Question Paper

Financial Accounting – II (112) : October 2004

• • Answer all questions.

• • Marks are indicated against each question.
< Answer
1. The pre-tax profits of Mitra Ltd. for the past four years are as under: >

Year Profit (Rs.)

2000-2001 1,32,000
2001-2002 1,45,000
2002-2003 1,50,000
2003-2004 1,80,000 Other Information:
• • The closing stock of the year 2001-2002 was overvalued by Rs.20,000.
• • During the year 2003-2004, Rs.15,000 was incurred towards a major repair of the machinery
to increase its operating capacity and the same was charged to revenue.
• • The profit for the year 2000-2001 includes income of Rs.2,000 from non-trading investments.
• • The tax rate is 35%.
The average annual post-tax profits of Mitra Ltd. for the purpose of valuation of goodwill, is
(a) Rs.1,00,750 (b) Rs.97,500 (c) Rs.1,55,000 (d) Rs.1,50,000 (e) Rs.95,875.
(2 marks)
< Answer
2. The profit of Yankee Ltd. is Rs.15,75,000, which is arrived at after considering the following: >

Directors’ remuneration Rs. 21,000

Subsidy received from the Government Rs.3,15,000
Income tax paid Rs. 94,500
Damages paid by virtue of legal liability Rs. 42,000
If the managerial remuneration payable to directors is 5% after charging such commission, the
commission payable is
(a) Rs.80,500 (b) Rs.64,500 (c) Rs.82,500 (d) Rs.79,500 (e) Rs.70,500.
(2 marks)
< Answer
3. Which of the following statements is false? >

(a) Brokerage is the sum paid to a person for placing shares

(b) Brokerage is payable at the rate of 1.5% in all types of public issue of industrial securities
(c) Brokerage will not be allowed in respect of shares taken up by directors
(d) Brokerage can be paid in respect of the rights issue taken up by the existing shareholders
(e) Brokerage cannot be paid on the applications made by the institutions against their underwriting
commitments.
(1 mark)
< Answer
4. Which of the following costs is not categorized as Research and Development Costs? >

(a) Cost of materials consumed in the process of research and development

(b) Amortization of patents and licenses related to research and development
(c) Depreciation of premises that is used for carrying the work of research
(d) Salaries and wages paid to personnel engaged in the research and development activities
(e) Promotional expenses on market research for existing products.
 (1 mark)
< Answer
5. The balance sheet items of Swipe Ltd as at March 31, 2004 have increased by the following amounts >
compared with those at the end of the previous year:
Assets – Rs.1,16,000
Liabilities – Rs. 70,000
Share Capital – Rs. 50,000.
The only change to retained earnings during 2003-2004 was relating to a dividend payment of
Rs.10,000. The net income for the year 2003-2004 amounted to
(a) Rs.14,000 (b) Rs.10,000 (c) Rs.8,000 (d) Rs.6,000 (e) Rs.4,000.
(2 marks)
< Answer
6. Consider the following data pertaining to a company: >

Average capital employed Rs.6,25,000

Closing capital employed Rs.7,50,000 The amount of capital employed at the beginning of
the year was
(a) Rs.6,87,500 (b) Rs.6,25,000 (c) Rs.5,62,500 (d) Rs.5,00,000 (e) Rs.1,25,000.
(1 mark)
< Answer
7. The following information is extracted from the books of Jeet and Company: >

Capital employed - Rs.1,00,000

Normal rate of return - 10%
Present value of annuity of Re.1 for five years at the rate of 10% – 3.78
Net profits for five years:
Year Rs.
1 14,400
2 15,400
3 16,900
4 17,400
5 17,900 The profits included non-recurring profits on an
average basis of Rs.1,000 and even recurring profits had a tendency of appearing at the rate of Rs.600
per annum.
The value of goodwill under the annuity method is
(a) Rs.37,800 (b) Rs.6,000 (c) Rs.22,680 (d) Rs.60,480 (e) Rs.59,724.
(2 marks)
< Answer
8. Consider the following data pertaining to Optimum Ltd.: >

• • Sundry assets of the company are Rs.22,50,800 and current liabilities are Rs.93,625.
• • Average capital employed in the business is Rs.18,00,000.
• • Rate of interest expected from capital having regard to the risk involved is 10%.
• • Net trading profits of the company for the past three years were Rs.3,22,800, Rs.2,72,100 and
Rs.3,37,500.
• • Fair remuneration to the directors for their services is Rs.36,000 per annum.
The value of goodwill on the basis of 3 years’ purchase of super profits calculated on the average of past
three years profits is
(a) Rs.3,92,400 (b) Rs.1,30,800 (c) Rs.2,84,400 (d) Rs.1,66,800 (e) Rs.1,77,247.
(2 marks)
< Answer
9. Following is the Balance Sheet of Sudha Ltd. as on March 31, 2004. >
 Liabilities Rs. Assets Rs.
Share Capital Goodwill 32,000
15,000 Equity shares of Rs.10 each 1,50,000 Land & Building 1,20,000
General Reserve 1,70,000 Plant & Machinery 1,30,000
Profit and Loss account Investments 50,000
Balance on April 1, 2003 Stock 50,000
Rs.10,000
Profit for the year Rs.76,000 86,000 Debtors 45,000
Cash at Bank 33,000
Sundry Creditors 54,000 Discount on issue of shares 30,000
Provision for taxation 30,000
4,90,000 4,90,000
The company found that the present value of assets are:

• • Land and Building increased by 40% of the book value.

• • Plant and Machinery increased by 35% of the book value.
• • Investments increased by 20% of the book value.
• • Current assets are to be recognized at their book value.
The closing capital employed to be considered for computation of goodwill of Sudha Ltd. as on March
31, 2004 is
(a) Rs.4,19,500 (b) Rs.3,77,500 (c) Rs.4,07,500 (d) Rs.3,87,500 (e) Rs.3,37,500.
(2 marks)
< Answer
10. Sundar Ltd., a listed company, proposed to issue 1,000 equity shares of Rs.100 each at par by way of >
private placement. The maximum amount of brokerage that can be paid by the company is
(a) Rs.500 (b) Rs.1,500 (c) Rs.2,500
(d) Rs.5,000 (e) No brokerage can be paid.
(1 mark)
< Answer
11. Consider the following information pertaining to M/s.Rainbow Ltd. as on March 31,2004: >

Liabilities Rs. Assets Rs.

Share capital 5,00,000 Land and building 3,60,000
(50,000 shares Rs.10 each) Plant and machinery 2,70,000
Reserves and surplus 4,60,600 Furniture 1,75,000
Sundry creditors 50,000 Inventories 90,000
Short term loan 80,000 Sundry debtors 60,000
Loans and advances 75,000
Cash on hand 10,000
Cash at bank 35,000
Preliminary expenses 15,600
10,90,600 10,90,600 The
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.22.00 (b) Rs.19.70 (c) Rs.18.40 (d) Rs.22.30 (e) Rs.19.20.
(2 marks)
< Answer
12. Which of the following statements is false? >
 (a) The forfeited shares should not be issued at a premium
(b) At the time of forfeiture of shares, share premium should not be debited with the amount of
premium already received
(c) Shares can be issued at a discount only after one year from the commencement of business
(d) Share premium cannot be utilized to redeem preference shares
(e) The loss on re-issue of shares cannot be more than the gain on forfeiture of those shares.
(1 mark)
< Answer
13. Which of the following cannot be utilized for issue of bonus shares? >

(a) General reserve (b) Revaluation reserve

(c) Debenture redemption reserve (d) Share premium
(e) Capital redemption reserve.
(1 mark)
< Answer
14. Prosperous Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20% payable as under: >

On application Rs.5 (inclusive of premium)

