in total assets to sales ratio) decreases the external funds required. Hence, (a) and (c) areincorrect. Short-term bank borrowings are one of the sources of the external funds and does notindicate the amount of funds required.<30. Answer : (d)Reason: The nominal value of shares taken up by the public is subscribed capital. The issued capital is thenominal value of shares offered to the public. Hence subscribed capital is equal to issued capital<17when all the shares offered to the public are taken up by the public. When the board of directorshave called up the total amount payable by the shareholders, the called-up capital will be equal tothe subscribed capital. When the maximum share capital which the company is authorized to issue isoffered to public, the authorized capital will be equal to the issued capital.When all the shareholdershave duly paid the total amount payable by them, the called-up capital will be equal to the paid-upcapital. Subscribed capital and issued capital are not one and the same. Thus the answer is (d).31. Answer : (d)Reason : An increase in current assets or a decrease in current liabilities will increase the working capital.Hence, a decrease in the amount of provision for tax i.e. a current liability results in an increase inworking capital. Option (a) results in an increase in current liability and hence results in decrease inworking capital. Other alternatives indicates changes in non-current assets and hence are notcorrect.

<32. Answer : (c)Reason : Inventory turnover ratio=Cost of goods sold/Average inventoryIf the inventory turnover ratio has decreased from past, it means that either inventory is growing orcost of goods sold sales are dropping. So statement (I) is incorrect.If a firm has an inventory turnover that is slower than for its industry, then there may be obsoletegoods on hand, or inventory stocks may be high. So statement (II) is incorrect.Low inventory turnover has impact on the liquidity of the business because most of the currentassets are tied up in inventory. So statement (III) is correct.Hence option (c) is the answer.<33. Answer : (e)Reason : Using a funds flow statement we can know about all the given factors. i.e. liquidity, acquisition ofnon current assets, about utilization of external funds and pattern of financing. Hence (e) is theanswer.<34. Answer : (a)Reason : If the proposed dividend appears in the balance sheet of subsidiary company, while preparing theConsolidated Balance Sheet, the amount belonging to minority shareholders should be shown underproposed dividend in the Consolidated Balance Sheet. Hence the answer is (a).<35. Answer : (c)Reason : Net value-added is derived by deducting depreciation from the gross value added. Gross valueadded is arrived at by deducting cost of all materials and services and other extraordinary expensesfrom sales revenue and any other income. Therefore, Net value added = Gross value added –Depreciation.<36. Answer : (b)

Reason : The item interest accrued on investments appears in the Balance Sheet of a company under thecategory of current assets.<37. Answer : (a)Reason : As per accounting standard 18, if two or more companies are subsidiaries of the same holdingcompany, each subsidiary is known as Fellow subsidiary.<38. Answer : (c)Reason : Though dividends can be declared only by a resolution of the shareholders, if the articles permit, thedirectors can declare an interim dividend (c) between two annual general meetings. The dividendrecommended by the directors is termed as proposed dividend (a) till such time it is approved by theshareholders in the AGM. The dividend finally decided by the shareholders in the AGM as payableis termed as Declared dividend (d). The unclaimed portion of it is un-paid/ un-claimed dividend (e).Final dividend (b) gives rise to an enforceable obligation.<1839. Answer : (a)Reason : Debt asset ratio indicates the capital structure of a company. Inventory turnover ratio and total assetturnover ratio are the turnover ratios that indicate how efficiently the assets are utilized by acompany. While return on equity and return on assets are the profitability ratios of a business entity.<40. Answer : (d)Reason : Economic value addition=Net operating profit after tax – Weighted average cost of capital.

