Financial Accounting II 1005

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Question Paper
Financial Accounting – II (112) : October 2005
• Answer all questions.
• Marks are indicated against each question.
1. Dinakar operates a garment store in a hired premises at a rent of Rs.1,20,000 per annum. The owner of< Answer >
the premises, who has recently completed her fashion-designing course, wishes to purchase the garment
store. The details of the business of Dinakar are as under:
I. The profit for the year 2004-05 is Rs.2,30,000.
II. The capital employed by Dinakar is Rs.20,00,000.
III. 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.
(2 marks)
< Answer >
2. Which of the following statements is false?
(a) Leased property reverts to the owner at the end period of the lease
(b) Lessee looses the use of improvements made to property when the leased property is returned
(c) The lease agreement may contain renewal option
(d) The ownership of the leased property rests with the lessor
(e) Capitalization of cost of improvements of the leased asset depends on its useful life.
(1 mark)
< Answer >
3. Which of the following items is not dealt with by any Accounting Standards?
(a) Patents (b) Trademarks and copyrights
(c) Goodwill (d) Research and development costs (e) Royalties.
(1 mark)
< Answer >
4. AS 26 does not apply to which of the following?
I. Intangible assets held by an enterprise for sale in the course of business.
II. Deferred tax assets.
III. Leases.
IV. Goodwill arising on an amalgamation and goodwill arising on consolidation.
(a) Only (I) above (b) Both (I) and (III) above
(c) Only (II) above (d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
5. For arriving at the average past earnings which adjustment is not needed?
(a) Profit or loss of any isolated transaction
(b) Profit or loss from non trading assets
(c) Any capital profit or loss not included in the profit & loss account
(d) Any qualification made with regard to revenues or expenses in the audit report
(e) Realistic depreciation not being provided for.
(1 mark)
< Answer >
6. The following is the Balance Sheet of Pioneer Ltd. as on March 31, 2005.
Balance Sheet as on March 31, 2005
Liabilities Rs. Assets Rs.
75,000 equity shares of Rs.10 Goodwill 60,000
each fully paid 7,50,000 Plant and Machinery 6,00,000
General reserve 1,00,000 Land and Building 2,50,000
Profit & loss a/c 2,30,000 Stock-in-trade 1,10,000
Bank loan (20%) 1,50,000 Sundry debtors 4,00,000
Sundry creditors 2,80,000 Cash at bank 90,000
Provision for taxation 1,40,000
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Discount on issue of shares 50,000
Preliminary expenses 90,000
16,50,000 16,50,000
Additional Information:
I. Sundry debtors include a debt of Rs.90,000 of which only Rs.60,000 is likely to be recovered. A
provision has to be made for the balance.
II. The profits earned by the company after payment of tax at the rate of 40% in the last four years
were as under:
2001-2002 Rs.1,00,000
2002-2003 Rs.1,10,000
2003-2004 Rs.1,30,000
2004-2005 Rs.1,40,000
III. The dividends paid by the company for the last four years were as follows:
2001-2002 11%
2002-2003 12%
2003-2004 14.5%
2004-2005 14.5%
The value of goodwill (rounded off to nearest tens) of the company by using the capitalization method
is
(a) Rs.60,080 (b) Rs.73,080 (c) Rs.90,080
(d) Rs.1,10,000 (e) No goodwill.
(3 marks)
7. If the yield rate of return of Expert Ltd. is 15.75%, normal rate of return is 9%, paid up value is Rs.10< Answer >
and nominal value of its equity share is Rs.20, the value of an equity share of Expert Ltd. is
(a) Rs.20.00 (b) Rs.17.50 (c) Rs.35.00 (d) Rs.5.71 (e)
Rs.11.43.
(1 mark)
8. On September 01, 2005, the balance in debenture redemption fund account of Rainbow Ltd. was< Answer >
Rs.1,20,000. This fund was invested in the following securities:
Rs.60,000, 10% Government loan Rs.52,500
Rs.37,500, 8% Debentures Rs.31,500
300 Equity shares of Rs.100 each Rs.36,000
On September 01, 2005, 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 of profit/loss transferred from debenture
redemption fund investment account to debenture redemption fund account of the company was
(a) Rs.14,250 (b) Rs.6,750 (c) Rs.1,34,250 (d) Rs.1,20,000 (e)
Rs.1,05,750.
(2 marks)
< Answer >
9. Tantrum Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per share payable
as follows:
On application – Rs.5 (including premium)
On allotment – Rs.4
On final call – Rs.3
Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. Vijay to whom 60 shares
were allotted, failed to pay allotment money and call money. Mr. Raj, the holder of 100 shares, failed to
pay call money. All these shares were forfeited after proper notice.
On forfeiture, the amount credited to share allotment account and share forfeiture account respectively
are
(a) Rs.480; Rs.300 (b) Rs.640; Rs.Nil (c) Rs.180; Rs.940
(d) Rs.400; Rs.320 (e) Rs.240; Rs.940.
(2 marks)
< Answer >
10. The fair value of a share is the average of
(a) Par value and market value
(b) Intrinsic value and yield value
(c) Intrinsic value and par value
(d) Par value and yield value
(e) Market value and yield value.
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(1 mark)
< Answer >
(a) Shares can be issued for cash or any other consideration
(b) In the event of over subscription, excess amount has to be refunded or a pro rata allotment is to be
made
(c) SEBI guide lines are applicable not only for the first issue of shares but also to subsequent issue of
shares
(d) The first issue of shares cannot be made at a discount
(e) The share application money is automatically converted to share capital.
(1 mark)
< Answer >
12. Consider the following data pertaining to Yama 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.
Reserve and surplus Rs.30,000
The average expected profit after taxation Rs.52,000
Sundry creditors Rs.60,000
Other external liabilities Rs.1,20,000
Preliminary expenses Rs.10,000
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%.
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 >
(a) Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses
(b) Capital profit realized in cash can be used for payment of dividend
(c) Reserves created by revaluation of fixed assets are not permitted to be capitalized
(d) Bonus issue cannot be made within 12 months of any right issue
(e) Dividend is payable on the calls paid in advance by shareholders.
(1 mark)
< Answer >
14. A company invited applications for 25,000 equity shares of Rs10 each and received 30,000 applications
along with the application money of Rs.4 per share. Which of the following alternatives can be
followed?
I. Refund the excess applications.
II. Make pro rata allotment to all the applicants, and refund the excess application money.
III.Not to allot any shares to some applicants, full allotment to some of the applicants and pro rata
allotment to the rest of the applicants.
IV. Not to allot any shares to some applicants and make pro rata allotment to other applicants.
V. Make pro rata allotment to all the applicants and adjust the excess money received towards call
money.
(a) Only (II) above (b) Both (I) and (IV) above
(c) All (I), (II), (III), (IV) and (V) above (d) Only (III) above
(e) Both (IV) and (V) above.
(1 mark)
15. The document inviting offers from public to subscribe for the debentures or shares or deposits of a body< Answer >
corporate is a
(a) Share certificate (b) Stock invest
(c) Fixed deposit receipt (d) Prospectus (e) Share Warrant.
(1 mark)
< Answer >
16. Consider the following information pertaining to Splendid Ltd.
On September 4, 2005, the company issued 12,000 7% Debentures having a face value of Rs.100 each
at a discount of 2.5%. On September 12, the company issued 25,000, 8% Preference share of Rs.100
each. On September 29,the company redeemed 30,000, 6% Preference shares of Rs.100 each at a
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premium of 5% together with one month dividend thereon. Bank balance as on August 31, 2005 was
Rs.29,25,000.
After effecting the above transactions, the Bank balance as on September 30, 2005 was
(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 >
17. Debenture premium cannot be used to
(a) Write off the discount on issue of shares or debentures
(b) Write off the premium on redemption of shares or debentures
(c) Pay dividends
(d) Write off capital loss
(e) Write off intangible asset.
(1 mark)
< Answer >
18. Drawal from Debenture Redemption Reserve is permissible only after ------------- of the debenture
liability has actually been redeemed by the company
(a) 10% (b) 15% (c) 20% (d) 25% (e)
5%.
(1 mark)
< Answer >
19. Viran Ltd. purchased Machinery from Indraja Company for a book value of Rs.4,00,000. The
consideration was paid by issue of 10% debentures of Rs.100 each at a discount of 20%. The debenture
account was credited with
(a) Rs.4,00,000 (b) Rs.5,00,000 (c) Rs.3,20,000 (d) Rs.4,80,000 (e)
Rs.Nil.
(1 mark)
< Answer >
20. The Balance Sheet of X Ltd. as on September 30, 2005, disclosed the following information:
Particulars Rs.