On allotment Rs.4
On first and final call Balance amount Applications were received for
15,000 shares and allotment was made on pro-rata basis. Mr. Lazy, to whom 140 shares were allotted,
failed to pay the allotment money. His shares were forfeited after the final call was made. All forfeited
shares were reissued to Mr. Zeal at a discount of 10% as fully paid-up. The amount transferred to capital
reserve is
(a) Rs.560 (b) Rs.630 (c) Rs.420 (d) Rs.140 (e) Rs.700.
(2 marks)
< Answer
15. The directors of Ganga Ltd. made the final call of Rs.30 per share on May 15, 2004 indicating the last >
date of payment of call money to be May 31, 2004. Mr.Hasan, holding 5,000 shares paid the call money
on July 15, 2004.
If the company adopts Table A, the amount of interest on calls-in-arrear to be paid by Mr.Hasan is
(a) Rs.625.00 (b) Rs.937.50 (c) Rs.750.00 (d) Rs.1,125.00 (e) Rs.1,250.00.
(2 marks)
< Answer
16. Consider the following data pertaining to Cute Limited: >

• • Share capital:
50,000 equity shares of Rs.10 each fully paid-up.
2,000, 8% preference shares of Rs.100 each fully paid-up.
• • Reserves and surplus Rs.30,000.
• • The average expected profit after taxation is Rs.52,000.
• • Sundry creditors Rs.60,000.
• • 10% of the profit after tax is transferred to reserves.
• • The normal profit earned on the market value of equity shares (fully paid) of the similar
type of business is 12%.
• • Other external liabilities are Rs.1,20,000.
• • Preliminary expenses Rs.10,000.
The intrinsic value per equity share is
(a) Rs.14.60 (b) Rs.10.60 (c) Rs.10.40 (d) Rs.14.40 (e) Rs.18.00.
(2 marks)
< Answer
17. When shares are issued to promoters for the services offered by them, the account that will be debited >
with the nominal value of shares is
 (a) Preliminary expenses (b) Goodwill
(c) Asset account (d) Share capital
(e) Loss on issue of shares.
(1 mark)
< Answer
18. The excess price received over the par value of shares, should be credited to >

(a) Calls-in-advance account (b) Share capital account

(c) Reserve capital account (d) Share premium account
(e) Share allotment account.
(1 mark)
< Answer
19. The Balance Sheet of Snigdha Ltd. as on March 31, 2004 is as under: >

Liabilities Rs. Assets Rs.

Share capital: Land and building 4,00,000
Equity shares of Rs.100 each 5,00,000 Plant and machinery 3,00,000
12% Preference shares of Rs.10 each 3,00,000 Furniture and fixtures 2,50,000
General reserve 1,50,000 Investments 2,25,000
Profit and loss account 2,50,000 Sundry debtors 1,00,000
18% Debentures 2,00,000 Inventories 1,50,000
Sundry creditors 50,000 Cash 50,000
Bank overdraft 25,000

14,75,000 14,75,000
The
12% preference shares are redeemable at a premium of 10% during the month of August 2004. The
company wishes to maintain the cash balance at Rs.25,000. For the purpose of redemption of preference
shares, it is proposed to sell the investments for Rs.2,00,000. The company proposes to issue sufficient
number of equity shares of Rs.100 each at a premium of 5% to raise required cash resources. The
number of equity shares to be issued is
(a) 1,500 (b) 1,000 (c) 500 (d) 2,000 (e) 750.
(2 marks)
< Answer
20. Sonex Ltd. had allotted 10,000 shares to the applicants of 14,000 shares on pro rata basis. The amount >
payable on application is Rs.2. Pramod applied for 420 shares. The number of shares allotted and the
amount carried forward for adjustment against allotment money due from Pramod is
(a) 60 shares; Rs.120 (b) 340 shares; Rs.160 (c) 320 shares; Rs.200
(d) 300 shares; Rs.240 (e) 420 shares; Nil.
(2 marks)
< Answer
21. Hitech Ltd. acquired assets worth Rs.7,50,000 from Light-blue Ltd. by issue of shares of Rs.100 at a >
premium of 25%. The number of shares to be issued by Hitech Ltd. to settle the purchase consideration
is
(a) 6,000 shares (b) 7,500 shares (c) 9,375 shares (d) 5,625 shares (e) 10,000 shares.
(1 mark)
< Answer
22. Issue of bonus shares by a subsidiary company out of capital profits will >

(a) Decrease the cost of control (b) Increase the cost of control
(c) Have no effect on the cost of control (d) Increase the revenue profit
(e) Decrease the revenue profit.
(1 mark)
< Answer
23. Consider the excerpts from the Balance Sheet of Loyal Ltd. as on March 31, 2003: >
 Liabilities Rs.
Share Capital
Authorised: 75,00,000
Issued and Subscribed:
2,50,000 Equity Shares of Rs.10 each, fully paid up 25,00,000
10,000 14% Preference Shares of Rs. 100 each, fully paid up 10,00,000
Reserves and Surplus:
Share Premium Account 25,000 In January 2004,
the company issued to the public 10,000 14% preference shares of Rs.100 each at a discount of 5%, the
amount per share being payable as follows :-
With application Rs.25
On allotment Rs.45
On first and final call Rs.25
The public applied for 9,000 shares only. These were allotted on February 03, 2004. The call was made
on March 03, 2004. All the moneys were received.
The company has written off discount on issue of shares to the extent available in share premium
account. The total of the asset side of the balance sheet of the company as on March 31, 2004 was
(a) Rs.44,00,000 (b) Rs.44,25,000 (c) Rs.45,00,000 (d) Rs.75,00,000 (e) Rs.75,25,000.
(2 marks)
< Answer
24. As per Schedule VI of the Companies Act, 1956, forfeited shares account will be >

(a) Added to paid-up capital (b) Deducted from paid-up capital

(c) Shown as a capital reserve (d) Shown as a revenue reserve
(e) Shown as a current liability.
(1 mark)
< Answer
25. On approval from the Central Government, the rate of discount on issue of shares can be ------percent of >
the nominal value of the shares.
(a) 10 (b) 20 (c) 15 (d) 5 (e) No limit.
(1 mark)
< Answer
26. Pious Ltd. redeemed its Rs.5,00,000, 12% Debentures at a premium of 2%. The offer for redemption >
was as follows:
Debenture Holders can have cash, or they can utilize their redemption money in the following manner:
(i) Subscribing to 8% cumulative preference shares issued at a premium of 5%
(ii) Taking up 10% debentures, issued at a discount of 10%.
Persons holding Rs.2,00,000 of the debentures agreed to take immediate cash payment. Some other
debenture holders holding Rs.1,94,200 debentures agreed to subscribe to the 8% cumulative preference
shares. The balance of 12% debentures was replaced by the new series of 10% debentures.
The amount of 10% debentures outstanding after effecting the above transactions is
(a) Rs.1,07,816 (b) Rs.95,220 (c) Rs.1,05,800 (d) Rs.1,19,907 (e) Rs.97,124.
(2 marks)
< Answer
27. The following information is taken from the Profit and loss account of Aditya Limited: >

Directors Fees Rs. 10,000

Donation to Ramakrishna mission Rs. 30,000
Ex-gratia payment to an employee Rs. 7,000
Interest on debentures Rs. 5,000
Depreciation Rs. 27,500
Income Tax Rs. 14,000
The net profit for the year Rs.1,50,500
 Other information:

• • Depreciation calculated in accordance with section 350 is Rs.24,000.

• • Capital expenditure of Rs.12,000 was included in general expenses and charged to Profit
and Loss Account.
• • Managing director is entitled to a commission of 1% of net profit after charging his
commission.
Commission payable to the managing director is
(a) Rs.1,755 (b) Rs.1,824 (c) Rs.1,852 (d) Rs.1,950 (e) Rs.2,000.
(2 marks)
< Answer
28. The loss on sale of “own debentures” is transferred to >

(a) Debenture holders account (b) Loss on issue of debentures account

(c) Share premium account (d) Profit and Loss account
(e) Profit and Loss Appropriation account.
(1 mark)
< Answer
29. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2004. >

H Ltd. S Ltd. H Ltd. S Ltd.

