KENDRIYA VIDYALAYA SANGATHAN

PATNA REGION
Study Materials
Session: 2023-24
(Based on Latest CBSE Syllabus)

CLASS: XII
ACCOUNTANCY
Politics without Principles, Education without Character, Science without Humanity,
and
Commerce without Morality are not only useless but also positively dangerous.

OUR CHIEF PATRONS

MR. ANURAG BHATNAGAR

(D. C. KVS RO PATNA)

MS. SOMA GHOSH MR. PURNENDU MANDAL MR. MANISH PRABHAT

(A. C. KVS RO PATNA) (A. C. KVS RO PATNA) (A. C. KVS RO PATNA)

CONTENT AND REVIEW TEAM

Smt. Ranjana Jha, Principal, K.V. Mashrak, (Chief coordinator)
Members:
1. Mr Manoj Kumar Gupta ( K.V JAMALPUR)
2.Mr. Prem Chandra Yadav (K. V. ARA)
3.Mr Neeraj Kumar Gothwal ( K.V. SIWAN)
4.Mr Sandeep Kumar (K.V. No. 2, GAYA)
5.Mr. Kamlesh Kumar Shukla ( K.V. GOPALGANJ)

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 CONTENTS

Sl. Topic Page

No. No.
1. CBSE Syllabus 2023-24 3

2. Accounting for Partnership 4-30

3. Accounting for Share Capital 31-40

4. Issue and Redemption of Debentures 40-48

5. Financial Statements of a Company & Financial 48-60

Statements Analysis
6. Accounting Ratios 61-65

7. Cash Flow Statement 65-75

8. Sample Papers 76-105

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 CHAPTER -1
Accounting for P a r t n e r s h i p F i r m s –
Partnership Fundamentals
LET’S SEE FINANCIAL STATEMENTS OF BOTH SOLE PROPRIETOR &
PARTNERSHIP

The Journal Entries regarding Profit and Loss Appropriation Account are as follows:

DON’T

FORGET

(i) For transfer of balance of Profit and Loss Account

Profit and Loss A/C Dr.
To Profit and Loss Appropriation A/c
(ii) For Interest on Capital
For allowing Interest on Capital
Interest on Capital A/c Dr.
To Partner‗s Capital/Current A/c
(Being interest on capital allowed @% p.a.)
For transferring Interest on Capital to P&L Appropriation A/c
Profit and Loss Appropriation A/C Dr.
To Interest on Capital A/c
(Being interest on capital transferred to P&L Appropriation A/c)
(iii) For Salary or Commission pay able to a partner
For allowing Salary or Commission to a partner:
Partners Salary/Commission A/C Dr.
To Partner‗s Capital/Current A/c

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 (Being salary/commission payable to a partner)

For transferring Partner‘s Salary/Commission A/c to Profit and Loss Appropriation A/c:
Profit and Loss Appropriation A/C Dr
To Partner‗s Salary/Commission A/c

(iv) For transfer of Reserves:

Profit and loss app a/c Dr.
To Reserve a/c
( Being reserve created)
(v) For Interest on Drawings: For charging interest on a partner‗s drawings:
Partner‗s Capital/Current A/C. Dr.
To Interest on Drawings A/c
(Being interest on drawings charged @%p.a.)
For transferring interest on drawings to Profit and Loss Appropriation A/c
Interest on Drawings A/C Dr.
To Profit and Loss Appropriation A/c
(Being interest on drawings transferred to P&L appropriation A/c)
(vi) For transfer to Profit (i.e. Credit Balance of Profit and Loss Appropriation Account
Profit and Loss Appropriation A/C Dr.
To Partners Capital/Current A/c
(Being profits distributed among partners)

Partner’s Capital Accounts

Partner’s Capital Accounts: It is an account which represents the partners‗interest in the business.
In case of partnership business, a separate capital account is maintained for each partner. The capital
accounts of partners may be maintained by any of the following two methods.
 Fixed Capital Accounts
 Fluctuating Capital Accounts

INTERESTONCAPITAL
Interest on partners‗ capital will be allowed only when it has been specifically mentioned in the
partnership deed. If interest on capital is to be allowed as per the agreement, it should be calculated with
respect to the time, rate of interest and the amount of capital. Interest on Capital can be treated as either:
An Appropriation of profit; or A charge against profit

INTEREST ON DRAWINGS:- if Regular time and Equal amount is withdrawn

monthly Quaterly Half yearly

Begning 6.5 7.5 9
Mid 6 6 6
End 5.5 4.5 3

MCQs
1. For which one of the following, the balance in the Securities premium Reserve Account cannot be used?
(A)To write off the preliminary expenses of the company
(B) To pay a premium on the redemption of preference shares of the company.
(C)To pay interest on the debentures of the company
(D)To pay for buyback of its own shares.
ANS- C
2. Capital employed in a business is Rs. 2,00,000. Normal Rate of Return on capital employed is 15%. During the year,
the firm earned a profit of Rs. 48,000. Calculate goodwill on the basis of 3 years‘ purchase of Supper Profit.
(A) Rs. 54,000 (B) Rs. 60,000 (C) Rs. 50,000 (D) None of these
ANS-A

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3. Galib&Jakib are partners in a firm. Galib is to get commission of 10% of net profit before charging any commission.
Jakib is to get a commission of 10% on net profit after charging all commissions. Net Profit for the year ended 31st
March, 2021 was
Rs 55,000. What will be amount of Profit to be distributed to each?
(A) Rs. 5,500 to Galib& Rs. 4,500 to Jakib. (B) Rs. 27,500 each. (C) Rs. 22,500 each. (D) None of the above
ANS-C
4. A firm has earned average profit of Rs 60,000. Rate of return on capital employed is 12.5% p.a. Total capital employed
in the firm is Rs 4, 00,000. Goodwill on the basis of two years purchase of super profits is:
a) 20,000 b) 15,000 c) 10,000 d) 25,000
ANS-A
5. In order to calculate normal profit for valuation of goodwill:
a)Abnormal losses are added b) Abnormal gain are deducted c) Both (a) or (b) d) None of the above
ANS-C

ASSERTION REASONING QUESTIONS

Answer the assertion from following options :
(A) Both A and R true and R is the correct explanation of A.
(B) Both A and R are true but R is not the correct explanation of A
(C) A is true and R is false
(D) A is false and R is true
1.Assertion: Ram spends thrice the time that Yami devoted to business. Ram claims that he should get salary of
Rs.5,000/- p.m. for extra time spent.
Reason: As there is no partnership deed Partnership Act 1932 applies and as per the Act partners will not be
allowed any salary or remuneration.
ANS-D
2. Assertion: In case of losses interest on capital will not be provided.
Reason: As interest on capital is treated as the appropriation of the profits and there are no profits but interest on
capital can be provided in case of losses if it is to be treated as charge.
ANS-A
3. Assertion: Y wants that profits should be distributed in the ratio of capitals as he has invested more capital
than X this dispute arises as the partnership deed was not there.
Reason: As there is no partnership deed Indian Partnership Act, 1932 applies and as per the Act, Profits are to
be distributed equally.
ANS-D
4.Assertion: Rent to a partner is transferred to debit of profit and loss account but not transferred to profit and
loss appropriation account
Reason: Rent to partner is a charge against profit, not an appropriation of profit. Hence it is transferred to debit
of profit and loss account
ANS-B
5. Assertion: Only capital account is maintained for each partner under fluctuating capital account method.
Reason: Interest on capital. Salary, commission and profit transferred to the credit of partners capital account
while interest on drawings and share of losses are transferred to the debit.
ANS-A
CASE/SOURCE BASED QUESTIONS:
CASE STUDY-I
Read the passage given below and answer the following questions:
Arav and Bhart are partners in a firm sharing profits and losses. Their capitals on 1 April, 2015were
Rs.4,80,000 and Rs.5,40,000. On 1 October, 2015, they decided that the total capital of the firm should be
Rs.10,00,000 to be contributed equally by both of them. According to the Partnerhip Deed, interest on capital is
allowed to the partners @6% p.a.
1. You are required to compute interest on capital for the year ending 31 March, 2016.
(A) Rs.29,400, Rs.31,200 (B) Rs.14,400, Rs.16,200 (C) Rs.15,000, Rs.15,000 (D) None of these

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ANS-A
2. What would be the profit sharing ratio of Arun and Barun?
(A) 1 : 1 (B) 2 : 3 (C) 3 : 2 (D) 3 : 4
ANS-A

CASE STUDY-II
Anu and Baatish started a new business in partnership and decided to share profits and losses in the ratio of 3 :
1. They contributed Capitals of rs. 50,000 and rs.30,000 respectively on April 1 , 2018 .Anu is a sleeping
partner whereas Baatish is a full time working partner. During the year ended 31st March, 2019 they earned a
net profit of rs. 50,000. The terms of partnership are:
(a) Interest on capital is to allowed @ 6% p.a. (b) Anu will get a commission @ 2% on turnover.
(c) Baatish will get a salary of rs. 500 per month. (d) Baatish will get commission of 5% on profits after
deduction of all expenses including such commission.
Partners‘ drawings for the year were: Anurs. 8,000 and Baatishrs. 6,000. Turnover for the year was rs. 3,00,000.
On the basis of the information given above , answer the following questions -
Q1. What will be Anu‘sandBaatish‘sCommission ?
a. Anu rs.6,000 ,Baatish- rs.1,660 b. Anu rs.30,000 ,Baatish- rs.1,660
c. Anu rs.6,000 ,Baatish- rs.1,660 d. Anu rs.6,000 ,Baatish- rs.1,581
ANS-D
Q2. How much share of profits will be given to Anu and Baatish?
a. Anu rs.23714 , Baatishrs.7,905 b. Anu rs.15809.5 ,Baatish rs. 15,809.5
c. Anu rs.22,000 , Baatishrs.7,000 d. None of the above
ANS-A
Q3. What will be the balance in Partners‘ Capital Account at the end of the year?
a. Anurs.74,000 ,Baatishrs. 43,000 b. Anurs.74,714 ,Baatishrs. 41,286
c. Anurs.74,147 ,Baatishrs. 41,826 d. Anurs.70,714 ,Baatishrs. 41,286
ANS-B
Q4. Baatish wants that his share in profits should be higher than Anu as he is putting
more efforts to carry on the business. Is he correct in saying so?
a. Yes b. No c. Can‘t say d. May or may not be
ANS-B
TRUE /FALSE QUESTIONS
1. Interest on partners loan is to be given @12% p.a. If the deed is silent about therate.(T/F) ANS-FALSE
2. If the deed is silent, interest at the rate of 6% p.a. would be charged on thedrawings made by the partner.(T/F)
ANS-FALSE
3. Methods of settlement of disputes among partners can`t be part of the partnership deed.(T/F) ANS-FALSE
4.Maximum number of partners in a banking firm can be 20.(T/F) ANS-FALSE
5.Each partner carrying on business is the principal and the agent for all other partners.(T/F) ANS-TRUE

CHAPTER: 2 - Valuation of Goodwill

Meaning of Goodwill
Over a period of time, a well- established business develops an advantage of good name, reputation
and wide business connections. This helps the business to earn more profits as compared to a newly
setup business. In accounting, the monetary value of such advantage is known as―goodwill.

Methods of Valuation of Goodwill

1. Average Profits Method
(a) Simple Average
Goodwill=Average Profit x Number of year's purchase.
(b) Weighted Average
Goodwill=Weighted average x number of years' purchase

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 2. Super Profit Method
(i) Normal Profit=Capital Employed x NRR/100
Formula: Super Profit =Average Profit-Normal Profit
(ii) Goodwill=Super profits x number of years' purchase.

Capitalisation Method
(a) Capitalisation of Average Profits:
Goodwill = Average Profits x100/Normal rate of Return – Existing Capital Employed
(b) Capitalisation of Super Profits =
Goodwill=SuperProfits×100/Normal Rate of Return

MCQs
1. Goodwill i s __ __ _
( a ) tangible asset (b) intangible asset (c) fictitious asset (d) both(b)&(c)
ANS:-D
2. Goodwill of the firm on the basis of 2 years' purchase of average profit of the last 3 years is Rs. 25,000. Find
average profit.
(a) Rs. 50,000 (b) Rs. 25,000 (c) Rs.10,000 (d)Rs. 12500
ANS:-B
3.Calculate the value of goodwill at 3 years' purchase when: Capital employed Rs. 2,50,000; Average
profit Rs. 30,000 and normal rate of return is 10%.
(a)Rs. 3000 (b)Rs. 25,000 (c)Rs. 30,000 (d)Rs. 5,000
ANS:-D
4. What are super profits
a)Actual profit – Normal Profit b) Normal Profit - Actual profit
c) Actual profit + Normal Profit d)None of the above
ANS:-A
5. The net assets of the firm including fictitious assets of 5,000 are 85,000.The net liabilities of the firm are
30,000.The normal rate of return is 10% and the average profits of the firm are 8,000.Calculate the
goodwill as per capitalization of super profits.
(a)Rs.20,000 (b)Rs. 30,000 (c)Rs. 25,000 (d)None of the above
ANS:-B

ASSERTION REASONING QUESTIONS

Answer the assertion from following options :
(A) Both A and R true and R is the correct explanation of A.
(B) Both A and R are true but R is not the correct explanation of A
(C) A is true and R is false
(D) A is false and R is true

1.Assertion (A): Goodwill is the good name or reputation of the Business which brings benefit to the business.
Reason(R): It is an intangible asset as it has no physical existence. ANS: D
2.Assertion (A): Both purchase and shelf generated goodwill are accounted in the books of account
Reason( R ): According to AS-26 only purchase goodwill is accounted in the books of account. Shelf generated
goodwill is not accounted in the books of account ANS:B
3.Assertion (A): Average Normal Profit as Calculated is multiplied by number of years' purchase to determine
the value of goodwill.
Reason (R): Number of years' purchase means the number of years for which the firm is likely to earn same
amount of profit after change in ownership becomes of the efforts put in the past
Ans (d) Both A and R are correct

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4.Assertion (A): Goodwill is the good name or reputation of the business which brings benefit to the business.
Reason (R): It is an intangible asset as it has no physical existence.
Ans:- (b) Both (A) and (R) are true and (R) is not the correct explanation of (A).

5.Assertion(A): any abnormal gain is excluded by deducting from and any abnormal loss is included by adding
to the pasts
Reason(R): Normal business profits earned by the business for the specified number of years are considered
Ans:- (d) Both A and R are true and R is correct explanation of A

CASE/SOURCE BASED QUESTIONS:

Case I:- Average profit earned by a firm is 75,000 which includes undervaluation of stock of 5000 on average basis.
The capital invested in the business is 8,00,000 & the normal rate of return is 8%.
1. Aerage profit is…………………………….(Ans: 80000)
2. Super profit is…………………………….(Ans: 16000)
3. Goodwillofthefirmonthebasisof5times the Super Profit is………………(Ans: 80000)

Case II :- 6. Average Profit of the firm is 1, 50, 000. Total tangible assets in the firmare12,00,000
&outsideliabilitiesare7,00,000.Inthesametypeofbusiness, the normal rate of return is 20 %.
1. NormalProfit is……………………………(Ans: 100000)
2. Capital Employed is…………………………(Ans: 500000)
3. SuperProfit is…………………………….(Ans: 50000)

TRUE /FALSE QUESTIONS

1. Location of business does not affect the goodwill of business. ANS:- False
2. ―Average profit method‖ takes into consideration the future maintainable profits. ANS:-True
3. Goodwill can be sold in part. ANS:-False
4. Purchased goodwill may arise on acquisition of an existing business concern. ANS:-True
5. Self-Generated goodwill is recorded in the books of accounts as some consideration is paid for it.
ANS:-False
CHAPTER: 3 - CHANGE IN PROFIT SHARING RATIO
Reconstitution of a Partnership Firm
Reconstitution of the firm may happen in the following circumstances:
(i) Change in the profit-sharing ratio among the existing partners
(ii) Admission of a new partner
(iii) Retirement of an existing partner
(iv) Death of a Partner
(v) Amalgamation of two partnership firms
Meaning for change in profit sharing ratio
 Change in profit sharing ratio means change in ratio in which partners of the firm will share future profit
and losses.
 Change in profit sharing ratio results in dissolution of partnership and not dissolution of partnership firm
as the existing partnership agreement comes to an end and a new agreement comes into existence and the firm
continues.
Accounting Treatment:
Sacrificing Ratio = Old Ratio - New Ratio

Gaining Ratio = New Ratio - Old Ratio

Calculation of Gaining Ratio/ Sacrificing Ratio
The purpose of calculation of Gaining or sacrificing ratio is for the treatment of valued Goodwill
(a) Treatment of Goodwill (Valued Or Self-generated – Appearing in Adjustment):
Date Particulars L/f (Rs.) Dr. (Rs.) Cr.

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 Gaining Partner‘s Capital/Current A/C Dr.
To Sacrificing Partners‘ Capital/Current A/C
(b) Treatment of past Reserves & Accumulated profits Appearing in Balance Sheet
Date Particulars L/f (Rs.) Dr. (Rs.) Cr.
General Reserve A/C Dr.
Profit & Loss A/C Dr.
Workman compensation fund a/c Dr.
Investment Fluctuation fund a/c Dr.
To Old Partners‘ Capital/Current A/C
Items appearing in Asset side of the Balance sheet
Date Particulars L/f (Rs.) Dr. (Rs.) Cr.
Old Partners Capital/ Current A/C Dr.
To Goodwill A/C
To Advertisement Suspense A/C
To Profit & Loss A/C(Loss)
(c) Preparation of Revaluation Account
The assets & liabilities are revalued at the time of:-
Change in profit sharing ratio , Admission of new partners, Retirement and Death of partner.
Revaluation Account
Particulars (Rs.) Particulars (Rs.)
To Assets A/C (decrease in value) ----- By Liabilities A/C (decrease in value) ------
To Liabilities A/C (increase in value) ------ By Assets A/C (increase in value) ------
To Unrecorded Assets A/C ------ By Unrecorded Assets -------
To profit transferred to ------ By Loss transferred to -------
Old Partners Capital A/C* (Old Ratio) Old Partners A/C* (Old Ratio)
------- -------
*Either Profit or loss will appear
MCQs
1. Any change in the relationship of existing partners which results in an end of the existing agreement and
enforces making of new· agreement is called:
(a) Revaluation of partnership (b) Reconstitution of partnership
(c) Realisation of partnership (d) None of the above
ANS:-B
2. Theratioinwhichapartnersurrendershisshareinfavourofapartnerisknownas:
(a) New profit-sharing ratio (b) Sacrificing Ratio
(c) Gaining Ratio (d) Capital Ratio
ANS:-B
3. Theratioinwhichapartnerreceivesariseinhisshareofprofitsisknownas:
(a) New Ratio (b) Sacrificing Ratio
(c) Capital Ratio (d) Gaining Ratio
ANS:-D
4. Reserves and accumulated profits are transferred to partners' capital accounts at the time of
reconstitution in:
(a)Old profit-sharing ratio (b)Sacrificing Ratio (c) Gaining ratio (d)New profit-sharing ratio
ANS:-A
5. Increaseanddecreaseinthevalueofassetsandliabilitiesarerecordedthrough:
(a) Partners' Capital Account (b) RevaluationAccount
(c) Profit and Loss Appropriation (d) Balance Sheet
ANS:-B

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 ASSERTION REASONING QUESTIONS
Answer the assertion from following options :
(A) Both A and R true and R is the correct explanation of A.
(B) Both A and R are true but R is not the correct explanation of A
(C) A is true and R is false
(D) A is false and R is true

1.Assertion (A) : A firm can change its existing agreement.

Reason (R) : Any change in its partnership agreement, will be treated as punishable offence.
ANS:-C
2 Assertion (A) : In absence of a deed , a sleeping partner who contributed 75% of total capital would get 75% of the
profit earned.
Reason (R) : A sleeping partner , in absence of a deed , gets equal share of profit , irrespective of his capital share.
ANS:-D
3 Given below are two statements, one labelled as Assertion (A) and the other labelled as Reason (R). You are to examine
these two statements carefully and select the answers using the code given below:
Assertion (A): The amount of interest on Mr. Anand‘s drawing@ 10% if he withdrew Rs. 5,00,000 during the year is Rs.
50,000
Reason (R): Anand‘s capital/current account will be debited for Rs. 25,000; as in
the absence of time period given, interest on drawing is calculated on average 6
months‘ time period.
ANS:-C
4 Assertion: As a result in Change in Profit Sharing ratio it result in dissolution of partnership firm,
Reason: As told agreement come to end as a result of any change in the Partnership Deed it ends up the old agreement and
the new agreement is formed so it becomes the part of Reconstitution of the Partnership Firm i.e. Dissolution of
Partnership.
ANS:-D
5 Assertion: The old balances of reserves need not be transferred to capital account of partners in case of change in profit
ratio.
Reason: If partners decide not to distribute the reserves, then adjusting entry can be passed in sacrifing/gaining ratio.
ANS:-A

CASE/SOURCE BASED QUESTIONS:

CASE STUDY NO.1
Bhavna and Rajiv were partners in a partnership firm carrying on a restaurant in Kolkata. Bhavna noticed that a
lot of food is left at the end of the day. To avoid wastage, she suggested that it can be distributed to the needy.
Rajiv wanted that it should be mixed with the food being served in the next day. Rajiv then give a proposal that
if his share in the profit increased, he will not mind free distribution of leftover food. Bhavna happily agreed.
So, they decided to change their profit-sharing ratio 1:2 with immediate effect. On that day revaluation of assets
and reassessment of liabilities was carried out that resulted into again of Ra. 18,000.On that date the goodwill of
the firm was valued at Rs.1,20,000.
Based on the above information, you are required to answer the following questions:
1 Sacrifice/Gain of Bhavna and Rajiv will be
A.Bhavna sacrifice 1/6,Rajiv Gain 1/6 B. Bhavn Gain 1/6,RajivSacrifice 1/6
C.Only Bhavna gains 1/6 D.Only Rajiv Sacrifice 1/6
ANS:-A
2 At the time of change in Profit Sharing ratio , gaining partner capital account is............. and sacrificing partner
is................for adjustment of Goodwill.
A.Credited, Debited B.Debited,Credited C.Increase,Decrease D.Decreased , Credited
ANS:-B

CASE STUDY NO.2

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Joseph and Monu were partners in a firm carrying on a tiffin service in Mumbai. Joseph noticed that a lot of
food is left at the end of the day. To avoid wastage, she suggested that it should be distributed to the needy.
Monu wanted that it should be mixed with the food being served the next day. Monu then gave a proposal that if
his share in the profit is increased, he will not mind free distribution of left over food. Joseph happily agreed. So
they decided to change their profit sharing ratio to 2:3 with immediate effect. On that date, revaluation of
assets and reassessment of liabilities was carried out that resulted into a profit of ₹8,000. On that date, the
goodwill of the firm was valued as ₹30,000.
1 Profit on revaluation will be
(A) Debited to capital account of partners in 2:3 (B) Debited to capital account of partners in 1:1
(C) Credited to capital account of partners in 2:3 (D) Credited to capital account of partners in 1:1
ANS:-D
2 Sacrifice/ Gain of Joseph and Monu will be:
(A) Joseph sacrifice 1/10, Monu gains 1/10 (B) Monu sacrifice 1/10, Joseph gains 1/10
(C) Only Joseph gain 1/10 (D) Only Monu sacrifice 1/10
ANS:-A
3 At the time of change in profit sharing ratio, gaining partner capital is ________and Sacrificing partner is
__________ for adjustment of goodwill.
(A) Credited, Debited (B) Debited, Credited (C) Increased, Decreased (D) Decreased, Credited
ANS:-B
4 The journal entry for adjustment of goodwill will be
(A) Monu‘s capital A/c Dr. 30,000 (B) Joseph‘s capital A/c Dr. 15,000
To Joseph‘s capital A/c 30,000 To Monu‘s capital A/c 15,000
(C) Monu‘s capital A/c Dr. 3,000 (D) Joseph‘s capital A/c Dr. 27,000
To Joseph‘s capital A/c 3,000 To Monu‘s capital A/c 27,000
ANS:-C
TRUE /FALSE QUESTIONS
1.Registration of partnership is optional. A. True B. False ANS:-TRUE
2 Sleeping partner are those who do not take part in conduct of the business. A.True B.False ANS:-TRUE
3 Interest as a charge means interest on capital is to be allowed whether the firm hasearned profit or incurred
loss. A.True B.False ANS:-TRUE
4 The net profit of the firm is Rs. 8,00,000 partners are entitled to salary Rs. 1,00,000 p.a. if 10% of divisible
profit to be transferred to general reserve then amount will be Rs.80,000. A.True B.False ANS:-FALSE
5 Unless otherwise specified, the partners have to share profits and losses in proportion of the capital
contributed by them. A.True B.False ANS:-FALSE

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 CHAPTER: 4 – Admission of Partner
When a new partner is admitted in a running business due to the requirement of more capital or may be to take
advantage of the experience and competence the newly admitted partner or any other reason, it is called
admission of a part in partnership firm.
According to section 31(1) of Indian partnership Act, 1932, ―A new partner be admitted only with the consent
of all the existing partners‖
At the time of admission of new partner, following adjustments are requires
1. Calculation of new profit sharing ratio and sacrificing ratio.
2. Accounting treatment of Goodwill.
3. Accounting treatment of accumulated profit, reserves and accumulated loss.
4. Accounting treatment of revaluation of assets and reassessment of liabilities.
5. Adjustment of capital in new profit sharing ratio.