7% Debentures (4000 nos. of Rs.100 each) 4,00,000
Debenture sinking fund 1,70,000
Debentures sinking fund investment is represented by Rs.40,000 own
debentures purchased at Rs.98 each and the remaining amount by
Rs.1,40,000, 10% preference shares
On the above date, the directors redeemed all the debentures. For this purpose, they realized 10%
preference shares stock at par.
The amount of profit on sale of preference shares held as investments transferred to debenture sinking
fund account is
(a) Rs.30,000 (b) Rs.10,000 (c) Rs.5,600 (d) Rs.9,200 (e)
Rs.800.
(2 marks)
21. Lakhani Ltd. Issued 800 12% Debentures of Rs.100 each on July 1, 2003. Interest is payable on< Answer >
September 30 and March 31, every year. The company purchased 400 of its own debentures for an
amount of Rs.38,400 on October 1, 2005 and cancelled all the above 400 debentures. The journal entry
passed on the cancellation of 400 debentures is
Rs. Rs.
(a) Cash account Dr. 38,400
To Own Debentures account 38,400
(b) 12% Debentures account Dr. 40,000
(c) 12% Debentures Account Dr. 40,000
To Capital Reserve account 1,600
(d) 12% Debentures account Dr. 40,000
To Loss on cancellation of debentures 1,600
(e) 12% Debentures account Dr. 38,400
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To Own Debentures account 38,400.
(1 mark)
22. ESS Ltd. issued 1,000, 10% debentures at the rate of Rs.100 each during the year 1999-2000. Interest < Answer >
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 2004-05:
On July 01, 2004 – 400 of its own 10% debentures at the rate of Rs.96 ex-interest.
On December 01, 2004 – 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 >
23. The loss on resale 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 >
24. On September 01, 2005, Beta Ltd. has issued 10,000 Partly Convertible Debentures of Rs.150 each at
par. The details of payment were as follows:
On application Rs.50
On allotment Rs.100
Additional information
I. On September 01, 2005, the debentures consisting of the convertible portion of Rs.50 to be
converted into 5 equity shares of Rs.10 each.
II. Non-convertible portion of Rs.100 to be redeemed on September 01, 2007 and will carry interest
at 17% with effect from September 01, 2005 to be paid semi-annually.
The issue was fully subscribed and all the moneys pertaining to application and allotment were received
by September 01, 2005.
The amount converted into equity share capital and the number of equity shares issued respectively will
be
(a) Rs.5,00,000 and 5,000 shares (b) Rs.50,000 and 5,000 shares
(c) Rs.15,00,000 and 1,50,000 shares (d) Rs.5,00,000 and 50,000 shares
(e) Rs.10,00,000 and 1,00,000 shares.
(2 marks)
25. OCB Company offered equity shares to its existing shareholders at the rate of 1 share for every 6 shares< Answer >
held by them. If the rights issue price is Rs.280 per share and the market price is Rs.315 per share, then
the value of a rights share is
(a) Rs.35 (b) Rs.30 (c) Rs.20 (d) Rs.10 (e)
Rs. 5.
(1 mark)
< Answer >
26. Consider the following data pertaining to four underwriters, Ajay, Samay, Vijay and Sujay
Particulars Ajay Samay Vijay Sujay
Shares underwritten
8,000 16,000 24,000 32,000
Marked applications
6,000 8,000 11,000 22,000
If total applications received are for 78,000 shares, the final liability of Vijay is
(a) 3,700 Shares (b) 1,600 Shares (c) 13,000 Shares
(d) 1,800 Shares (e) 9,800 Shares.
(3 marks)
< Answer >
27. As per Accounting Standard 18, if two or more companies are subsidiaries of the same holding
company, each subsidiary is known as ___________ of the other subsidiary.
(a) Fellow subsidiary (b) Co-subsidiary (c)
Subsidiary
(d) Associate (e) Sub-subsidiary.
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(1 mark)
< Answer >
28. 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 >
29. The following information is taken from the Profit and loss account of Aditya Limited
Managing Directors Salary Rs.60,000
Directors Fees Rs.10,000
Donation to Ramakrishna mission Rs.30,000
Ex-gratia payments to an employee Rs.7,000
Interest on debenture
Rs.5,000
Depreciation Rs.27,500
Income Tax Rs.14,000
The net profit for the year (before adjustments) Rs.1,50,500
Other information:
I. Depreciation is calculated in accordance with IT provisions is Rs.24,000.
II. Capital expenditure of Rs.12,000 was included in general expenses and charged to Profit and loss
Account
III. Managing director is entitled to commission of 1% of net profit after charging such commission.
After considering the above information, the commission payable to the managing director is
(a) Rs.1,755 (b) Rs.1,870 (c) Rs.1,851 (d) Rs.1,950 (e)
Rs.2,000.
(2 marks)
< Answer >
30. Which of the following statements is false with regard to Segmental reporting?
(a) In the absence of any standardized norm for joint cost allocation, it is possible to opt for suitable
cost allocation method to arrive at the desired segmental results
(b) If certain assets are normally utilized for more than one segment, it is difficult to earmark assets
employed for a particular segment
(c) Segmental results may be influenced by selecting appropriate transfer pricing formulae
(d) Segment Reporting is applicable to enterprises whose debt or equity securities are listed on a stock
exchange in India
(e) Segment Reporting is applicable to commercial, business or industrial enterprises whose turnover
for the accounting period exceeds Rs.5 crore.
(1 mark)
< Answer >
31. The following is the balance sheet of VIBGYR Ltd. as on March 31, 2005:
Equity shares of Rs.10 each fully paid up 10,00,000 Sundry assets 19,50,000
12% Redeemable preference shares of Investments 4,50,000
Rs.100 each fully paid up 8,00,000
General Reserve 4,00,000 Cash at bank 2,00,000
Profit & Loss account 2,50,000
Share premium 25,000
Sundry creditors 1,25,000
26,00,000 26,00,000
The Board of Directors of the company decided to redeem the preference shares at a premium of 10%.
In order to facilitate the redemption, the Board has taken the following decisions:
• To sell the investments for Rs.4,00,000.
• To issue sufficient equity shares at a premium of Rs.2 per share to raise the balance need of funds.
• To maintain minimum bank balance of Rs.50,000.
The Board of Directors initiated the above course of action during the month of April, 2005 and
redeemed all the preference shares.
The amount to be transferred to Capital Redemption Reserve is
(a) Rs.70,000 (b) Rs.5,25,000 (c) Rs.1,25,000 (d) Rs.8,00,000 (e)
Rs.5,50,000.
(3 marks)
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32. The balance sheet items of Swipe Ltd. as at March 31, 2005 have increased by the following amounts< Answer >
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 the year 2004-05 was relating to a dividend payment of
Rs.10,000. The net income for the year 2004-2005 amounted to
(a) Rs.14,000 (b) Rs.10,000 (c) Rs.8,000 (d) Rs.6,000 (e)
Rs.4,000.
(1 mark)
< Answer >
33. The share capital of Suhasini Ltd. consists of 5,000 equity shares of Rs.100 each. The net profit for the
year 2004-05 amounted to Rs.1,00,000 of which, the directors proposed to distribute Rs.75,000 to the
shareholders as dividend. The minimum amount of profits to be transferred to reserve is
(a) Rs.Nil (b) Rs.10,000 (c) Rs.5,000 (d) Rs.7,500 (e)
Rs.2,500.
(1 mark)
< Answer >
34. Brokerage on shares can be paid by the listed companies, in respect of
(a) Rights issue taken up by the existing shareholders
(b) Rights issue renounced by the existing shareholders
(c) Private placement of shares
(d) Applications made by institutions / banks against their underwriting commitments
(e) Shares taken by directors’ friends.
(1 mark)
< Answer >
35. According to the Companies Act, 1956, the period to which the accounts of a company relate should not
exceed
(a) 12 months (b) 15 months (c) 18 months
(d) 24 months (e) 21 months.
(1 mark)
< Answer >
36. For valuation of an equity share under the yield method, information is required regarding
I. Net assets of the business. II. Number of equity shares.
III. Normal rate of return. IV. Face value of the share.
V. Paid-up value of the share.
(a) Both (I) and (II) above (b) Both (III) and (IV) above
(c) Both (III) and (V) above (d) (I), (III) and (IV) above
(e) (II), (III) and (IV) above.
(1 mark)
37. The authorized capital of Ace Widgets Ltd. consists of both cumulative preference shares and equity< Answer >
shares. Each 5% cumulative preference share has a par value Rs.100. Each equity share has a par value
Rs.10. During the year April 01, 2004 to March 31, 2005, the cumulative preference share capital
balance was Rs.2,00,000 and the equity share capital balance was Rs.5,00,000.
If dividend declarations totalled Rs.8,000 and Rs.15,000 in the year 2003-04 and 2004-05 respectively,
the dividends allocated to the equity share holders in the year 2004-05 were
(a) Rs.3,000 (b) Rs.5,000 (c) Rs.10,000
(d) Rs.12,000 (e) Rs.15,000.
(2 marks)
38. As per the provisions of the Companies Act, 1956, a chartered accountant cannot be an auditor for more < Answer >
than
(a) 10 companies per individual