Share Capital @ Rs.10 each Shares in S. Ltd.
20,000 10,000 800 Shares 8,000
Other Liabilities 10,000 5,000 Other Assets 22,000 15,000
30,000 15,000 30,000 15,000 H
Limited has acquired the shares on the closing date of the Balance Sheet.
The Minority interest shown in the consolidated Balance Sheet is
(a) Rs.2,000 (b) Rs.2,500 (c) Rs.5,000 (d) Rs.3,000 (e) Insufficient data.
(2 marks)
< Answer
30. Which of the following is not a characteristic of Bearer Debentures? >

(a) They are treated as negotiable instruments

(b) Their transfer requires a deed of transfer
(c) They are transferable by mere delivery
(d) The interest on it is paid to the holder irrespective of identity
(e) They are one of the classifications of debentures from the recording point of view.
(1 mark)
< Answer
31. On December 01, 2003, X Ltd. purchased 5,000 of its 12% debentures of Rs.100 each at a price of >
Rs.98 ex-interest. Interest on debentures is payable on March 31 and September 30, every year. At the
time of recording the purchase of debentures, the interest account will be debited by
(a) Rs.5,000 (b) Rs.1,000 (c) Rs.15,000 (d) Rs.Nil (e) Rs.10,000.
(1 mark)
< Answer
32. Which of the following cannot be used for the purpose of creation of capital redemption reserve >
account?
(a) Profit and loss account (credit balance) (b) General reserve account
(c) Dividend equalization reserve account (d) Unclaimed dividends account
(e) Both (b) and (d) above.
(1 mark)
< Answer
33. Which of the following statements is not true regarding the issue of convertible debentures? >

(a) Compulsory credit rating is required if conversion of FCDs is made after 18 months from the date
of allotment
 (b) The discount on non-convertible portion of PCDs need not be disclosed in prospectus
(c) Issue of FCDs with a conversion period of more than 36 months will not be permissible
(d) Premium on conversion of PCDs shall be predetermined
(e) Any conversion, in part or whole, will be optional at the hands of the debenture holder, if it takes
place after 18 months from the date of allotment.
(1 mark)
< Answer
34. Komal Ltd. issued 20,000, 8% debentures of Rs.10 each at par, which are redeemable after 5 years at a >
premium of 20%. The amount of loss on redemption of debentures to be written off every year is
(a) Rs.40,000 (b) Rs.10,000 (c) Rs.20,000 (d) Rs.8,000 (e) Rs.5,000.
(1 mark)
< Answer
35. The profit or loss on cancellation of own debentures is calculated at the time of >

(a) Issue of debentures (b) Creation of sinking fund for redemption

(c) Purchase of own debentures (d) Cancellation of own debentures
(e) Payment of interest in next immediate subsequent interval.
(1 mark)
< Answer
36. Which of the following is false? >

(a) A company can issue irredeemable 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) A company can use share premium as per legal provisions.
(1 mark)
< Answer
37. On April 01, 2004, the balance in debenture redemption fund account of Narmada Ltd. was Rs.80,000. >
This fund was invested in the following securities:
Rs.40,000, 10% Government loan Rs.35,000
Rs.25,000, 8% Debentures Rs.21,000
200 Equity shares of Rs.100 each Rs.24,000
On September 30, 2004, Government loan was sold at par, 8% debentures were sold at 98% and the
equity shares were sold at Rs.125 per share. The amount transferred from debenture redemption fund
investment account to debenture redemption fund account of the company was
(a) Rs.9,500 (b) Rs.4,500 (c) Rs.89,500 (d) Rs.80,000 (e) Rs.70,500.
(2 marks)
< Answer
38. Which of the following is false with regard to value added? >

(a) Gross value added is derived by deducting depreciation from the net value added
(b) Value added is the most relevant concept of the social responsibility concept of the enterprise
(c) Value added equals pre tax profit plus labor, depreciation and interest
(d) It measures the value of increase in resources
(e) Additive approach and subtractive approach are the two approaches for computing value added.
(1 mark)
< Answer
39. The authorized capital of Success & Success Ltd. is Rs.6,00,000 consisting of 3,000, 6% Preference >
Shares of Rs.100 each and 30,000 Equity Shares of Rs.10 each. Consider the following balances
appearing in the books as on March 31, 2004:
Particulars Cr. Rs.
Provision for Final Dividend for 2002 – 2003 12,000
Provision for Preference Dividend: Half year upto 30-9-2003 6,000
6% Preference Share Capital 2,00,000
Equity Share Capital 2,00,000
Profit and Loss Account 28,500
 Additional Information:

• • Dividend at the rate of 5% is proposed on Equity Share Capital.

• • Provision for Taxation is Rs.8,000.
• • The profit for the year 2003-04 is computed as Rs.17,850.
The balance of profit carried to Balance Sheet after effecting the above adjustments is
(a) Rs.4,350 (Credit) (b) Rs.12,350 (Credit) (c) Rs.18,350 (Credit)
(d) Rs.10,350 (Credit) (e) Rs.650 (Debit).
(2 marks)
< Answer
40. The item ‘Interest Accrued on Investments’ appears in the Balance Sheet of a company under the >
category of
(a) Secured loans (b) Current assets, loans and advances
(c) Investments (d) Current liabilities (e) Reserves and surplus.
(1 mark)
< Answer
41. Sampath Ltd. issued 1,00,000 equity shares of Rs.100 each, payable as under: >

On application Rs.40
On allotment Rs.20
On first call Rs.20
On final call Rs.20
The applications received for 1,70,000 shares were dealt with as
under:
Applicants of 20,000 shares were allotted in full.
Applicants of 1,40,000 shares were allotted 80,000 shares pro-rata.
Applications for 10,000 shares were rejected.
The excess of application money received that can be adjusted towards allotment money, is
(a) Rs.20,00,000 (b) Rs.8,00,000 (c) Rs.16,00,000 (d) Rs.4,00,000 (e) Rs.24,00,000.
(2 marks)
< Answer
42. The following list of accounts with their normal balances was taken from the general ledger of Grenison >
Company as of March 31, 2004:
Particulars Rs.
Discount on issue of debentures 8,500
Cash 73,500
Equity Share Capital of Rs.100 each 6,80,000
General Reserve 2,31,500
Securities premium 3,95,000
Dividends Payable 22,000
Profit and Loss appropriation account 80,000
10% Debentures of Rs.100 each 1,00,000 The total of owner’s equity as at March 31,
2004 is
(a) Rs.13,78,000 (b) Rs.13,86,500 (c) Rs.14,00,000 (d) Rs.14,08,500 (e) Rs.14,82,000.
(2 marks)
< Answer
43. Diana Ltd. has issued 10,000, 10% Preference Shares of Rs.100 each fully paid up and 1,30,000 equity >
shares of Rs.10 each fully paid up. The equity shares are issued at a premium of Rs.20 per share. The
profit for the year 2003-04 is Rs.10,84,000 and the balance brought forward from the previous year
amounted to Rs.1,52,800.
 The company wanted to provide Rs.4,38,000 for taxation of the previous year before making any
appropriations.
The company declared an equity dividend of 10% and it has decided that an amount equal to 10% of
equity dividend shall be set aside for bonus to staff.
The total amount debited to Profit and Loss Appropriation Account on account of the above decisions is
(a) Rs.2,30,000 (b) Rs.1,43,000 (c) Rs.6,81,000 (d) Rs.5,81,000 (e) Rs.5,68,000.
(2 marks)
< Answer
44. The following information is extracted from the books of Jeet Ltd. as on March 31, 2004: >

Particulars Debit (Rs.) Credit (Rs.)

