CS FOUNDATION PAP ER-3 FINANCIAL ACCOUNTING JUNE-2009 Q.

1 (a) (i) Limitations of Accounting : The following are the limitations of acco unting :(a) Influenced by personal judgem ent :- Accounting is not an exact science and an accountant has to exercise his personal judge ment in respect of variou s items. For examp le, it is very difficult to predict what is the exact useful life of an asset or what is the right method of valuation of stock, etc. Different persons are bound to have different opinions in respect of such things and hence it will result in different accounting figures. (b) Omission of qualitative information :- Accounting contains only those informations which can be expressed in terms of money. Qu alitative aspects of business are om itted as the se cannot be expressed in monetary terms. Thus, changes in management, reputation of business, loyalties of employees, etc. Which have a vital impact on the profitability of the firm are ignored and omitted from being recorded in the bo oks o f accounts. (c) Based on historical cost :- Accounts are prepared on the basis of historical cost i.e. original cost and as such the figures given in the financial statements donot show the effect of changes in price level and henc e, do not show the true and fair view of the business. (d) Affected by w indow dressing :- Profits for a period can be manipulated omitting costs such as adve rtisement, dep reciatio n, etc for the purchases made at the end of the year may not be recorded or the closing stock may be over valued. Hence, the correct decisions cannot be taken on the basis of such financial statements. (e) Un suitable for forecasting :- Accounts are only a record o f past events. Changes take place in the demand of the product, position of competition, etc. As such, financial analysis based on past events may not be of much use for forecasting. (ii) Sam e as 2006 Dec [1] { C} (i) (iii) Sam e as 1999 Dec [1] { C} (iii) (iv) Refer 2004 J une [2 ] (ii) Q.1 (b) (i) False. Every error does not affect the agreement of trial balance. There are errors like erro rs of co mplete omission, errors of commission, compensatory errors, errors of principle, errors of duplication, etc. donot affect the agreement of the trial balance.

False. Goodwill is an intangible asset and is shown in the bo oks as a fixed asset. It is not a fictitious asset because it has a value and even a very high valuable asset of the business. (iii) False. Revenue items are a part of income statement and capital items are recorded in balance sheet. Hence, it is absolutely essential to distinguish between capital expenditure and revenue expenditure otherwise income statement will not show true profit or loss and balance sheet will not show true financial position. (iv) False. Single entry system is very suitable for small concerns without the adeq uate knowledge of accounting principles. It is less expensive and calculation of profit or loss is much easier in this system. (v) False. Trial balance is prepared at very primary stage of recording transactions for checking the airthemetical accuracy of books of acco unts while balance sheet is prepared at very closing date of the year for indicating the financial position of the concern on a particular date. Trial balance is prepared for internal use of management but balance she et is for external use of interested parties. Q.2 (a) (i) W hen as asset is shown at its original cost till its dispo sal, the annual depreciation is recorded by credit to provision for depreciation acco unt. (ii) The relationship between the consignor and consignee is that of principal and agent. (iii) A statement forwarded by the consignor to the consignee about description of goods consigned is called proforma invoice. (iv) Partnership business is carried on in the name of the firm. (v) In case o f new accounts, deb it in the account of a person means that the person has become the debtor of the business. (vi) The ledger is the principal books of accounts. (vii) W hen the trial balance doesnot agree, the difference may be transferred to a suspense account to make the trial balance agree. (viii) W hen the ben efit of a revenue expense extends over a number of years, it is called deferred revenue expenditure.

(ii)

2(b) (i) Sam e as 2 000 Dec [2] (ii) Revalu ation A/c (a) It is prep ared at the time of reconstitution of the firm. It records the revaluation of assets and liabilities. Realisatio n A/c It is prepared at the time of dissolution of the firm. It records the sale of va rious assets and pa yments of liabilities.

(b)

(c)

The balance of this acco unt is transfered to old partners capital accounts. Accounting entries are made on the basis of the difference between book value and revalued figure. On revaluation, the accounts of assets and liabilities are not closed.

The balance of this a ccount is transfered to all partners capital acco unt. Accounting entries are made at the book value of assets and liabilities.

(d)

(e)

The accounts of assets and liabilities are closed on preparation of realisation ac count.

(iii) Tra ding A/c Trading A/c is prepared to calculate the gross profit or loss for a particular period. In this account, cost of goods sold, sales and direct expenses are accounted. Pro fit and Lo ss A/c Pro fit & Lo ss A/c is p repared to ascertain net profit or loss.

(a)

(b)

In this account, indirect expenses such as administrative expense, selling expenses, etc. are charged against gross profit and other incomes. The net profit or loss is transfered to capital account in the balance sheet.

(c)

The gross profit or loss is transfered to pro fit & loss A/c.