1. Calculation of new profit sharing ratio

Following types of problems may arise for the calculation of new profit share ratio.

Case (i) When old ratio is given and share of new partner is given.
Note : Unless agreed otherwise, it is presumed that the new partner acquires his share in profits from the old
partners in their old profit sharing ratio.
Alternative Method : Old Ratio = A : B 1:2
Left the profit of the firm = 1 C‘s share (New Partner) = 1/3 Remaining Profit = 1-1/3 = 2/3
Now this profit 2/3 will be divided between the old partners in their future profit sharing ratio (old ratio) i.c., 1:2

A‘s new Profit = 1/3 of 2/3 = = 2/9 B‘s new Profit = 2/3 of 2/3 = = 4/9

C‘s profit = 1/3 or = 3/9 Hence the new ratio = 2:4:3

Note : In this case only New Partners share is given then Sacrificing ratio = Old Ratio = 1 : 2 there is not need
to calculate it.

Case (ii) When new partner acquires his/her share from old partners in agreed share.
2. Accounting Treatment of Goodwill
At the time of admission of a partner, treatment of Goodwill is necessary to compensate the old partners for
their sacrifice. The incoming partner must compensate the existing partners because he is going to acquire the
right to share future profits and his share is sacrificed by old partners. If goodwill (Premium) is paid to old
partners privately or outside the business by the new partner then on entry is required in the books of the firm.
There may be different situations about the treatment of goodwill at the time of the admission of the new
partner.
(i) Goodwill (premium) brought in by the new partner in cash and retained in the business
Note : Sacrificing = Old ratio – New ratio

A = 3/5 – 3/8 = B = 2/5 – 3/8 =

This sacrificing ratio between A and B i.e., 9 : 1.
3. Accounting treatment of Accumulated Profits
Accumulated profits and reserves are distributed to partners in their old profit sharing ratio. If old partners are
not interested to distribute, these accumulated profits are adjusted in the same manner as goodwill and the
following adjusting entry will be passed.
New Partner‘s capital A/c Dr. (New share)
To old partner‘s capital A/c (Sacrificing ratio)
4. Accounting treatment for revaluation of assets and re-assessment of liabilities

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The assets and liabilities are generally revalued at the time of admission of a new partner. Revaluation Account
is prepared for this purpose in the same way was in case of change in profit sharing ratio. This account is
debited with all losses and credited with all gains. Balance of Revaluation Account is transferred to old partner
in their old ratio.
5. Adjustment of Capital in New Profit Sharing Ratio
Working Notes :

Gauri‘s share of goodwill = Rs.

Total adjusted capital of old partner for 2/3 share = Rs. 1,42,433 + Rs. 91,217 = Rs. 2,33,650

Proportionate capital of Gauri 1/3 share = Rs. = Rs. 1,16,855

Bank A/c
Particulars (Rs.) Particulars (Rs.)

To Gauri‘s Capital 1,16,825 By balance c/d 1,31,825

To Premium for goodwill 15,000
1,31,825 1,31,825

Q1. Chander and Damini were partners in a firm sharing profits and losses equally. On 31st March, 2017 their balance sheet was as follows

On 1st April, 2017, they admitted Elina as a new partner for 13rd share in the profits on the following conditions.
(i) Elina will bring ₹ 3,00,000 as her capital and ₹ 50,000 as her share of goodwill premium, half of which will be withdrawn by Chander and
Damini. (ii) Debtors to the extent of ₹ 5,000 were unrecorded.
(iii) Furniture will be reduced by 10% and 5% provision for bad and doubtful debts will be created on bills receivables and debtors.
(iv) Value of land and building will be appreciated by 20%.
(v) There being a claim against the firm for damages, a liability to the extent of ₹ 8,000 will be created for the same.
Prepare revaluation account and partners‘ capital accounts, (CBSE 2018)
Answer:

Q2. Abha and Bimal are partners in a firm sharing profits and losses in the ratio of 3 : 2. On 31st March, 2015 they admitted Chintu into
partnership for 1/5th share in the profits of the firm. On that date their balance sheet stood as under

14
 Chintu was admitted on the following terms
(i) He will bring ₹ 80,000 as capital and ₹ 30,000 for his share of goodwill premium.
(ii) Partners will share future profits in the ratio of 5 : 3 : 2.
(iii) Profit on revaluation of assets and reassessment of liabilities was ₹ 7,000.
(iv) After making adjustments, the capital accounts of the partners will be in proportion to Chintu‘s capital. Balance to be paid off or brought in by
the old partners by cheque as the case may be.
Prepare the capital accounts of the partners and bank account. (All India (C) 2016)
Answer

CHAPTER: 5 – Retirement / Death of a Partner

Retirement of a Partner
Retirement of a partner means retiring from the firm, i.e., ceasing to be a partner of the firm. Retirement of a
partner is one of the modes of reconstituting the firm under which an old partnership comes to an end and a new
one between the continuing partners (i.e. partners other than the outgoing partner) comes into existence,
however, the firm continues its business.
On the retirement or death of a partner, the existing partnership deed comes to an end, and in its place, a new
partnership deed is framed, whereby the remaining partners continue to do their business on changed terms and
conditions.
Death of a Partner
The partnership comes to an end immediately, whenever a partner dies although the firm may continue with the
remaining partners. The deceased partner is entitled to get his share in the firm as per the provision of a
partnership agreement.
Adjustments required at the time of Retirement of a Partner/ Death of a partner:
1. Calculation of new profit sharing ratio and gaining ratio.
2. Adjustment for goodwill.

15
3. Adjustment of profit/loss arising on the revaluation of assets and reassessment of liabilities.
4. Adjustment of accumulated profits, reserves and losses.
5. Calculation and adjustment of Deceased partner’s share of profit up to the date of his death.
6. Computation of amount due to retiring partner and payment to retiring partner/ Computation of amount due
to deceased partner.
7. Settlement of Deceased Partner’s Executor’s Account
8. Adjustment of capitals (if agreed).
1. (a) New Profit Sharing Ratio
After retirement/death of a partner, the new ratio in which the continuing partners (i.e. partners other than the
outgoing partner) decides to share the future profits and losses, is known as new profit sharing ratio.
New Ratio =Old Share +Acquired Gaining Share
(b) Gaining Ratio
The ratio in which the continuing partners acquire the outgoing (retired or deceased) partners‘ share is called as
Gaining ratio. This ratio is calculated by taking out the difference between new profit share and old profit
share.
Gaining Ratio =New Share -Old Share
2. Treatment of Goodwill
At the time of retirement or death of a partner, his share of profits is taken by the continuing partners. The
continuing partners then compensate the retiring or deceased partner in the form of goodwill contributed in their
gaining ratio.
Gaining Partners‘ Capital/Current A/c Dr
To Retiring/ Deceased Partners‘ Capital/Current A/c
Goodwill Already Appearing in Books
Any goodwill already appearing in the books (balance sheet) will be immediately written off (debited) to old
partners‘ capital accounts in old profit sharing ratio. Here, the word ‗old partners‘ includes the Retiring/
Deceased partner.
All Partners‘ Capital/Current A/c Dr (In old ratio)
To Goodwill A/c (With existing book value of goodwill)
Hidden Goodwill
Sometimes the firm agrees to settle the retiring or deceased partners‘ account by payment of a lump sum
amount. If such amount is in excess of his capital and share in reserves/revaluation of assets and reassessment
of liabilities, etc, the excess will be treated as his share of goodwill.

3. Revaluation of Assets and Reassessment of Liabilities

At the time of retirement/death of a partner, the assets and liabilities are revalued so that the due share of an
outgoing partner in the profit/loss arising from such revaluation may be ascertained and adjusted in capital
account.
For this purpose, revaluation account is prepared.
Journal Entries:

(a) For increase in value of asset: (b) For increase in the value of asset:
Asset a/c Dr. Asset a/c Dr.
To Revaluation a/c To Revaluation a/c
(c) For unrecorded assets: (d) For decrease in the value of asset:
Unrecorded Asset a/c Dr. Revaluation a/c Dr.
To Revaluation a/c To Asset a/c
(e) For increase in the value of liabilities: (f) For unrecorded liabilities:
Revaluation a/c Dr. Revaluation a/c Dr.
To liability a/c To unrecorded liability a/c

16
 (g) For decrease in the value of liabilities: (h) Profit on revaluation;
Liability a/c Dr. Revaluation a/c Dr.
To Revaluation a/c To All Partners‘ Capital a/c( in old profit
sharing ratio)
(i) Loss on revaluation;
All Partners‘ Capital a/c ( in old profit sharing ratio) Dr.
To Revaluation a/c

Calculation and adjustment of deceased partner’s share of profit up to the date of his death.

If a partner dies on any date after the date of the balance sheet, then his share of profits is calculated from the
beginning of the year to the date of death on the basis of time or sales. When share of profit is calculated on the
basis of time, it may be on the basis of previous years‘ profit or average profit of past years.
1. On the Basis of Time
Profit from the date of last balance sheet to the date of death
=No. of Days or Months from the Date of Last Balance Sheet to the Date of Death/ 365 Days or 12 Months
× Previous Year‘s Profits or Average Profits of a Given Number of Past Years
2. On the Basis of Sales
Profit from the date of last balance sheet to the date of death
=Sales from the Date of the Last Balance Sheet to the Date of Death/
Previous Year‘s Sales or Average Sales of a Given Number of Past Years
× Previous Year‘s Profits of Average Profits of a Given Number of Past Years
Accounting Treatment
(i) In case of profit
Profit and Loss Suspense A/c Dr
To Deceased Partner‘s Capital A/c
(ii) In case of loss
Deceased Partner‘s Capital A/c Dr
To Profit and Loss Suspense A/c

(a) Calculation of Amount Payable to Retiring/Deceased Partner

The amount due to a retiring/deceased partner is ascertained by preparing retiring/deceased partners‘ capital
account, after taking into account the following-
Items to be Credited
a. Opening balance of capital and current account of retiring/deceased partner.
b. His share of reserve/accumulated profits.
c. His share of goodwill of the firm.
d. His share of profit till the date of his retirement/death.
e. His share in the profit of revaluation account.
f. His salary and/or interest on capital due to him till the date of his retirement/death.
Items to be debited
a. Drawings and interest thereon of the retiring/deceased partner.
b. Share in the accumulated losses of past year/years.
c. Share in the loss of revaluation account.
(b) Settlement of the Amount Due to the Retiring Partner
The amount due to the retiring partner is either paid off immediately or is transferred to his loan account. The
retiring partners‘ loan account will appear in the books of the new firm as a liability until it is paid off finally.
The following journal entries are passed in this regard
Accounting Treatment
1. If the amount is paid in lumpsum

17
Retiring Partners‘ Capital A/c Dr
To Cash/ Bank A/c
2. In case the amount is paid in instalments

(i) For amount due transferred to retiring partners’ loan account

Retiring Partners‘ Capital A/c Dr
To Retiring Partners‘ Loan A/c
(ii) On interest being provided
Interest on Loan A/c Dr
To Retiring Partners‘ Loan A/c
(iii) On payment of installment with interest
Retiring Partners‘ Loan A/c Dr
To Cash/Bank A/c
3. If payment is partly paid in cash and the remaining amount is to be treated as loan
Retiring Partners‘ Capital A/c Dr
To Cash/ Bank A/c
To Retiring Partners‘ Loan A/c
7. Settlement of Deceased Partner’s Executor’s Account
The payment to the executors of the deceased partner is made as is stated in the partnership deed or as agreed to
by the remaining partners and the executors. The payment is made either in full in one installment or more than
one installment.
Accounting Treatment
(i) When payment is made in full in one installment
Deceased Partner‘s Executor‘s A/c Dr
To Bank A/c
(ii) When payment is made in more than one installment
(a) When interest is due
Interest A/c Dr
To Deceased Partner‘s Executor‘s A/c
(b) When instalment is paid
Deceased Partner‘s Executor‘s A/c Dr
To Bank A/c
Multiple Choice Questions
1. In the absence of any information regarding the acquisition of share in profit of the retiring/deceased partner
by the remaining partners, it is assumed that they will acquire his/her share:-
(a) Old Profit Sharing Ratio (Answer) (b) New Profit Sharing Ratio
(c) Equal Ratio (d) None of these
2. Gobind, Hari and Pratap are partners. On death of Gobind, the goodwill already appears in the Balance Sheet
at Rs. 24,000. The goodwill will be written-off:
(a) by debiting all partners‘ capital accounts in their old profit sharing ratio.(Answer)
(b) by debiting remaining partners‘ capital accounts in their new profit
sharing ratio.
(c) by debiting deceased partners‘ capital accounts from his share of goodwill.
(d) none of these.
3. Anand, Bahadur and Chander are partners sharing profit equally. On Chander‘s death, his share is acquired
by Anand and Bahadur in the ratio of 3:2. The New Profit Sharing Ratio between Anand and Bahadur will be–
(a) 2:3 (b) 4:5 (c) 3:2 (d) 8:7(Answer)
4. The old profit sharing ratio among Rajender, Satish and Tejpal were 2:2:1. The New Profit Sharing Ratio
after Satish‘s death is 3:2. The gaining ratio is–
(a) 3:2 (b) 2:1 (c) 1:1(Answer) (d) 2:3
5. At the time of retirement of a partner, gaining ratio is used to distribute-
18
(a) Goodwill (Answer) (b) Profit or Loss on Revaluation
(c) Profit and Loss Account (Credit Balance) (d) Both b and c

One Word Answer/ Fill in the blanks

Q. No. Questions Answer

1. Which ratio is to be calculated at the time of retirement to compensate the retiring Gaining Ratio
partner?
2. As per which section of Indian Partnership Act 1932, a retiring partner becomes Section 37
entitled to profit after retirement if his due remains unpaid.
3. At the time of retirement of a partner, Unrecorded Asset is to be Credited
_______________to Revaluation Account.
4. Name the account which is opened to credit the share of profit of the deceased Profit and Loss
partner till the time of his death to his capital account. Suspense A/c
5. At what rate is interest payable on the amount remaining unpaid to the retiring 6% p.a.
partner?

ASSERTION AND REASONING QUESTIONS

In the following questions, a statement of Assertion (A) is followed by a statement of Reason(R).
Choose one of the correct alternatives given below:
Alternatives:
(a) Both Assertion (A) and Reason (R) are true, and Reason(R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason(R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.

1. Assertion (A) Retirement of a partner results into a reconstitution of the firm.

Reason (R) In retirement, old partnership agreement discontinues and new partnership agreement come into
existence.
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).
2. Assertion (A) If the amount of any asset is understated, then revaluation account will be debited to restore
asset amount to its actual value.
Reason (R) Increase in the value of an asset is profit for the firm.
Ans. (d) If the amount of any asset is understated, then revaluation account will be credited
to restore asset amount to its actual value because increase in the value of an asset is profit for the firm.
3. Assertion (A) Accumulated profits and losses will be debited and credited to all the partners‘ capital account.
Reason (R) Accumulated profits and losses are distributed among partners in old profit sharing ratio.
Ans. (d) Accumulated profits are credited and losses are debited to partners‘ capital account in old profit
sharing ratio.
4 Assertion (A) Profit on the revaluation of assets and liabilities is a capital profit.
Reason (R) Capital profits are recurring in nature.
Ans. (c) The profit that is earned through capital items is called the capital profit. It is not recurring in
nature.
5. Assertion (A): At the time of death of a partner, the deceased partner will get his share in General Reserve and credit
balance in Profit & Loss Account
Reason (R): Deceased partner will get his share of ‗Workmen Compensation Reserve‘ (amounts remain after
settlement of Workmen Compensation claim).
Ans. (b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of
Assertion (A)

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 CASE BASED QUESTION
1. Ravi, Shyam and Sohan were partners in a firm sharing profits and losses in the ratio of 3:2:1. Their books
were closed on March 31st every year. Shyam died on September 30, 2023 and Ravi and Sohan decided to share
future profits in 3:2. The executers of Shyam are entitled to his share of capital 50, 00,000 along with his share
of goodwill. The total goodwill of the firm was valued at Rs.1, 20,000.
You are required to give answer to the following questions:
i. In respect of goodwill:
(A) Ravi and Sohan will be debited by Rs.30, 000 and Rs.10, 000 respectively.
(B) Ravi and Sohan will be debited by Rs.28, 000 and Rs.12, 000 respectively.
(C) Ravi and Sohan will be debited by Rs.12, 000 and Rs.28, 000 respectively. (Answer)
(D) Ravi and Sohan will be debited by Rs.10, 000 and Rs.30, 000 respectively.
ii. On death of a partner, the amount due to him will be transferred to :
(A) His executer‘s account (Answer) (B) His current account (C) His capital account (D) His loan account
iii. Choose the odd one:
(A) Revaluation account (B) Gaining ratio (C) Realization of assets (Answer) (D) Adjustment of goodwill
iv. On retirement or death of a partner, his share of goodwill will be distributed among remaining partners in:
(A) Old ratio (B) Gaining ratio(Answer) (C) Sacrifice ratio (D) New profit sharing ratio
2. Analyze the case given below and answer the questions that follow:
Ram, Hari and Karan are partners sharing profits and losses in the ratio of 14 : 5 : 6 respectively. Hari retires and
surrenders his entire 5/25th share in favour of Ram. The goodwill of the firm is valued at 2 years‘ purchase of Super
Profit based on average profits of last three years. The profits for the last three years are Rs50,000, Rs 55,000 and Rs
60,000, respectively. The normal profits for the similar firm are 30,000. Goodwill already appears in the books of the
firm at 75,000.
i. Who is the gaining partner on retirement of Hari?
(A) Ram (Answer) (B) Karan (C) Both (A) and (B) (D) Neither (A) nor (B)
ii. What is the value of goodwill determined by using super- profit method?
(A) Rs50,000 (Answer) (B) Rs 10,000 (C) Rs 30,000 (D) Rs 75,000
iii. In which ratio, existing goodwill of Rs 75000 be written off:
(A) 14:5:6 (Answer) (B) New ratio, after Hari retirement
(C) In gaining ratio (D) None of these.

Short / Long Answer Type Questions

1. Kavi, Ravi, Kumar and Guru were partners in a firm sharing profit in the ratio of 3 : 2 : 2 : 1. On 1st February, 2023,
Guru retired and the new profit sharing ratio decided between Kavi, Ravi and Kumar was 3 : 1 : 1. On Guru‘s retirement,
the goodwill of the firm was valued at Rs.3,60,000. Showing your working notes clearly, pass necessary journal entry in
the books of the firm for the treatment of goodwill on Guru‘s retirement.
Ans.
Kavi‘s Capital A/c Dr 81,000
To Ravi‘s Capital A/c 18,000
To Kumar‘s Capital A/c 18,000
To Guru‘s Capital A/c 45,000
(Amount of goodwill adjusted)
Working Notes:
(a) Gaining Ratio= New-Old
Kavi =3/5-3/8=9/40, Ravi= 1/5-2/8=(2/40), Kumar = = 1/5-2/8=(2/40)
(b) Share of Goodwill:
G‘s share=360000*1/8=45000, Kavi‘s share=360000*9/40=81000, Ravi sacrifices=360000*2/40=18000,
Kumar sacrifices=360000*2/40=18000

2. Manav, Nath and Narayan were partners in a firm sharing profits in the ratio of 1 : 2 : 1. The firm closes its books on
31st March every year. On 30th September, 2023 Nath died. On that date his capital account showed a debit balance of

20
Rs. 5,000. There was a debit balance of Rs. 30,000 in the profit and loss account. The goodwill of the firm was valued at
Rs. 3,80,000. Nath‘s share of profit in the year of his death was to be calculated on the basis of average profit of last 5
years, which was Rs. 90,000. Pass necessary journal entries in the books of the firm on Nath‘s death.
Ans.
(i) Manav‘s Capital A/c (1,90,000 *1/ 2) Dr 95,000
Narayan‘s Capital A/c (1,90,000 *1/ 2) Dr 95,000
To Nath‘s Capital A/c 1,90,000
(Being Nath‘s share of goodwill adjusted in the capital accounts of gaining partners in gaining ratio)
(ii) Manav‘s Capital A/c ( 30,000 *1/ 4) Dr 7,500
Nath‘s Capital A/c ( 30,000 *2/ 4) Dr 15,000
Narayan‘s Capital A/c ( 30,000 *1/ 4) Dr 7,500
To Profit and Loss A/c 30,000
(Being the transfer of profit to old partners in old ratio)
(iii) Profit and Loss Suspense A/c (90 000*2/4*6/12) Dr 22,500
To Nath‘s Capital A/c 22,500
(Being Nath‘s share of profit till the date of his death transferred to his capital account)
(iv) Nath‘s Capital A/c Dr 1,92,500
To Nath‘s Executor A/c 1,92,500
(Being the transfer of amount due to Nath‘s executor account)
Working Notes a. Calculation of Nath’s Share of Goodwill: Firm‘s goodwill = Rs. 3,80,000;
Nath‘s share of goodwill = 3 80 000 *2/4 =1,90,000
b. Calculation of Amount Transferred to Nath’s Executors Account
= 95,000 + 95,000 + 22,500 -5,000 -15,000 = Rs. 1,92,500

3. X, Y and Z were partners in a firm sharing profits and losses in the ratio of 3:2:1. Their Balance Sheet as at
31st March, 2023, was as follows:
Liabilities Amt. in Assets Amt. in Rs.
Rs.
Capitals: 5,00,000 Machinery 5,70,000
X: 3,00,000 Investments 1,10,000
Y: 1,80,000 Debtors: 1,20,000 1,10,000
Z: 1,20,000 Less: Prov. for D/D 10,000
Workmen‘s Compensation Fund 60,000 Stock 1,40,000
Employees‘ Provident Fund 1,10,000 Cash 30,000
Creditors 1,90,000
9,60,000 9,60,000
st
On 1 April, 2023, Z retires from the firm on the following terms:
1. Provision for doubtful debts was to be maintained at 10% on debtors.
2. Stock was undervalued by Rs. 10,000.
3. An old customer, whose account was written off as bad, paid Rs. 15,000.
4. 20% of the Investments were taken by X at book value.
5. Claim on account of workmen‘s‘ compensation amounted to Rs. 70,000.
6. Creditors included a sum of Rs. 27,000 which was not likely to be claimed.
7. Goodwill valued at Rs. 60,000.
Pass necessary Journal entries on retirement of Z.
OR
Prepare Revaluation Account, Partners Capital Accounts, and the Balance Sheet of the reconstituted firm.