Opening stock (April 01, 2003) 1,86,420
Purchases and sales 7,18,210 11,69,900
Returns 12,680 9,850
Manufacturing wages 1,09,740
Carriage inward 4,910
Sundry Manufacturing Expenses 19,240 On March 31, 2004
outstanding manufacturing wages stood at Rs.1,890. On the same date stock was valued at Rs.1,24,840.
The Gross Profit for the year is
(a) Rs.2,51,500 (b) Rs.2,60,000 (c) Rs.2,61,250 (d) Rs.2,70,100 (e) Rs.2,80,900.
(2 marks)
< Answer
45. 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
46. The remuneration of Managing Director (in case of 2 MDs) is limited to >

(a) 10% of adjusted profits (b) 5% of adjusted profits

(c) 15% of adjusted profits (d) 1% of adjusted profits (e) 20% of adjusted profits.
(1 mark)
< Answer
47. In the annual general meeting of Gamma Ltd., the directors declared a dividend of 5%. As a result of >
this, the
(a) Total shareholders’ equity decreases by 5%
(b) Total shareholders’ equity increases by 5%
(c) Total shareholders’ equity does not change
(d) Par value per share decreases by 5%
(e) Both (b) and (d) above.
(1 mark)
< Answer
48. Who among the following persons should lay before the shareholders, the annual accounts at every >
annual general meeting?
(a) The Auditor (b) The Board of Directors
(c) The Company Secretary (d) The Chairman
(e) The Managing Director.
(1 mark)
 < Answer
49. 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
50. Under which of the following situations, is a special resolution not required to appoint an auditor of a >
company?
(a) Where 27% of equity share capital is held by a State Government
(b) Where 30% of preference share capital is held by a public financial institution
(c) Where 49% of equity share capital is held by the Central Government
(d) Where 78% of debentures is held by a nationalized bank
(e) Where 20% of equity share capital is held by a State Government.
(1 mark)
< Answer
51. Value addition is equal to >

(a) Conversion cost

(b) Conversion cost + Administration cost
(c) Conversion cost + Administration cost + Selling costs + Profits
(d) Conversion costs + Opening stock
(e) Conversion costs + Opening stock + Closing stock.
(1 mark)
< Answer
52. The auditor of a company gives a report that the financial statements of the company reflect a true and >
fair view subject to certain reservations. Such a report is known as
(a) Clean report (b) Qualified opinion
(c) Unqualified opinion (d) Provisional report subject to issue of final report
(e) Fair report.
(1 mark)
< Answer
53. Which of the following conditions is/are essential for the reappointment of the retiring auditor? >

I. Passing of resolution at the Annual General Meeting.

II. Approval from the Central Government.
III. The retiring auditor should be qualified for reappointment.
IV. The retiring auditor has not notified in writing his unwillingness to be reappointed.

(a) Only (I) above (b) Only (II) above

(c) Both (I) and (II) above (d) (I), (II) and (III) above
(e) (I), (III) and (IV) above.
(1 mark)
< Answer
54. According to the Companies Act, 1956, the companies have to compulsorily maintain their books of >
account only 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
55. Satya Ltd. acquired 3,000 equity shares and 1,800, 10% preference shares of Nitya Ltd. on January 01, >
2004 at a cost of Rs.5,20,000 and Rs.2,00,000 respectively. The balances of general reserve and profit
and loss account of Nitya Ltd. as on the date of acquisition were Rs.2,50,000 and Rs.1,00,000
respectively. The paid-up capital of Nitya Ltd. consists of 5,000 equity shares of Rs.100 each and 2,500,
 10% preference shares of Rs.100 each. The cost of control to be shown in the Consolidated Balance
Sheet as on March 31, 2004 is
(a) Rs.10,000 (Goodwill) (b) Rs.16,000 (Capital reserve)
(c) Rs.40,000 (Capital reserve) (d) Rs.30,000 (Goodwill)
(e) Rs.25,000 (Goodwill).
(2 marks)
< Answer
56. Which of the following area is not prone to multiplicity of accounting policies to inflate or deflate >
profits?
(a) Valuation of inventories (b) Conversion of foreign currency items
(c) Depreciation methods (d) Recognition of revenues/expenses
(e) Cash manipulation.
(1 mark)
< Answer
57. Auditing begins where the ------- ends >

(a) Sale (b) Accounting (c) Manufacturing

(d) Accounting year (e) Stock valuation.
(1 mark)
< Answer
58. Intra group balances and transactions resulting in unrealized profits >

(a) Should be eliminated in full

(b) Should be eliminated to the extent of holding company’s share
(c) Need not be eliminated
(d) Should be eliminated to the extent the management thinks, the amount is unreliable
(e) Eliminated to the extent of minority interest.
(1 mark)
< Answer
59. M/s.Sunshine Ltd. issued 32,500 equity shares of Rs.10 each. The issue was underwritten by A, B and C >
as follows:
15,000 shares
10,000 shares
7,500 shares The company received applications for 31,500
shares, of which marked applications were as follows:
12,000 shares
8,000 shares
8,900 shares The final liability of B is
(a) 2,000 shares (b) 1,000 shares (c) Nil shares (d) 600 shares (e) 400 shares.
(2 marks)
< Answer
60. The first auditors of a company should be appointed by the Board of Directors >

(a) In the statutory meeting within 3 months from the commencement of business
(b) In the statutory meeting within 6 months from the commencement of business
(c) In the first annual general meeting of the company
(d) Within one year from the date of registration of the company
(e) Within one month from the date of registration of the company.
(1 mark)
< Answer
61. On July 01, 2003, Silver Spoon Ltd. acquired 7,000 equity shares of Pure Products Ltd. for a >
consideration of Rs.8,00,000. The share capital of Pure Products Ltd. consists of 10,000 equity shares of
Rs.100 each.
 The balances of General reserve and Profit and loss account of Pure Products Ltd. are as under:
Particulars As on July 01, 2003 (Rs.) As on March 31, 2004 (Rs.)
General reserve 1,70,000 2,00,000
Profit and loss account 1,50,000 1,75,000 The amount of
minority interest shown in Consolidated Balance Sheet as on March 31, 2004 is
(a) Rs.4,57,500 (b) Rs.3,60,000 (c) Rs.3,07,500
(d) Rs.4,05,000 (e) Rs.4,12,500.
(2 marks)
< Answer
62. Consolidated financial statements are prepared on the principle that >

(a) In form the companies are one entity, in substance they are separate
(b) In form the companies are separate, in substance they are one
(c) In form and substance, the companies are one entity
(d) In form and substance, the companies are separate
(e) In form and substance, the companies are different to the extent of minority interest.
(1 mark)
< Answer
63. On October 1, 2003, Sun Ltd. acquired 13,500 equity shares of Rs.10 each out of 18,000 equity shares >
of Moon Ltd. at a price of Rs.2,02,500.
Moon Ltd. declared an interim dividend of 10% on its share capital for the year 2003-2004.
Sun Ltd. received this dividend in October 2003 and credited to its profit and loss account.
If Sun Ltd. share in capital profits, and revenue profits, is Rs.76,500 and Rs.54,000 respectively, the Cost
of Control is
(a) Rs.2,02,500 (Goodwill) (b) Rs.2,25,000 (Goodwill)
(c) Rs.22,500 (Capital reserve) (d) Rs.60,000 (Capital reserve)
(e) Rs.28,000 (Goodwill).
(2 marks)
< Answer
64. The profits earned by a subsidiary company before the acquisition by a holding company is known as >

(a) Revenue profits (b) Capital profits (c) Super profits

(d) Average profits (e) Future maintainable profits.
(1 mark)
< Answer
65. Substantial interest of an enterprise is determined by >