Financial Accounting-I (MB131): July 2006

Financial Accounting-I (MB131): July 2006

• Answer all questions.• Marks are indicated against each question.1. The funds available with a company after paying all claims including tax and dividend is called(a) Net profit (b) Net operating profit(c) Capital profit (d) Retained earnings(e) Profit before tax.(1 mark)<Answer>2. Which of the following events/transactions is not recorded in the books of account of abusiness?(a) Withdrawal of goods by the proprietor for personal consumption(b) Sale of an asset on credit(c) Purchase of a new asset in exchange of an old asset(d) Receipt of interest by proprietor on bank fixed deposit held jointly with spouse(e) Loss of stock by fire.(1 mark)<Answer>3. Which of the following accounting concepts enables comparison of financial statements over aperiod of time?(a) Cost concept (b) Consistency concept(c) Materiality concept (d) Money measurement concept(e) Accounting period concept.(1 mark)<Answer>4. Under the Companies Act, a company is normally not permitted to have an accounting periodextending beyond(a) 6 months (b) 12 months (c) 15 months

(d) 18 months (e) 22 months.(1 mark)<Answer>5. Who of the following is not an internal user of Financial Statements?(a) Board of Directors (b) Partners (c) Investors(d) Managers (e) Officers.(1 mark)<Answer>6. For a trading company which of the following is not a non-trading income or expense?(a) Rent received (b) Profit from sale of old furniture(c) Dividend received (d) Interest on borrowings(e) Interest on Investments.(1 mark)<Answer>7. Which of the following statements is false?(a) Accounting principle is general law or rule followed in the preparation of financialstatements(b) Usefulness, objectivity and feasibility are the three basic norms generally found inaccounting principles(c) The entity concept does not consider the business and the proprietor as distinct fromeach other(d) In accountancy all business transactions are recorded as having dual aspect(e) The convention of disclosure implies that all material information should be disclosed inthe accounts.(1 mark)<Answer>

8. When applied to Balance-Sheet the convention of conservatism results in(a) Understatement of assets(b) Understatement of liabilities and provisions(c) Over statement of capital(d) Understatement of assets and liabilities and provisions(e) Understatement of assets, liabilities and provisions and capital.(1 mark)<Answer>9. The total of all the current assets of Intelligent Limited is Rs. 3,00,000. The followinginformation is also available from the trial balance of the company.The only other current asset not included in the information above is closing stock. Its valuemust be(a) Rs.2,14,500 (b) Rs.2,04,500 (c) Rs.2,02,000(d) Rs.1,98,000 (e) Rs.2,41,500.(2 marks)Sundry debtors Rs. 30,500Current liabilities Rs. 16,400Provision for taxation Rs. 12,000Cash & bank balance Rs. 30,000Bills receivable Rs. 25,000Office typewriter Rs. 39,000<Answer>10.Valuation of inventory on the same basis every year, is based on the principle of(a) Cost concept (b) Consistency concept(c) Conservatism concept (d) Matching concept(e) Accounting period concept.(1 mark)<Answer>11.Consider the following data pertaining to Volga Ltd.:While finalizing the annual accounts, if the company values the machinery at Rs.12,00,000,

which of the following concepts is violated by the company?(a) Cost (b) Matching(c) Realisation(d) Periodicity (e) Business Entity.(1 mark)Particulars Rs.Cost of the machinery purchased on April 1, 2005 10,00,000Installation charges 1,00,000Market value as on March 31, 2006 12,00,000<Answer>12.As per Accounting Standard-1, which of these accounting assumptions are taken intoconsideration while preparing financial statements?I. Prudence.II. Going concern.III. Accrual.IV. Consistency.(a) Both (I) and (IV) above (b) Both (II) and (III) above(c) Both (I) and (III) above (d) (II), (III) and (IV) above(e) All (I), (II), (III) and (IV) above.(1 mark)<Answer>13.The ending balance of owner’s equity is Rs.21,000. During the year, the owner contributed Rs.6,000 and withdrew Rs.4,000. If the firm had Rs.8,000 net income for the year, what was theowner’s equity at the beginning of the year?(a) Rs.23,000 (b) Rs.21,000 (c) Rs.19,000 (d)Rs.11,000 (e) Rs.25,000.(2 marks)<Answer>14.According to money measurement concept, which of the following will be recorded in thebooks of accounts?