Solution: Journal entries

Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
1. X‘s Capital A/c Dr. 22,000
Investments A/c 22,000

21
 (Being investments taken by partner)
2. Revaluation A/c Dr. 12,000
To Provision for d/d/ A/c 2,000
To Provision for WC A/c 10,000
(Being loss on revaluation)
3. Stock A/c Dr. 10,000
Cash A/c Dr. 15,000
Creditor A/c Dr. 27,000
To Revaluation A/c 52,000
(Being gain on revaluation)
4. Revaluation A/c Dr. 40,000
To X‘s Capital A/c 20,000
To Y‘s Capital A/c 13,333
To Z‘s Capital A/c 6,667
5. (Being gain on revaluation transferred in 3:2:1)
X‘s Capital A/c Dr. 6,000
Y‘s capital A/c Dr. 4,000
To Z‘s Capital A/c 10,000
6. (Being share of goodwill adjusted in gaining ratio i.e. 3:2)
Z‘s Capital A/c Dr. 1,36,667
To Z‘s Loan A/c 1,36,667
(Being balance of capital transferred to loan a/c)

OR
Revaluation Account
Particulars Amt. in Particulars Amt. in Rs.
Rs.
Prov. for WC 10,000 Stock 10,000
Prov. for d/d 2,000 Creditor 27,000
Capital A/cs Cash A/c 15,000
X 20,000 (Bad debts Recovery)
Y 13,333
Z 6,667 40,000
52,000 52,000
Capital Accounts
Particulars X Y Z Particulars X Y Z
Z‘s Capital 6,000 4,000 Balance b/d 3,00,000 1,80,000 1,20,000
Investments 22,000 X‘s Capital 6,000
Z‘s Loan A/c 1,36,667 Y‘s Capital 4,000
Balance c/d Revaluation A/c 20,000 13,333 6,667
2,92,000 1,89,333
3,20,000 1,93,333 1,36,667 3,20,000 1,93,333 1,36,667

Balance Sheet (After reconstitution)

Liabilities Amt. in Assets Amt. in Rs.
Rs.

22
 Workmen Compensation Fund 60,000 Investments 1,10,000 88,000
Prov. for Workmen Comp. 10,000 Less: Taken by X (22,000)
Employees Provident Fund 1,10,000 Debtors 1,08,000
Creditors 1,90,000 1,63,000 1,20,000
Less: Not likely to claim (27,000) Less; Prov. for d/d (12,000)
Capital A/cs: Machinery 5,70,000
X 2,92,000 Stock 1,40,000 1,50,000
Y 1,89,333 Add: Undervalued 10,000
Z‘s Loan A/c Cash 30,000 45,000
4,81,333 Add: Bad debts Rec. 15,000
1,36,667
9,61,000 9,61,000

4. N, M and P were partners in a firm sharing profits and losses in the ratio 4:3:2.Their balance sheet as on 31st
March, 2023 was as follows:
Balance Sheet of Nikita, Mankrit and Pulkit as on 31st March 2023
Capital A/cs: 9,00,000 Plant & Machinery 7,40,000
Nikita 4,00,000 Stock 2,30,000
Mankrit 3,00,000 Sundry Debtors 1,40,000
Pulkit 2,00,000 Cash at Bank 40,000
General Reserve 90,000
Creditors 1,60,000
11,50,000 11,50,000

M died on 31st July, 2023. According to the partnership deed, the executors of the deceased partnerare
entitled to:
(a) Balance of partner's capital account
(b) Salary @ Rs. 6,000 per quarter.
(c) Share of goodwill calculated on the basis of twice the average of past three years' profits and share of
profits from the closure of the last accounting year till the date of death calculated on the basis of average
of three completed years' profits before death.
Profits for 2020-21, 2021-22 and 2022-23 were Rs. 80,000, Rs. 90,000 and Rs. 1,00,000 respectively.
M withdrew Rs. 6,000 on 15th May, 2023.
Prepare M's capital account to be rendered to her executors.
Solution:
M’s Capital Account
Particulars Amt. in Rs Particulars Amt. in Rs
Drawings 6,000 Balance b/d 3,00,000
M‘s Executor A/c 4,18,000 Salary 24,000
N‘s Capital A/c 40,000
P‘s Capital A/c 20,000
Profit & Loss Suspense A/c 10,000
General Reserve 30,000
4,24,000 4,24,000 Working
Notes:
(1) Calculation of M’s share of goodwill
Average Profit for the last three years = (80,000 + 90,000 + 1,00,000) / 3
= Rs. 90,000
Goodwill of the firm = Average Profits of the last three years × Number of
Years‘ Purchase

23
 = Rs. (90,000 × 2) = Rs.1,80,000
M‘s share of goodwill = Rs. (1,80,000 × 3/9) = Rs.60,000
Gaining Ratio among the partners = 2:1
(2) Calculation of M’s Share of Profit
Average Profits of last three years = Rs. 90,000
Profits till the date of death = Rs. (90,000 × 4/12) = Rs. 30,000
M‘s Share of Profits = Rs. (30,000 × 3/9) = Rs.10,000

**TIPS for Calculation of New Profit Sharing Ratio and Gaining Ratio
Case 1 When one partner retires and the new profit sharing ratio among the remaining partners is not
given, then it will be assumed that the remaining partners continue to share profits and losses in the
remaining ratio.
Case 2 When gains of continuing partners are separately given, then new share of the continuing
partners may be calculated by adding their gain to their old share.
Case 3 When the remaining partners acquire share of the retiring partner in specified ratio, then share
taken by each partner is computed separately and then added to their old share.
Case 4 When old ratio and new ratio are given, gaining ratio is computed by taking out the difference
between old share and new share.
Case 5 When entire share of retiring partner is taken by only one partner, then the acquired share will
be added to that particular partner‘s share.

CHAPTER:6 Dissolution of Partnership Firm

Dissolution of Partnership: A Partnership gets terminated in case of Change in existing profit-sharing
ratio among partners; Admission of a new partner; Retirement of a partner; Death of a partner; Insolvency of a
partner; Completion of the venture; Expiry of the period of partnership.
Dissolution of Partnership Firm: The dissolution of a firm implies the discontinuance of partnership
business and separation of economic relations between the partners.
On dissolution of the firm, the firm closes its business altogether and realizes all its assets and pays all its
liabilities
Dissolution of the Firm takes place in any of the following ways:
1. Dissolution by Agreement 2. Compulsory Dissolution 3. On the happening of certain
Contingencies 4. Dissolution by Notice 5. Dissolution by Court

Difference between Dissolution of Partnership and Dissolution of Partnership Firm

Basis Dissolution of Partnership Dissolution of Firm
1. Termination of Business The business is not terminated The business of the firm is closed
2. Settlement of assets and Assets and liabilities are revalued Assets are sold and liabilities are
liabilities and new balance sheet is drawn. paid-off.
3. Court‘s intervention Court does not intervene because A firm can be dissolved by the
partnership is dissolved by mutual court‘s order.
agreement.
4. Economic relationship Economic relationship between Economic relationship between
the partners continues though in a the partners comes to an end.
changed form.
5. Closure of books Does not require because the The books of account are closed.

24
 business is not terminated.
Accounting Treatment on Dissolution
Transaction Journal Entries
1 To Transfer of Assets Realisation A/c Dr.
(Except Cash & Bank balance andProfit To Land & Building A/c
& Los A/c Dr.) To Machinery A/c
To Debtors A/c etc.
2 To Transfer of Liabilities Creditors A/c Dr.
(Except Capitals, Partner‘s Loanand Bank Loan A/c Dr.
Profit & Loss A/c Cr.) Provision for Doubtful Debts Dr.
Partner‘s Mrs./Mr. Loan A/c Dr.
To Realisation A/c
3 To Transfer Accumulated Profits General Reserve A/c Dr.
Workmen Comp. Reserve A/c Dr.
Profit & Loss A/c Dr.
To Partner‘s Capitals A/c
4 To Transfer Accumulated Losses Partner‘s Capitals A/c Dr.
To Profit & Loss A/c
To Advertisement Suspense A/c
5 To Realize from sale of Recorded Bank A/c Dr.
& Unrecorded Assets To Realisation A/c
6 To Take over asset by a Partner Partner‘s Capital A/c Dr.
To Realisation A/c
7 To Take over asset by a Creditors NO ENTRY WILL BE PASSED
8 To Take over liability by a Partner Realisation A/c Dr.
To Partner‘s Capital A/c
9 To Settle Recorded/Unrecorded Realisation A/c Dr.
Liabilities by payment To Bank A/c
10 To close Partners‘ Current A/c Partner‘s Current A/c Dr.
(If Credit balance) To partner‘s Capital A/c
To close Partners‘ Current A/c Partner‘s Capital A/c Dr.
(If Debit balance) To Partner‘s Current A/c
11 Realisation Expense Realisation A/c Dr.
(Paid by firm) To Bank A/c
12 Realisation Expense Realisation A/c Dr.
(Paid by a Partner) To Partner‘s Capital A/c

13 When a partner agreed to undertake dissolution work on remuneration.

(a) For agreed remuneration to such Realisation A/c Dr.
partner To Partner‘s Capital A/c
(b) If payment made by Firm Partner‘s Capital A/c Dr.
To Bank A/c
(c) If the partner himself pays No any entry will be passed
Realisation expenses (privately)
14 Gain or Loss on Realisation Realisation A/c Dr.
transfer to Capital A/c To Partners‘ Capital A/c
Partners‘ Capital A/c Dr.
To Realisation A/c

25
 15 To pay Partner‘s Loan Partner‘s Loan A/c Dr.
To Bank A/c
16 For Settlement of Partners’ Capital Account
(a) If there is Debit Balance Bank A/c Dr.
To Partner‘s Capital A/c
If there is Credit Balance Partner‘s Capital A/c Dr.
(b) To Bank A/c

Dr. Realisation A/c Cr.

Particulars Amt. Particulars Amt.
(₹) (₹)
To Sundry Assets: xxx By Sundries Liabilities xxx
Land and Building (Only outsiders liabilities)
Plant and Machinery By Provision on Assets xxx
Furniture By Cash/Bank (Assets realized) xxx
Debtors By Cash/Bank (unrecorded Asset) xxx
Bills Receivable etc. By Partners Capital A/c xxx
To Cash/ Bank (Liability paid) xxx (Asset taken by Partner)
To Partners Capital A/c xxx By Partners Capital A/c xxx
(liability taken by partner) (Loss transfer to Partners if any)
To Cash/ Bank (Realisation Exp.) xxx
To Partners Capital A/c‗s (Profit to Partners) xxx
xxxxx xxxxx
Dr. Partner’s Loan A/c Cr.
Particulars A (₹) B (₹) Particulars A (₹) B (₹)
To Bank A/c xxx xxx By Balance b/d xxx Xxx
xxxx xxxx xxxx xxxx
Dr. Partner’s Capital A/c Cr.
Particulars L A (₹) B (₹) Particulars L A (₹) B (₹)
F F
To P&L A/c (Loss) xxx By balance b/d xxx xxx
To Realisation A/c xxx By General Reserve xx xx
(Loss on Realisation) By P&L A/c (Profit) xxx xxx
To Realisation A/c xxx By Realisation A/c xxx xxx
(Asset taken over) (Profit on realization)
To Bank A/c (Final Payment) xxx
xxxx xxxx xxxx xxxx
Dr. Cash/ Bank A/c Cr.
Particulars Amt. Particulars Amt.
(₹) (₹)
To Balance b/d xxx By Realisation A/c (Liabilities paid) xxx
To Realisation A/c (Assets Realised) xxx By Realisation A/c (Realisation Exp.) xxx
To Realisation A/c (Unrecorded Assets) xxx By Realisation (unrecorded liability) xxx
By Partner‘s Loan A/c xxx
By Partner‘s Capital A/c xxx
xxxx xxxx

ASSERTION REASON TYPE QUESTIONS

Answer the following questions by choosing correct option from below:
(A) Both Assertion and reason are true, and reason is correct explanation of assertion.

26
(B) Assertion and reason both are true, but reason is not the correct explanation of assertion.
(C) Assertion is true, reason is false. (D) Assertion is false, reason is true.
Q.1 Assertion (A): On dissolution, goodwill account is transferred to Realisation Account.
Reason (R): Goodwill is an Asset which cannot be seen or touched.
Q.2 Assertion (A): At the time of Dissolution of Partnership Firm, The amount received from realisation of all
the assets of the firm is used first of all to pay the external liabilities of the firm
Reason (R): As per the Partnership Act, outside liability should be paid first of all at the time of dissolution of
partnership firm.
Q.3 Assertion (A): On the dissolution of a firm the cash-in-hand is not transferred to Realisation Account
Reason (R): Realisation Account is Real Account
Q.4 Assertion (A): A partnership firm is deemed to be dissolved at the time of retirement of a Partnership firm.
Reason (R): Partnership firm lacks stability.
Q.5 Assertion: the consent of all the partners is mandatory in dissolution.
Reason: dissolution by agreement
ANSWER KEY
Q.1 B Q.2 A Q3 C Q.4 D Q.5 B

FILL IN THE BLANKS:

1. At the time of admission partnership firm is dissolved if business is .
2. All the accounts are settled among partners and creditors at the time of
of a business.
3. First of all _ of the firms will be settled out of sources of the business.
4. Admission of a partner is termination of and not a dissolution of
.
5. Court may also dissolve a firm, if a partner a suit, that one of the partnersis of mind.
ANSWER KEY
1. Discontinued; 2. Dissolution; 3. liabilities; 4. Agreement, firm; 5.files, unsound

MULTIPLE CHOICE QUESTIONS

Q.1 On dissolution of a firm, out of the proceeds received from the sale of assets .................will be paid first of
all
(A) Partner‘s Capital (B) Partner‘s Loan to Firm
(C) Partner‘s additional capital (D) Outside Creditors
Q.2 Court can make an order to dissolve the firm when:
(A) Some partner has become fully mad (B) Partnership deed is fully followed
(C) Continued future profits are expected (D) Firm is running legal business
Q.3 On taking responsibility of payment of a liability of ₹30,000 by a partner, the account Credited will be:
(A) Realisation Account (B) Cash Account
(C) Capital Account of the Partner (D) Liability Account
Q.4 There was an Unrecorded asset of ₹3,000 which was taken over by a partner by at 2,500. Partner‘s Capital
Account will be debited by....................
(A)₹2,000 (B) ₹2,500 (C) ₹500 (D) ₹3,500
Q.5 If total assets are ₹2,00,000; total liabilities are ₹40,000; amount realised on sale of assets is ₹1,75,000 and
realisation expenses are ₹2,000, the profit or loss on realisation will be:
(A) Profit ₹12,000 (B) Loss ₹68,000 (C) Loss ₹27,000 (D) Loss ₹25,000
ANSWER KEY MCQ
Q1. D Q2. A Q3. C Q4. B Q5. C Q6
Very Short Questions / Answer
Q.1 Name the asset that is not transferred to the debit side of Realisation Account, but brings certain amount of
cash against its disposal at the time of dissolution of the firm.

27
Ans. Unrecorded Assets.
Q.2 Creditors of ₹50,000 took over Stock of ₹40,000 at ₹35,000 at the time of dissolution of Firm . Give
necessary Journal entry.
Ans. No journal entry
Q.3 On dissolution of a firm, bank overdraft is transferred to
Ans. realisation account
Q.4. After transferring liabilities like creditors and bills payables in the Realisation Account, in the absence of
any information regarding their payment, such liabilities are treated as:
Ans. Fully paid
Q.5 When realisation expenses are paid by the firm on behalf of a partner, such expenses are debited to
Ans. Partner‘s Capital Account
Case Study Questions
On the basis of the following case study, answer the question number 1 to 4:
Ravi, Rakesh and Raman were partners in a firm sharing in 2:2:1. On 31st March 2023, they decided
to dissolve the firm. On the date following was their position:
Balance Sheet (as on 31.3.2023)
Liabilities ₹ Assets ₹
Creditors 50,000 Cash at bank 20,000
Ravi 1,10,000 Sundry Debtors 1,50,000
Rakesh 90,000 Less: Provision (10,000) 1,40,000
Raman 70,000 2,70,000 Stock 60,000
Fixed Assets 1,00,000
3,20,000 3,20,000
The assets and liabilities of settled as follows:
(i) One of the creditors for ₹ 20,000 agreed to accept half of the stock in full settlement. Balance of the
creditors were paid at a discount of 5%. Remaining half of the stock was sold in the market at a profit
of 33.33%.
(ii) All other assets realized at rupees 2,00,000.
(iii) Raman was appointed to look after all the dissolution procedure and hence, he was allowed a
remuneration of 15% on the cash realized to from sale of assets.
1. What is the amount paid to creditors at the time of dissolution?
(A) 48,500 (B) 30,000 (C) 58,500 (D) 28,500
2. State the amount realized from sale of stock.
(A) 33,333 (B) 40,000 (C) 30,000 (D) 33,000
3. What is the amount of remuneration payable to Raman?
(A) 36,000 (B) 30,000 (C) 6,000 (D) 37,500
4. What is the amount of gain or loss on Realisation?
(A) 76,000 Gain (B) 76,000 Loss (C) 74,500 Gain (D)74,500 Loss
On the basis of the following case, answer the question number 5 to 8:
X and Y were partners in a firm in equal ratio. Following was their balance sheet as on 31st March
2023:
Balance Sheet
(as on 31.3.2023)
Liabilities ₹ Assets ₹
Provision for DD 5,000 Cash at Bank 15,000
Creditors 45,000 S. Debtors 80,000
M₹ Y‘s Loan 25,000 Stock 50,000
Capitals: Machinery 75,000
X 1,00,000 Profit & Loss A/C 20,000
Y 65,000 1,65,000

28
 2,40,000 2,40,000
They dissolve the firm on the above date and following agreements were decided upon:
(i) X took over a part of the stock at ₹18,000 being 10% less than its book value. Balance of the stock
was taken over by Y at 75% of its book value less 2,500.
(ii) One of the creditors of ₹20,000 agreed to accept a part of machine at an agreed valuation of 25,000
being 25% more than its book value. Balance of the creditors were paid in full.
(iii) Balance of the machine and the debtors were realized at ₹1,00,000.
5. State the amount at which stock was taken over by Y:
(A) 30,000 (B) 22,500 (C) 20,000 (D) 24,000
Answer key
1. (D) 28,500 2. (B) 40,000 3. (A) 36,000 4. (D) 74,500 Loss 5. (C)20,000

Short Answer & Long Answer Questions

Q.1 What journal entries would be passed in the books of A and B who are partners in a firm, sharing
profits in the ratio of 5:2, for the following transactions on the dissolution of the firm after various assets
(other than cash) and third party liabilities have been transferred to Realisation Account?
a. Bank loan ₹ 12,000 is paid.
b. Stock worth ₹ 6000 is taken over by B.
c. Loss on Realisation ₹ 14,000.
d. Realisation expenses amounted to ₹ 2,000, B has to bear these expenses.
e. Deferred Revenue Advertising Expenditure appeared at ₹ 28,000.
f. A typewriter completely written off in the books of the firm was sold for ₹ 200.
Solution:
JOURNAL Dr. (₹) Cr. (₹)

(a) Realisation A/C Dr. 12000

To Bank A/C 12000
(b) B‘s capital A/C Dr. 6,000
To realisation A/C 6,000
(c) A‘s capital A/C Dr. 10,000
B‘s capital A/C Dr. 4,000 14000
To Realisation A/C
(d) B‘s capital A/C Dr. 2,000
To bank A/C 2,000
(e) A‘s capital A/C Dr. 20,000
B‘s capital A/C Dr. 8,000 28,000
To def. rev. advertising exp. A/C
(f) Bank A/C Dr. 200
To realisation A/C 200

Q.3 Sameer and Sudhir were partners in a firm sharing profits in the ratio of 5 : 3.
On 28.2.2023 the firm was dissolved. On the date of dissolution Sameer‘s capital was ₹ 2,40,000 and Sudhir‘s
capital was ₹1,80,000. Creditors on that date were ₹80,000 and there was a balance of ₹1,36,000 in general
reserve A/C. Cash balance was ₹20,000 Sundry assets realized ₹7,50,000 and expenses on dissolution were
₹2,000 which were paid by Sudhir.
Prepare Realisation Account, Cash Account and Partners Capital Accounts.

Dr. Realisation Account Cr.

Particulars Amt.(₹) Particulars Amt.(₹)
To Sundry Assets 6,16,000 By Creditors A/c 80,000

29
 To Bank a/c: By Bank a/c:
Creditors 80,000 Assets realised 7,50,000
Realisation Exp. 2,000 82,000
To Profit transfer to Capital A/c:-
Sameer 82,500
Sudhir 49,500 1,32,000
8,30,000 8,30,000

Dr. Cash A/c Cr.

Particulars Amt.(₹) Particulars Amt.(₹)
To Balance B/d 20,000 By Realisation A/c 82,000
By Sameer capital
To Realisation A/c 7,50,000 A/c 4,07,500
By Sudhir capital A/c 2,80,500
7,70,000 7,70,000

Dr. Partner’s Capital Account Cr.