(a) Direct voting power of 20% (b) Indirect voting power of 20%
(c) Direct or Indirect voting power of 20% or more
(d) Direct equity holding of 20% (e) Direct preference holding of
20% or more.
(1 mark)
< Answer
66. The creditors of H Ltd. include Rs.6,000 for purchases from S Ltd. The adjustment entry made during >
the preparation of consolidated balance sheet will
(a) Reduce debtors by Rs.6,000(b) Reduce creditors by Rs.6,000
(c) Increase debtors by Rs.6,000 (d) Increase creditors by Rs.6,000
(e) Both (a) and (b) above.
(1 mark)
< Answer
67. ESS Ltd. issued 1,000, 10% debentures at the rate of Rs.100 each during the year 1999-2000. Interest on >
debentures is payable half yearly on September 30 and March 31 every year. The company has power to
purchase its own 10% debentures in the open market for cancellation. The following purchases were
 made during the year 2003-2004:
On July 01, 2003 – 400 of its own 10% debentures at the rate of Rs.96 ex-interest.
On December 01, 2003 – 300 of its own 10% debentures at the rate of Rs.102 cum- interest.
The total amount debited to own debenture investment account was
(a) Rs.70,000 (b) Rs.68,500 (c) Rs.69,000 (d) Rs.70,600 (e) Rs.71,600.
(2 marks)
< Answer
68. While computing the profits of a business, which of the following measures considers the cost of debt as >
well as the cost of equity?
(a) Gross value added (b) Net value added (c) Economic value added
(d) Market value added (e) Brand value added.
(1 mark)
< Answer
69. The common denominator that accounts for the economic value destroyed or added is the concept of >

(a) Money measurement (b) Employee benefit (c) Net value added
(d) Economic value added (e) Market value added.
(1 mark)
< Answer
70. Who among the following is not disqualified for appointment as an auditor of a company? >

(a) A body corporate

(b) Managing Director of the company
(c) Wife of the Managing Director of the company
(d) A shareholder of the company
(e) An individual who is indebted to the company for a sum exceeding Rs.1,000.
(1 mark)
< Answer
71. The profit and loss account of Urmila Ltd. for the year ending March 31, 2004 showed a debit balance >
of Rs.75,000. Subsequently, it was noticed that the following transactions were omitted:
Goods worth Rs.3,000 were returned to the supplier and was not recorded in the books.
The rent of the godown is Rs.24,000 per annum, out of which only Rs.20,000 was paid.
One cheque given by a customer for Rs.7,000 was dishonored and the fact of dishonor was not recorded
in the books.
The profit/loss made by the company after considering the above transactions is
(a) Rs.76,000(Profit) (b) Rs.74,000(Profit)
(c) Rs.83,000(Loss) (d) Rs.69,000(Profit)
(e) Rs.76,000(Loss).
(2 marks)
< Answer
72. The Net Value Added (NVA) is derived by deducting ____ from the Gross Value Added (GVA) >

(a) Extraordinary expenses (b) Depreciation

(c) Investment income(d) Cost of material and services
(e) Capital profit.
(1 mark)
 Suggested Answers
Financial Accounting – II (112) : October 2004
1. Answer : (a) <
TOP
2000-2001 2001-2002 2002-2003 2003-2004 >
Particulars
Rs. Rs. Rs. Rs.
Profits 1,32,000 1,45,000 1,50,000 1,80,000
Less: Overvaluation of closing stock (20,000)
Add: Overvaluation of opening stock 20,000
Add: Major repair 15,000
Less: Income from non-trading investments (2,000)
Adjusted pre-tax profits 1,30,000 1,25,000 1,70,000 1,95,000
Average pre-tax profits = (1,30,000 + 1,25,000 + 1,70,000 + 1,95,000) / 4 = Rs.1,55,000
Average post-tax profits = Rs.1,55,000 x 65% = Rs.1,00,750
2. Answer : (d) <
TOP
Reason : To arrive at the profits for calculating managerial remuneration, the director’s remuneration, damages paid by >
virtue of legal liability shall be deducted and subsidy received from Government shall be added.
However the income tax payable shall not be deducted. Hence the profit for the purpose of calculating
managerial remuneration is
Rs.15,75,000 + Rs.94,500 = Rs.16,69,500
5
Rs.16, 69, 500 ×
105
Commission = = Rs.79,500.
3. Answer : (d) <
TOP
Reason : Brokerage is the sum paid to a person for placing shares. Brokerage is payable at the rate of 1.5% in all types >
of public issue of industrial securities. Brokerage will not be allowed in respect of shares taken up by directors.
Brokerage cannot be paid against the underwriting commitments. Also brokerage cannot be paid in respect of
the rights issue taken up by existing shareholder. Hence statement in alternative (d) is false and is the correct
answer.
4. Answer : (e) <
TOP
Reason : All costs incurred to maintain production or to promote sales of existing products are excluded from the >
research and development costs. Any routine or promotional costs of market research of existing products
cannot be called as research and development costs. The cost of materials consumed in the process of research
and development, amortization of patents and licenses related to research and development, depreciation of
premises that is used for carrying the work of research, salaries and wages paid to personnel engaged in the
research and development activities can be considered as research and development expenses.
5. Answer : (d) <
TOP
Reason : >

Rs. Rs.
Assets increased by 1,16,000
Add: Dividend paid during the year 10,000
1,26,000
Less: Liabilities increased by 70,000
Share capital increased by 50,000 1,20,000
Net income for the year 6,000
6. Answer : (d) <
TOP
Reason : Average capital employed = (Opening capital employed + Closing capital employed) ÷ 2 >
 2 × Rs.6,25,000 = Opening capital employed + Rs.7,50,000
Opening capital employed = Rs.12,50,000 –Rs.7,50,000 =Rs.5,00,000
7. Answer : (c) <
Reason : Average Profit Rs.14,400 + 15,400 + 16,900 + 17,400 + 17,900/5 TOP
>
Rs.16,400 Less : Non-recurring profit Rs. 1,000 Rs.15,400
Add : Recurring profit Rs. 600
Average adjusted profit Rs.16,000
Normal profit 1,00,000 x 10/100, Rs.10,000
Super profit = 16,000 – 10,000 = 6,000
Goodwill as per annuity method = 6,000 x 3.78 = Rs.22,680.
8. Answer : (c) <
TOP
Reason : Trading profits for the last three years : >
Particulars Rs.
Year 1 3,22,800
Year 2 2,72,100
Year 3 3,37,500
Total 9,32,400
Average Profit (9,32,400 / 3) 3,10,800
Less : Remuneration of the directors 36,000
Average Maintainable Profits 2,74,800

Less : Normal Profit expected @ 10% on average 1,80,000

 10 
18, 00, 000 × 
 100 
capital employed
Super Profit 94,800
Goodwill at 3 years’ purchase (94,800 × 3) 2,84,400
9. Answer : (d) <
TOP
Reason : Computation of closing capital employed : >
Particulars Rs. Rs.
Assets
Land and building (1,20,000x1.4) 1,68,000
Plant and Machinery (1,30,000x1.35) 1,75,500
Stock 50,000
Debtors 45,000
Cash at Bank 33,000
4,71,500
Less : Current Liabilities
Sundry creditors 54,000
Provision for taxation 30,000 84,000
Closing capital employed 3,87,500
10 Answer : (a) <
TOP
. Reason : The listed companies are allowed to pay brokerage on private placement of capital at a maximum rate of 0.5 >
%. Hence the maximum amount of brokerage that can be paid by M/s. Sundar Ltd. is
1,000 shares x Rs. 100x 0.5% = Rs.500.
11. Answer : (c) <
TOP
Reason : >
 Particulars Rs. Rs.
Land and building 3,60,000
Plant and machinery (Rs.2,70,000 × Rs.90%) 2,43,000
Furniture 1,80,000
Inventories 90,000
Sundry Debtors (Rs.60,000 × 95%) 57,000
Loans and advances 75,000
Cash 10,000
Bank 35,000
Less: 10,50,000
Sundry creditors 50,000
Short term loan 80,000 1,30,000
Net assets 9,20,000 Value of share =
Rs.9, 20, 000
= Rs.18.40
50, 000