(a) Health of the Chairman of the company(b) Quality control in the business(c) Value of building(d) ISI certification obtained(e) Election of board of directors.(1 mark)<Answer>15.Accounting Standards 12 (AS 12) pertains to(a) Accounts for Amalgamation(b) Accounting for Government Grants(c) Accounting for the Effects of Changes in Foreign Exchange Rates(d) Accounting for Construction Contracts(e) Contingencies and Events Occurring after the Balance-Sheet Date.(1 mark)<Answer>16.The income or expenses which arise in the current year as a result of errors or omissions in thepreparation of financial statements of one or more previous years is known as(a) Prior period items (b) Extraordinary items(c) Contingent items (d) Preliminary items(e) Equity items.(1 mark)<Answer>17.Which of the following represent(s) Personal accounts in accounting parlance?I. Sundry creditors.II. Bank account.III. Outstanding wages.IV. Prepaid insurance.(a) Only (I) above (b) Only (II) above(c) Only (III) above (d) Only (IV) above(e) All (I), (II), (III) and (IV) above.(1 mark)

<Answer>18.M/s. Swapna Enterprises introduced the imprest system of petty cash book, the amount ofimprest being Rs.1,000. The petty cash transactions during the month of June 2006 are asunder:The amount of cash received on July 01, 2006 to make up the imprest balance is(a) Rs.678 (b) Rs.294 (c) Rs.906 (d)Rs.522 (e) Rs.1,100.(2 marks)ParticularsAmount(Rs.)Stamps 145Conveyance 186Repairs 228Stationery 154Other office expenses 193<Answer>19.Which of the following is not a nominal A/c?(a) Purchases (b)Sales (c) Rent(d) Trade mark (e) Advertisement.(1 mark)<Answer>20.Which of the following type of error will not be reflected by a Trial Balance?(a) Posting of a transaction twice(b) Omission of a transaction(c) Wrong calculation of balance in ledger accounts(d) Omission of an account balance(e) Wrong totaling in a subsidiary book.(1 mark)

<Answer>21.Consider the following data pertaining to purchases made by Zodiac Ltd., a dealer in electronicgoods, for the month of June 2006:On June 22, 2006, the company purchased from Indian Stationers on credit for office use 10dozens of carbon papers at the rate of Rs.35 per dozen and 10 dozens of ball pens at the rate ofRs.25 per dozen.The total of purchases for the month of June 2006, was(a) Rs.2,14,350 (b) Rs.2,38,000 (c) Rs.2,14,950(d) Rs.2,38,600 (e) Rs.2,14,200.(2 marks)Date Particulars No. of unitsRate per unitRs.TradeDiscountJune 01 Black & White TVs 50 3,000 10%Colour TVs 10 6,000 10%June 09 Tape Recorders 10 1,000 10%Two-in-one 10 1,500 10%June 19 Audio Cassettes 100 30 5%<Answer>22.Consider the following data pertaining to a company for the month of June 2006:The sales of the company during the month are(a) Rs.1,41,250 (b) Rs.1,35,600 (c) Rs.1,33,750(d) Rs.1,28,400 (e) Rs.1,13,000.Opening stock Rs.22,000Closing stock Rs.25,000Purchases less returns Rs.1,10,000Gross profit margin (on sale) 20%<Answer>

(1 mark)23.Which of the following statements is false?(a) Credit side total of discount column of cash book is an income(b) Credit balance of bank pass book is an overdraft(c) Debit balance of bank column of cash book is an asset(d) Debit balance of cash column of cash book is an asset(e) Credit balance of bank column of cash book is a liability.(1 mark)<Answer>24.Consider the following data pertaining to M/s. Libra Company:During the year 2005-06, the sales were Rs.3,60,000 and all were on credit. The cashpurchases were Rs.80,000 and credit purchases were Rs.2,00,000. Expenses paid during theyear were Rs.70,000.The cash and bank balance of M/s. Libra Company as on March 31, 2006 was(a) Rs.50,000 (b) Rs.90,000 (c) Rs.70,000(d) Rs.80,000 (e) Rs.60,000.(2 marks)ParticularsAs on April 01, 2005Rs.As on March 31, 2006Rs.Cash & bank 60,000 ?Sundry debtors 50,000 40,000Sundry creditors 70,000 80,000<Answer>25.Purchases of office furniture on acceptance of a bill of exchange is recorded inI. Journal proper.II. Bills payable book.III. Purchases book.(a) Only (I) above (b) Only (II) above(c) Only (III) above (d) Both (I) and (II) above