(b) 20 companies per firm of Chartered Accountants
(c) 20 Public limited companies per individual
(d) 30 companies having a paid-up share capital of Rs.25 lakhs or more
(e) 20 companies per individual.
(1 mark)
39. The Board’s report shall include a statement showing the employee’s name who is in receipt of < Answer >
remuneration not less than Rs.________ Per annum or Rs.______ Per month during the financial year
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(a) Rs.3 lakhs; Rs.25,000 (b) Rs.6 lakhs; Rs.50,000
(c) Rs.12 lakhs; Rs.1,00,000 (d) Rs.24 lakhs; Rs.2,00,000
(e) Rs.36 lakhs; Rs.3,00,000.
(1 mark)
< Answer >
40. Which of the following need not be stated in the Director’s Report?
(a) Technology absorption
(b) Financial state of affairs of the company
(c) Foreign exchange earnings of the company
(d) Statement of accounting policies
(e) Conservation of energy.
(1 mark)
< Answer >
41. Which of the following statements is true?
(a) Par value must be separately reported in the balance sheet because it represents the market value
of the shares when it was first issued
(b) Selling common shares for more than par value results in gain that is reported in the income
statement
(c) Common shareholders assume a higher investment risk than long-term creditors
(d) Non-convertible debentures cannot be issued by companies
(e) When declared, both cash dividends and bonus shares decrease the total share holders’ equity.
(1 mark)
< Answer >
42. The Balance Sheet of Marvel Ltd. as on March 31, 2005 is as under:
Equity share capital 6,00,000 Land and building 4,70,000
Reserves and surplus 2,10,000 Plant and machinery 2,50,000
12% Debentures 1,50,000 Furniture and fixtures 2,00,000
Sundry creditors 72,500 Sundry debtors 90,000
Bank overdraft 32,500 Inventories 65,000
Provision for taxation 45,000 Cash 35,000
11,10,000 11,10,000
The following assets are revalued as under:
Land and building Rs.5,00,000
Plant and machinery Rs.2,00,000
Sundry debtors Rs. 85,000
The profit of the company for the year ended March 31, 2005 was Rs.1,15,500. The company charges
depreciation on all its fixed assets at the rate of 10% per annum. The depreciation adjustment on the
revalued assets should be made for one year. The return on capital employed is
(a) 14.33% (b) 12.89 % (c) 13.12 % (d) 10.85 % (e)
14.15 %.
(3 marks)
< Answer >
43. Consider the following data pertaining to Wise Ltd. as on September 30, 2005:
Particulars Rs.
1,000 Equity shares of Rs.100 each 1,00,000
1,000 10% Preference shares of Rs.100 each 1,00,000
500 14% Debentures of Rs.100 each 50,000
Sundry creditors 65,000
Fixed assets 2,50,000
Current assets 65,000
The asset backing of equity shares is
(a) Nil (b) 1 time (c) 2 times (d) 3 times (e) 4
times.
(2 marks)
< Answer >
44. As per the Accounting Standard 20, which of the following are not potential equity shares?
(a) Share warrants (b) Convertible preference shares
(c) Employee stock option plans (d) Convertible debt instruments
(e) Redeemable preference shares.
(1 mark)
< Answer >
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45. Which of the following is/are a limitation(s) of a Balance Sheet?
I. It does not contain certain assets and liabilities despite its claim to be the statement of all assets
and liabilities.
II. The factors, which have a vital bearing on the earnings of the organization, are not disclosed.
III. Personal judgment plays a great part in determining the figures of the balance sheet.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
46. Under which of the following situations, is C Ltd not a subsidiary of A Ltd.?
(a) Where A Ltd. holds 60% in B Ltd. and B Ltd. holds 60% in C Ltd.
(b) Where A Ltd. holds 60% in B Ltd. and B Ltd. holds 60% in C Ltd and A Ltd. also holds 10% in C
Ltd.
(c) Where A Ltd. holds 60% in B Ltd. and B Ltd. holds 60% in C Ltd and A Ltd. also holds 5% in C
Ltd.
(d) Where A Ltd. holds 40% in B Ltd. and B Ltd. holds 60% in C Ltd and A Ltd. also holds 12% in C
Ltd.
(e) Where A Ltd. holds 40% in B Ltd. and B Ltd. holds 90% in C Ltd and A Ltd. also holds 15% in C
Ltd.
(1 mark)
< Answer >
(a) A company can redeem its preference shares
(b) Preference shareholders are creditors of a company
(c) The part of the authorized capital which can be called up only in the event of liquidation of a
company is called reserve capital
(d) Capital redemption reserve can be utilized for issuing fully paid bonus shares
(e) Profit on reissue of forfeited shares is transferred to capital reserve account.
(1 mark)
< Answer >
48. H Ltd. acquired 21,000 equity shares of S Ltd. on December 31, 2004. The summarized balance sheets
of the two companies as on March 31, 2005 are given below.
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital of 8,00,000 3,00,000 Land and 3,80,000 1,60,000
Rs. 10 each fully building
paid
General reserve 2,00,000 - Plant and 4,20,000 1,00,000
machinery
Profit and loss a/c 2,00,000 80,000 Investment 2,60,000 -
Bills payable 37,000 16,000 Stocks 60,000 62,000
Sundry creditors 1,33,000 64,000 Sundry 1,53,000 68,000
debtors
Bills 41,000 28,000
receivable
Cash and bank 56,000 32,000
Preliminary - 10,000
expenses
13,70,000 4,60,000 13,70,000 4,60,000
The additional information is as follows :
I. On April 01, 2004, S Ltd. profit and loss account showed a debit balance of Rs. 20,000
II. On March 31, 2005, S Ltd. decided to revalue its plant and machinery at Rs. 2,00,000 and land
and building at Rs.1,50,000.
III. On February 15, 2005, H Ltd. sold to S Ltd. goods costing Rs. 20,000 for Rs. 25,000. 30% of
these goods remained unsold with S Ltd. on March 31, 2005.
IV. Creditors of S Ltd. include Rs. 14,000 due to H Ltd. on account of these goods.
The share of holding company out of capital profits is
(a) Rs. 1,22,500 (b) Rs. 94,500 (c) Rs. 1,08,500
(d) Rs. 1,40,000 (e) Rs. 1,15,500.
(3 marks)
< Answer >
49. Following is the balance sheets pertaining to H Ltd. and its subsidiary S Ltd., as on March 31, 2005
Page 10 of 24
Balance sheet of H Ltd & S Ltd. as on March 31, 2005
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 5,00,000 1,00,000 Machinery 3,00,000 90,000
(Rs.100 each)
Reserve 2,00,000 75,000 Furniture 50,000 17,000
P & L A/c 1,00,000 25,000 Other Assets 4,40,000 1,43,000
Creditors 1,50,000 50,000 Share is S Ltd. 800 1,60,000
(Acquired on
01.04.2004)
9,50,000 2,50,000 9,50,000 2,50,000
Other details:
• Reserve and P & L (Cr.) of S Ltd. stood at Rs. 25,000 and Rs. 15,000 respectively on the date of
acquisition of its 80% shares by H Ltd.
• Machinery book value Rs.1,00,000 and furniture book value Rs. 20,000 of S Ltd. were revalued at
Rs. 1,50,000 and Rs. 15,000 respectively for the purpose of fixing the price of its shares and
book values of other assets remained unaffected.
The value of machinery and furniture of S Ltd. to be considered in the Consolidated Balance Sheet is
(a) Rs.1,35,000; Rs.12,750 (b) Rs.1,45,000; Rs.15,750
(c) Rs.1,40,000; Rs.12,750 (d) Rs.1,50,000; Rs.17,750
(e) Rs.1,40,000; Rs.17,750.
(2 marks)
< Answer >
50. The following information is extracted from the books of Jeet Ltd. which follows the accounting year of
October 1, 2004 to September 30, 2005.
Particulars (Rs.)
Opening stock (1/10/2004) 1,86,420
Purchases 7,18,210
Sales 11,69,900
Sales returns 12,680
Purchases returns 9,850
Manufacturing wages 1,09,740
Carriage inwards 4,910
Sundry Manufacturing Expenses 19,240
On September 30, 2005, outstanding manufacturing wages stood at Rs.1,890. On the same date stock
was valued at Rs.1,24,840.
Goods worth Rs.10,000 was issued as free samples during the year.
The Gross Profit for the year ending September 30, 2005 is
(a) Rs.2,61,500 (b) Rs.2,60,000 (c) Rs.2,61,250
(d) Rs.2,70,100 (e) Rs.2,80,900.
(2 marks)
< Answer >
51. 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 for
1,92,800 shares and allotment was made as under:
• Applicants for 50,800 shares were allotted 30,480 shares pro-rata
The surplus money, if any, would be refunded only after utilizing the excess received on application
towards 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 >
52. Parent Company reports net profit of Rs.5,00,000 and stockholders’ equity of Rs. 20,00,000. Subsidiary
Company reports post-acquisition profit of Rs.1,00,000 and stockholders’ equity of Rs.5,00,000. Parent
owns 80% of the Subsidiary’s common stock. The consolidated financial statement will report
(a) Net profit of Rs. 6,00,000 and share capital of Rs.20,00,000
(b) Net profit of Rs. 5,80,000 and share capital of Rs.20,00,000
Page 11 of 24
(c) Share Capital of Rs. 25,00,000 and net profit of Rs.5,00,000
(d) Share Capital of Rs. 24,00,000 and net profit of Rs.6,00,000
(e) Investments of Rs. 4,00,000 and share capital of Rs.20,00,000.
(1 mark)
< Answer >
53. H. Ltd. acquired 70% shares of S. Ltd. on October 1, 2004 at a price of Rs.5,00,000. The balance of
profit and loss account of S. Ltd. is as under:
As on Balance
April 1, 2004 Rs. 80,000 (Debit balance)
March 31, 2005 Rs.1,60,000 (Credit balance)
The share of capital profit of H. Ltd., at the time of consolidation, is.