12 Answer : (a) <

TOP
. Reason : Forfeited shares can be re-issued at a premium. Thus, the statement in alternative (a) is false. The statements >
in other alternatives are true; If share premium is already received, share premium account cannot be debited
with the amount of premium on forfeiture of shares; Shares can be issued at discount, only after one year from
the commencement of business; Share premium can be utilized only for specific purposes as per the provisions
of section 78 of the Companies Act and it cannot be utilized to redeem preference shares; The forfeited shares
cannot be reissued for a loss more than the gain on those shares.
13 Answer : (b) <
TOP
. Reason : Revaluation reserve cannot be utilized for issuing bonus shares. However the capital reserve, debenture >
redemption reserve, share premium and capital redemption reserve can be utilized for issuing bonus shares.
14 Answer : (b) <
TOP
. Reason : Issued at a premium of 20% = Rs.10 x 20% = Rs.2 >
Issue price per share = Rs.10+Rs.2 = Rs.12
Amount called up on first and final call = Rs.12 – (Rs.5+Rs.4) = Rs.3
Amount paid by Mr.Lazy = Rs.5 x 140 x15,000/10,000 = Rs.1,050
Amount of share premium paid by Mr.Lazy = Rs. 2 x 140 shares = Rs.280
Amount transferred to share forfeited account = Rs.1,050 – Rs.280 = Rs.770
Reissued at a discount of 10% = Rs.10 x 10% = Re.1
Amount of discount to Mr.Zeal = 140 shares x Re. 1 = Rs.140
Amount transferred to capital reserve = Rs.770 – Rs.140 = Rs.630
15 Answer : (b) <
TOP
. Reason : If a company adopted Table A, interest on calls-in arrear is to be paid at the rate of 5% per annum for the >
period between the last date fixed for payment of call and the actual date of payment. Accordingly, the interest
payable by Mr.Hasan is for one and half month at the rate of 5% on Rs.1,50,000 (Rs.30 × 5,000 shares). Hence
interest is Rs.937.50.
16 Answer : (c) <
TOP
. Reason : Cute Ltd. Intrinsic Value of Shares >
(Rs.)
50,000 equity shares @ Rs.10 each 5,00,000
2,000, 8% preference shares @ Rs.100 each 2,00,000
Reserves and surplus 30,000
External liabilities 1,20,000
Sundry creditors 60,000
Total liabilities 9,10,000
 (Rs.)
Total assets 9,10,000
Less : Fictitious assets (10,000)
(preliminary expenses)
Sundry creditors (60,000)
Extenral liabilities (1,20,000)
Preference shares (2,00,000)
Net assets available for equity shareholders 5,20,000
Net assets availabe for equity shareholders Rs.5, 20, 000
Number of equity shares 50, 000
Intrinsic value of shares = = = Rs.10.40.
17 Answer : (b) <
TOP
. Reason : When shares are issued to promoters for the services offered by them, the account that will be debited with the >
nominal value of shares is goodwill account. They are not the expenses incurred prior to incorporation to be
debited to preliminary expenses, neither a loss on issue of shares to be debited to loss on issue of shares. It is
not a tangible value to debit to asset account on the other hand share capital is credited but not debited.
18 Answer : (d) <
TOP
. Reason : If by the terms of issue, the price payable is above the par value of shares, it is called an issue at premium. The >
amount so received is to be credited to securities premium account.
19 Answer : (b) <
TOP
.
Reason : >

Dr. Cash account

Cr.
Particulars Rs. Particulars Rs.
To Balance b/d. 50,000 By Preference shareholders 3,30,000
(Rs.3,00,000 x 110%)
To Investments 2,00,000 By Balance c/d. 25,000
To Equity shares (including premium)
1,05,000
3,55,000 3,55,000 No. of equity
shares = Rs.1,05,000 / Rs.105 = 1,000 shares.

20 Answer : (d) <

TOP
. Reason : Since the allotment is made pro rata. >
The calculation of shares allotted to Pramod is as under :
420 x 10,000/14,000 = 300 shares allotted.
Hence the amount Earlier paid @ 2 per application
= 2 x 420 shares = Rs.840
The amount actually adjusted for application
= 2 x 300 shares = Rs.600
Surplus amount utilized for adjustment of allotment money = Rs.240
21 Answer : (a) <
TOP
.
Rs.7,50,000 >
=6,000 shares
Rs.125
Reason : Issue price = Rs.100 × 125% = Rs.125 Number of shares to be issued =
<
22 Answer : (c) TOP
. Reason : If the bonus shares are issued out of capital (or pre-acquisition) profit, it will not have any effect on the >
consolidated balance sheet. Because it will cause decrease in the holding company’s share of pre-acquisition
 profit and on the other hand paid-up value of the equity shares held by the holding company will be increased
by the same amount. So, the amount of goodwill or capital reserve will be the same. Hence, the statements in
(a), (b), (d) and (e) are not correct.
<
23 Answer : (a) TOP
. Reason : Balance Sheet of Loyal Ltd. as on March 31, 2004. >
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital Net Sundry Assets 35,25,000
Authorised : 75,00,000 Current Assets, Loans and Advances
Issued : (A) Current Assets
Equity shares Rs.10 each 25,00,000 Cash at Bank 8,55,000
14% Preference Shares (B) Loans and Advances Nil
of Rs.100 each 20,00,000 45,00,000 Miscellaneous Expenditure
Subscribed : Discount on Issue of Shares 20,000
2,50,000 Equity Shares of Rs.10 each, 25,00,000
fully paid up
19,000 14% Preference Shares
of Rs.100 each, fully paid up 19,00,000
44,00,000 44,00,000
24 Answer : (a) <
TOP
. Reason : The shares forfeited account should be added to the paid-up capital according to Schedule VI of the >
Companies Act, 1956. However, once the shares forfeited are re-issued, the balance in the shares forfeited
account which pertains to the re-issued shares will be transferred to capital reserve.
25 Answer : (b) <
TOP
. Reason : On approval from the Central Government, the rate of discount on issue of shares can be --20-- percent of the >
nominal value of the shares. (b) is the correct answer.
26 Answer : (d) <
TOP
. Reason : >
Particulars Rs. Rs.
12% Debentures A/c Dr. 5,00,000
Premium on Debenture Redemption A/c Dr. 10,000
Discount on Issue of Debenture A/c Dr. 11,991

 10 
 1,19, 907 x 100 
 

To Bank A/c (2,00,000 + 4,000) 2,04,000

 20  1,88,652
 1, 98, 084 x 21 
 
To 8% cumulative preference shares
To Premium an Issue of preference shares A/c (1,98,084 – 1,88,652) 9,432

 100  1,19,907
 1, 07, 916 x 90 
 
To 10% Debentures Account
(Being redemption of 12% debentures at a premium of 2% in cash and exchange
of 8% cum. Preference shares at a premium of 5% and 10% debentures at
discount of 10%)
27 Answer : (c) <
TOP
.
 Reason : Rs. Rs. >