Q. 3 (a) (i) Plant & machine ry acco unt is a __ ___ tangible real ac count. (ii) The credit sales of goods in trade are recorded in the ______ sales book. (iii) The person who draws a bill of exchange is called its ____ drawer. (iv) Statement of affairs as prepared under single entry system is a statement of __ __ assets & liabilities. (v) Under the straight line method of depreciation, the amo unt of yea rly depreciation____ remains the same. (vi) The value o f a fixed asset after deducting depreciation is known as its ____ book value. (vii) Cash book acts as a ____ journal as well as part of ledger. (viii) The expired cost is known as ____ expense. Q.3 (b) (i) Refer 1999 D ec [1] {C} (iv) (ii) It is very essential to distinguish between capital profits and revenue profits. Revenu e profits are earned in the ordinary co urse of business and are available for distrib ution as profits after certain statutory deductions. However, capital profits are earned as a result of selling some fixed assets or some other capital nature transactions. For example, if a company issues shares at a premium, that amount of premium is the capital profit. Capital profits are either capitalised i.e. added to cap ital fund o f the con cern o r transfered to capital reserve for contingencies. (iii) In order to ascertain the true financial position of the business, it is necessary that assets must be shown at their true book value i.e. after deducting the reasonable depreciation. If the depreciation is not provided, the assets will appear in the balance sheet at overstated figures which may lead to misrepresentation of the business. It is also necessary the value of asset should be reduced due to the use and the reduction in the value of assets should be deducted from the income earned in order to have the correct and real profits of the business. (iv) Average clause is applicable only when the amount of the insurance policy is less than the value of the asset insured. If the actual value of the prope rty is much more than the insured sum, the insurer will be liable only for that proportion which the insured value bears to the actual value of the property insured. The amount of claim can be calculated with the help of following formula : Claim =

If the property is totally destroyed, the average clause will not be app licable and the amount of claim will be restricted to the sum insured only. Income & Expenditure A/c for the year ended on 31.03.09 Dr. Expenditure To Salaries To R ent Add: Due on 31.3.09 Less: Due on 31.03.08 To Electricity Add: Due on 31.03.09 Rs. 18,640 7,440 1,440 8,880 720 3,120 800 3,920 1,360 1,320 8,160 Income By Entrance Fees By subscription 32,000 Add: Outstanding for current year 1,600 By Profit on sale of refreshments (30,00020,000) Rs. 4,000 Cr.

33,800

10,000

Less: Due on 31.03.08 2,560 To P rinting & Stationery To Insurance Premium 720 Add: Prepaid on 31.03.08 200 920 Less: Prepaid on 31.03.09 280 To G eneral Expenses To Depreciation on furniture [refer working note (2)] To interest on loan (8000 @ 10% for 6 month) To S urplus

640 1,840 2,100

400

13,340 47,800 47,800

Balance sheet of fun club as on 31.03.09 Liabilities Capital 14,000 Add: surplus 13,340 Outstanding Rent Outstanding Electricity Bill Subscriptio n received in advance Loan from Y 8,000 Add: outstanding interest 400 Rs. Liabilities Furniture 30,000 Less: Depreciation 2,100 Subscription due Prepaid Insurance Cash-in-hand Rs.

27,340 1,440 800 1,400

27,900 1,600 280 9,600

8,400 39380 39380

W orking Note s: (1) Liabilities Outstanding Rent Outstanding Electricity bill Capital (Balancing figure) Balance sheet as on 01.04.08 Rs. 720 2,560 14,000 Assets Cash-in-hand Subscription due Prepaid Insurance Furniture Rs. 4,080 1,000 200 12,000

17,280 (2) Calculation of Depreciation on Furniture : On 12,000 @ 10% for full year = Add: on 18,000 @ 10% for 6 months =

17,280

1,200 900 2,100

(a) Journal entries in the books of Kunal Date 2008 May1 Particulars Subhash Dr. To Sales A /c (Being goods sold to Subhash on credit) Bills Receivable A /c Dr. To Subhash (Being two bills of Rs. 20,000 and Rs. 40,000 drawn o n Subhash) Bank A/c Dr. Discount A /c Dr. To Bills Receivable A /c (Being the bill discounted with the bank @ 12% p.a.) Mohit Dr. To Bills Receivable A /c (Be ing the bill endorsed to Mohit) Subhash Dr. To Mohit (Being the bill dishonoured before the due date) Bank A/c Dr. Bad-debts A/c Dr. To S ubhash (Being only 60 % of Subhash acceptance received on bein g insolvent) Dr. (Rs.) 60,000 60,000 Cr. (Rs.)

May 1

60,000 60,000

May 4

19,600 400 20,000

May 4

40,000 40,000

Sep 4

40,000 40,000

No v. 8

24,000 16,000 40,000

Journal entries in the bo oks of Su bhash Date 2008 May 1 Particulars Purchases A/c Dr. To K unal (Being goods purchased on credit by Kunal) Kunal To Bills P ayable A/c (Being bills accepted) Bills P ayable A/c To B ank (Being bill net on due date) Dr. Dr. (Rs.) 60,000 60,000 Cr. (Rs.)

May1

60,000 60,000

July 4

Dr.