Sameer
Particulars Sameer (₹) Sudhir (₹) Particulars (₹) Sudhir(₹)
To Bank A/c 4,07,500 2,80,500 By balance b/d 2,40,000 1,80,000
By Realisation A/c 82,500 49,500
By General Reserve 85,000 51,000
4,07,500 2,80,500 4,07,500 2,80,500

SCIENCE WITHOUT DISCRIMINATION,

HUMAN EXISTENCE WITHOUT
DISCIPLINE FRIENDSHIP WITHOUT GRATITUDE
MUSIC WITHOUT MELODY
A SOCIETY WITHOUT MORALITY AND JUSTICE CAN NOT BE OF BENEFIT TO THE PEOPLE
***************************************

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 CHAPTER 7-Accounting for share capital
MEANING OF COMPANY
 The word ‗company’ is derived from the Latin word ‗com‘ i.e. with or together and ‗panis‘ i.e. bread.
 Chief Justice Marshall – ―A corporation is an artificial being, invisible, intangible, existing only in
contemplation of the law. Being a mere creation of law, it possesses only the properties which the
charter of its creation confers upon it, either expressly or as incidental to its very existence.‖
FEATURES OF COMPANY
1. Incorporated association 2. Separate legal entity 3.Perpetual existence
4. Common seal 5. Limited liability
6. Distinction between ownership and management 7. Transferability of shares
8. Maintenance of books 9. Periodic audit
TYPES OF COMPANIES
Classification on the basis of the number of members:
i)Companies Limited by Shares ii)Companies Limited by Guarantee
iii)Unlimited Companies
Classification on the basis of the number of members:
i)Public Company ii)Private Company iii)One Person Company (OPC)
NATURE AND CLASSES OF SHARES
(1) Preference Shares: - According to Section 43 of The Companies Act, 2013, apreference share is one, which
fulfills the following conditions:
(a) It has preferential right to dividend to be paid.
(b) On the winding up of the company, it has preferential right to the repayment of capital before
anything is paid toequity shareholders.
(2) Equity Shares:-According to Section 43 of The Companies Act, 2013, an equity share is a share which is
not a preference share.
TYPES OF SHARE CAPITAL
1. Authorized / Nominal/ Registered Share Capital: - It is the amount of share capital that a company
is authorized to rise as per its Memorandum of Association during its span of life.
2. Issued Share Capital: - It is that part of the authorized share capital which is actually offered to the
public for subscription.
3. Subscribed Share Capital: It is that part of issued share capital which has been subscribed by the
applicants. It should not be less that 90% of the issued capital (Minimum Subscription).
a. Subscribed and Fully Paid: - When entire nominal value of a share is called by the company
and also paid up by the shareholder, it is said to be Subscribed and fully paid.
b. Subscribed but Not Fully Paid: - Shares are said to be Subscribed but not
Fully paid-up under the following two situations:
i. when company has called up the full amount but some shareholders have not paid the
full amount or
ii. When company has not called up the full amount.
4. Called-up Capital: - It means the amount that the shareholders have been called upon by the
company to pay on the shares subscribed by them.
5. Paid up Capital: - It is the amount of money actually paid by the subscribers.
6. Unissued Share Capital: - It is that portion of the authorized capital for which shares have not been
invited for subscription.
7. Uncalled Share Capital:-The unpaid portion of the subscribed capital is called uncalled capital.
8. Reserve Capital: - It is the part of the uncalled capital which has been reserved by the company to
be called in the event of winding up (sec.418).
DISCLOSURE OF SHARE CAPITAL IN BALANCE SHEET
Name of the Company............................
Balance Sheet (An Extract) as on...............................
Particulars Note Figures at the end Figures at the end

31
 No of current of previous
of reporting period of reporting period
1 2 3 4
I. Equity and Liabilities
1. Share holders‘ funds
(a) Share Capital 1 XXX XXX
Notes to accounts:
Particulars Amount(₹) Amount(₹)
(a) Share Capital
Authorized Capital XXX
(................... Shares of ₹ ......... each)
Issued Capital XXX
(................... Shares of ₹ ......... each)
Subscribed Capital
Subscribed and fully paid up
(................... Shares of ₹ ......... each) XXX
Subscribed but not fully paid up
(.............. Shares of ₹....... Each, ₹...... called up) XXX
Less: Calls in arrears (ifany) (XXX)
XXX
Add: Shares forfeited A/c XXX XXX
Procedure for Issue of Shares:
Following steps are to be taken by a public company for the issue of share to public
1. To issue Prospectus 2. To receive Applications
3. To make Allotment of shares 4.To make calls
USE OF SECURITIES PREMIUM RESERVE(Most Imp.)
Under Section 52(2) of the Companies Act, 2013, the amount of securities premium reserve may be used
only for the following purposes:
1. To write-off preliminary expenses of the company
2. To write-off the expenses of, commission or discount allowed on issue of shares or debentures of
company
3. To issue fully paid bonus shares to the shareholders of the company
4. To pay premium on the redemption of preference shares or debentures of the company
5. To buy back of its own shares and other securities as per Section 68.
SWEAT EQUITY SHARES: -A company may issue sweat equity shares as per Section 54 of Companies
Act, 2013. Sweat equity shares means equity shares issued by the company to its employees or directors at a
discount or for consideration other than cash for providing know-how or making available intellectual property
rights.
CALLS-IN-ARREARS: -It is often happens that some shareholders fail to pay the amount of allotment or
call when it becomes due. This is known as calls in arrears.
There are two methods to deal with calls in arrears.
1. Without opening calls in arrear account: - Under this method, there is no need to open calls-in-arrear
account.
2. By opening Calls-in-arrears account: - Under his method, ‗Calls in Arrears A/c‘ is opened and this
account is debited when some amount of allotment or alls is not received.
CALLS IN ADVANCE:- A shareholder sometimes pay a part, or whole, of the amount not yet called upon
his shares. The amount received as calls in advance, credited to a newly opened account ―Calls in advance A/c‖.
UNDER SUBSCRIPTION: - Sometimes, number of shares applied for by the public is less than the number of
shares offered by the company. Such an issue is said to be under –subscribed.

32
OVER SUBSCRIPTION: - Shares are said to be over-subscribed when the number of shares applied for is
more than the number of shares offered to the public for subscription.
PRO-RATA BASIS ALLOTMENT: The excess application money received is normally adjusted towards the
amount due on allotment. In case of over subscription, the Board of Directors can issue the shares in any of the
following four alternatives.
1. Rejecting the applications for excess number of shares
2. Allotting the shares on pro-rata basis on all the applications received
3. Rejecting some applications completely and allotting to the remaining application on a pro-rata basis
4. Rejecting some applications, allotting the number of shares asked for by some applicants and allotting the
remaining shares to the remaining applications on a pro-rata basis.
FORFEITURE OF SHARES
If any shareholder fails to pay amount due on allotment or on any call within the specified period, the Directors
may cancel his shares. This is called Forfeiture of Shares.
REISSUE OF FORFEITED OF SHARES

Directors have the authority to reissue the forfeited shares on such terms as they think fit. That is to say that
they are at liberty to reissue the forfeited shares at par, at premium or at discount. However, if the shares are re-
issued at a discount the amount of the discount cannot exceed the amount previously received on these shares.
MCQ
1) Priyanka Ltd. forfeited 500 shares of 10 each. Out of these forfeited shares 250 were reissued at 3,000.
Calculate the Reissue price per share.
(i) 12 (ii) 25 (iii) 10 (iv) 6
Ans.(i) ₹ 12 Explanation: Re-issue price =3000/250 = 12
2) Nominal share capital is:
(i) that part of the authorized capital which is issued by the company
(ii) the amount of capital which is actually applied for by the prospective shareholders
(iii) the maximum amount of share capital which a company is authorized to issue
(iv) the amount actually paid by the shareholders.
Ans. (iii) the maximum amount of share capital which a company is authorized to issue
3) Interest on calls in arrears is charged according to ―Table F" at:
(i) 10% (ii) 6% (iii) 8% (iv) 11%
Ans. (i) 10%
4) Money received in advance from shareholders before it is actually called-up by the directors Is:
(i) debited to calls in advance account (ii) credited to calls in advance account
(iii) debited to calls account (iv) none of the above
Ans. (ii) credited to calls in advance account
5) Shares can be forfeited
(i) for non-payment of call money (ii) for failure to attend meetings (iii) for failure to repay the loan
to the bank (iv) for which shares are pledged as a security
Ans. (i) for non-payment of call money
(Fill in the blanks)
1) Excess balance amount at share forfeiture account will be transferred to ________ account. (Capital
Reserve)
2) ________ on reissue of forfeited shares cannot be more than the amount forfeited.(Discount)
3) Shares are ________ by a company if it does not receive the called amount.(forfeited)
4) Actual number of shares offered to the public for subscription is known as ________ Capital.(Issued
Capital)

33
5) At ________ % rate interest on calls-in-advance is paid by the company as per Table F of Schedule I of the
Companies Act, 2013.(12)
(One word/sentence questions)
1) Define Authorized Capital.
Ans. Capital as is authorized by Memorandum of Company to be maximum amount of share capital of the
company.
2) What is Full form of ESOP?
Ans. Employee stock option Plan
3) What are calls in arrears?
Ans. It refers to that part of capital which is not received
4) What is rate of interest on call in arrear and call in advance according to table F of company act2013?
Ans. Call in arrear 10% & call in advance 12%
5) What is meant by shares issued for consideration other than cash?
Ans. That share against which the company has not received cash instead has received assets or services.
ASSERTION REASONING QUESTIONS
Answer the assertion from following options :
(A) Both A and R true and R is the correct explanation of A.
(B) Both A and R are true but R is not the correct explanation of A
(C) A is true and R is false
(D) A is false and R is true
1) Assertion (A): Equity shares are those shares that do not preference shares.
Reason (R): Equity shares are the least issued class of shares and carry the minimum risks and rewards of the
business.
Ans. (c)
2) Assertion (A): Calls - in - arrear is the amount that has not been called by the company but has been paid by
the shareholders.
Reason (R): Calls - in - arrear will be shown as a deduction from the subscribed but not fully paid - up capital.
Ans. (d)
3) Assertion (A) : The security premium amount can be used to issue partially paid up bonus shares.
Reason (R): According to Section 52(2) of the Companies Act, 2013, the amount of Securities Premium
Reserve can be used only for some specific purposes.
Ans. (d)
4) Assertion (A): Issued share capital can be more than the authorized share capital.
Reason (R): Issued share capital is that part of authorized share capital that is used for subscription whether
subscribed or not.
Ans. (d)
5) Assertion (A): A company has perpetual succession.
Reason (R): Insolvency or death of a shareholder will not affect its existence.
Ans. (a)
Case Study
1) Read the text carefully and answer the questions: Soon after incorporation of Arun Ltd. decided to issue
80,000 equity shares of 10 each at a premium of 5 per share. Instead of collecting all the capital in the form
of cash/bank they have decided to go for the purchase of assets in return pay them in the form of issue of shares.
They approached a businessman who sells machinery which is very must useful in production of that material.
The company purchased Machinery worth 5,50,000 and in return they issued equity shares of 10 each at a
34
premium of 10%. Further they issued shares to the public for subscription. The issue is oversubscribed to the
extent of 10%. To the surprise one shareholder who got 1000 shares paid all the money due on allotment 3
and call money 2 along with allotment money.
1. Select the type of allotment of shares made to the company against the purchase of Machinery.
a) Initial public offer b) Preferential allotment
c) Issue against consideration other than cash d) Issue for cash
2. If the shares are issued at premium of 10% against the purchase of an asset, then how many shares are
issued?
a) 50,000 shares b) 45,000 shares c) 65,000 shares d) 55,000 shares
3. Which option is not available to adjust the excess applications received on issue of equity shares?
a) Excess applications can be adjusted towards allotment
b) Excess applications can be partly rejected and partly adjusted towards allotment
c) Excess applications can be rejected
d) Excess applications can be allotted with preference shares
4. How much amount is received as calls in advance?
a) 2,000 b) 3,000 c) 1,000 d) 5,000
Ans. 1) (c) Issue against consideration other than cash
2)(a) 50,000 shares
3)(d) Excess applications can be allotted with preference shares
4)(d) ₹ 5,000
2) Question No. 1 to 5 are based on the given text. Read the text carefully and answer the questions:
Nidiya Limited was incorporated on 1st April 2017 with registered office in Mumbai. The capital clause of
memorandum of Association reflected a registered capital of 8,00,000 equity shares of 10 each and 1,00,000
preference shares of 50 each. Since some large investments were required for building and machinery the
company in consultation with vendors, Ms. VPS Enterprises, issued 1,00,000 equity shares and 20,000
preference shares at par to them in full consideration of assets acquired. Besides this the company issued
2,00,000 equity shares for cash at par payable as 3 on application, 2 on allotment, 3 on first call and 2 on
second call. Till date second call has not yet been made and all the shareholders have paid except Mr. Ajay who
did not pay allotment and calls on his 300 shares and Mr. Vipul who did not pay first call on his 200 shares.
Shares of Mr. Ajay were then forfeited and out of them 100 shares were reissued at 12 per share.
1)Shares issue to vendors of building and machinery, Ms. VPS Enterprises, would be classified as:
1. Preferential Allotment 2.Employee Stock Option Plan
3.Issue for consideration other than cash 4.Right Issue of Shares
a) Option (4) b) Option (3) c) Option (1) d) Option (2)
2) How many equity shares of the company have been subscribed?
1. 3,00,000 2. 2,99,500 3. 2,99,800 4. None of these
a) Option (3) b) Option (4) c) Option (1) d) Option (2)
3) What is the amount of security premium reflected in the balance sheet at the end of the year?
1. 200 2. 600 3. 400 4. 1,000
a) Option (3) b) Option (1) c) Option (2) d) Option (4)
4) What amount of share forfeiture would be reflected in the balance sheet?
600 2. 900 3. 200 4. 300
a) Option (1) b) Option (2) c) Option (3) d) Option (4)
5) Amount transfer to capital reserve -
a) Rs.900 b) Rs.300 c) Rs.100 d) Rs.700
Ans.1)(b) Option (c) Explanation: Option (c)
2) (a) Option (c) Explanation: No. of shares forfeited at the end of the year: 200

35
3) (a) Option (c) Explanation: Called-up amount = ₹ 8 per share
Re-issue amount = ₹ 12 per share
Premium = ₹ 4 per share
Number of shares re-issued = 100
Security premium reflected in the balance sheet at the end
of the year = 100 ₹ 4 = ₹ 400
4)(a) Option (a) Explanation: No. of shares forfeited at the end of the year: 200
Amount of share forfeiture to be reflected in the balance sheet: 200 ₹3 = ₹ 600
5)(b) Rs.300

Sure Shot questions (short Answer type questions)

1) Light Lamps Ltd. issued 50,000 shares of 10 each as fully paid - up to the promoters for their services to set
- up the company. It also issued 2,000 shares of 10 each credited as fully paid - up to the underwriters of
shares for their services. Journalise these transactions.
Ans.
Date Particulars L.F. Dr.(₹) Cr.(₹)
Incorporation Expenses A/c Dr. 5,00,000
To Share Capital A/c(50,000×10) 5,00,000
Underwriting Commission A/c Dr. 20,000
To Underwriters ‘A/c 20,000
Underwriters‘ A/c Dr. 20,000
To Share Capital A/c(2,000×10) 20,000

2)Malik Limited has a subscribed capital of 2,000 equity shares of Rs. 25 each, Rs. 20 per share
called up. The directors forfeited 200 equity shares held by a shareholder who had failed to pay
the first call made @Rs. 10 per share. Later the directors reissued these forfeited shares at Rs.
20per share paid up at Rs.15per share. Pass the journal entries for forfeiture and reissue of shares.
Ans.
Date Particulars Debit Credit
(i) Equity Share Capital Account Dr. 4,000
To Share Forfeited Account 2,000
To Calls-in-Arrears Account 2,000
(ii) Bank Account Dr. 3,000
Share Forfeited Account Dr. 1,000
To Equity Share Capital Account 4,000
(iii) Share Forfeited Account Dr. 1,000
To Capital Reserve Account 1,000
3) TheauthorizedcapitalofSusahLtd.Is50,00,000 divided into25,000 shares of ₹200each.Outofthese,
the company issued 12,000 shares of Rs 200 each at a premium of 10%. The amount share was
payable as follows:
₹60 on application,
₹60 on allotment (including premium),
₹30 on first call, and balance on final call.

36
Public applied for 11,000 shares. All the money was duly received. Prepare an extract of Balance Sheet of
Susah Ltd. As per Schedule III, Part I of the Company Act, 2013 showing share capital.
Ans.
BALANCE SHEET OF SUHAS LTD.(An Extract)as at...
Particulars Note No. ₹

I.EQUITYANDLIABILITIES
Shareholders' Funds
Share Capital 1 22,00,000
Note to Accounts
Particulars ₹
1.ShareCapital
Authorised Capital
25,000EquitySharesof200each 50,00,000
Issued Capital
12,000EquitySharesof200each
Subscribed Capital 24,00,000
Subscribed and fully paid-up11,000EquitySharesof200 each
22,00,000

JOURNAL ENTRIES FOR ISSUE, FORFEITURE AND RE-ISSUE OF SHARE CAPITAL

1.Issue of shares At Par and Fully Subscribed
(i) Issue of Shares at par, amount payable in lump sum:
Date L.F Dr Cr
XXX Bank a/c Dr XXX
To Share Application and Allotment a/c XXX
XXX Share Application and Allotment a/c Dr XXX
To Share Capital a/c XXX
(ii) Issue of Shares at par, amount payable in installments:
Date Particulars L.F Dr Cr
XXX Bank a/c Dr XXX
To Share Application a/c XXX
XXX Share Application a/c Dr XXX
To Share Capital a/c XXX
XXX Share Allotment a/c Dr XXX
To Share Capital a/c XXX
XXX Bank a/c Dr XXX
To Share Allotment a/c XXX
XXX Share First Call a/cDr XXX
To Share Capital XXX
XXX Bank a/c Dr XXX
To Share First Call a/c XXX
XXX Share Second Call a/c Dr XXX
To Share Capital XXX
XXX Bank a/c Dr XXX
To Share Second Call a/c XXX
2. Issue of Shares at Premium and Fully Subscribed
(i)Issue of Shares at premium, amount payable in lump sum

37
 Date Particulars L.F Dr Cr
XXX Bank a/c Dr XXX
To Shares Application and Allotment a/c XXX
XXX Share Application and Allotment a/c Dr XXX
To Share Capital a/c XXX
To Securities Premium Reserve a/c XXX
(ii).Issue of Shares at premium, amount payable in installments:
Date Particulars L.F Dr Cr
XXX Bank a/c Dr XXX
To Share Application a/c XXX
XXX Share Application a/c Dr XXX
To Share Capital XXX
(OR)
XXX Share Application a/c Dr XXX
To Share Capital a/c XXX
To Securities Premium Reserve XXX
XXX Share Allotment a/c Dr XXX
To Share Capital a/c XXX
To Securities Premium Reserve XXX
XXX Bank a/c Dr XXX
To Share Allotment a/c XXX
XXX Share First Call a/c Dr XXX
To Share Capital XXX
(OR)
XXX Share First Call a/c Dr XXX
To Share Capital a/c XXX
To Securities Premium Reserve XXX
XXX Bank a/c Dr XXX
To Share First Call XXX
3.Under Subscription:
Example:-A Ltd. Made first call of 2 Rupees per share on its 10,000 shares. One share Holder
holding 500 shares didn‘t pay first call. When the company made second call of 3 Rupees he
paid all his arrears.
(i) Without Opening Calls in Arrears a/c
There is No change in Entries At the time of Application, Allotment and Calls
(ii) If Calls in Arrears A/C is opened: There will be some changes in entries.

Without opening calls in arrears a/c By opening calls in arrears a/c

Share First call a/c Dr 20,000 Share First call a/c Dr 20,000
To Share capital a/c 20,000 To Share capital a/c 20,000
Bank a/c Dr 19,000 Bank a/c Dr 19,000
To Share first call 19,000 Calls in Arrears a/c Dr 1,000
To Share second call a/c 20,000
Share second call a/c Dr 30,000 Share final call a/c Dr 30,000
To Share capital a/c 30,000 To Share capital a/c 30,000
Bank a/c Dr 31,000 Bank a/c Dr 31,000
To Share second call 30,000 To Share second call 30,000
To Share first call 1,000 To Calls in Arrears a/c 1,000
4.Over Subscription:

38
(i) Rejection of Extra Applications

Date Particulars L.F Dr Cr

XXX Share Application a/c Dr XXX
To Bank a/c XXX
Share Application a/c Dr XXX
XXX To Share Capital a/c XXX
To Bank a/c XXX
(ii)Pro-rata Allotment:
Date Particulars L.F Dr Cr
XXX Bank a/c Dr XXX
To Share Application a/c XXX
Share Application a/c Dr XXX
XXX To Share Capital a/c XXX
To Share Allotment a/c XXX

(iii) Rejecting some Applications and Pro-rata Allotment:

Date Particulars L.F Dr Cr

XXX Bank a/c Dr XXX
To Share Application a/c Share XXX
Application a/c Dr XXX
XXX To Share capital a/c XXX
To Share Allotment a/c XXX
To Bank a/c (Refund) XXX

5. Forfeiture of shares:
(i)Forfeiture of shares which were issued at par

Date Particulars L.F Dr Cr

Share Capital a/c (No. of Shares forfeited X Called up Per share) Dr
To Call in arrear a/c (Amt not received if any)
To Share forfeiture a/c (Amt received on forfeited shares)

(ii) Forfeiture of shares which were issued at premium:

Date Particulars L.F Dr Cr
XXX Share capital a/c Dr (No. Of shares forfeited X Amt called up) XXX
Securities premium reserve a/c Dr (Amt not received as Premium) XXX
To Share Allotment a/c (Amt not received on Allot Including prem) XXX
To Share first call a/c (Amt not received on first call) XXX
To Share second call a/c (Amt not received on 2ndcall) XXX
To Share forfeiture a/c XXX
5. Re-Issue of forfeited shares If forfeited shares are re-issued at par

Date Particulars L.F Dr Cr

XXX Bank a/c Dr XXX
To Share capital XXX

If forfeited shares are re-issued at premium

Date Particulars L.F Dr Cr
XXX Bank a/c Dr XXX

39
 To Share capital a/c XXX
To Securities premium reserve a/c
If forfeited shares re-issued at Discount
Date Particulars L.F Dr Cr
XXX Bank a/c Dr XXX
Share forfeiture a/c Dr XXX XXX
To Share capital a/c
6.Gain on forfeiture

Date Particulars L.F Dr Cr

XXX Share forfeiture a/c Dr XXX
To Capital reserve a/c XXX

ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH

On purchase of Asset:
Sundry Assets Dr. (with agreed value assets taken over)
To Vendors A/c (with agreed value of Purchase Consideration)
On purchase of entire business
Sundry Assets Dr. (with agreed value assets taken over)
Goodwill A/c Dr. (with the excess of P.C. over of net assets)
To Sundry Liabilities (with agreed value liabilities taken over)
To Vendors A/c(with agreed value of Purchase Consideration)
To Capital Reserves A/c (with the excess of value of net Assets over P.C.)
ON ISSUE OF SHARES TO VENDORS
If the Shares are issued at PAR
Vendor A/c Dr.
To Share Capital A/c
If the Shares are issued at PREMIUM
Vendor A/C Dr.
To Share Capital A/C
To Securities Premium Reserve A/c

CHAPTER:8 ISSUE OF DEBENTURES

 DEBENTURE: According to section 2 (30) of the Indian companies Act,2013,‖Debentureincludes debenture stock,
bonds, any other instruments of the company evidencing a debt whether constituting a charge on the assets of the
company or not‖
(i) ISSUE OF DEBENTURE FOR CASH: Debenture can be issued foe cash or for any other consideration like
shares. Debentures may be issued at par, at premium or at discount.
(i) Issue of debenture at par: When debenture are issued at their face value, then it is called as issue of
debenture at par. For example, a debenture of ₹100, issued for ₹100.
(ii) Issue of Debentures at Premium: When debentures are issued at a price more than their face value, they are
said to have been issued at premium. For example, if a debenture of 100 is issued at 120, then 20 is the
premium.
(iii) Issue of Debentures at Discount: When the debentures at a price less than their face value, the debentures
are said to have been issued at a discount. For example, a debenture of company issues.
Accounting Entries for Issues of Debentures for cash:
(i) Amount Received in Lump Sum:
Following Journal entries are passed when debentures are issued:

40
 AT PAR AT PREMIUM AT DISCOUNT
1. Bank A/c Dr Bank A/c Dr Bank A/c Dr
To Debenture Appl. And Allot.A/c To Debenture Appl. And Allot.A/c To Debenture Appl. And Allot. A/c
2. Debenture Appl. And Allot.A/c Dr 2. Debenture Appl. And Allot.A/c Dr 2. Debenture Appl. And Allot.A/c Dr
To …...%Debenture A/c To …..%Debenture A/c Discount on Issue of Debenture A/c Dr
To Securities Premium A/c To …...%Debenture A/c
(ii) Amount Received in Instalments
Following Journal Entries are passes When debentures are issued:

At Discount At Premium At Discount

1.Bank A/c Dr 1.Bank A/c Dr 1.Bank A/c Dr
To Debenture Application A/c To Debenture Application A/c To Debenture Application A/c
2.Debenture Application A/c Dr 2.Debenture Application A/c Dr 2.Debenture Application A/c Dr
To …. % Debenture A/c To …. % Debenture A/c To …. % Debenture A/c
3. Debenture Allotment A/c Dr 3.Debenture Allotment A/c Dr 3.Debenture Allotment A/c Dr
To … % Debentures A/c To … % Debenture A/c Dis. on issue of Debentures A/c Dr
To Securities Premium A/c To …. Debentures A/c
4.Bank A/c Dr 4.Bank A/c Dr 4.Bank A/c Dr
To Debenture Allotment A/c To Debenture Allotment A/c To Debenture Allotment A/c
5. Debenture Call(s) A/c Dr 5. Debenture Call(s) A/c Dr 5. Debenture Call(s) A/c Dr
To …. % Debenture A/c To …..% Debenture A/c To …..% Debenture A/c
6.Bank A/c Dr 6.Bank A/c Dr 6.Bank A/c Dr
To Debenture Call(s) A/c To Debenture Call(s) A/c To Debenture Call(s) A/c
Notes:(1) In case of oversubscription of debenture excess money can either be refunded or can be adjusted
towards allotment and calls or both can be done by passing the following journal entry;
Debenture Application A/c … Dr
To % Debentures A/c
To Debenture Allotment A/c
To Calls in advance A/c (excess amount after allotment)
To Bank A/c (excess amount after calls or refunded amount after rejection)
(2)In case of Lumpsum issue excess debenture money has to returned back only.