Net profit as per profit and loss account is 1,50,500

Add: Income tax 14,000
Depreciation (27,500-24,000) 3,500
Ex-gratia payments 7,000
Capital expenditure 12,000
36,500 1,87,000
Commission payable :1% on net profit after charging commission
= Rs.1,87,000 (1/101) = Rs.1,852
28 Answer : (d) <
TOP
. Reason : The loss on resale of “own debentures” represents a loss of revenue nature and is transferred to (d) >
Profit and Loss account.
29 Answer : (a) <
TOP
.
800 4  >
1,000   Holding Company
5 
Reason : = Minority Interest = (10,000 × 1/5) = 2,000.
30 Answer : (b) <
TOP
. Reason : Debentures are classified as Registered or Bearer from the recording point of view (e). They are transferable >
by mere delivery (c). They are just like bearer cheques or government currency notes and treated as negotiable
instruments (a) Interest coupons are attached to such debentures and their payment is made to the holder
irrespective of identity (d). Thus, the alternatives (a), (c), (d) and (e) are features of bearer debentures. Their
transfer does not require a deed of transfer. Thus, the alternative (b) is not a characteristic of Bearer
Debentures.
31 Answer : (e) <
TOP
.
Reason : Interest = 5,00,000 x 12% x 2/12 = Rs.10,000. >

32 Answer : (d) <

TOP
. Reason : According to the provisions of the Companies Act, unclaimed dividend cannot be used for creation of capital >
redemption reserve account. Profit and loss (cr. balance), general reserve, dividend equalization reserve are
used to create the capital redemption reserve a/c.
33 Answer : (b) <
TOP
. Reason : Convertible debentures are subject to the following guidelines issued by the SEBI. Issue of Fully convertible >
Debentures (FCDs) having a conversion period more than 36 months will not be permissible, unless
conversion is made optional with put or call option. ii.Compulsory credit rating will be required if conversion
is made for FCDs after 18 months. iii.Premium amount on conversion, time of conversion in stages if any shall
be predetermined and stated in the prospectus. The issuer will freely determine interest rates for the
debentures. iv. Any conversion in part or whole of the debentures will be optional at the hands of the
debenture holder, if the conversion takes place at or after 18 months from the date of allotment but before 36
months. v. In case of NCDs/PCDs credit rating is compulsory when maturity exceeds 18 months. vi.Premium
amount at the time of conversion for the PCD shall be determined and stated in the prospectus. Redemption
amount, period of maturity yield on redemption for the PCDs/NCDs shall be indicated in the prospectus. The
discount on the non- convertible portion of the PCD in case they are traded and the procedure for their
purchase on spot trading basis must be disclosed in the prospectus. Thus, alternative (b) is the correct answer
and false statement.
34 Answer : (d) <
TOP
. Reason : Amount debited to loss on issue of debentures = Rs.20,000 × Rs.10 × 20% = Rs.40,000 Amount of loss on >
issue of debentures to be written off every year = Rs.40,000 / 5 = Rs.8,000
<
35 Answer : (d) TOP
 >
. Reason : The profit or loss on cancellation of own debentures is calculated at the time of Cancellation of own
debentures (d) is the correct answer. The profit loss on cancellation cannot be ascertained. Unless they are
paid. Hence (d) is the correct answer.
36 Answer : (b) <
TOP
. Reason : No company shall, after the commencement of the Companies Act, 1956, issue any debentures carrying voting >
rights at any meeting of the company, whether generally or in respect of particular classes of business.
37 Answer : (a) <
TOP
. Reason : >
Dr. Debenture redemption fund investment account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d. By Bank:
10% Government loan 35,000 10% Government loan 40,000
8% Debentures 21,000 8% Debentures 24,500
Equity shares 24,000 Equity shares 25,000
To Debenture redemption 9,500
fund a/c.
89,500 89,500
38 Answer : (a) <
TOP
. Reason : Net value added is derived by deducting depreciation from the gross value added and not vice versa. Thus >
statement in alternative (a) is false. The value added is not the most relevant concept and the statement forms
part of social responsibility reporting (b). It is arrived at by deducting only the cost of bought in materials and
services (c). It measures the value of increase in resources (d). The approaches adopted are additive approach
and subtractive approach in computing value added (e). Thus, the alternatives (b), (c), (d) and (e) are true.
39 Answer : (a) <
TOP
. Reason : Success & Success Ltd. Profit and Loss Appropriation account >
Particulars Rs. Particulars Rs.
To Provision for Taxation 8,000 By Balance b/d 28,500
To Final Dividend for 2002-2003 12,000 By Net Profit b/d 17,850
To Preference Dividend 6,000
To Proposed Dividend:
On Preference Shares 6,000
On Equity Shares @ 5% 10,000
To Balance carried to Balance Sheet 4,350
46,350 46,350
40 Answer : (b) <
TOP
. Reason : The item interest accrued on investments appears in the Balance Sheet of a company under the category of >
current assets, loan and advances.
41 Answer : (c) <
TOP
. Reason : Rs.16,00,000 >
No of No of Amount Amount Amount Amount Amount
shares shares received on adjusted available for available for refunded
applied allotted application towards adjustment to adjustment to
application allotment first call
money money
Rs. Rs. Rs. Rs. Rs.
20,000 20,000 8,00,000 8,00,000 - -
1,40,000 80,000 56,00,000 32,00,000 16,00,000 8,00,000 -
10,000 - 4,00,000 - - - 4,00,000
42 Answer : (b) <
TOP
. Reason : The total shareholders’ equity equals the sum of the balances to the credit of equity shares, security premium, >
general reserve and profit and loss appropriation account. Rs.6,80,000 + Rs.3,95,000 + Rs.2,31,500 +
Rs.80,000 = Rs.13,86,500.
43 Answer : (c) <
TOP
. Reason : Provision for taxation of the previous year = Rs.4,38,000 >
Dividend on 10% 10,000 Preference Shares of Rs.100 = Rs.1,00,000
10% Dividend on 1,30,000 equity shares of Rs.10 each = Rs.1,30,000
Amount equal to 10% of equity dividend shall be set aside = Rs.13,000 for bonus to staff.
The total amount debited to Profit and Loss appropriation account = Rs.6,81,000.
44 Answer : (a) <
TOP
. Dr. Trading and profit and loss account for the year ended March 31, 2004 Cr. >
Amount
Particulars Rs. Amount Rs. Particulars Rs.
Rs.
To Opening stock (1/4/2003) 1,86,420
By Sales 11,69,900
Less : Returns 12,680 11,57,220
To Purchases 7,18,210 Closing stock 1,24,840
Less returns 9,850 7,08,360
To Wages 1,09,740
Add: Outstanding 1,890 1,11,630
To Carriage inward 4,910
To Sundry Manufacturing
19,240
expenses
To Gross Profit 2,51,500
12,82,060 12,82,060
45 Answer : (c) <
TOP
. Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not issued by a >
newly formed company (a) They are not the shares issued to the public at large. They are issued 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.
46 Answer : (a) <
TOP
. Reason : The remuneration of Managing Director (in case of 2 MDs) is limited to 10% of adjusted profits. >