(a) Rs.28,000 (b) Rs.48,000 (c) Rs.56,000
(d) Rs.84,000 (e) Rs.96,000.
(1 mark)
< Answer >
54. Glow Ltd. acquired 1,600 equity shares of Gloom Ltd. of Rs.100 each on March 31, 2005. The
summarized balance sheets of Glow Ltd. and Gloom Ltd. as on that day were as follows:
Liabilities Glow Ltd. Gloom Ltd. Glow Ltd. Gloom Ltd.
Rs. Rs. Rs. Rs.
Capital : Land &

Buildings 1,50,000 1,80,000
5,000 equity Plant &
shares of Rs.100 Machinery
each
5,00,000 2,40,000 1,09,400
2,000 equity Investments in
shares of Rs.100 Big Ltd. at cost
each
2,00,000 3,40,000 –
Capital Reserve 1,20,000 Stocks 1,20,000 36,000
General Reserve 2,40,000 Sundry Debtors 44,000 40,000
Profit and Loss Bills Receivable
A/c (including
Rs.3,000 from
GloomLtd.)
57,200 36,000 15,800 –
Bank Overdraft Cash and Bank
80,000 – Balances 14,500 8,000
Bills Payable
(including
Rs.4,000 to
Glow Ltd.)
- 8,400
Creditors 47,100 9,000
9,24,300 3,73,400 9,24,300 3,73,400
The Bills payable and Bills receivable shown in the consolidated Balance sheet as on March 31, 2005
respectively are
(a) Rs.8,400 and Rs.15,800 (b) Rs.4,400 and Rs.11,800
(c) Rs.3,400 and Rs.7,400 (d) Rs.5,400 and Rs.12,800
(e) Rs. Nil (as the Bills payable is the liability of subsidiary company) and Rs.15,800.
(2 marks)
< Answer >
55. Consider the Balance Sheets of H Ltd. and S Ltd. as on March 31, 2005:
Liabilities H Ltd. S Ltd. H Ltd. S Ltd.
Share Capital @ Rs.10 20,000 10,000 Shares in S. Ltd. 7,500
each 800 Shares
Other Liabilities 10,000 5,000 Other Assets 22,500 15,000
Profit and loss account 5,000 Cash 5,000
30,000 20,000 30,000 20,000
H Ltd. has acquired the shares on the closing date of the Balance Sheet.
Page 12 of 24
The total of the consolidated Balance Sheet is
(a) Rs.40,000 (b) Rs.50,000 (c) Rs.43,000
(d) Rs.42,500 (e) Rs.34,500.
(2 marks)
< Answer >
56. Parent Ltd. acquired 4000 shares of Ward Ltd on April 01, 2004 for a price of Rs.4,50,000. The share
capital of Ward Ltd. consists of 5,000 equity shares of Rs.100 each.
During the consolidation of accounts, it is noticed that the sundry creditors of Parent Ltd. include
Rs.20,000 for goods purchased from Ward Ltd. from which the subsidiary company made a profit of 33
1
3 % on cost.
If half of the goods sold above were still in the stock of Parent Ltd. as on March 31, 2005
The unrealized profit in the Consolidated Balance Sheet as on March 31, 2005 is
(a) Rs.2,500
(b) Rs.2,000
(c) Rs.6,667
(d) Rs. Nil since the goods are purchased from subsidiary company
(e) Rs.2,667.
(2 marks)
< Answer >
57. Multiple Ltd. acquired 2,000 shares in Single Ltd. for a price of Rs.2,50,000. On the date of
acquisition, Single Ltd. had the following balances on the liabilities side of Balance Sheet:
• Authorised, issued and subscribed share capital of Rs.100 each Rs.3,00,000
• General Reserve Rs. 90,000
• Profit and Loss Account (pre-acquisition) Rs. 60,000
• Sundry Creditors Rs. 50,000
• Post acquisition profit Rs. 30,000
The cost of control shown in the Consolidated Balance Sheet is
(a) Rs.20,000 (capital reserve) (b) Rs.2,00,000 (goodwill)
(c) Rs.1,00,000 (capital reserve) (d) Rs.50,000 (capital reserve)
(e) Rs.50,000 (goodwill).
(2 marks)
< Answer >
58. Consolidated Balance Sheet is the
(a) Comparative Balance sheet of two or more firms
(b) Balance Sheet of the holding company and its subsidiary
(c) Balance sheet along with relevant statements consolidated
(d) Balance Sheet of two or more affiliates
(e) Balance Sheet having a group of items compiled together.
(1 mark)
< Answer >
(a) In additive approach all the items that create value are added up to give the sum of value
added
(b) Value added statement forms part of social responsibility reporting
(c) Value added is used in measuring national income
(d) Value added is different from conversion cost
(e) Value added statement can replace the profit and loss account.
(1 mark)
< Answer >
(a) EVA is a residual income
(b) EVA is obtained by subtracting the cost of capital from operating profit
(c) EVA is after tax operating profit
(d) EVA requires deduction of cost of capital alone
(e) EVA maximizes shareholder value.
(1 mark)
< Answer >
61. Which of the following items should not appear under the heading “unsecured loans” in the balance
sheet of a limited company?
Page 13 of 24
(a) Sinking funds
(b) Loans and advances from subsidiaries
(c) Short term loans and advances from banks
(d) Loans and advances from others
(e) Fixed deposits.
(1 mark)
< Answer >
62. Which of the following statements is false with regard to Brand Valuation?
(a) Brand is a company’s most valuable asset
(b) The value of a brand is equal to the present value of future earnings of that brand
(c) Brand valuation is a tool that quantifies the economic value of a brand
(d) Earnings valuation method is a single stage process involving the determination of the future
earnings attributable to the brand
(e) Cost method states the brand value at its cost to the company.
(1 mark)
< Answer >
63. Which of the following statements is false with regard to Market Value Added?
(a) MVA is the difference between market value of invested capital and book value of invested
capital
(b) MVA is a measure of shareholder value
(c) When MVA is positive it means value is being created for shareholders
(d) When MVA is negative it means shareholders’ value is being destroyed
(e) MVA is not equal to the present value of all future EVA.
(1 mark)
< Answer >
64. Shown below are selected data from income statement of AB Ltd.
Particulars Rs.
Sales 1,00,000
Other income 12,000
Operating expenses 60,000
Excise duty 5,000
Considering the above data the value added by manufacturing activity is
(a) Rs.40,000 (b) Rs.52,000 (c) Rs.35,000
(d) Rs.47,000 (e) Rs.57,000.
(1 mark)
< Answer >
65. When shares are forfeited, the share capital account is debited with______ and the share forfeiture
account is credited with_________
(a) Paid-up capital of shares forfeited; Called up capital of shares forfeited
(b) Called up capital of shares forfeited; Calls in arrear of shares forfeited
(c) Called up capital of shares forfeited; Amount received on shares forfeited
(d) Calls in arrears of shares forfeited; Amount received on shares forfeited
(e) Uncalled capital of shares forfeited; Calls in arrear of shares forfeited.
(1 mark)
< Answer >
66. Which of the following is false regarding general instructions for preparation of balance sheet of a
company
(a) Dividends declared by subsidiary company after the date of balance sheet should be included in
the balance sheet
(b) Particulars of any redeemed debentures which the company has power to reissue should be given
(c) All investments must be classified into trade and other investments and the names of the company
in which such investments have been made should also be disclosed
(d) Depreciation written-off should be allocated under the different assets head and deducted in
arriving at the value of fixed assets
(e) In case of subsidiary company, the number of shares held by the holding company must be
separately stated.
(1 mark)
< Answer >
67. On April 01, 2004, Libra Ltd. issued 10,000 12% Debentures of Rs.100 each at a discount of 5% and
the debenture issue was subscribed in full. All the moneys due on the issue were received in full.
Interest is payable yearly on March 31. The company has the practice of deducting tax at the rate of
10%. The journal entry passed for payment of interest on March 31, 2005 was
(a) Debenture interest a/c. Dr. Rs.1,20,000
Page 14 of 24
To Debenture holders a/c. Rs.1,08,000
To Tax deducted at source a/c. Rs. 12,000
(b) Debenture interest a/c. Dr. Rs.1,20,000
(c) Debenture interest a/c. Dr. Rs.1,08,000
(d) Profit and Loss a/c. Dr. Rs.1,20,000
(e) Debenture interest a/c. Dr. Rs.1,20,000
To Bank a/c. Rs.1,20,000.
(2 marks)
< Answer >
68. With regard to auditors’ responsibilities, it is true that the
(a) Accuracy of the financial statements is the responsibility of the auditors
(b) GAAP requires most publicly traded companies to file audited financial statements
(c) Audited financial statements may not include estimates
(d) Auditors provide an opinion on whether the financial statements are prepared in accordance with
GAAP (Generally Accepted Accounting Principles)
(e) Auditors guarantee the financial soundness of the company.
(1 mark)
< Answer >
69. Under which of the following circumstances, 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 and 20% of equity share capital is held by a nationalized bank
(e) Where 25% of equity share capital is held by a nationalized bank.
(1 mark)
< Answer >
70. Madhuban Ltd has redeemed its 12% preference shares of Rs. 2,00,000 at a premium of 4% . To meet
the redemption it has issued Rs. 1,98,084 worth of shares of Rs. 20 each at a premium of 5%. The
balance outstanding to the credit of share premium account after adjusting premium on redemption of
preference shares is
(a) Rs.Nil (b) Rs.1,904 (c) Rs.1,432 (d) Rs.8,000 (e)
Rs.9,904.
(1 mark)
< Answer >
71. Capital Reserves are created out of
(a) Balance in Profit and loss Account (b) Capital Profits
(c) Revenue Profits (d) Provisions (e) Unclaimed dividends.
(1 mark)
Page 15 of 24
Suggested Answers
Financial Accounting – II (112) : October 2005
1. Answer : (b) < TOP >
Reason :
Profit for the year 2004-05 2,30,000
Add: Rent (not relevant if the owner of the premises operates the 1,20,000
business)
Adjusted maintainable profits 3,50,000
Capital employed by Dinakar 20,00,000
Add: Value of premises 4,00,000
Total capital employed 24,00,000
Normal profit (12% of Rs.24,00,000) 2,88,000
Super profits (Rs.3,50,000 – Rs.2,88,000) 62,000
2. Answer : (e) < TOP >
Reason : Capitalization of cost of improvements on leased assets depends on terms of lease agreement and
not on its useful life.
Reason : Trade marks and copyrights are not dealt with by accounting standards
Reason : AS26 does not apply to all of them. Leases that fall within the scope of AS19 and goodwill
covered by AS14 and AS21, Deferred tax assets by AS 22 and Intangible assets held by an
enterprise for sale in the course of business by AS2 and AS7.
5. Answer : (c) < TOP >
Reason : For arriving at the average past earnings, no adjustment is needed for any capital profit or loss or
receipt or expense not included in the profit & loss account. They need to be excluded if they are
included.
Reason :
Pioneer Ltd. Computation of net tangible assets
Particulars Rs. Rs.
Plant & machinery 6,00,000
Land & building 2,50,000
Stock in trade 1,10,000
Sundry debtors 4,00,000
Cash at bank 90,000
14,50,000
Less: Liabilities:
Bank loan (20%) 1,50,000
Sundry creditors 2,80,000
Provision for 1,40,000
taxation
Provision for bad 30,000 6,00,000
debts
Net tangible assets 8,50,000
Computation of average maintainable profit:
Average profit after tax
Rs.1,00,000 + Rs.1,10,000 + Rs.1,30,000 + Rs.1,40,000
= 4
Rs.4,80,000
= 4 = Rs.1,20,000
Average dividend paid
11% + 12% + 14.5% + 14.5% 52%
= 4 = 4 = 13%
= Normal rate of dividend
Page 16 of 24
Average maintainable profit
= Normal rate of return x 100
Rs.1, 20, 000
= 13% = Rs.9,23,077 ≈ 9,23,080
Goodwill = Total value of the business – Net tangible assets
= Rs.9,23,080 – 8,50,000 = Rs.73,080
 Yield rate of return 