(e) Both (II) and (III) above.(1 mark)<Answer>26.In retail inventory method, original selling price may be modified. If the selling price islowered below the original selling price, it is known as(a) Markup (b) Markup cancellation(c) Net markup (d) Markdown (e)Net markdown.(1 mark)<Answer>27.Consider the following information of Make-up Company for the year 2005-2006:The amount to be debited to profit and loss account to make the estimated provision is(a) Rs.8,600 (b) Rs.10,400 (c) Rs.10,520 (d) Rs.10,600(e) Rs.10,680.(2 marks)Opening balance of provision for debtors account Rs. 20,000Bad debts during the year Rs. 18,000Closing balance of Sundry debtors Rs.2,65,000Estimated provision for doubtful debts 4%<Answer>28.A company purchased second hand machinery in exchange of its 2,000 shares. The book valueof the machinery is Rs.2,25,000 and similar machinery is available in the market forRs.2,50,000. The book value of the company’s share is Rs.90 and its shares are quoted atRs.110 in the market. The value of machinery to be taken in the book is(a) Rs.2,25,000 (b) Rs.2,50,000 (c) Rs.1,80,000(d) Rs.2,20,000 (e) Rs.2,00,000.(2 marks)<

Answer>29.Which of the following is not included in the cost of land?(a) Broker’s commission (b) Legal fee (c) Stamp duty(d) Registration charge (e) Property tax.(1 mark)<Answer>30.Renewal fee for patent is(a) Capital expenditure (b) Revenue expenditure(c) Deferred revenue expenditure (d) Development expenditure(e) Contingent expenditure.(1 mark)<Answer>31.The main objective of providing depreciation is to(a) Calculate the true net profit(b) Compute the actual cash profit(c) Create funds for replacement of fixed assets(d) Reduce tax burden(e) Value the equity shares of a company.(1 mark)<Answer

1. Answer : (d)Reason : The fund available with a company after paying all claims including tax and dividend isRetained earnings. (d) is the correct answer.<TOP>2. Answer : (d)Reason : The receipt of interest by proprietor on bank fixed deposit held jointly with spouse cannot beentered in the books of account of the business. The other items i.e. withdrawal of goods bythe proprietor for personal consumption, sale of an asset on credit,

purchase of new asset inexchange of old asset and loss of stock by fire are all recorded in the books of account.<TOP>3. Answer : (b)Reason : According to the consistency concept, the financial statements should be prepared on thebasis of accounting principles which are followed consistently. Hence, this concept enablescomparison of financial statements over a period of time. According to cost concept, alltransactions are recorded at cost. All material items should be separately disclosed undermateriality concept. Money measurement concept envisages that a record is made only ofinformation that can be expressed in monetary terms. According to accounting period concept,the income or loss of a business is measured periodically for a specific interval of time, calledaccounting period.<TOP>4. Answer : (c)Reason : As per the companies Act, the accounting period of a company in the normal circumstanceshall not exceed 15months. Answer(c)is correct.<TOP>5. Answer : (c)Reason : Board of Directors, Partners, Managers and Officers are internal users. An investor is anexternal user.<TOP>6. Answer : (d)