20,000 20,000

Sep . 4

Bills P ayable A/c Dr. To K unal (Being the bill dishonoured on the due date) Kunal Dr. To Bank A/c To Deficiency A /c (Being the payment of only 60% of due on being inso lvent)

40,000 40,000

No v. 8

40,000 24,000 16,000

Q.5 (b) Bank Reconciliation Statement as on 31.12.2008 Particulars Bank Balance as per cash book Add: (i) Cheques issued but not presented for payment till 31.12.08. Less: (1) Cheques deposited but not credited by the bank till 31.12.08. (2) Incidental charged by the bank Plus 10,000 4,000 M inus

7,500 50 14,000 7,550 6,450 14,000

Balance as per Pass Book 14,000

Q.6 (a) Trading A/c for the period from 1 st April 08 to 12th June 08 Particulars To O pening Stock To Purchases To Gro ss Pro fit (@ 3 0% on sales) Rs. 8,35,000 11,20,000 4,62,000 Particulars By Sales By Closing stock (balancing figure) Rs. 15,40,000 8,77,000

24,17,000

24,17,000

Calculation of Amount of Claim : Value of stock as on 12 th June 08 Less: (1) Salvaged stock (2) Agreed value of damaged stock Loss of stock 8,77,000 1,12,000 1,05,000 2,17,000

6,60,000

Applying Average Clause : Amount of Claim = = Rs. 4,51,539.

Q. 6 (b) Journal Entries Particulars (i) Return Inwa rds A/c Dr. To Suspense A /c (Being the return inward book cost sheet, now rectified) Furniture A/c Dr. To Purc hase A /c (Being the purchase of office table passed through purchase book, now rectified) Furniture A/c Dr. To W ages A /c (Being wages paid for making showcases wrongly passed through wages A/c, now rectified) Susp ense A /c Dr. To Cred itors A/c (Being creditors A/c co st sheet by Rs. 740, now rectified) Y Dr. To Allowance A/c (Being a cheque of Y dishonoured wrongly debited to allowances A/c, now rectified) Dr. (Rs.) 2,000 2,000 Cr. (Rs.)

(ii)

6,000 6,000

(iii)

7,500 7,500

(iv)

740 740

(v)

4,000 4,000

10

Susp ense A/c Dr. Particulars To Balance b/d (difference in trial balance) To Cred itors A/c Rs. 1,860 Particulars By R eturn Inward s A/c By B alance C/d Rs. 2,000 600 Cr

740 2,600 2,600

Q.7 Co nsign men t A/c Dr. Particulars To Goods sent on consignment To B ank: Freight5,000 Loading charges 10,000 To SatPal (exp enses) To SatPal (commission) To S tock reserve (loading) To Pro fit & Lo ss A/c Rs. Particulars By Sat Pal (sales) By Goods sent on consignment (loading) By Consignment stock (at invoice price) Cr Rs 4,10,000 30,000 41,500

4,00,000

15,000 2,000 4,100 3,000 57,400 4,81,500

4,81,500

11

SatPal A/c Dr. Particulars To Consignm ent A/c (Sales) Rs. 4,10,000 Particulars By C onsignment A/c (expenses) By C onsignment A/c (commission) By B ank A /c (settlement) Rs. Cr.

2,000 4,100 4,03,900 4,10,000

4,10,000

Go ods sent o n consign men t A/c Dr. Particulars To Consignm ent A/c (loading) To Tra ding A /c (transfer) Rs. 30,000 3,70,000 Particulars By C onsignment A/c Rs. 4,00,000 Cr.

4,00,000 W orking Note s : (1) Valuation of Closing Stock : Invoice Price Add: Direct exp enses 1/10 of 4,15,000 = 41,500

4,00,000

4,00,000 15,000 4,15,000

(2)

Loading on closing stock =

= Rs. 3,000

12

Q.8 Realisatio n A/c Dr. Particulars To La nd & B uilding To M achinery To F urniture To Stock To D ebtors To Bank (expenses) To Profit transfered to: Ps Capital (5/10) Qs Capital (3/10) Rs Capital (2/10) Rs. 5,50,000 3,00,000 1,65,000 2,80,000 2,00,000 3,000 Particulars By Provision for bad deb ts By Creditors BY M Ltd. By Bank (debtors realised) Rs. Cr

10,000 1,15,000 12,00,000 1,80,000

3,500 2,100 1,400 15,05,000 15,05,000

Partners Capita l A/c Dr.

Particulars To Shares in M Ltd To Bank A/c P Q R Particulars P Q

Cr.
R

By Balance B/d 6,00,000 3,60,000 2,40,000 By Realisation A/c (profit) 1,03,500 42,100 61,400 7,03,500 4,02,100 3,01,400

7,00,000 4,00,000 3,00,000 3,500 2,100 1,400

7,03,500 4,02,100 3,01,400

13

Ba nk A /c Dr. Particulars To Balance b/d To Realisation A /c (debtors) Rs. 30,000 1,80,000 Particulars By R ealisation A/c (expenses) By P s Cap ital A/c By Q s Cap ital A/c Br R s Cap ital A/c Rs. Cr.

3,000 1,03,500 42,100 61,400 2,10,000

2,10,000

Shares in M Ltd. Dr. Particulars To M Ltd. Rs. 12,00,000 Particulars By P s Cap ital A/c By Q s Cap ital A/c By R s Cap ital A/c Rs. 6,00,000 3,60,000 2,40,000 12,00,000 Cr.

12,00,000

14