47 Answer : (a) <

TOP
. Reason : In the annual general meeting of Gamma Co. Ltd., the directors declared a dividend of 5%. As a result of this, >
the Total of shareholders’ equity decreases by 5%
48 Answer : (b) <
TOP
. Reason : At every annual general meeting, the Board of Directors should lay before the shareholders, balance sheet and >
profit and loss account.
49 Answer : (e) <
TOP
. Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It cannot be debited to >
general reserve account, capital reserve account, revaluation reserve account and capital redemption reserve
account.
50 Answer : (d) <
TOP
. Reason : Where 78% of debentures is held by a nationalized bank (d) a company need not pass a special resolution to >
appoint an auditor of the company. In case of the situations stated in other alternatives where 27% of equity
 share capital is held by a State Government (a) where 30% of preference share capital is held by a public
financial institution (b) where 49% of equity is held by the Central Government (c) a special resolution is
required to appoint an auditor. Hence (d) is the correct answer.
51 Answer : (c) <
TOP
. Reason : According to the additive approach, all the items that create value such as wages and salaries, interest, >
depreciation, rent, rates and insurance, employee benefits, other overhead expenses and profit before tax are all
added up to give the sum of value-added. In short, value addition (according to the additive approach) =
Conversion cost + Administration cost + Selling costs + Profits.
52 Answer : (b) <
TOP
. Reason : The auditor of a company gives a report that the financial statements of the company reflect a true and fair >
view subject to certain reservations. Such a report is known as qualified opinion (b). The alternative (b) is the
correct answer. Clean report (a) specifies that the that financial statements of the company reflect a true and
fair view and there are nothing which needs to be qualified. Un-qualified opinion (c) states that there is
nothing which needs to be qualified it is a clean report and is not the correct answer. Provisional report
subject to issue of final report (d) is not a report to be given by the auditor and is not the correct answer.
Alternative (e) the combination of two incorrect answers is also incorrect. Thus, alternative (b) is the correct
answer.
53 Answer : (e) <
TOP
. Reason : Section 224(2) of the Companies Act, 1956, explains the situation where an auditor may be reappointed at the >
annual general meeting and accordingly the statements in (I), (III) and (IV) sre essential for reappointment of
the retiring auditor:
I. I. Passing of resolution at the annual general meeting.
III. III. The retiring auditor should be qualified for reappointment
IV. The retiring auditor has not notified in writing his unwillingness to be reappointed.
Thus, the combination of these statements i.e. alternative (e) is the correct answer. The alternative (b) which
states the statement in (II) Approval from the Central Government is incorrect because if is not required for
reappointment of the retiring auditor and other alternative (a), (c) and (d) are not correct because of the wrong
combination of one or more correct statements. Thus, alternative (e) is the correct answer.
54 Answer : (a) <
TOP
. Reason : According to the Companies Act, 1956, the companies have to compulsorily maintain their books of account >
only on accrual basis. Cash basis should not be followed.
55 Answer : (d) <
TOP
.
Reason : Degree of control = 3,000 / 5,000 = 3/5 = 60% >

Particulars Rs. Rs.

Cost of investment (Rs.5,20,000 + Rs.2,00,000) 7,20,000
Less: Face value of shares held:
Equity shares 3,00,000
10% Preference shares 1,80,000
Capital profit (Rs.3,50,000 x 3/5) 2,10,000 6,90,000
Goodwill 30,000
56 Answer : (e) <
TOP
. Reason : The valuation of inventories (a) can be a tool to inflate or deflate the actual profits by adoption of various >
methods depending on economic conditions. While translating the foreign currency transactions (b) into
reporting currency, different rates can be adopted to manipulate the profits. Various depreciation methods (c)
change the value of depreciation where by profits can be inflated or deflated. The policy of recognizing
expenses / incomes (d) as capital/revenue matters considerably and changes the profits of a business thus, in
all the areas (a), (b), (c) and (d), the changes in existing accounting policies result in inflation or deflation of
 profits. These are prone to multiplicity of accounting policies.
57 Answer : (b) <
TOP
. Reason : Auditing begins where -- Accounting ends. The auditing begins as soon as the accounting process is >
completed. (b) is the correct answer.
58 Answer : (a) <
TOP
. Reason : Intra group balances and transactions resulting in unrealized profits should be eliminated in full. >

59 Answer : (e) <

TOP
. Reason : 400 shares. >
Particulars A B C Total
Shares underwritten 15,000 10,000 7,500 32,500
Less: Unmarked applications (in the ratio 6:4:3) 1,200 800 600 2,600
13,800 9,200 6,900 29,900
Less: Marked applications 12,000 8,000 8,900 28,900
1,800 1,200 (2000) 1000
Less: Benefit of C’s surplus (in the ratio 6:4) 1,200 800 2000
Final liability 600 400 Nil 1000
60 Answer : (e) <
TOP
. Reason : The first auditor of a company should be appointed within one month from the date of registration of the >
company.
61 Answer : (e) <
TOP
.
Reason : >

Particulars Rs.
Nominal value of 3,000 shares @ Rs.100 per share 3,00,000
Share of capital Profit (1,70,000 + 1,50,000) × 30% 96,000
Share of Revenue Profit
[(2,00,000 – 1,70,000) + (1,75,000 – 1,50,000)] × 30% 16,500
Minority interest 4,12,500
62 Answer : (b) <
TOP
. Reason : In form the companies are separate; in substance they are one. >

63 Answer : (c) <

TOP
. Reason : Cost of Control >
Particulars Rs. Rs.
Cost of acquisition of shares 2,02,500
Less : Nominal value of 13,500 shares 1,35,000
Capital profits 76,500
Dividend for 2003-2004 (to be adjusted against cost of control) 13,500 2,25,000
Capital Reserve 22,500
64 Answer : (b) <
TOP
. Reason : The profits earned by a subsidiary company before the holding company acquiring control over it is known as >
capital profit. Any profit before acquisition date is the capital profit. Other profits mentioned in (a), (c), (d) and
(e) are not true
65 Answer : (c) <
TOP
. Reason : Direct or Indirect voting power of 20% or more. >

66 Answer : (e) <

TOP
.
 Reason : During the preparation of consolidated balance sheet the debtors and creditors will be reduced by Rs.6,000. >

67 Answer : (b) <

TOP
. Reason : >
01.07.2003
400 × Rs.96 ex. interest Rs.38,400
01.12.2003
300 × Rs.102 cum. Interest = Rs.30,600 – Rs.500 Rs.30,100
2 10
×
12 100
(Interest for 2 months 30,000 × = Rs.500)
Rs.68,500 Amount debited to
own debenture investment account is Rs.68,500.
68 Answer : (c) <
TOP
. Reason : Economic value added (c) measure considers the cost of debt as well as the cost of equity while computing >
profit of a business. Gross Value added (a) is arrived at by deducting from sales revenue and any other direct
income and investment income, the cost of all materials and services and other extraordinary expenses and
thus it includes other expenses in addition to the cost of debt and equity. And is not the correct answer. Net
value added (b) is derived by deducting depreciation from the gross value added. Market value added (d) is the
difference between the market value of the invested capital and boo value of invested capital. It is a measure
of shareholders’ value. And is not the correct answer. Brand Value Added (e) is a tool that quantifies the
economic value of a brand. And is not the correct answer. Thus, (c) is the correct answer.
69 Answer : (d) <
TOP
. Reason : Maximizing shareholders’ value has always been the main objective of a company. A company is said to have >
created economic value only if the return on its capital is greater than the opportunity cost. The one
performance measure which accounts for the economic value added or destroyed is the concept of Economic
value added (d). Money measurement concept (a) attributes values to the business events which can be
quantified and not the economic value. Employee benefit (b) the contribution of the employees using capital
and it does not measure the economic value. Net value added (d) is the addition of wealth made by the
organization with the efforts of management and employees using capital and it is not a denominator to
measure economic value. Market value added (e) is the difference between the market value of invested capital
and book value of invested capital.
70 Answer : (c) <
TOP
. Reason : Section 226 of the Companies Act specifies the persons qualified for appointment as an auditor of the >
company and the wife of the Managing director of the company (c) if otherwise qualified, can be appointed
as an auditor of a company. A body corporate (a) is disqualified to be appointed as auditor of a company. An
officer or employee of the company is disqualified and by virtue of this, Managing Director of the company
(b) is disqualified to be appointed as an auditor of a company. A shareholder of the company (d) with voting
rights cannot be appointed as an auditor of a company. An individual who is indebted to the company for a
sum exceeding Rs.1,000 (e) or who has given any guarantee or provided any security in connection with the
indebtedness of any third person is disqualified to be an auditor of a company. Thus, alternative (c) is the
correct answer,
71 Answer : (e) <
TOP
. Reason : >
Particulars Rs.
Loss as reported by the accountant 75,000
Less: Goods returned to supplier (3,000)
Add: Rent not considered 4,000
Loss after considering all aspects 76,000 The non-recording of return of cheque
does not affect the profit/loss.
72 Answer : (b) <
TOP
. Reason : The net value added is derived by deducting depreciation from the gross value added. >

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