Reason : Rent received, Profit from sale of old furniture, Dividend received, and Interest onInvestments are non-trading income. Interest paid on borrowings is a trading expense.<TOP>7. Answer : (c)Reason : The entity concept considers the business and the proprietor as distinct from each otherAccounting principle is general law or rule followed in the preparation of financial statementsUsefulness, objectivity and feasibility are the three basic norms generally found in accountingprinciples. In Accountancy all business transactions are recorded as having dual aspect .Theconvention of disclosure implies that all material information should be disclosed in theaccounts.<TOP>8. Answer : (a)Reason : The concept of conservatism involves understating gains and values and overstating lossesand liabilities. Hence when applied to Balance-Sheet the convention of conservatism results inunderstatement of assets. Option (a) is correct.<TOP>9. Answer : (a)Reason : Total of all current assets = Rs.3,00,000Total of current assets excluding stock= Sundry Debtors + Bills Receivable + Cash & Bank Balance= 30,500 + 25,000 + 30,000 = Rs. 85,500Value of closing stock = Rs.3,00,000 – Rs.85,500 = Rs.2,14,500<TOP>

10. Answer : (b)Reason : The consistency concept requires that once an entity has decided to follow one method ofvaluation of inventory, it will follow the same unless there is strong reason to change themethod of valuation, which is in consonance with consistency principle.<TOP>11. Answer : (a)Reason : In terms of cost concept the value of an asset is to be determined on the basis of acquisitioncost. Valuation of machinery at market value is in violation of cost concept unless the machineis actually sold, realizable value will give only a hypothetical figure. Market value is highlysubjective because to know the value of the asset one has to chase the uncertain future. Theother concepts matching concept (b) deals with matching costs with revenue, Realizationconcept (c) deals with recognition of income at various levels of production, Periodicityconcept (d) explains how the accounting information is to be reported at regular intervals tofoster comparability, Business entity concept (e) explains the owner is different from thebusiness entity. Thus, the concepts (b), (c), (d), and (e) do not explain how the fixed assets areto be recorded.<TOP>12. Answer : (d)Reason : As per AS 1, the accounting assumptions of Going concern, Accrual and Consistency aretaken into consideration while preparing financial statements. (d), the combination of these isthe correct answer.<TOP

>13. Answer : (d)Reason : The owners’ equity at the beginning of the year = Rs.11,000Closing Capital plus drawings less (contribution plus net income) = Rs.21,000 + Rs.4,000 –(Rs.6,000 + Rs.8,000) = Rs.25,000- Rs.14,000 = Rs.11,000.<TOP>14. Answer : (c)Reason : According to money measurement concept the Value of building will be recorded in thebooks of accounts. All other events cannot be measured in terms of money and hence notrecorded in books of accounts.<TOP>15. Answer : (b)Reason : Accounting Standards 12 (AS 12) pertains to Accounting for Government Grants.<TOP>16. Answer : (a)Reason : According to Accounting Standard-5, the incomes or expenses which arise in the currentperiod as a result of errors or omissions in the preparation of financial statements of one ormore prior periods is known as prior period items. Extraordinary items are income orexpenses that arise from events or transactions that are clearly distinct from the ordinaryactivities of the enterprise and, therefore, are not expected to recur frequently or regularly.Contingent items are gains or losses, which arise only on the occurrence or non-occurrence ofa one or more uncertain future events. Preliminary items are those expenses incurred for theincorporation of the company. Equity items are the items like equity share

capital, calls-inarrears,which are related to equity shareholders.<TOP>17. Answer : (e)Reason : Personal accounts deal with accounts of individuals like creditors, debtors, banks etc. Itshows the balance due to these individuals or due from them on a particular date andrepresentative personal accounts represent the amounts due on account of accrual concept likeaccrued expenses and prepaid expenses or accrued incomes and pre-received incomes. Byvirtue of this, the accounts stated in alternatives (a) sundry creditors, (b) Bank account, (c)outstanding wages and (d) prepaid insurance represents personal accounts.<TOP>18. Answer : (c)Reason :ParticularsAmount(Rs.)Amount(Rs.)Petty cash 1,000Less : Stamps 145Conveyance 186Repairs 228Stationery 154Other office expenses 193 90694Amount reimbursed 9061,000<TOP>19. Answer : (d)