  x Paid-up value of equity share
Reason : Value of equity share =  Normal rate of return 
= (15.75/9) x 10 = 17.50.
8. Answer : (a) < TOP >
Reason : Debenture redemption fund investment account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Balance b/d. By Bank:
10% Government loan 52,500 10% Government loan 60,000
8% Debentures 31,500 8% Debentures 36,750
Equity shares 36,000 Equity shares 37,500
To Debenture redemption 14,250
fund a/c.
1,34,250 1,34,250
Reason : The journal entry is
Share capital account (160 x 10) Dr. Rs.1,600
To Share allotment account (60 x 3) Rs.180
To Share final call account (160 x 3) Rs.480
To 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 per share.)
Shares allotted = 60
6, 000
60 × = 72
Share applied = 5, 000 = 72 x 5 = Rs.360.
Share application money = 60 x 5 = Rs.300
Balance amount = Rs.360 - Rs.300 = Rs.60
Amount to be paid on allotment = Rs.4 x 60 = Rs.240
Balance amount = Rs.240 – Rs.60 = Rs.180
[Amount to be paid on allotment = Rs.4 – Re.1 (240/60 – 3)]
Reason : The fair value of the share is the average of the value obtained by the net asset method and the
yield method.
Intrinsic value + Yield value
Fair value = 2
Reason : The share application money is converted into share capital only after the board of directors
approves the allotment of shares. Till such time, it is treated as a liability.
Reason : Intrinsic Value of Shares Yama Ltd.
Particulars (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
Total liabilities 9,10,000
Page 17 of 24
Particulars (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
Intrinsic value of shares = Number of equity shares
Rs.5, 20, 000