 ISSUE OF DEBENTURE FOR CONSIDERATION OTHER THAN CASH: Debentures can be issued for
consideration other than cash too. In this case, there are two situations-issue of debentures to the vendor for purchase
of assets and issue of debentures for purchase consideration.

 (1)Issue of Debenture to the Vendor for Purchase of assets: If a company purchases some assets from a
vendor then in Such cases instead of making payment in cash, it can issue fully paid debentures to the vendor if
the latter agrees.
Following entries will be passed for this purpose:

(i) For purchase of assets

Assets A/c
To Vendor's A/c
(Being assets purchased from vendor)
(ii) For issue of debentures to vendor
(a) At Par (b) At Premium (c) At Discount
Vendor's A/c Dr Vendor's A/c Dr Vendor's A/c Dr
To …. % Debentures A/c To.... % Debentures A/c Discount on Issue of Debentures A/c Dr
To Securities Premium Reserve A/c To...% Debentures A/c

(2) Issue of Debentures for Purchase of Business: Sometimes a company purchases a running business (its assets and
liabilities both) and issues debentures to vendor, as purchase consideration. In this case, there are three situations:
(a) When Purchase consideration is equal to Net Assets:
Sundry Assets A/c Dr
To Sundry Liabilities A/c

41
 To Vendor's A/c
(Being purchase of business from the vendor company)
(b) When purchase consideration is more than Net Assets: In this case, difference between
purchase consideration and net assets is treated as goodwill, which can be calculated as:
Net Assets = Sundry assets taken - sundry liabilities
Journal Entry:
Sundry Assets A/c Dr
*Goodwill A/c (Amount of difference) Dr.
To Sundry Liabilities A/c
To Vendor Company A/c
* To Capital Reserve A/c (Amount of difference)
(Being purchase of business from vendor company)
* Goodwill = Purchase consideration - Net Assets / (ii) Capital Reserve = Net assets - Purchase consideration

Recording of Debentures as Collateral Security

1st Method: Journal entry for issue of debentures as collateral security is not passed in the books of accounts.
(a) Debentures issued as collateral security for long term loan from Bank:
Balance Sheet as at (Relevant extract)
Particulars Note Current Previous
year year
no. (Rs) (Rs)
I. EQUITY AND LIABILITIES
Non- Current Liabilities
Long - Term Borrowings xx
Total xx

Notes to Accounts
Particulars (₹)
1. Long-term Borrowings
Term Loan From Bank xx
(Secured by issue of ….., … % debentures of ₹… each as collateral Security) ________

(b) Debentures issued as collateral security for short term loan from bank
Balance sheet as at(Relevant Extract)
Current Previous
Particulars Note year year
no. (₹) (₹)
I. EQUITY AND LIABILITIES
Current Liabilities
Short-term Borrowings 1 xx
Total xx
Note to Accounts
Particulars (₹)
1. Short-term Borrowings
Loan From Bank xx
(Secured by issue of ….., … % debentures of ₹… each as collateral Security) ________

2nd Method: Debentures issued as collateral security are recorded in the books of accounts.
Following Journal Entries is passed
Debenture Suspense A/c Dr
To ...% Debentures A/c
When Loan is repaid, the above entry is cancelled by passing a reverse entry.
Balance sheet as a (Relevant extract)

42
 Current Previous
Particulars Note year year
no. (₹) (₹)
I. EQUITY AND LIABILITIES
Non- Current Liabilities
Long - Term Borrowings 1 xx
Total xx

Note to Accounts
Particulars (₹)
1. Long-term Borrowings
Term Loan from Bank xx
(Secured by issue of ..., … % debentures of ₹… each as collateral Security) ________

 Interest on Debentures: Coupon rate debentures issued by the company are entitled to periodical interest which is
usually paid half yearly. Interest on debentures is calculated at a fixed rate on the face value of debentures payable
quarterly, half-yearly or yearly as per the terms of issue. Interest on debentures is a charge against profit, not an
appropriation of profit, so it is payable even if the company incurs loss. Entries will be:
(i) When interest is due: (ii) On payment of Debentures' Interest to the Debenture holders:
Debenture Interest A/c Dr Debenture holders' A/c Dr
To Debenture holders' A/c To Bank A/c
Or
When Interest is due and Tax is Deducted at Source (TDS): (iii) On payment of tax deducted at source to the Government
Debenture Interest A/c Dr Account:
To Debenture holders' A/c TDS Payable A/c Dr
To TDS Payable A/c To Bank A/c
(iv) On transfer of Debentures' Interest to Statement of Profit and Loss at the end of the year:
Statement of Profit and Loss Dr
To Debenture Interest A/c

Issue of Debentures with terms of Redemption: Debentures may be redeemed either at par or at premium according to the
terms laid down at the time of issue. After taking into account the three possibilities of issue (i.e., at par, at premium or at
discount) and two possibilities of redemption (i.e., at par or at premium) a company can issue debentures in six ways.

ISSUE OF DEBENTURES WITH TERMS OF REDEMPTION

(i) Issued at par and redeemable at par (iv) Issued at par and redeemable at a premium
(ii) Issued at discount and redeemable at par (v) Issued at a discount and redeemable at a premium
(iii) Issued at a premium and redeemable at par (vi) Issued at a premium and redeemable at a premium
In all the above six cases, the following journal entries will be passed:

43
 Writing off Discount or Loss On issue Of Debentures
Discount or Loss on Issue of Debentures, both are capital loss for the company and they are incurred at the time of
Issue of debentures. It is generally written off from.
(i) Securities Premium Reserve [Sec. 52 (2)] (ii) Statement of Profit and Loss
In case balance in Securities Premium reserve is not sufficient to write off the total amount of discount or loss, on issue of
debentures, it is written off from Securities Premium Reserve, to the extent of balance available in Securities Premium
Reserve and then the remaining balance is written off from Statement of Profit and Loss.
The Following journal entry is passed:
Securities Premium Reserve A/c Dr
And / Or
Statement of Profit and Loss (Finance cost) Dr
To Discount or Loss on Issue of Debentures A/c
Notes:(i) According to Accounting Standard 16, Borrowing costs, the loss on issue of debentures is to be written off in the
year in which it is incurred, i.e., in the year in which debentures are issued and allotted.
(ii) Loss on Issue of Debentures A/c' is an expenditure account, whereas 'Premium on Redemption of Debentures A/c' is a
liability account.
(ii) At the time of making payment due (i.e., redemption of debentures), 'Premium on Redemption of
Debentures A/c' is debited.
(iv)Discount or Loss on Issue of debentures written off is a part of Finance Cost to be shown in Statement of Profit and
Loss.
Disclosure of Discount or Loss on Issue of Debentures in Balance Sheet
According to AS-16, Discount or Loss on issue of debentures is written off in the year of their allotment.
(a) If Discount or Loss on issue of debentures is written off from Securities Premium Reserve, it is shown by way of
deduction from balance in Securities Premium Reserve in the Balance Sheet.
(b) When balance amount of Discount or Loss on issue of debentures is written off from Statement of Profit and
Loss, it is shown by way of deduction from Surplus, i.e., Balance in Statement of Profit and Loss.
(c) When there is no balance in Securities Premium Reserve or in absence of information about Securities Premium
Reserve, Discount or Loss on issue of debentures is written off from Statement of Profit and Loss.

44
 MULTIPLE CHOICE QUESTIONS
1. The debentures which are payable on the expiry of a specified period either in lump-sum or in
instalments during the life time of the company are known as :
(a) Secured debentures (b) Specific coupon rate debentures
(c) Redeemable debentures (d) Convertible debentures
2. Which of the following statements is incorrect with respect to debentures?
(a) Debentures can be issued for cash (b) Debentures cannot be issued at discount.
(c) Debentures can be issued as collateral security. (d) Debentures can be issued at premium.
3. While issuing ________ type of Debentures, company does not give any undertaking for the repayment of money
borrowed by issuing such debentures.
(a) Zero Coupon Rate Debentures (b) Non-Convertible Debentures
(c) Secured Debentures (d) Non-Redeemable Debentures
4. Debentures holders are:
(a) the owners of the company (b) the vendors of the company
(c) the creditors of the company (d) the debtors of the company
5. In the Balance Sheet of a company, debentures should are generally shown under the head of;
(a) Share Capital (b) Non-current Liabilities
(c) Current Liabilities (d) Non-current Assets
Ans. 1. (c), 2. (b), 3. (d), 4. (c), 5. (b),
ASSERTION – REASON QUESTIONS
There are two statements marked as Assertion (A) and Reason (R), mark your answer as per the codes
given below.
(a) Both A and R are correct, and R is the correct explanation of A.
(b) Both A and R are correct, but R is not the correct explanation of A.
(c) A is correct but R is incorrect.
(d) A is incorrect but R is correct.
1. Assertion (A):Sometimes a company purchases a running business (its assets and liabilities both)
. and Issuesdebentures to vendor, as purchase consideration
Reason (R) : In such cases, purchase consideration can be equal to or less than the net assets but cannot be not more than
,

the net assets.

2.Assertion (A) :Debentureholders and shareholders can be distinguished on the basis of ownership.
Reason (R) :Debentureholders are owners of a company and shareholders are creditors of a company.
.

[Ans: 1. (c), 2. (c)]

CASE BASED QUESTIONS
Read the following hypothetical situation and answer question number (i) to (ii): Rose Bond Ltd. is in the
business of manufacturing electrical water pumps. It decides to install some Godrej refrigerators and microwave
ovens in the company for providing facilities to its employees as the company is located in the remote area. It
named its welfare scheme as 'Employees' Relief On 1st April, 2021 the purchase price of electrical appliances
was paid by issuing 6% Debentures of ₹20,00,000 were issued at a premium of 10% for this purpose.
In another case, the company agreed to issue 9% debentures of 100 each at 120 to the vendors for the purchase
of machinery worth ₹1,25, 000.
Read the above information carefully and answer the following questions:
(i) Which of the following will be debited by ₹22,00,000 for the issue of debentures for the
purchase of electrical appliances for Rose Bond Ltd.?
(a) 6% Debentures A/c (b) Rose Bond Ltd. (c) Godrej Ltd. (d) Both (a) and (b)
(ii) The number of 9% Debentures issued by the Company would be:
(a) 1,250 (b) 1,200 (c) 1,041 (d) 2,080
Ans. (i) (c), (ii) (c)
SHORT ANSWER QUESTIONS
1. BG Ltd, issued 2,000, 12% debentures of 100 each on 1st April, 2019, The issue was subscribed. According to the terms
of issue, interest on the debentures is payable half-yearly c 30th September and 31st March and the tax deducted at source
is 10%. Pass necessary journal entries related to the debenture interest for the half-yearly ending 31st March, 2020 and
transfer of interest on debentures of the year to the Statement of Profit and Loss.
Ans:- In the Books of BG Ltd.

45
 Journal
Date Particulars L.F. Dr(₹) Cr(₹)
2019
Sept 30 Debenture interest A/c Dr 12,000
To Debenture holders A/c 10,800
To TDS Payable A/c 1,200
(Being the interest due on debentures for the half
year ended 30th sept..,2019; TDS deducted @10%)
Debenture holder A/c Dr 10,800
TDS Payable A/c Dr 1,200
To Bank A/c 12,000
(Being the interest paid to debenture holder and
TDS deposited in Government A/c)
2020 Debenture Interest A/c Dr 12,000
Mar-31 To Debenture holders A/c 10,800
To TDS Payable A/c 1,200
(Being the interest due on debentures for the half
year ended 30th sept..,2019; TDS deducted @10%)
Debenture holder A/c Dr 10,800
TDS Payable A/c Dr 1,200
To Bank A/c 12,000
(Being the Interest paid and TDS deposited in the
Government A/c)
Statement of Profit and Loss (Finance Cost) Dr 24,000
To Debenture Interest A/c 24,000
(Being the interest transferred to Statement of
Profit and Loss as finance Cost at the year end)

2. Sinco Ltd. purchased assets of the book value of ₹ 1,98,000 from Dixon Ltd. It was agreed that the purchase
consideration be paid by issuing 10% debentures of 100 each. Record the necessary journal entries in the books of Sinco
Ltd. assuming that the debentures have been issued : (i) At a discount of 10% (ii) At a premium of 10%.
Ans:- In the Books of Sinco Ltd
Journal
Date Particulars L.F Dr(₹) Cr(₹)
Sundry Assets A/c Dr 1,98,000
To Dixon Ltd. 1,98,000
(Being Sundry assets purchased from Dixon Ltd.)
Dixon Ltd. Dr 1,98,000
Discount on Issue of Debentures A/c Dr 22,000
To 10% Debentures A/c 2,20,000
(Being 2,200, 10% debentures 0f ₹100 each issued at 10% discount)

Dixon Ltd. Dr 1,98,000

To 10% Debenture A/c 1,80,000
To Securities Premium A/c 18,000
(Being 1,800 10% debentures of ₹100 each issued at 10% premium)

LONG ANSWER QUESTION

Q. 1. BLtd. purchased Building worth 3,00,000, Plant worth 2,80,000 and Furniture worth 20,000 from C Ltd. for a
purchase consideration of 76,30,000. B Ltd. paid the purchase consideration by issuing 9% debentures of 100 each.
Pass necessary journal entries in the books of B Ltd. for the acquisition of assets and issue of debentures
when:
(a) Debentures were issued at par. (b) Debentures were issued at a premium of 25%

46
(c) Debentures were issued at a discount of 10%.
Ans:- In the books of B Ltd.
Journal
Date Particulars L.F. Dr(₹) Cr(₹)
Building A/c Dr 3,00,000
Plant A/c Dr 2,80,000
Furniture A/c Dr 20,000
Goodwill A/c Dr 30,000
To C Ltd. 6,30,000
(Being assets taken over from C Ltd.)
Debenture Issued at par:
C Ltd. Dr 6,30,000
To 9% Debentures A/c 6,30,000
(Being 6,300 9% Debentures of ₹100 each issued at par to c Ltd.)
Debenture Issued at premium:
C Ltd. 6,30,000
To 9% Debentures A/c 5,04,000
To Securities Premium A/c 1,26,000
(Being 5,040 ,9% Debentures issued at a Premium of 25%)
Debentures Issued at a Discount:
C Ltd. Dr 6,30,000
Discount on issue of Debentures A/c Dr 70,000
To 9% Debentures Allotment A/c 7,00,000
(Being 7,000 9% Debentures issued at a discount of 10%)

2. Pass necessary journal entries for issue of 12% debentures in the books of Ghanshyam Ltd. in the
following cases:
(i) Issued 1,000, 12% debentures of 100 each at a premium of 10%, redeemable at a premium of 5%.
(ii) Issued 5,000, 12% debentures of100 each at a premium of 10%, redeemable at par
(iii) Issued 2,000, 12% debentures of 100 each at a discount of 10%, redeemable at a premium of 5%
Date Particular L.F. Dr(₹) Cr(₹)
Bank A/c DR 1,10,000
(i) to Debenture Application and Allotment A/c 1,10,000
(Being money received on 1,000 12% Debentures @
₹110 each including Premium)
Debenture Application and Allotment A/c Dr 1,10,000
Loss on Issue of Debentures A/c Dr 5,000
To 12% Debentures A/c 1,00,000
To Securities Premium A/c 10,000
To Premium on Redemption of Debentures A/c 5,000
(Being debentures issued at 10% premium and
redeemable at 5% premium)
Bank A/c DR
(ii) To Debenture Application and Allotment A/c
(Being application money received on 5,0000 debentures)
Debenture Application and Allotment A/c Dr 5,50,000
To 12% Debentures A/c 5,50,000
To Securities Premium A/c 50,000
(Being transfer of application money to debentures A/c
issued at premium but redeemable at par)
Bank A/c DR 1,80,000
(iii) To Debenture Application and Allotment A/c 1,80,000

47
 (Being application money received on 2,000 debentures
at ₹90 per debentures)
Debenture Application and Allotment A/c Dr 1,80,000
Loss on Issue of Debentures A/c (20,000+10,000) Dr 30,000
To 12% Debentures A/c 2,00,000
To Premium on Redemption of Debentures A/c 10,000
(Being transfer of application money to debentures A/c
issued at 10% discount but redeemable 5% at par)

THE END OF KNOWLEDGE IS WISDOM

THE END OF CULTURE IS PERFECTION
THE END OF WISDOM IS FREEDOM
***********************************************************

CHAPTER 9 : FINANCIAL STATEMENTS OF THE COMPANY (PART-2)

Meaning:
i. An accounting process initiates with journalising of the transactions and ends with the preparation of Trial
Balance which comprises of all the debit and credit account balances.
ii. A summary of accounting data which is prepared by an enterprise at the end of an accounting process with
the help of such Trial Balance is known as Financial Statements.
iii. As per Section 2(40) of the Companies Act, 2013, a set of Financial Statements prepared in accordance with
Schedule III of this Act comprises of a Balance Sheet, Notes to Accounts, Statement of Profit and Loss and
Cash Flow Statement.
Nature: Nature of Financial Statements can be understood as a result of a combination of the following points:
i. Recorded Facts: It refers to the recorded transactions in the books of account on the basis of evidences.
ii. Conventions: All the transactions that are recorded in the books of account should follow all the relevant
accounting conventions as may be applicable to the respective transactions. Such conventions make financial
statements reliable, understandable and comparable. iii.
Accounting Concepts: All the transactions that are recorded in the books of account should follow the
accounting concepts. Such concepts also make the financial statements reliable, understandable and
comparable.
iv. Personal Judgements: Personal judgements also have an important bearing on the financial statements as it
facilitates the selection of methods, etc. when any one alternative is to be chosen out of the various alternatives.
v. Source of Financial Information: Financial statements acts a source of financial information on the basis of
which conclusions and interpretations can be drawn about the financial performance and position of a company.
Characteristics: Following are the Characteristics of Financial Statements:
i. They are historical documents as are related to past period.
ii. They are expressed in monetary terms.
iii. They show financial performance through the Statement of Profit and Loss and financial position through
Balance Sheet.
Objectives: Financial Statements are prepared with an objective to:
i. compute profit or loss from operating activities of the business.
ii. present a true view of the financial position of the business.
iii. provide information on economic resources of the business.
iv. provide data about the inflow and outflow of cash and cash equivalent.
v. determine the effectiveness of the management activities to ensure better performance of its business.
Limitations: Following are the limitations of the financial statements:
i. Historical Records: Financial Statements provide information which is historical in nature and therefore, it is
not useful for the potential investors or lenders as it does not provide any information of the future business or

48
its future financial position. ii. Affected
by Estimated: Financial Statements are the outcome of accounting concepts and conventions combined with
estimates and are therefore, not free from bias. iii. Different
Accounting Practices: Financial Statements can be drawn up on the basis of different accounting practices.
Profitability determined by each of these practise will be different and hence, there is no standard practice
which can be followed by all. iv. Qualitative
Elements are Ignored: Financial Statements are based completely on monetary items and therefore, many non-
monetary important factors that affect the profitability of the business are ignored.
v. Price Level Changes are Ignored: Financial Statements follow the historical cost concept while disclosing
the value of assets. Because of such practices, current market value is not taken into consideration.
Users of Financial Statements:
1. Internal Users:
i. Shareholders: Shareholders are those users who provide funds or contribute capital to the company and are
therefore, exposed to risks. In view of the risk involved, they are always interested in the profitability, returns,
financial and cash position of the company.
ii. Management: Management is responsible to safeguard the investment in business and increase the value of
business by managing the business effectively and thereby maximising the profits. It makes use of the financial
information to arrive at the informed decisions to increase the profitability of the business.
iii. Employees: Employees work in the company for a consideration in the form of salary. In addition to the
salary these employees are also entitled to various benefits in form of bonus which is directly linked to the
profits of the business.
2. External Users:
i. Banks and Financial Institutions: These are the organisations which provide loans to the businesses and are
therefore, concerned about the performance of the company to ensure that the business is able to repay the loan
along with the interest due.
ii. Investors and Potential Investors: Investors wish to know how safe their investments into a business are.
The investors gain the information related to investment directly from financial reports of the business so as to
judge profitability and growth status of business.
iii. Creditors: Creditors are the suppliers who provide goods and services on credit and are therefore,
concerned about the financial stability of the company to ensure that the dues are cleared on time without any
delay.
iv. Government and its Authorities: These users use the financial statements to compile national income and
then further take some important policy decisions.
v. Securities and Exchange Board of India (SEBI): SEBI and Other agencies study the financial statements
of the companies to check if the companies are operating within the prescribed limits and investor interests are
being protected.
Understanding Balance Sheet:
Meaning, Characteristics and Format of a Balance Sheet:
 Meaning: Balance Sheet or the Position Statement shows the financial position of a business by providing
complete details of its Assets, Liabilities and Equity at a particular date.
- Equity: A liability towards the shareholders is termed as ‗Equity‘ or 'Shareholders‘ Funds‘. Equity includes
Share Capital, Money received against Share Warrants.
- Liabilities: It is a liability towards the outsiders/external parties. It is shown as Non-Current Liabilities and
Current Liabilities.
 Characteristics: Following are the characteristics:
i. It comprises of balances of all the assets, liabilities and owner‘s equity. ii. It considers opening balances,
transactions during the year and closing balances for the items appearing in the Balance Sheet. iii. It satisfies the
accounting equation of Assets = Liabilities + Owner‘s Equity. iv. It gives a true picture of the financial position
of an entity on a particular date.
Format: As prescribed in Part I of Schedule III of the Companies Act, 2013, Balance Sheet is prepared as
follows:

49
Particulars Note Figures at the end of Figures at the end
No. the Current of the Previous
Reporting Period Reporting Period

(1) (2) (3) (4)

I.EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital
(b) Reserves and Surplus
c) Money received against Share Warrants
2. Share Application Money Pending
Allotment
3.Non-Current Liabilities
a) Long-term Borrowings
b) Deferred Tax Liabilities (Net)
c) Other Long-term Liabilities
d) Long-term Provisions
3. Current Liabilities
a) Short-term Borrowings
b) Trade Payables
c) Other Current Liabilities
d) Short-term Provisions
Total
II. ASSETS
1. Non-Current Assets
a) Fixed Assets:
i. Tangible Assets
ii. Intangible Assets
iii. Capital Work-in-Progress
iv. Intangible Assets under
Development b) Non-current Investments
c) Deferred Tax Assets (Net)
d) Long-term Loans and Advances
e) Other Non-Current Assets
2. Current Assets
a) Current Investments
b) Inventories
c) Trade Receivables
d) Cash and Cash Equivalents
e) Short-term Loans and Advances
f) Other Current Assets
Total

Understanding Statement of Profit and Loss:

Meaning, Characteristics and Format of a Statement of Profit and Loss:
 Meaning: It is known as an Income Statement as it takes into consideration all the incomes and expenses for a
particular period in order to determine whether the entity is a profit making entity or is running into losses. It
shows the profitability of the business entity for a given period of time, say if the given period is accounting
year 2018-19, then such statement is prepared for a period of 12 months starting from 1st April, 2018 to 31st
March, 2019.