Reason : Trade mark is treated as a fixed asset and hence a real account. All others are nominal A/c’s.<TOP>20. Answer : (b)Reason : Since a transaction altogether has been omitted both debit and credit aspects have not beenrecorded. Hence the trial balance cannot disclose the existence of the above error.<TOP>21. Answer : (a)Reason : Purchases Day BookThe purchase of stationery is not a part of purchase of goods and it is to be debited tostationery account.Date Particulars Details(Rs.)Total(Rs.)June. 01 50 Black & White T.V. @Rs.3,000 each10 Colour T.V. @ Rs.6,000each1,50,00060,0002,10,000Less : Trade discount @10%21,000 1,89,000June. 09 10 pieces of Taperecorder @Rs.1,000 each10,00010 pieces of Two-in-one @Rs.1,500 each15,00025,000Less : Trade discount @

10%2,500 22,500June. 19 100 pieces of Audio Casettes@ Rs.30 each3,000Less : Trade discount @5%150 2,8502,14,350<TOP>22. Answer : (c)Reason :Gross profit margin = 20% on sales20% on sales = 25% on cost.Sales = Rs.1,07,000 × 1.25 = Rs.1,33,750.Thus, the sales of the company is Rs.1,33,750.Particulars Rs.Opening stock 22,000Add : Purchases less returns 1,10,0001,32,000Less : Closing stock 25,000Cost of goods sold 1,07,000<TOP>23. Answer : (b)Reason : Credit balance of bank pass book is an overdraft (b) is a false statement because creditbalance as per pass book indicates the favourable balance and it is an asset. Credit balance ofdiscount column of cash book is an income (a) is true. Debit balance of bank column of cashbook is an asset (c). Debit balance of cash column of cash book is an asset and Credit balanceof bank column of cash book is a liability (e) are the true statements and the alternatives arenot the correct answers. Thus, (b) is the correct answer.<

TOP>24. Answer : (b)Reason : Dr. Sundry debtors account Cr.Dr. Sundry Creditors Cr.Cash and Bank balance :Date Particulars Rs. Date Particulars Rs.April 01,2005To Balanceb/d50,0002005-2006By Cash(Balancingfigure)3,70,0002005-2006To Sales 3,60,000March 31,2006By Balancec/d40,0004,10,000 4,10,000Date Particulars Rs. Date Particulars Rs.2005-2006 To Cash(balancingfigure)1,90,000April 01,2005By Balanceb/d70,000March 31,2006To Balancec/d

80,0002005-2006ByPurchases2,00,0002,70,000 2,70,000Particulars Rs.Opening cash and bank balance 60,000Add Cash received from sundrydebtors3,70,0004,30,000Less Cash paid to sundry creditors 1,90,000Cash purchases 80,000Expenses paid 70,000Closing cash and bank balance 90,000<TOP>25. Answer : (d)Reason : Purchase of office furniture against acceptance of a bill of exchange is recorded in JournalProper to record the purchase and in Bills payable subsidiary to record the acceptance of billof exchange. Thus, it is recorded in both the books (d) is the correct answer.<TOP>26. Answer : (d)Reason : Markdown means selling price being lowered below the original selling price. Selling pricebelow the original selling price cannot be mark-up, markup cancellation, net mark-up or netmarkdown. Hence (d) is correct.<TOP>27. Answer : (a)Reason : Make-up Co.

Bad debts Rs.18,000Add : Closing provision (4% onRs.2,65,000)Rs.10,600Rs.28,600Less : Opening provision Rs.20,000Amount to be debited to profit & lossaccountRs. 8,600<TOP>28. Answer : (d)Reason : When machinery is acquired in exchange of shares, the market value of the company’s shareis considered to calculate the value of machinery. Hence (110x2000) = Rs.2,20,000 is thevalue of machinery.<TOP>29. Answer : (e)Reason : Property tax is a revenue expenditure. All other expenses like legal fee, registration chargestamp duty, broker’s fee etc. can be included in the cost of the building.<TOP>30. Answer : (b)Reason : Although patent is a capital expenditure, renewal fee paid for patent is treated as revenueexpenditure.<TOP>31. Answer : (c)