= 50, 000 = Rs.10.40.
Reason : Dividend is not payable on the calls in advance paid by the shareholders. It is payable on the
outstanding balance of called up shares minus calls in arrear amount. Capital redemption reserve
cannot be used for writing off miscellaneous expenses and losses. Capital profit realized in cash
can be used for payment of dividend. Reserves created by revaluation of fixed assets are not
permitted to be capitalized. Bonus issue cannot be made within 12 months of any right issue.
Hence, (e) is the answer.
Reason : The company can follow all the options without restricting itself to anyone.
15. Answer : (d) < TOP >
Reason : A prospectus (d) means any document described or issued as a prospectus and includes any
notice, circular, advertisement or other document inviting deposits from the public or inviting
offers from the public for the subscription or purchase of shares or debentures of a body corporate
is the correct answer. Total capital of a company is divided into units of small denominations
which are called as shares. Share certificate (a) is an ownership security. Stock invest (b) is an
instrument which can be used by an applicant to tender money for share or debentures applied for.
Fixed deposit receipt (c) is the acknowledgement of deposit of a certain sum of money repayable
after a fixed tenure as per the contract and share warrant (e) is a financial instrument that gives the
holder the right to acquire equity shares. Thus, alternatives (a), (b), (c) and (e) are not correct.
Reason : Balance as on August 31, 2005 Rs.29,25,000
Issue of debenture 12,000 Rs.12,00,000
Less: discount Rs. 30,000 Rs.11,70,000
Issue of preference shares 25,000 Rs.25,00,000
Total available cash Rs.65,95,000
Less: Redemption of 30,000
6% preference shares Rs.30,00,000
Premium on redemption @ 5% Rs. 1,50,000
Dividend for one month @ 6% Rs. 15,000 Rs.31,65,000
Balance as on 30 th September 2005 Rs.34,30,000
Reason : Debenture premium account cannot be used to pay dividends. Hence option (c) is the correct
answer. The other options are not the correct answers as Debenture premium account can be used
to write off the discount on issue of shares or debentures (a), write off the premium on redemption
of shares or debentures (b), write off capital loss (d) and write off intangible asset (e).
Reason : Drawal from Debenture Redemption Reserve is permissible only after 10% of the debenture
liability has actually been redeemed by the company.
Reason : Sometimes the companies may go for issue of debentures towards consideration for purchase of
fixed asset. In such cases, the debentures may be issued at par / at discount / at premium. In the
present case, the journal entry will be:
For purchase of Land and Building:
i. Machinery a/c. Dr. Rs.4,00,000
To Indraja & Company a/c. Rs.4,00,000
Page 18 of 24
For issue of debentures at discount of 20%
ii. Indraja & Company a/c. Dr. Rs.4,00,000
Discount on issue of debentures Dr. Rs.1,00,000
To 10% Debentures a/c. Rs.5,00,000
(Issue of 5,000 debentures of face value Rs.100 each at a discount of 20%)
Thus 10% debentures are figured at Rs.5,00,000.
< TOP >
20. Answer : (d)
Reason : Profit on sale of investment is arrived at as under :
Paarticulars Rs.
Total amount available for investment 1,70,000
Less: Amount used in purchasing own debentures Rs.40,000 at Rs.98 39,200
Amount invested in 10% Rs.1,40,000 stock, i.e. cost price of stock 1,30,800
Sale price of 10% preference shares 1,40,000
Profit on sale of preference shares 9,200
< TOP >
21. Answer : (c)
Reason : When debentures are purchased as investment, a separate Own Debentures account is opened.
The Investment account (Own debentures) will be debited by the actual amount paid irrespective
of the nominal value of debentures purchased. The profit or loss on cancellation will be
transferred to the Capital Reserve. Hence option (c) is the correct entry.
12%Deebentures Account Dr. Rs.40,000.00
To Own Debentures Account Rs.38,400.00
To Capital Reserve Account Rs.1600.00
Reason :
01.07.2004
400 × Rs.96 ex. Interest Rs.38,400
01.12.2004
300 × Rs.102 cum. Interest = Rs.30,600 – Rs.500 Rs.30,100
2 10
×
(Interest for 2 months 30,000 × 12 100 =
Rs.500)
Rs.68,500
Amount debited to own debenture investment account is Rs.68,500.
Reason : The loss on resale of “own debentures” represents a revenue nature and is transferred to (d) Profit
and Loss account.
Reason : 17% PCDs a/c Dr. Rs.5,00,000
To Equity Share Capital Rs,5,00,000
(Being the conversion into PCD of 10,000 × Rs.50 of 50,000 shares at the rate of 5 equity shares
for Rs.50)
1 1
× Rs.35
Reason : Value of right = 1 + 6 (Rs.315 – Rs.280) = 7 = Rs.5
Reason :
Particulars Ajay Samay Vijay Sujay Total
Shares underwritten 8,000 16,000 24,000 32,000 80,000
Less: unmarked 3,100 6,200 9,300 12,400 31,000
applications
(in the ratio 1:2:3:4)
4,900 9,800 14,700 19,600 49,000
Less: Marked 6,000 8,000 11,000 22,000 47,000
applications
(1,100) 1,800 3,700 (2,400) 2,000
Less: Surplus of Sujay
and Ajay’s share 1,100 –1,400 –2,100 2,400 Nil
(in the ration 2:3)
Page 19 of 24
Final liability Nil 400 1,600 Nil 2,000
Reason : As per accounting standard 18, if two or more companies are subsidiaries of the same holding
company, each subsidiary is known as Fellow subsidiary.
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 account.
Reason : Net profit as per profit and loss account 1,50,500
Add: Income tax 14,000
Depreciation (Rs.27,500 – Rs.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
1
= Rs.1,87,000 x 101 = Rs.1,851
Reason : AS-17 is applicable to commercial, business or Industrial enterprises whose turnover for the
accounting period exceeds Rs.50 crore and not 5 crore as given in option (e).
Reason : VIBGYR Ltd.
Workings:
Note 1 Bank Account
Rs. Rs.
To Balance 2,00,000 By Preference share
holders 8,80,000
To Investments Account 4,00,000
(Rs.8,00,000 × Rs.1.10)
To Equity shares By Balance account. 50,000
27,500 shares × Rs.10
Rs.2,75,000
Premium of Rs.2 per share Rs. 3,30,000
55,000
9,30,000 9,30,000
Amount transferred to capital redemption reserve account.
Face value of preference shares Rs.8,00,000
Less: Face value of shares – 27,500 × 10 (funds available by way Rs.2,75,000
of fresh equity issue)
Rs.5,25,000
Where redemption of preference shares in effected without corresponding issue of shares it implies
that it is made out of distributed profits, the gap created to the extent is transferred the Capital
Redemption Reserve
Reason :
Particulars 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
< TOP >
33. Answer : (c)
75,000
× 100
Reason : Dividend proposed is 15% of paid-up capital i.e. 5,00,000 Where the proposed dividend
exceeds 12.5% but does not exceed 15% of paid-up capital, the amount to be transferred to the
Page 20 of 24
reserves shall not be less than 5% of the current profits. Hence the minimum amount to be transferred to
reserves is 1,00,000 × 5% = Rs.5,000
Reason : Brokerage will not be allowed in respect of promoters’ quota, including the amounts taken up by
the directors, their friends and the employees, in respect of the rights issues taken up or renounced
by the existing shareholders and when applications are made by the institutions or banks against
their underwriting commitments. However, brokerage can be paid by the listed companies on
private placement at a maximum rate of 0.5 percent Thus, the correct answer is (c).
Reason : According to the Companies Act, 1956, the period to which the accounts of a company relate
should not exceed 15 months.
Reason : The formula to calculate the value of share under yield method is
Expected rate of return
×Paid-up value of share
Normal rate of return
Hence the normal rate of return and paid-up value of share is required. The net assets of the
business and number of equity shares are required to calculate the value of share under intrinsic
value method. Thus the answer is (c).
Reason : Since the annual preferred dividend preference is Rs.10,000 [i.e., (Rs.2,00,000 Rs.100 per share)
Rs.5 per share], and the issue is cumulative, 2003-04 dividends in arrear were Rs.2,000 (i.e.,
Rs.10,000 - Rs.8,000). Accordingly, the cumulative preference class of shares was entitled to the
first Rs.12,000 of dividend declared in 2004-05. This leaves Rs.3,000 to allocate to the equity
class of shares. Thus, alternative (a) is the correct answer.
Reason : As per the provisions of the Companies Act, 1956, a chartered accountant cannot be an auditor
for more than 20 companies per individual.
Reason : Board’s report shall also include a statement showing the employee’s name who is in receipt of
remuneration not less than Rs.6,00,000 per annum or Rs.50,000 per month during the financial
year.
Reason : Statement of accounting policies need not be stated in the Director’s Report. It is to be stated in
Auditors’ Report.
Reason : The statement in alternative (c) is the correct answer as stockholders have no guarantee that the
corporation will earn income, their investments are riskier. Creditors receive an agreed rate of
interest. Par value must be separately reported in the balance sheet because it represents the
market value of the stock when it was first issued is a false statement par value has nothing to do
with the market value of the stock and alternative (a) is not the correct answer. The statement in
alternative (b) Selling common shares for more than par value results in gain reported in the
income statement is false because the amount paid above par is credited to securities premium
and not net income. A company neither earns a profit nor incurs a loss when it sells stock to, or
buys its stock from, it's own stockholders. The statement in alternative (d) is false because Non-
convertible debentures can be issued by companies. The statement in alternative (e) is false
because Cash dividends decrease stockholders' equity because the shareholder is receiving a
distribution of the company's assets in the form of cash, whereas bonus issue does not decrease
stockholders' equity because the shareholder receives no assets. Thus, alternative (c) is the
correct answer.
Reason :
Particulars Rs.
Land and building 5,00,000
Plant and machinery 2,00,000
Furniture and fixtures 2,00,000
Sundry debtors 85,000
Inventories 65,000
Cash 35,000
10,85,000
Less:
12% Debentures 1,50,000
Page 21 of 24
Bank overdraft 32,500
Provision for taxation 45,000 3,00,000
Capital employed 7,85,000
Particulars Rs.
Profit for the year 2003-2004 1,15,500
Less: Depreciation on land and building 3,000
Add: Depreciation on plant and 5,000
machinery
Less: Bad debts 5,000
Profit 1,12,500
Return on capital employed = Rs.1,12,500 / Rs.7,85,000 x100= 14.33%
Net assets available for equity shareholders