50
 Characteristics: Following are the characteristics:
i. It comprises of all the incomes earned and all the expenses incurred during a particular accounting period.
ii. It is based on the historical data as it records all transactions which have already taken place during that
particular period.
 Format: As prescribed in Part II of Schedule III of the Companies Act, 2013, statement of profit and loss is
prepared as follows:
Particulars Note No. Figures at the end Figures at the end
of the Current of the Previous
Reporting Period Reporting Period
(1) (2) (3) (4)
I. Revenue from Operations
II. Other Income
III. Total Revenue (I+II)
IV. Expenses
Cost of Materials Consumed
Purchases of Stock-in-Trade
Changes in Inventories (Finished goods,
Work-in-Progress and Stock-in-Trade)
Employee Expenses
Finance Costs
Depreciation Expenses
Amortisation Expenses
Other Expenses
Total Expenses
V. Profit before Tax (III-IV)
VI. Less: Tax
VII.Profit or Loss for the period (V-VI)
Note no. column has been kept for the purpose of specifying cross reference to the Note no. in the Notes to
Accounts where detail of the respective item can be given.

Understanding Annual Report:

 Meaning: An Annual report of an entity is the one which discloses the prescribed information to enable the
users of such report to understand the actual profitability and financial position of the entity. Based on such
report and analysis of the same, valuable decisions are taken by the users. Therefore, in order to ensure correct
decision making, it is very essential to provide correct and systematic information in such annual report.
 Contents: Such a set of Annual Report of a company has:
A Board of Directors‘ Report comprising:
i. Report prepared in terms of Section 134 of the Companies Act, 2013;
ii. Directors‘ Responsibility Statement;
iii. Corporate Governance Report; and
iv. Discussion and Analysis done by the Management
Report by the Auditor for the Shareholders.
Set of Financial Statements comprising of:
i. Balance Sheet on a particular date;
ii. Statement of Profit and Loss for a particular period;
iii. Cash Flow Statement.
 Notes to Accounts that has details of:
i. Accounting policies followed;
ii. Details of line items in Balance Sheet and Statement of Profit and Loss;
iii. Explanatory note for significant transactions and events;
iv. If required by Part III of Schedule III of the Companies Act, 2013, any other additional information can be
provided.

51
 Main-Heads and Sub-Heads
S. Entry (Item) Main Head Sub Head
No.
1 Accrued income Current Assets Other Current Assets
2 Advance Taxes Current Assets Other Current Assets
3 Amount received against Share Warrants Shareholders‘ Funds As a Separate item after Reserves and Suplus
4 Balance with Bank Current Assets Cash and Cash Equivalents
5 Bank Overdraft/Cash Credit from Banks Current Liabilities Short-term Borrowings
6 Bills Payables Current Liabilities Trade Payables
7 Bills Receivables Current Assets Trade Receivables
8 Bonds Non-current Liabilities Long-term Borrowings
9 Booking Amount received from Current Liabilities Other Current Liabilities
Customers
10 Brand / Trademarks Non-current Assets Property, Plant and Equipment and
Intangible Assets — Intangible Assets.
11 Building under Construction Non-current Assets Capital Work-in-Progress
12 Calls-in-Advance along with interest Current Liabilities Other Current Liabilities
13 Calls-in-Arrears Shareholders‘ Funds Share Capital
14 Capital Redemption Reserve Shareholders‘ Funds Reserves and Surplus
15 Capital Reserve Shareholders‘ Funds Reserves and Surplus
16 Cash in Hand Current Assets Cash and Cash Equivalents
17 Cheques and Drafts in Hand Current Assets Cash and Cash Equivalents
18 Computer Software Non-current Assets Property, Plant and Equipment and
Intangible Assets — Intangible Assets.
19 Computers and Printers Non-current Assets Property, Plant and Equipment and
Intangible Assets — Property, Plant and
Equipment.
20 Copyrights Non-current Assets Property, Plant and Equipment and
Intangible Assets — Intangible Assets.
21 Covid Nasal Vaccines Development Non-current Assets Property, Plant and Equipment and
Expense Intangible Assets — Intangible Assets
under Development.
22 Creditors Current Liabilities Trade Payables
23 Current Maturities of Long-term Debts Current Liabilities Short-term Borrowings
24 Borrowings Payable in 30 Months, Current Liabilities Short-term Borrowings
Operating Cycle Period 24 Months
25 Borrowings Payable in 30 Months, Non-current Liabilities Long-term Borrowings
Operating Cycle Period 36 Months
26 Debentures Non-curr. Liab Long-term Borrowings
27 Debentures issued and maturing within 12 Current Liabilities Short-term Borrowings
months from the date of the Balance Sheet
28 Debit Balance in Surplus i.e., Balance in Shareholders‘ Funds Reserves and Surplus
Statement of Profit & Loss
29 Deposit with Electricity Company Non-current Assets Other Non-current Assets
30 Designs Non-current Assets Property, Plant and Equipment and
Intangible Assets — Intangible Assets.
31 Dividend Receivable Current Assets Other Current Assets
32 Equity Share Capital Shareholders‘ Funds Share Capital
33 Forfeited Shares Account Shareholders‘ Funds Share Capital
34 Goods-in-Transit Current Assets Inventories
35 Public Deposits Non-current Liabilities Long-term Borrowings
36 Security Deposit for Rented Office Non-current Assets Long-term Loans and Advances
37 Softwares being developed by the Non-current Assets Property, Plant and Equipment and
company Intangible Assets — Intangible Assets
under Development.

52
 38 Term Loans from Banks and Financial Non-current Liabilities Long-term Borrowings
Institutions
39 Deferred Tax Asset (Net) Non-current Assets
40 Deferred Tax Liability (Net) Non-current Liability

MCQ
1.Balance sheet of a company is required to be prepared in the format given in ………………………
(a) Schedule III Part II (b) Schedule III Part I- Ans (c) Schedule III Part III (d) Table A
2. As per Companies Act, the Balance Sheet of a company is required to be presented in ………………………
(a) Horizontal Form (b) Vertical Form - Ans (c) Either Horizontal or Vertical Form (d) Neither of the above
3. Securities Premium Reserve appears in a Company‘s Balance Sheet under :
(a) Share Capital (b) Long-term Provision (c) Short-term Provision (d) Reserve & Surplus- Ans
4.Which of the following is the element of financial statements?
(a) Balance Sheet (b) Profit & Loss A/c (c) Both (a) and (b) Ans (d) None of these
5. An Annual Report is issued by a company to its:
(a) Directors (b) Authors (c) Shareholders- Ans (d) Management

FILL IN THE BLANKS

1) According to prescribed order of assets in a Company‘s Balance Sheet ……………………… assets should be shown
first of all. (Non-Current Assets)
2)Prepaid Expenses appear in a Company‘s Balance Sheet under the Sub-head ………………
(Other Current Assets)
3) ‗Claims against the Company not acknowledged as debts‘ is shown under the head ……………….(Contingent
Liabilities)
4) 6% Debentures appear in a Company‘s Balance Sheet under the Sub-head ………….( Long-term Borrowings)
5) Interest accrued on Investments appear in a Company‘s Balance Sheet under the Sub-head ………………….(Other
Current Assets)

Question-Answer
1.Identify the major heads under which the following items will be shown in the balance sheet of a company as
per Schedule III of Companies Act, 2013. (All India 2016)
(i) Provision for tax (ii) Loans payable on demand (iii) Computer and related equipment
(iv) Goods acquired for trading
Ans.
Items Major Heads
(i) Provision for Tax Current Liabilities
(ii) Loans Payable on Demand Current Liabilities
(iii) Computer and Related Equipment Non-current Assets
(iv) Goods Acquired for Trading Current Assets

2. Under what heads and sub-heads, will the following items appear in the balance sheet of a company as per
Schedule III, Part I of the Companies Act, 2013.
(i) Stores and spares (ii) Proposed dividend (iii) Computer software (All India 2013)
Ans.
Items Major Heads Sub Heads
(i) Stores and spares Current Assets Inventories
(ii) Proposed dividend Current Assets Short-term Provisions
(iii) Computer software Non-Current Assets Fixed Assets (Intangible
assets)

53
3.List the items which are shown under the heading ‗current assets‘ in the balance sheet of a company as per
Schedule III, Part I of the Companies Act, 2013. (Delhi 2011; Modified)
Ans.
Current Assets
(i) Current investments (ii) Inventories (iii) Trade receivables (iv) Cash and cash equivalents
(v) Short-term loans and advances (vi) Other current assets
4. List the items which are shown under the heading ‗current liabilities‘ as per Schedule III, Part I of the
Companies Act, 2013. (Delhi 2011)
Ans.
Current Liabilities
(i) Short-term borrowings (ii) Trade payables (iii) Other current liabilities (iv) Short-term provisions
5. (i) Give the meaning of ‗long-term provisions‘.
(ii) List any four items other than ‗stock-in-trade‘ that are presented under the sub-head ‗inventories‘ as per
Schedule III of the Companies Act, 2013. (All India 2016)
Ans.
(i) Long-term provisions are the provisions against which liability will arise after 12 months of the date of
balance sheet or after the period of operating cyde. e.g. Provision made for retirement benefits payable to
employees who will retire after 12 months from the date of balance sheet, provision for warranty claims that
relates to the period after 12 months of the date of balance sheet.
(ii) The items other than ‗stock-in-trade‘ that are presented under the sub-head inventories are
 Raw material Work-in-progress Finished goods Stores and spares

**********************
CHAPTER 10 :ANALYSIS OF FINANCIAL STATEMENTS
*Financial Statement Analysis:
The process of critical evaluation of the financial information contained in the financial statements in order to
understand and make decisions regarding the operations of the firm is called ‗Financial Statement Analysis‘.
The term ‗financial analysis‘ includes both ‘analysis and interpretation’.
(a) The term analysis means simplification of financial data by methodical classification given in the financial
statements.
(b) Interpretation means explaining the meaning and significance of the data.
*Significance of Analysis of Financial Statements:
Financial analysis is useful and significant to different users in the following ways:
(a) Finance manager: On the basis of financial statement analysis, a finance manager makes rational decisions
for the firm
(b) Top management: Financial analysis helps the management in measuring the success of the company‘s
operations, appraising the individual‘s performance and evaluating the system of internal control.
(c) Trade payables: Trade payables are particularly interested in the firm‘s ability to meet their claims over a
very short period of time. Their analysis will, therefore, evaluate the firm‘s liquidity position.
(d) Lenders: Suppliers of long-term debt are concerned with the firm‘s long term solvency and survival. They
analyse the firm‘s profitability over a period of time, its ability to generate cash, to be able to pay interest and
repay the principal.
(e) Investors: Investors, who have invested their money in the firm‘s shares, are interested about the firm‘s
earnings. As such, they concentrate on the analysis of the firm‘s present and future profitability.
(f) Others: The economists, labour unions, government agencies, researchers, etc., analyse the financial
statements to study the present business and economic conditions.
*Objectives of Analysis of Financial Statements:
The analysis is undertaken to serve the following purposes (objectives):

54
(a) To assess the current profitability and operational efficiency of the firm as a whole as well as its different
departments so as to judge the financial health of the firm.
(b) To ascertain the relative importance of different components of the financial position of the firm.
(c) To identify the reasons for change in the profitability/financial position of the firm.
(d) To judge the ability of the firm to repay its debt and assessing the short-term as well as the long-term
liquidity position of the firm.
*Limitations of Financial Analysis:
(a) Financial analysis does not consider price level changes.
(b) Financial analysis may be misleading without the knowledge of the changes in accounting procedure
followed by a firm.
(c) Financial analysis is just a study of reports of the company.
(d) Monetary information alone is considered in financial analysis while non-monetary aspects are ignored.
(e) The financial statements are prepared on the basis of accounting concept, as such; it does not reflect the
current position.
(f) Financial analysis may be misleading due to window dressing of financial statements.

*Tools of Analysis of Financial Statements:

The most commonly used techniques of financial analysis are as follows:
1. Comparative Statements: These are the statements showing the profitability (statement of profit and loss)
and financial position (balance sheet) of a firm for different periods of time in a comparative form to give an
idea about the position of two or more periods. This analysis is also known as ‘Horizontal Analysis’.
2. Common Size Statements: These are the statements which indicate the relationship of different items of a
financial statement with a common item by expressing each item as a percentage of that common item.
Common size statements are useful, both, in intra-firm comparisons over different years and also in making
inter-firm comparisons for the same year or for several years. This analysis is also known as ‘Vertical
Analysis’.
3. Trend Analysis: It is a technique of studying the operational results and financial position over a series of
years. Using the previous years‘ data of a business enterprise, trend analysis can be done to observe the
percentage changes over time in the selected data.
4. Ratio Analysis: It describes the significant relationship which exists between various items of a balance
sheet and a statement of profit and loss of a firm. It is possible to assess the profitability, solvency and
efficiency of an enterprise through the technique of ratio analysis.
5. Cash Flow Analysis: It refers to the analysis of actual movement of cash into and out of an organization. The
flow of cash into the business is called as cash inflow or positive cash flow and the flow of cash out of the firm
is called as cash outflow or a negative cash flow. The difference between the inflow and outflow of cash is the
net cash flow. It summarizes the causes for the changes in cash position of a business enterprise between dates
of two balance sheets.
*Comparative Statements
(A) Comparative Balance Sheet as at 31st March, 20.....
Particulars First Second Absolute Percentage
Year Year Increase / Increase /
Decrease Decrease
1 2 3 4 5(%)

55
I. EQUITY AND LIABILITIES
1) Shareholder’s Funds
(a) Share Capital
(b) Reserves and Surplus
(c) Money received against share warrants
2) Share Application money pending allotment
3) Non-current Liabilities
(a) Long term borrowings
(b) Deferred tax liabilities (net)
(c) Other long term liabilities
(d) Long term provisions
4) Current Liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
Total
II. ASSETS
1) Non-Current Assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
2) Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short term loans and advances
(f) Other current assets
Total

(B) Comparative Statement of Profit and Loss for the year ended 31st March….
Particulars First Second Absolute Percentage
Year Year Increase / Increase /
Decrease Decrease
1 2 3 4 5(%)
I Revenue from operations
II Other income
III Total Revenue (I+II)
IV Expenses:
Cost of materials consumed
Purchases of stock-in-trade
Changes in inventories of finished goods
Work-in-progress and stock-in-trade
Employee benefits expense
Finance costs
Depreciation and amortization expense
Other expenses

56
Total expenses
V Profit before tax(III-IV)
VI Tax
VII Profit after tax(V-VI)
**TIPS for preparing the comparative statements
The following steps may be followed to prepare the comparative statements:
Step 1: List out absolute figures in rupees relating to two points of time (as shown in columns 2 and 3).
Step 2: Find out change in absolute figures by subtracting the first year (Col.2) from the second year
(Col.3) and indicate the change as increase (+) or decrease (–) and put it in column 4.
Step 3: Preferably, also calculate the percentage change as follows and put it in column 5.
Absolute Increase or Decrease (Col.4)/ First year absolute figure (Col.2) × 100
**Common Size Statements
(A) Common Size Balance Sheet as at 31st March, 20.....
Particulars First Second Percentage of Percentage
Year Year Year 1 of Year 2
1 2 3 4(%) 5(%)
I. EQUITY AND LIABILITIES
1) Shareholder’s Funds
(a) Share Capital
(b) Reserves and Surplus
(c) Money received against share warrants
2) Share Application money pending allotment
3) Non-current Liabilities
(a) Long term borrowings
(b) Deferred tax liabilities (net)
(c) Other long term liabilities
(d) Long term provisions
4) Current Liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
Total
II. ASSETS
1) Non-Current Assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
2) Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short term loans and advances

57
(f) Other current assets
Total

(B) Common Size Statement of Profit and Loss for the year ended 31st March…..
Particulars First Year Second Percentage of Percentage of
Year Year 1 Year 2
1 2 3 4(%) 5(%)
I Revenue from operations
II Other income
III Total Revenue (I+II)
IV Expenses:
Cost of materials consumed
Purchases of stock-in-trade
Changes in inventories of finished goods
Work-in-progress and stock-in-trade
Employee benefits expense
Finance costs
Depreciation and amortisation expense
Other expenses
Total expenses
V Profit before tax(III-IV)
VI Tax
VII Profit after tax(V-VI)

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**A Comparative View of ‘Comparative Statements’ and Common Size Statement
Sl.No. Comparative Statements Common Size Statement
1 Useful in intra-firm comparisons. Useful in both ‗intra-firm‘ as well as ‗inter-
firm comparisons.
2 This analysis is also known as ‗Horizontal This analysis is also known as ‗Vertical
Analysis‘. Analysis‘.
3. Calculation of Percentage: Calculation of Percentage:
% = Absolute Increase or Decrease (Col.4)/ % = Absolute amount of particular item in
First year absolute figure (Col.2) × 100 column 2/ Common Base*100

MCQs/ Fill in the blanks/ One Word Answer

1. Which of the following is not a tool of Financial Statement analysis?
(i) Cash Flow Statement (ii) Ratio Analysis
(iii) Trend Analysis (iv) Balance Sheet
(a) (i) only (b) (iv) only (Answer) (c) (i),(ii) and(iii) (d) (iii) only
2. Which of the following is not a limitation of analysis of financial statements?
(a) Window Dressing (b) Price level changes ignored
(c) Subjectivity (d) Intra firm comparison possible (Answer)
3. ‗Monetary information alone is considered in financial analysis‘ refers to which limitation of financial
statement analysis.
a) Historical analysis. b) Qualitative aspect ignored. (Answer)
**TIPS for preparing the Common Size Statement
The following procedure may be adopted for preparing the common size statements.
1. List out absolute figures in rupees at two points of time, say year 1, and year 2 (Column 2 & 4 ).
2. Choose a common base (as 100). For example, revenue from operations may be taken as base (100)
in case of statement of profit and loss and total assets or total liabilities (100) in case of balance sheet.
3. For all items of Col. 2 and 3 work out the percentage. Column 4 and 5 shows these percentages.
Calculation of Percentage:
1. For Common Size Balance Sheet: (%)= Absolute amount of particular item in column 2/ Common
Base(i.e. total assets or total liabilities)*100
2. 1. For Common Size Balance Sheet: (%)= Absolute amount of particular item in column 2/ Common
Base(i.e. revenue from operations)*100

c) Not free from bias. d) Ignore Price level Changes.

4. Comparative statements are also known as:
(a) Dynamic analysis (b) Horizontal analysis (Answer) (c) Vertical analysis (d) External analysis
5. The most commonly used tools for financial analysis are:
(a) Horizontal analysis (b) Vertical analysis (c) Ratio analysis (d) All the above (Answer)
6. _________ is useless without ___________, and __________ without _______________ is difficult or even
impossible. (Answer: Analysis, interpretation; interpretation, Analysis)
7. Name the tool of Vertical analysis of Financial Statements. (Answer: Common Size Statement)
8. Name the tool of Horizontal analysis of Financial Statements. (Answer: comparative Statement)
Assertion- Reasoning Questions
In the following questions, a statement of Assertion (A) is followed by a statement of Reason(R).
Choose one of the correct alternatives given below:
Alternatives:
(A) Both (A) and (R) are correct and (R) is the correct reason of (A).
(B) Both (A) and (R) are correct but (R) is not the correct reason of (A).
(C) Only (R) is correct. (D) Both (A) and (R) are wrong.

59
1. Assertion (A): Common size statements are useful, both in intra-firm comparisons and also in making inter-
firm comparisons.
Reason (R): Common size analysis is also known as ‗Vertical Analysis‘.
Answer: (B) Both (A) and (R) are correct but (R) is not the correct reason of (A).
2. Assertion (A): Comparative Statements are prepared with finding out change in absolute figures by
subtracting the second year from the first year.
Reason (R): The figures in the comparative statements can be used for identifying the direction of changes in
performance of an organization.
Answer :(C) Only (R) is correct.
3. Assertion (A):Analysis of financial statements can be useful in decision-making involving comparison with
other firms (cross sectional analysis) and with firms‘ own performance, over a time period (time series
analysis).
Reason (R): Analysis of financial statements has a primary objective of determining the best possible estimates
and predictions about the future conditions.
Answer: (A) Both (A) and (R) are correct and (R) is the correct reason of (A).
4. Assertion (A): Financial statements may not help the users in decision-making
Reason (R): Financial statements show aggregate information but not detailed information.
Answer: (A) Both (A) and (R) are correct and (R) is the correct reason of (A).

Numerical Questions For Practices

1. From the following information, prepare Comparative Balance Sheet of Bijoy Ltd.:
Particulars Note No. 2022 – 23 2021 – 22
(Rs.) (Rs.)
Share Capital 35,00,000 35,00,000
Reserves and Surplus 6,00,000 10,00,000
Long-term Borrowings 16,00,000 15,00,000
Current Liabilities 5,00,000 4,50,000
Fixed Assets 35,00,000 25,00,000
Investments (Non-Current) 10,50,000 15,00,000
Current Assets 6,50,000 14,50,000
(Hint: 0%, (-) 40%, 6.67%, 11.11%, 40%, 30%, 55.17%)
2. Prepare a Common-Size Statement of Profit and Loss of ‗Ram Ltd.‘ from the following information:
Particulars Note 2022 – 23 2021 – 22
No. (Rs.) (Rs.)
1.Revenue from operations 20,00,000 10,00,000
2. Purchase of Stock in Trade 7,70,000 4,20,000
3. Changes in Inventories 1,20,000 80,000
4. Other expenses 52,000 30,000
5. Other incomes 60,000 50,000
Tax Rate 50%
(Hint: 2022-23- 100%, 3%, 103%, 38.5%, 6%, 2.6%, 47.1%, 55.9%, 27.95%, 27.95%
2021-22- 100%, 5%, 105%, 42%, 8%, 3%, 53%, 52%, 26%, 26%).