Reason : Asset backing per equity share = Equity share capital
= Rs.2,50,000 + Rs.65,000– (Rs.65,000+ Rs.50,000+ Rs.1,00,000)
Rs.1, 00, 000
= Rs.3,15,000 – Rs.2,15,000= Rs.1,00,000 = Rs.1, 00, 000 = 1 time
Reason : As per the Accounting Standard 20, the following are potential equity shares (a) Share warrants
(b) Convertible preference shares (c) Employee stock option plans (d) Convertible debt
instruments. Thus, alternative (e), Redeemable preference shares are not potential equity shares.
Reason : Though the balance sheet is claimed to be the statement of all assets and liabilities, still it does
not contain certain assets and liabilities. For example, the efficient management force is a human
asset available to the organization. Though efforts are being made to quantify and present the
human resources, most of the balance sheets do not present the same. Also dissatisfied labor force
is a liability to the organization. The factors, which have a vital bearing on the earnings of the
organization such as changes in the managerial personnel, cessation of agreements, loss of
markets, are not disclosed. Personal judgment plays a great part in determining the figures for the
balance sheet. Example: provision for depreciation, stock valuation, provision for bad debts are
more based on the personal judgment and is therefore not free from bias. Hence the answer is (e).
Reason : In this case A Ltd. ultimately holds only 36% in C (12% on its own and 24% through B). Further
B is also not a subsidiary of A.
Reason : Preference share holders are not the creditors of the company. The other statements are true.
21000
Reason : i. Shares of H Company = 30000 x 100 = 70%
Shares of Company = 30%
ii. Calculation of Capital Profit Rs.
Loss as on 1.4.2004 20,000
Profit as on 31.3.2005 80,000
Total profit for the year 1,00,000
Profit up to December 31, 2004 = Rs.1,00,000 x 9/12 75,000
Profit for the subsequent 3 months = Rs.1,00,000 x 3/12 25,000
Current year’s profit till December 31, 2004 75,000
Appreciation in the value of Plant & Machinery 1,00,000
Less: decrease in value of land & bldg. 10,000 1,65,000
Less Preliminary Expenses 10,000
Profit & Loss a/c(Dr.) as on April1, 2004 Rs.20,000 30,000
Total capital profit 1,35,000
H Company = 70% of Rs.1,35,000 = Rs.94,500
Page 22 of 24
Reason : Fixed Assets of S Ltd. Rs. Rs.
Machinery and Furniture Machinery Furniture
Values as given on 30-9-2005 90,000 17,000
Adjustment due to revaluation + 50,000 - 5,000
Adjustment due to depreciation :
Machinery – 50,000 x 10/100 - 5,000 + 750
Furniture – 5,000 x 15/100 (saving) 1,35,000 12,750
Rate of Depreciation has been ascertained as follows:
Book value at the time of acquiring shares 1,00,000 20,000
Less: Book value on September 30, 2005 90,000 17,000
Depreciation Provided 10,000 3,000
Therefore, rate of depreciation Rs.10,000/Rs.1,00,000 × 100 = 10% and
Rs.3,000/ Rs.20,000 × Rs.100 = 15%.
Reason :
Dr. Profit and loss A/c. for the period ended September 30, 2005 Cr.
Amount Amount
(Rs.) (Rs.)
To Opening stock
1,86,420 By Sales 11,69,900
(1/4/2003)
Less: Returns 12,680 11,57,220

To Purchases 7,18,210 By free samples 10,000
By Closing
Less: Returns 9,850 7,08,360 1,24,840
stock
To Wages 1,09,740
+ Outstanding 1,890 1,11,630
To Carriage inward 4,910
To Sundry
19,240
Manufacturing expenses
To Gross Profit 2,61,500
12,92,060 12,92,060
Reason :
Shares Shares Application Application Excess Allotment Surplus /
applied allotted money money due money money due (deficit)
received (including
Rs. premium)
Rs. Rs. Rs. Rs.
(1) (2) (3)=(1)×Rs.2 (4)=(2) × Rs.2 (5)=(3) –(4) (6)=(2) (7) = (5)– (6)
×Rs.4.5
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 7,400
46,000 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 3,60,000
Hence the amount of refund is Rs.7,400
Reason : The consolidated balance sheet shows Rs.5,80,000 against profit and loss account being the profit
of parent company of Rs.5,00,000 and 80% share in the post acquisition profit of subsidiary
company of Rs.1,00,000. Thus, Rs.5,80,000 and share capital of parent company is Rs.20,00,000.
Alternative (b) is the correct answer.
Reason : Pre acquisition profit up to October 1, 2004
Page 23 of 24
Share of loss as on 31.3.2004 = Rs.80,000 ×70% = Rs.56,000
Profit from April 1, 2004 to September 30, 2004 (i.e., for 6 months)
1
Profit = (Rs.80,000 + Rs.1,60,000) × 70% × 2 = Rs.84,000
Net share of H Ltd. in capital profits = Rs.84,000 – Rs.56,000 = Rs.28,000
Reason : In the consolidated Balance sheet, only mutual indebtedness is to be eliminated
Bills payable 8,400 Bill receivable 15,800
Less Bills mutually 3,000 Less : Bills mutually 3,000
drawn and accepted.
Drawn and accepted 5,400 12,800
Reason : The minority interest shown in the consolidated Balance Sheet is (800/1,000) = (4/5) Holding
Company Minority Interest = (10,000 x 1/5) = Rs.2,000.
Share of profit of subsidiary company (1/5 x Rs.5,000) = Rs.1,000
∴ Minority Interest = Rs.3,000
Capital Reserve : Rs.
Cost of acquisition 7,500
Less : Face value 8,000
4
Less: Share in profit and loss account = Rs 5,000× 5 = 4,000
Capital Reserve 4,500
∴Consolidated Balance Sheet
Share capital @ Rs. 10 each 20,000 Other assets 37,500
Cash 5,000
Capital Reserve 4,500
Monitory interest 3,000
Other liabilities 15,000
42,500 42,500
Reason : Half of the stock remained unsold = Rs.20,000/2 = Rs.10,000
Rs.5, 000 1
=
Profit percentage = RS.20, 000 4
1
×
Unrealised profit share = Rs.10,000 4 = Rs.2,500
Reason : Multiple Ltd. acquired to 2,000 shares in Single Ltd. for a price of Rs.2,50,000. :
Degree of control: 2,000/3000 = 2/3 rd share
Cost of Investments Rs.2,50,000
Less :Share capital (face value) Rs.3,00,000 x 2/3 = Rs.2,00,000
Share in capital profits Rs.90,000 + Rs.60,000
= Rs.1,50,000 x 2/3 = Rs.1,00,000
Rs.3,00,000
Cost of control (capital reserve) Rs. 50,000.

Reason : It is the consolidated balance sheet of the holding company along with its subsidiary.
Reason : Value added statement is supplementary to profit and loss account and it is mandatory for a
company to prepare profit and loss account. It is not a replacement.
< TOP >
Page 24 of 24
60. Answer : (d)
Reason : EVA requires deduction of full cost of capital i.e. cost of debt and cost of equity.
Reason : Sinking fund is created out of profit. It is the part of profit. It should be listed under the heading
“Reserves and Surplus” and not under “unsecured loans”. The items stated under (b), (c), (d) and
(e) are unsecured loans.
Reason : Earnings valuation of brand valuation is a two stage process involving (i) determining the future
earnings attributable to brand and (ii)applying an appropriate multiplier to determine its present
value.
Reason : MVA is equal to the present value of all future EVA.
Reason : Value added = Sales - Operating expenses – Excise duty
Rs.1,00,000 – Rs.60,000 – Rs.5,000 = 35,000.
Reason : Since on due basis, the share capital account to the extent called up is already credited, the same
called up capital on the forfeited shares should be reversed by a debit entry. The amount which
has been received on the shares forfeited, should be credited to share forfeiture account.
Reason : Dividends declared by subsidiary company after the date of balance sheet should not be included
unless they are in respect of a period which closed on or before the date of the balance sheet.
Except that all the other statements are true regarding the preparation of balance sheet. Hence, (a)
is the answer.
Reason : Debenture interest a/c. Dr. Rs.1,20,000
Amount of debenture interest for one year 10,000 x Rs.100 x 12% = Rs.1,20,000 and tax at the
rate of 10%, of it will be 1,20,000 x 10% = Rs.12,000.
Reason : In regard to managers' and auditors' responsibilities, it is true that the auditors provide an opinion
on whether the financial statements are prepared in accordance with GAAP (Generally Accepted
Accounting Principles).
Reason : Where 78% of debentures and 20% of equity share capital 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 &
where 49% of equity is held by the Central Government. (c) a special resolution is required to
appoint an auditor. (d) is the correct answer.
Reason :Premium on issue of shares Rs.1,98,084 /21=9432×20=188640 ×5% =9,432

Premium on redemption of preference share Rs.2,00,000 x 4% = 8,000
Share premium outstanding = 1,432
Reason : Capital Reserves are created out of capital profit.
< TOP OF THE DOCUMENT >

Financial Accounting II 1005

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Page 1 of 24

The share of capital profit of H. Ltd., at the time of consolidation, is.

Capital : Land &

 Yield rate of return 

Rs.5, 20, 000

Net assets available for equity shareholders

Less: Returns 12,680 11,57,220

58. Answer : (b) < TOP >

Reason :Premium on issue of shares Rs.1,98,084 /21=9432×20=188640 ×5% =9,432

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