**********************

60
 CHAPTER 11 :ACCOUNTING RATIOS
Meaning of Accounting Ratios: A ratio is a mathematical number calculated as a reference to relationship
of two or more numbers and can be expressed as a fraction, proportion, percentage and a number of times.

Types of Ratios:
1. Liquidity Ratios: To meet its commitments, business needs liquid funds. The ability of the business to pay
the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure
it are known as ‗Liquidity Ratios‘. These are essentially short-term in nature.
2. Solvency Ratios: Solvency of business is determined by its ability to meet its contractual obligations towards
stakeholders, particularly towards external stakeholders, and the ratios calculated to measure solvency position
are known as ‗Solvency Ratios‘. These are essentially long-term in nature.
3. Activity (or Turnover) Ratios: This refers to the ratios that are calculated for measuring the efficiency of
operations of business based on effective utilisation of resources. Hence, these are also known as ‘Efficiency
Ratios’.
4. Profitability Ratios: It refers to the analysis of profits in relation to revenue from operations or funds (or
assets) employed in the business and the ratios calculated to meet this objective are known as ‗Profitability
Ratios‘.
Computation of Ratios:
1. Liquidity Ratios:
(a) Current Ratio:
Current Ratio = Current Assets/ Current Liabilities
Current assets include current investments, inventories(excluding loose tools& spare parts), trade
receivables (debtors and bills receivables), cash and cash equivalents, short-term loans and advances and other
current assets such as prepaid expenses, advance tax and accrued income, etc.
Current liabilities include short-term borrowings, trade payables (creditors and bills payables), other
current liabilities and short-term provisions.

(b) Quick or Liquid Ratio:

Quick ratio = Quick Assets/Current Liabilities
The quick assets are defined as those assets which are quickly convertible into cash. While calculating quick
assets we exclude the inventories at the end and other current assets such as prepaid expenses, advance tax, etc.,
from the current assets. It is calculated to serve as a supplementary check on liquidity position of the business
and is therefore, also known as ‘Acid-Test Ratio’.
Effect on Ratios after any Transaction:
When the Ratio is→/ 1:1 Less than 1:1 More than 1:1
When↓ e.g. 0.7:1 or 1:2 e.g. 1.25:1
Only Numerator Increases Improved Improved Improved
Only Numerator Decreases Reduced Reduced Reduced
Only Denominator Increases Reduced Reduced Reduced
Only Denominator Decreases Improved Improved Improved
Both Numerator & Denominator Increases No Change Improved Reduced
Same Amount
Both Numerator & Denominator Decreases No Change Reduced Improved
Same Amount

2. Solvency Ratios:
(a) Debt-Equity Ratio:
Debt-Equity Ratio = Long-term Debts/Shareholders’ Funds where
Long-term debts= Long-term borrowings+ other non-current liabilities+Long-term provisions.

61
Shareholders‘ Funds (Equity) = Share capital + Reserves and Surplus + Money received against share warrants
+ Share application money pending allotment
Share Capital = Equity share capital + Preference share capital or
Shareholders‘ Funds (Equity) = Non-current Assets + Working capital – Non-current liabilities
Working Capital = Current Assets – Current Liabilities
(b) Debt to Capital Employed Ratio:
Debt to Capital Employed Ratio = Long-term Debt/Capital Employed (or Net Assets)
Capital employed=Long-term debt + Shareholders‘ funds
Alternatively, Net assets=Total assets– Current liabilities
(c) Proprietary Ratio: Proprietary ratio expresses relationship of proprietor‘s (shareholders) funds to net
assets.
Proprietary Ratio = Shareholders’, Funds/Capital employed (or net assets)
(d) Total Assets to Debt Ratio: This ratio measures the extent of the coverage of long-term debts by assets.
Total assets to Debt Ratio = Total assets/Long-term debts
(e) Interest Coverage Ratio:
Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on long-term debts

3. Activity (or Turnover) Ratio:

(a) Inventory Turnover Ratio:
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Average inventory=Opening Inventory+ Closing Inventory/2
Cost of revenue from operations=Revenue from operations-Gross profit OR
Opening Inventory+ Net Purchases+ All Direct Expenses-Closing Inventory
(b) Trade Receivables Turnover Ratio:
Trade Receivable Turnover ratio=Net Credit Revenue from Operations/Average Trade Receivable
Average Trade Receivable = (Opening Debtors and Bills Receivable + Closing Debtors and Bills
Receivable)/2
It is to be noted that debtors should be taken before making any provision for doubtful debts.
Average collection period=Number of days or Months or weeks/Trade receivables turnover ratio
(c) Trade Payable Turnover Ratio:
Trade Payables Turnover ratio = Net Credit purchases/ Average trade payable
Where Average Trade Payable = (Opening Creditors and Bills Payable + Closing Creditors and Bills
Payable)/2
Average Payment Period = No. of days/month/weeks in a year/Trade Payables Turnover Ratio
(d) Net Assets or Capital Employed Turnover Ratio:
Employed Turnover ratio =Revenue from Operation/Capital Employed
(e) Fixed Assets Turnover Ratio: Net Revenue from Operation/Net Fixed Assets
(f) Working Capital Turnover Ratio: = Net Revenue from Operation/Working Capital

4. Profitability Ratios:
(a) Gross Profit Ratio: Gross profit ratio as a percentage of revenue from operations is computed to have an
idea about gross margin.
Gross Profit Ratio = Gross Profit/Net Revenue of Operations×100
(b) Operating Ratio: It is computed to analyse cost of operation in relation to revenue from operations.
Operating Ratio =(Cost of Revenue from Operations+Operating Expenses)/Net Revenue from Operations
×100
Operating expenses include office expenses, administrative expenses, selling expenses, distribution expenses,
depreciation and employee benefit expenses etc.
(c) Operating Profit Ratio:
Operating Profit Ratio = 100 – Operating Ratio or
Operating Profit/ Revenue from Operations × 100

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Where Operating Profit = Revenue from Operations – Operating Cost
(d) Net Profit Ratio:
Net Profit Ratio = Net profit/Revenue from Operations × 100
Generally, Net profit refers to profit after tax (PAT), but it is also to be calculated profit before tax (PBT).
(e) Return on Capital Employed or Investment:
Return on Investment = Profit before Interest and Tax/ Capital Employed × 100
******************************************************************************
MCQs
Q.1 Which of the following is an Efficiency Ratio?
(a) Return on Investment (b) Interest Coverage Ratio
(c) Proprietary Ratio (d) Working Capital Turnover Ratio
Q.2 If revenue from operations is ₹40,00,000 and gross profit is 25%, Cost of revenue from operations will be:
(a) ₹ 23,50,000 (b) ₹32,50,000 (c) ₹ 20,00,000 (d) ₹ 30,00,000
Q.3 Which one of the following is incorrect?
(i) Inter-firm Comparison is known as Cross-sectional Analysis.
(ii) Liquidity ratio is also known as acid test ratio.
(iii) Ideally accepted current ratio is 2: 1.
(iv) Debt equity ratio is the relationship between outsider‘s funds and shareholders‘ funds.
In the context of the above two statements, which of the following options is correct?
(A) All (i), (ii), (iii) and (iv) are incorrect.
(B) Only (i), (ii) and (iv) are incorrect.
(C) Only (ii), (iii) and (iv) are incorrect.
(D) Only (ii) and (iii) are incorrect.
Answers:
1. (d) 2. (d) 3. (d)
Fill in the blanks
Q.1 For inter-firm comparison, _________________ is considered a good measure of profitability. (Debt-
Equity Ratio/Return on Investment)
Q.2 Solvency Ratios are the _______________(Traditional/Functional) classification of ratios.
Q.3 Ratio analysis is _____________(Horizontal/Vertical) analysis.
Q.4 ___________ Quick ratio suggests unnecessarily deployment of resources. (High/low)
Q.5 Debtors should be taken _______________(before/after) making any provision for doubtful debts while
calculating Trade Receivables Turnover Ratio.
Q.6 ___________________ (Liquidity/Profitability) ratios are very useful for inter-firm as well as intra-firm
comparisons.
Answers:
1. Return on Investment 2. Functional 3. Vertical 4. High 5. Before 6. Profitability

One Word Answers

Q.1 What will be the Current ratio of a company whose Net Working Capital is Zero?
Q.2 Which ratio indicates the proportion of assets financed out of shareholders‘ funds?
Q.3 A company had a liquid ratio of 1 and current ratio of 2.5 and inventory turnover ratio 6 times. It had total
current assets of ₹ 10,00,000. Find out annual sales if goods are sold at 25% profit oncost.
Q.4 From the following calculate Interest coverage ratio. Net profit after tax Rs 20,00,000; 10% debentures Rs
2,00,00,000; Tax Rate 50%.
Q.5 Debt to Capital Employed ratio is 0.4:1. State whether Sale of Equipment costing ₹ 10,00,000 for ₹
9,00,000, will improve, decline or will have no change on the Debt to Capital Employed Ratio.
Answers:
1. 1:1 2. Proprietary Ratio 3. ₹ 45,00,000 4. 3 Times 5. Improve
63
 Miscellaneous Questions
Q.1 The Current Ratio of Resource Ltd. is 2:1. State giving reasons, which of the following transactions will
improve, reduce or not change the current ratio:
(i) Payment to Bank Overdraft ₹ 20,000 (ii) Purchased goods on credit ₹ 30,000
(iii) Cash received from Bills Receivable ₹ 15,000 (iv) Issue of Debentures ₹ 3,00,000
(Hint: Improve, Reduce, No Change, Improve)
Q.2 State any three important limitations of Ratio Analysis.
(Hint: Limitations of Accounting data, Ignores price level Changes, Ignores qualitative and non-monetary
Aspects, and Variations in Accounting Practices or Forecasting)
Q.3 From the given information, calculate the following ratios:
(i) Operating Profit Ratio (ii) Inventory Turnover Ratio
Information:
Cash Revenue from Operations: ₹ 20,00,000; Credit Revenue from Operations : 150% of Cash Revenue from
Operations; Operating Expenses: 10% of Total Revenue from Operations
Rate of Gross Profit: 40% Opening Inventory: ₹ 1,50,000
Closing Inventory: ₹ 1,00,000 more than Opening Inventory
Q.4 Calculate the following ratio on the basis of following information:
(i) Gross Profit Ratio (ii) Working Capital Turnover ratio (iii) Acid Test Ratio (iv) Inventory Turnover Ratio (v)
Fixed Assets Turnover Ratio
Gross Profit ₹ 50,000, Revenue from Operations ₹ 1,00,000, Inventory ₹ 15,000, Trade Receivables ₹ 27,500,
Cash and Cash Equivalents ₹ 17,500, Current Liablilites ₹ 40,000, Land & Building ₹ 50,000, Plant &
Machinery ₹ 30,000, Furniture ₹ 20,000
Q.5 Shourya Ltd. has a current ratio of 3:1 and quick ratio of 2:1. The excess of current assets over quick assets
are ₹ 40,000. Calculate current assets and current liabilities.
Assertion- reasoning
In the following questions, a statement of Assertion (A) is followed by a statement of Reason(R).
Choose one of the correct alternatives given below:
Alternatives:
(A) Both (A) and (R) are correct and (R) is the correct reason of (A).
(B) Both (A) and (R) are correct but (R) is not the correct reason of (A).
(C) Only (R) is correct. (D) Both (A) and (R) are wrong.

Q.1Assertion (A): A high quick ratio indicates a favorable position.

Reasoning (R): A high quick ratio leaves a high liquidity to meet current obligations.
Q.2 Assertion (A): Increase in the value of Current Assets will result in increase of Current ratio.
Reason (R): Increasing the value of Current Assets will lead to increase the paying capacity of the firm.
Q.3Assertion (A): No effect on current ratio(2:1) if a bills payable is discharged on maturity.
Reason (R): On discharging the bills payable, there is equal change in Both the Current assets and Current Liabilities.
Q.4 Assertion (A): Suppliers of long-term debt are concerned with the firm‘s long-term solvency and survival.
Reason (R): They analyses the firm‘s profitability over a period of time, its ability to generate cash, to be able to
pay interest and repay the principal and the relationship between various sources of funds.
Answers:
1. (D) (A) is incorrect but (R) is correct.
2. (A) Both (A) and (R) are correct and (R) is the correct reason of (A).
3. (C) Only (R) is correct.
4. (A) Both (A) and (R) are correct and (R) is the correct reason of (A)

Case Studies
Q.1 Sahaj Ltd. and Saharsh Ltd. use different methods for calculating depreciation. These variations in
depreciation cost leave a big question mark on the cross-sectional analysis and comparison of these two firms
was not possible.

64
Identify the limitation of Ratio Analysis highlighted in the above situation. Also explain any two other
limitations of Ratio Analysis apart from the identified above.
Q.2 Rehan Ltd. has shown the following details about the financial year 2022-23:
Trade Receivable turnover ratio 3 times; Cost of Revenue from Operations ₹ 4,80,000; Gross profit ratio 20%;
Closing trade receivables were ₹ 50,000 more than opening trade receivables; cash revenue from operations
being % of credit revenue from operations.
Based on the above information, answer the following:
(i) Value of Revenue from operations:
(a) ₹6,00,000 (b) ₹5,40,000 (c) ₹5,60,000 (d) None of the above
(ii) Value of Credit Revenue from operations:
(a) ₹6,00,000 (b) ₹4,50,000 (c) ₹5,00,000 (d) None of the above
(iii) Value of Opening Trade Receivables:
(a) ₹ 1,25,000 (b) ₹ 1,50,000 (c) ₹ 1,75,000 (d) None of the above
(iv) Value of Closing Trade Receivables:
(a) ₹ 1,25,000 (b) ₹ 1,50,000 (c) ₹ 1,75,000 (d) None of the above
Answer: (i) (a) ₹6,00,000 (ii) (b) ₹4,50,000 (iii) (a) ₹ 1,25,000 (iv) (c) ₹1,75,000

CHAPTER 12- CASH FLOW STATEMENT

 Cash Flow Statement: Cash Flow Statement is a statement that shows flow of cash and cash equivalents during a
given period of time. Cash Flow Statement shows the net increase or net decrease of cash and cash equivalents under
each activity, i.e., Operating, Investing, Financing and collectively.
Operating Activities: Operating Activities are the main revenue generating activities of a business firm. Operating
activities are those transactions and events whose cash flows affect the net profit or loss of a business firm.
Examples of Cash Flows from Operating Activities; AS-3 (Revised) gives the following examples of
cash flows from operating activities:
OPERATING ACTIVITIES

CASH INFLOWS CASH OUTFLOWS

(i) Cash Sales (i) cash Purchases
(ii) Cash received from debtors (ii) Payment to Trade Payables
(iii) Cash reserve as commission (iii) Cash Operating Expenses
(iv) Cash received as cash (iv) Income Tax paid(Net of Refund)
(v) Cash receives as royalty

The Major Inflows and outflows in case of financial companies:

OPERATING ACTIVITIES

CASH INFLOWS CASH OUTFLOWS

(i) Cash received for investment. (I) Cash paid for interest.
(ii) Cash receives for Dividends.
(iii) Proceeds from sale of (ii) Payments for purchases of
Securities securities.

65
 Investing Activities: Investing Activities are those activities which are related to the acquisition and disposed of long
term assets and other investments not included in the cash equivalents.

EXAMPLES: AS-3 (Revised) gives the following examples of cash flows from investing activities:

INVESTING ACTIVITIES

CASH INFLOWS CASH OUTFLOWS

(i) sale of Fixed Assets (Tangible and (i) Purchase of fixed Asset
Intangible) (ii) Purchase of investments (Non-
(ii) Sale of Investments (Non-current current other than marketable
other than markable securities securities)
(iii) interest received (iii) Payment of Tax (related to
(iv) Dividend received investing activities)
(v) Rent received

 Financing Activities: Financing Activities are those activities that result in the changes in size and composition of the
owners' capital (including Preference Share Capital in the case of a company) and borrowings of the business firm.
Examples of Cash Flows from Financing Activities: AS-3 (Revised) gives the following examples of cash flows
from Financing Activities.

FINANCING ACTIVITIES

CASH INFLOWS CASH OUTFLOWS

(i) Issues of share in cash (i) Payment of loans
(ii) Issues of Debenture in cash (ii) Payment of Interest
(iii) Proceeds from long term loans (iii) Payment of Dividend
(iv) Proceeds from Bank Overdraft (iv) Buy-back of Equity Shares
or cash credit. (v) Redemption of Preference shares
(vi) Repayment of Long-term Loans
(vii) Repayment of Bank Overdraft or
cash credit
(viii)Payment of Tax (related to
Financing Activities)

66
 FORMAT OF CASH FLOW STATEMENT
Cash of Flow Statement of …. For the Year ending ….
(As per Accounting Standard (AS-3) (Revised) (Indirect Method)}
Particulars (₹) (₹)
1. Cash Flow from operating Activities
(A) Net Profit before Taxation and Extraordinary items(WN 1) -----
Adjustment for Non-Cash And Non-Operating items
(B) Items to added back:
Depreciation -----
Interest on Borrowings (Short term and long term) and Debentures ----
writing off underwriting commission/share issue Expenses -----
Goodwill/Patents/Trade Marks/Copyrights Amortised ----
Loss on sale of Fixed Assets -----
(c) Items to be Deducted:
interest income (------)
Dividend Income (------)
Rental Income (------)
Profit on sale of Fixed Assets (------)
Liability/Provisions Written back (------) (------)
(D) Operating profit Before working Capital Changes(A+B-C) ------
(E) Add: Decrease in Current Assts ----
Increase in Current Liabilities ------
(F)Less: Increase in Current Assets (------)
Decrease in Current Liabilities (------)
(G) Cash generated from Operations(D+E-F) --------
(H) Less:Income Tax Paid (Net of Refund Tax) (------)
(I) Net Cash from Operating Activities ----
2. Cash Flow from Investing Activities:
Proceeds from Sale of Tangible Fixed Assets ------
Proceeds from Sale of Intangible Fixed Assets ------
Proceeds from Sale of Non-Current Investments ------
interest And Dividend Received ------
Rental Income (------)
Purchase of Tangible Fixed Assets (------)
Purchase of Intangible Assets like Goodwill,Patents,etc. (------)
Purchase of non currents investments (------)
Extraordinary items(e.g. Insurance claim on machinery against fire) (------)
Net cash from investing Activities --------
3.Cash Flow From Financing Activities:
Proceeds form Issue of share capital and Debentures
Proceeds from long-term Borrowings ----
Increase/Decrease in Bank overdraft and cash credit ----
Payment of Underwriting commission/Shares issue Expenses ---
Final Dividend Paid ----
Inteirm Dividend Paid (------)
interest on Long-term Borrowings Paid (------)
Redemption of Debentures/Preference Shares (------)
Extraordinary items(E.g Buy-back of shares) (------)
Net Cash from financing Activities (------)
4.Net Increase/Decrease in cash and cash Equivalents(X+Y+Z) ------
5.Add: Cash and Cash Equivalents in the beginning of the Year(WN2) -----
6.Cash and Cash Equivalents at the end of the year(WN3) ------

67
Working Note: 1.Calculation of Net Profit before Tax And Extraordinary Items
Particulars (₹)
Net profit of the current year or difference between closing balance and opening
balance of surplus,i.e.,Balance in Statement of profit and loss --------
Add:- Transfer to reserves (all transfers to reserves from Surplus i.e., balances in Statement of P & L) --------
- Dividend Paid ( proposed dividend for Previous year) --------
- Interim Dividend paid during the year --------
- Provisions for tax made during the current year --------
- Extraordinary items, if any debited to statements of Profit and Loss --------
Less:-Refund of tax Credits to Statements of Profit and Loss (----)
- Extraordinary items, if any Credited to Statement of Profit and Loss (----)
Net Profit before tax and extraordinary items _____
Note:- Proposed Dividend of Current Year is Contingent Liability as per AS-4
2.Calculation of Cash and Cash Equivalents in the beginning
Particulars (₹)
- Cash in Hand -------
- Cash in Bank -------
- Short-term Deposits -------
- Marketable Securities -------
- Cheques and Drafts in Hand ____

3.Calculation of Cash and Cash Equivalents at the end

Particulars (₹)
- Cash in Hand -------
- Cash in Bank -------
- Short-term Deposits -------
- Marketable Securities -------
- Cheques and Drafts in Hand ____

MULTIPLE CHOICE QUESTIONS

1. Which of the following transactions will result in no flow of cash?
(a) Purchase of machinery (b) Sale of investments
(c) Acquisition of machinery by issue of equity shares (d) Redemption of debentures
2. An investment normally qualifies as cash equivalent only when it has a short maturity, of say,
from the date of acquisition.
(a) Three months or more (c) One year or less (b) Six months or less (d) Three months or less
3. Interest of 3,000 received in cash on loans and advances will result in:
(a) cash inflow from operating activities (b) cash inflow from investing activities
(c) cash inflow from financing activities (d) No change in cash or cash equivalents.
4. In case of a financial enterprise whose main business is lending and borrowing, 'interest paid' and
'interest received' are classified as:
(a) Operating activities (c) Financing activities (b) Investing activities (d) Cash equivalents
5. Which of the following transactions will not result in flow of cash :
(a) Cash withdrawn from the bank 7,000 (b) Issue of shares 20,00,000
(c) Purchase of investments 60,000 (d) Payment of wages 11,000
[Ans. 1. (c), 2. (d), 3. (b), 4. (a), 5. (a)]
ASSERTION-REASON QUESTIONS
There are two statements marked as Assertion (A) and Reason (R), mark your answer as per the codes given below.
(a) Both A and R are correct, and R is the correct explanation of A.
(b) Both A and R are correct, but R is not the correct explanation of A,
(c) A is correct but R is incorrect.

68
(d) A is incorrect but R is correct.
1. Assertion (A):Short-term investments are not considered while preparing a cash flow
Reason (R):Being Cash and Cash Equivalents,they are part of Cash management ofthe enterprise.
2. Assertion (A): 'Receipt of dividend' can never be classified under operating activities.
Reason(R):For financial companies, receipt of dividend is considered main revenue generating activity of business.
.

3.Assertion (A): Investing activities involve the purchase and sale of long-term assets.
Reason (R) : These assets also include the purchase and sale of such investments which are not marketable securities.
.

4.Assertion (A):Accquistion of machinery by issue of equity shares is not considered while preparing Cash Flow
.

Statement‘.
Reason (R):It is a transaction which results in outflow of cash
5. Assertion (A): Operating activities are related to main revenue generating activities of business, i.e., purchase and sale
.

of goods and services whereas investing activities are related to . purchase and sale of long-term assets.
.

Reason(R) :Redemption of preference shares will result into outflow of cash.

[Ans. 1. (a), 2. (d), 3. (a), 4. (c), 5. (b)]

CASE BASED QUESTION
Read the following hypothetical situation and answer question number (i) to (iii):
MJ Ltd. is a company involves in trading of FMCGs. During the year, the company purchased machinery on
deferred payment basis. During the year ended 31st March, 2021 the company paid an instalment of 4,00,000
which included interest of 40,000. The company received a dividend of 35,000 on the shares invested in a
Future Money Ltd.
(i) Can the 'receipt of dividend' be classified under operating activities?
(ii) While preparing cash flow statement, under which type of activities will this payment be
classified? Also, mention the amount involved in each activity.
(iii) The company's book shows cash used in operating activities as ₹5,30,000. This situation is prevailing for
the last four years. The company is unable to execute its development and expansion plans. What would you
suggest to the company?
Ans. (1) No, the company cannot classify the 'receipt of dividend' as operating activity as it is a trading
company. Only in case of financial companies, receipt of dividend is classified as operating activities as for
financial companies receipt of dividend is considered main revenue generating activity of business.
(ii) Payment of instalment 3,60,000 will be shown under cash outflows from Investing Activities. Payment of
interest of 40,000 will be shown under cash outflows from Financing Activities.

(iii) Negative Cash Flow from Operating Activities during last four consecutive years shows that company is
incurring losses year after year. For a trading company, it is important to earn profits from operating activities. It
is suggested to the company to review its plans and business policies. It is also suggested to change its product
mix or scale up to its production

LONG ANSWER QUESTIONS

Q. 1. From the following Balance Sheet of Keiro Ltd. and the additional information as on 31st March,
2023, prepare a Cash Flow Statement:
Particulars Note no. 31st March, 2023 (₹) 31st March, 2022 (₹)
I. EQUITY AND LIABILITIES
(1) Share holders fund
(a)Share Capital 7,90,000 5,80,000
(b)Reserves and Surplus 1 4,60,000 1,20,000
(2)Non-Current Liabilities
Long term Borrowings 2 5,00,000 3,00,000
(3)Current Liabilities
(a)Short-term borrowings 3 1,15,000 42,000
(b)Short-term Provisions 4 1,18,000 46,000

69
Total 19,83,000 10,88,000

II. ASSETS
(1)Non-Current Assets
Property,Plant and Equipment and
Tangible Assets
(a)Property,Plant and Equipment 5 9,80,000 6,35,000
(b)Intangible Assets 6 2,68,000 1,70,000
(2)Current Assets
(a)Current Investments 1,40,000 70,000
(b)Trade Receivables 4,40,000 1,50,000
(c)Cash and Cash Equivalents 1,55,000 63,000
Total 19,83,000 10,88,000

Note No. Particulars 31st March, 2023 (₹) 31st March, 2022 (₹)
1 Reserve and Surplus
(Surplus i.e. Balance in Statement of Profit and Loss) 3,20,000 60,000
3,20,000 60,000
2 Long-term Borrowings
12% Debentures 5,00,000 3,00,000
5,00,000 3,00,000
3 Short-term Borrowings
Bank Overdraft 1,15,000 1,15,000
1,15,000 1,15,000
4 Short-term Provisions:
Provision for tax 1,18,000 1,18,000
1,18,000 1,18,000
5 Property ,Plant and Equipment
Machinery 11,00,000 7,50,000
Less: Accumulated Depreciation -1,20,000 (1,15,0000
9,80,000 6,35,000
6 Intangible Assets:
Goodwill 2,68,000 1,70,000
2,68,000 1,70,000

Ans:
Cash Flow Statement
For the year ended on 31st March , 2018
Particulars (₹) (₹)
CASH FLOW FROM OPERATING ACTIVITIES
Net Profit before Tax and extraordinary items(WN1) 4,58,000
Add: Depreciation on Plant and Machinery 5,000
Interest on 12% Debentures (WN2) 50,000
Operating Profit before working capital changes 5,13,000
Less: Increase in Trade Receivables -2,90,000

cash generated from operations 2,23,000

less: tax paid -46,000
cash inflows from operating Activities 1,77,000

Cash Flow From Investing Activities

70
Purchase of Plant And Machinery -3,50,000
Purchase of goodwill -98,000

cash used in investing activities -44,80,000

CASH FLOW FROM FINANCING ACTIVITIES
Issue of Shares 2,10,000
issue of 12% Debentures 2,00,000
Bank Overdraft raised 73,000
Interest paid on 12% Debentures -50,000
cash inflows from financing activities 4,33,000
Net Increase in cash and cash Equivalents 1,62,000
Add: Opening balance of cash and cash equivalents
current investments 70,000
cash and cash equivalents 63,000 1,33,000
closing balance of cash and cash Equivalents
current investments 1,40,000
cash and cash equivalents 1,55,000 2,95,000

Working Note:
1.Calculation of Net Profit before Tax: (Rs)
Net Profit 2,60,000
Add: Amount transferred to Reserve 80,000
Add: Provision for Tax 1,18,000
4,58,000
2. Interest on Debentures (i) 3,00,000 × 12/100 = 36,000
(ii) 2,00,000 × 12/100 × 7/12 = 14,000
Rs.50,000
2. From the following Balance Sheet of Anuradha Ltd, as at 31st March, 2022, calculate Cash from
Operating Activities:
Balance Sheet of Anuradha Ltd.
As at 31st March,2022

Particulars Note No. 31.3.2022 31.03.2023

I.Equity and Liabilities
1. Shareholders Funds
(a) share capital 1 3,00,000 2,50,000
(b) Reserve and surplus 2 1,50,000 1,00,000
2. Non-Current Liabilities
Long-term Borrowings 3 75,000 25,000
3. Current Liabilities
(a) Trade Payables 25,000 50,000
(b) other current liabilities 4 50,000 75,000
Total 6,00,000 5,00,000

II. Assets
1. Non-Current Assets
(a)Property,Plant and Equipment and Intangible 5 4,50,000 2,74,000
Assets
(b) Intangible Assets 6 24,000 26,000
2.current Assets
(a) Investors 76,000 1,00,000
(b)Trade Receivables 20,000 10,000

71
 (c) Cash and Cash Equivalents 30,000 90,000
Total 6,00,000 5,00,000

Notes Of Accounts
Note No. Particulars 31st March,2012(₹) 31st March,2021(₹)
1 share capital
Equity Share Capital 3,00,000 2,50,000

2 Reserve and Surplus

Surplus (Balance in the Statement 1,50,000 1,00,000
of profit and loss)

3 Long-term Borrowings
12% Debentures 75,000 25,00

4 Other Current Liabilities

Outstanding Rent 50,000 75,000

5 Tangible Assets
(a) Land and Building 4,00,000 2,00,000
(b) Furniture 50,000 74,000
4,50,000 2,74,000

6 Intangible Assets Patents 24,000 26,000

Ans:-
Cash Flow Statement of Anuradha Ltd.
For the Year ended 31st March,2022
Particulars (₹) (₹)
A. Cash Flow from Operating activities
Net Profit before Tax 50,000
Adjustments for Non-Cash items:
Add:Items to be added back
Amortisation of Patents 2,000
Depreciation on Furniture(WN1) 24,000
Interest om Debentures(WN2) 3,000 29,000
Operating profit before working
capital charges 79,000
Less:Increase In Current Assets and
Decrease in Current Liabilities -10,000
Trade Receivables -25,000
Outstanding Rent -25,000
Trade Payables
Add:Decrease in Current Assets
Inventories 24,000 -36,000
Net Cash from Operating Activities 43,000

3. Following is the Balance Sheet of K.K. Ltd. as at 31st March, 2015:

Balance Sheet
As at 31st March,2015
31st 31st
Particulars Note no. March,2015 March,2014
I.Equity and Liabilities
(1) Share holders fund

72
 (a) Share Capital 10,00,000 8,00,000
(b)Reserve and Surplus 1 4,00,000 -1,00,000
(2) Non-current Liabilities:
Long-term Borrowings 2 9,00,000 10,00,000
(3) Current Liabilities
(a)Short-term Borrowings 3 3,00,000 1,00,000
(b)Short-term Provisions 4 1,40,000 1,80,000
Total 27,40,000 19,80,000
II. ASSETS:-
(1!)Non-Current Assets:
(a) Property ,Plant and Equipment and Intangible Assets
(i) Property ,Plant and Equipment 5 20,06,000 14,40,000
(ii) Intangible 6 40,000 60,000
(b) Non-Current Investment 2,00,000 1,50,000
(2)Current Assets:
(a)Current Investments
(b) Inventories 1,00,000 1,20,000
(c) Cash and Cash Equivalents 7 2,14,000 90,000
Total 1,80,000 1,20,000

27,40,00 19,80,000

Note to Accounts:
31st
Note No. Particulars 31st March,2012(₹) March,2021(₹)
1 Reserve and Surplus
(Surplus i.e. Balance in Statement of Profit and Loss) 4,00,000 -1,00,000
4,00,000 -1,00,000
2 Long-term Borrowings
12% Debentures 9,00,000 10,00,000
9,00,000 10,00,000
3 Short-term Borrowings
Bank Overdraft 3,00,000 1,00,000
3,00,000 1,00,000
4 Short-term Provisions:
Provision for tax 1,40,000 1,80,000
1,40,000 1,80,000
5 Property,Plant and Equipment
Machinery 24,06,000 16,42,000
Accumulated Depreciation -4,00,000 -2,02,000
20,06,000 14,40,000
6 Intangible Assets:
Goodwill 40,000 60,000
40,000 60,000
7 Inventories:
Stock-in-trade 2,14,000 90,000
2,14,000 90,000

Ans:
Cash Flow Statement of KK Ltd.
For the year ended 31st march,2015 as per As-3

Particulars (₹) (₹)

A.Cash Flow from Operating activities:
Net Profit before Tax and extraordinary items 6,00,000

73
 Add:Non-cash and non-operating charges
Goodwill written off 20,000
Depreciation on machinery 1,98,000
Interest on Debentures 1,20,000
Operating-profit before working capital changes 9,38,000
Less:Increase in Current Assets:
Increase in Inventories -1,24,000
Cash from Operations 8,14,000
Less:Tax paid -1,40,000
Net Cash generated from Operating Activities: (A) 6,74,000
B.Cash Flow from Investing Activities
Purchase of machinery -7,64,000
Purchase on non-current investments 50,000
Net Cash used in investing Activities (B) -8,14,000
C.Cash Flow from Financing Activities
Issue of share capital 2,00,000
Redemption of 12% debentures -1,00,000
Interest on debentures paid -1,20,000
Bank Overdraft raised 2,00,000
Net Cash flow financing activities (C) 1,80,000
Net increase in cash and cash equivalents(A+B+C) 40,000
Add:Cash and Cash Equivalents in the beginning of the year
Current investments 1,20,000
Cash and Cash Equivalents 1,20,000 2,40,000
Cash and Cash Equivalents at the end of the year
Current investments 1,00,000
Cash and Cash Equivalents at the end of the year 1,80,000 2,80,000

4. Cash flow from the operating activities of Pinnacle Ltd. for the year ended 31st March, 2019 was 28,000. The Balance
Sheet along with notes to accounts of Pinnacle Ltd. as at 31st March, 2019 is given below:
Pinnacle Ltd.
Balance sheet
As at 31st March
31st 31st
I. EQUITY AND LIABILITIES: Note no. March,2019(₹) March,2018(₹)
1. Shareholders Funds
(a) Share Capital 9,00,000 5,00,000
(b) Reserves and Surplus 1 90,000 1,10,000
2. Non-Current Liabilities
(a) Long-Term Borrowings 2 3,00,000 2,00,000
3. Current Liabilities
(a) Trade Payables 60,000 80,000
Total 13,50,000 8,90,000
II. ASSETS:
1. Non-Current Assets
(a) Property,Plant and Equipment and Intangible
Assets
(i)Property,Plant and Equipment 3 7,46,000 5,24,000
(ii) Intangible Assets 4 36,000 76,000
2. Current Assets
(a) Current Investments 1,30,000 20,000
(b) Inventories 2,00,000 1,30,000
(c) Cash and Cash Equivalents 2,38,000 1,40,000
Total 13,50,000 8,90,000

74
Notes to Accounts
Note No. Particulars 31st March,2012(₹) 31st March,2021(₹)
1 Reserve and Surplus
Surplus (Balance in the Statement
of profit and loss) 90,000 1,10,000

2 Long-term Borrowings 3,00,000 2,00,000

12% Debentures

3 Property , Plant and Equipment 8,86,000 6,04,000

Plant and Machinery -1,40,000 -80,000
Accumulated Depreciation 7,46,000 5,24,000

4 Intangible Assets:
Goodwill 36,000 36,000
Ans:
Cash Flow Statement of pinnacle Ltd.
For the year ended 31st March,2019

Particulars (₹) (₹)

A.Cash Flow from Investing Activities
(A) 28,000
B.Cash Flow from Investing Activities:
Sale of Fixes Assets 1,02,000
Purchase of Machinery(WN1) -3,95,000
Net Cash used in Investing Activities
(B) -2,93,000
C.Cash Flow from Financing Activities:
Issue of Equity Share Capital 4,00,000
Issue of Long Term Borrowings(9% on Debentures) 1,00,000
Interest on Long-Term Borrowings(9% on Debentures) -27,000
Net Cash from Financing Activities
(C) 4,73,000
D.Net Increase in Cash and Cash Equivalents (A+B+C) 2,08,000
E.Add:Cash and Cash Equivalents in the beginning 1,60,000
Current Investment+Cash and Cash Equivalents
(20,000+1,40,000)
F.Cash and Cash Equivalents at the end (Cash and Cash
Equivalents+
Current Investment) 3,63,000

75
 SAMPLE QUESTION PAPER
SUBJECT: ACCOUNTANCY (055)
CLASS XII - 2023-24
TIME 3 HOURS MAX. MARKS 80

GENERAL INSTRUCTIONS:
1. This question paper contains 34 questions. All questions are compulsory.
2. This question paper is divided into two parts, Part A and B.
3. Part - A is compulsory for all the candidates.
4. Part - B has two options i.e. (i) Analysis of Financial Statements and (ii) Computerised Accounting.
Students must attempt only one of the given options as per the subject opted.
5. Question Nos.1 to 16 and 27 to 30 carries 1 mark each.
6. Questions Nos. 17 to 20, 31and 32 carries 3 marks each.
7. Questions Nos. from 21 ,22 and 33 carries 4 marks each
8. Questions Nos. from 23 to 26 and 34 carries 6 marks each
9. There is no overall choice. However, an internal choice has been provided in 7 questions of one mark, 2
questions of three marks, 1 question of four marks and 2 questions of six marks.

Q. PART A MARKS

No (Accounting for Partnership Firms and Companies)

1. Dinesh and Deepa were in partnership sharing profits and losses in the ratio of 3:1. They admitted 1
Durgesh as a new partner. Durgesh brought Rs. 1,20,000 as his share of goodwill premium, which was
credited to Dinesh and Deepa's capital accounts in the ratio of 2:1. On the date of admission, goodwill of
the firm was valued at Rs. 4,80,000. New profit sharing ratio will be:
(A) 7:2:3 (B) 8:1:3 (C) 9:3:4) (D) 5:1:2
2. Assertion (A):Rent provided to partner for use of his property is shown in Profit and Loss A/c. 1
Reason (R): Salary provided to partner is charge against profits.
(A) (A) is correct but (R) is wrong.
(B) Both (A) and (R) are correct, but (R) is not the correct explanation of (A).
(C) Both (A) and (R) are incorrect.
(D) Both (A) and (R) are correct, and (R) is the correct explanation of (A).
3. A and B are partners. A's Capital is Rs. 1,50,000 and B's Capital is Rs.9 0,000 General Reserve appear in 1
the books at Rs. 60,000. Normal return on Capital is 10%. Value of goodwill calculated on the basis of
three year's purchase of average super profit is Rs. 2,10,000. Average profits will be:
(A) Rs. 1,00,000 (B) Rs. 94,000 (C) Rs. 40,000 (D) Rs. 46,000
OR
On dissolution of a firm, its Balance Sheet revealed total creditors Rs. 50,000; Total Capital Rs.
48,000; Cash Balance Rs. 3,000. Its assets were realised at 12% less. Loss on realisation will be :
(A) Rs. 6,000 (B) Rs. 11,760 (C) Rs. 11,400 (D) Rs. 3,600
4. If Rs. 5,00,000, 9% debentures are issued for cash, Rs. 8,00,000, 8% debentures are issued for 1
consideration other than cash and Rs. 3,00,000, 10% debentures are issued as Collateral Security, amount
charged by the company to Statement of Profit & Loss against the finance cost for one year will be
(A) Rs. 1,39,000 (B) Rs. 1,25,100 (C) Rs. 1,09,000 (D) Rs. 98,100
5. X and Y entered into partnership on 1.4.2021. On 1.1.2022 they admitted Z as a new partner for 1/6th 1
share in the profits which he acquired equally from X and Y. The new profit sharing ratio of X, Y and Z
was 3:2:1. Calculate the profit sharing ratio of X and Y at the time of forming the partnership.
(A) 5:3 (B) 3:5 (C) 5:7 (D) 7:5
OR
Strom and Rain are partners in a firm. They admit Wind on 1st April, 2021, for 1/4 share in the profits of
the firm. Wind acquired her share as 1/12 from Strom and the remaining from Rain.
The sacrificing ratio of the old partners will be:
(A) 11:12 (B) 1:1 (C) 1:2 (D) 1:11
6. Which of the following statements does not relate to 'Reserve Capital"? 1
(A) It is a part of uncalled capital of a company.
(B) It cannot be used during the lifetime of a company.
(C) It can be used for writing off capital losses.

76
 (D) It is a part of subscribed capital.
OR
A company cannot issue:
(A) Redeemable Equity Shares (B) Redeemable Preference Shares
(C) Redeemable Debentures (D) Fully Convertible Debentures
7. Monika, a partner, is paid remuneration of Rs. 15,000 for dissolution work. Realisation expenses 1
amounted to Rs. 5,000 were paid by the firm. Pass Journal Entry,
8 On C's retirement, Machinery appeared in the books of the firm at Rs. 1,80,000 and Furniture at Rs. 1
1,00,000. On revaluation, it was found that Machinery is overvalued by 20%. Net Loss on Revaluation is
calculated at Rs. 40,000. What will be the revalued value of Furniture?
(A) Rs. 24,000 (B) Rs. 790,000 (C) Rs. 30,000 (D) Rs. 50,000
9. Match the following with respect to the treatment of goodwill: 1
(i) Change in Profit Sharing Ratio A. Gaining Partners Capital A/c Dr.
To Retiring Partners Capital A/e
(ii) Admission of a Partner B. Gaining Partners Capital A/c Dr.
To Sacrificing Partners Capital A/c
(iii) Retirement of a Partner C. Premium for Goodwill A/e Dr.
To Sacrificing Partners Capital A/e
(a) (i) (c), (ii) (a), (iii) (b) (b) (i) (a), (ii) (b), (iii) (c)
(c) (i) (b), (ii) (a), (ii) (c) d) (i) (b), (ii) (c), (iii) (a)
10. Tripti and Khushi are partners sharing profits in the ratio of 3:2. Ruchi was manager who 1
received quarterly salary of Rs. 20,000 in addition to commission of 10% on net profits after charging
such commission. Total remuneration to Ruchi amounted to Rs. 1,30,000. What was the profit for the
year before charging salary and commission?
11. The balance in the Investments Fluctuation Reserve after meeting the fall in book value of 1
investments, at the time of admission will be transferred to:
(A) Capital accounts of old partners (B) Revaluation account
(C) Investment Account (D) Capital accounts of all partners
12. P and Q are partners sharing profit or loss in the ratio of 4: 1. P surrenders 1/6 from his share and Q 1
surrenders 1/4 of his share in favour of R, a new partner. What will be the R's share?
(A) 5/12 (B) 11/60 (C) 13/60 (D) 7/12
OR
Ram and Mohan are partners sharing profits and losses in the ratio of 3:2. The firm maintains fluctuating
capital accounts and the balance of the same as on 31st March 2022 is Rs. 6,00,000 and Rs. 6,65,000 for
Ram and Mohan respectively. Drawings during the year were Rs. 85,000 each. As per the partnership
deed, Interest on capital @ 10% pa. on Opening Capital has been allowed to them. Calculate the opening
capital of Ram given that the divisible profits during the year 2021-22 was 2,25,000.
(A) Rs. 5,00,000 (B) Rs. 6,50,000 (C) Rs. 5,50,000 (D) Rs. 6,00,000
13. Following are the factors affecting goodwill except: 1
(A) Nature of Goods. (B) Location of the customers.
(C) Location of Business. (D) Technical know-how,
14. A share of Rs. 100 each, issued at Rs. 20 premium out of which Rs. 70 (including Rs. 10 premium) was 1
called up and paid up. The uncalled capital will be
(A) Rs. 50 per share (B) Rs. 40 per share (C) Rs. 80 per share (D) Rs. 30 per share
15. Authorised capital of a Company is divided into 5,00,000 shares of Rs. 10 each. It issued 3,00,000 shares. 1
Public applied for 3,60,000 shares. However, 3,00,000 shares were allotted on pro-rata basis. Later on,
20,000 shares were forfeited for non-payment of allotment money. Amount of issued capital will be:
(A) Rs. 30,00,000 (B) Rs. 36,00,000 (C) Rs. 50,00,000 (D) Rs. 6,00,000
16. Mohini Ltd. issued 70,000, 6% Debentures of Rs. 10 each at certain rate of premium and to be redeemed 1
at 10% premium. At the time of writing off Loss on Issue of Debentures, Statement of Profit and Loss
was debited with Rs. 28,000. At what rate of premium, these debentures were issued?
(A) 10% (B) 16% (C) 6% (D) 4%
OR
Kavya Ltd. issued 50,000, 8% Debentures of Rs. 10 each at certain rate of discount and were to be
redeemed at 20% premium. Existing balance of Securities Premium before issuing of these debentures
was Rs. 1,25,000 and after writing off Loss on Issue of Debentures, the balance in Securities Premium

77
 was 5,000. At what rate of discount, these debentures were issued?
(A) 5% (B) 1% (C) 2% (D) 4%
17. A, B and C were partners in a firm sharing profits in 3:2:1 ratio. The firm closes its books on 31 st March 3
every year. B died on 12-6-2022 and A and C decided to share future profits in the ratio of 5:4. On B's
death his share in the profits of the firm till the time of his death was to be calculated on the basis of
previous year's profit which was Rs. 6,30,000. Calculate B's share in the profit of the firm. Pass necessary
journal entry for B's share of profit at the time of his death.
18. P and Q were partners in a firm sharing profits in the ratio of 5:3. On 1-4-2014 they admitted R as a new 3
partner for 1/8th share in the profits with a guaranteed profit of Rs. 75,000. The new profit sharing ratio
between P and Q will remain same but they agreed to bear any deficiency on account of guarantee to R in
the ratio of 3:2. The profit of the of the firm for the year ended 31-3-2015 was Rs. 4,00,000.
Prepare Profit and Loss Appropriation Accounts of P, Q and R for the year ended 31-3-2015.
OR
On March 31, 2022 the capital accounts of A, B and C after making adjustments for profits, drawings,
etc. were Rs. 4,00,000, Rs. 3,00,000 and Rs. 2,00,000 respectively. Subsequently, it was discovered that
interest on capital and interest on drawings had been omitted. The partners were entitled to interest on
capital @ 5% p.a. The drawings during the year were: A- Rs. 1,00,000; B- Rs. 75,000; and C- Rs. 45,000.
Interest on drawings chargeable to the partners was A Rs. 2,500; B Rs. 1,800 and C- Rs. 1,000. The net
profit during the year amounted to Rs. 6,00,000. The profit sharing ratio of the partners was 3:2:1.
Record the necessary adjustment entry for rectifying the above errors of omission. Show
your workings.
19. Z Ltd. forfeited 500 shares of Rs. 10 each issued at a premium of 20% to Ankit, who had applied for 600 3
shares, for non-payment of allotment money at Rs. 6 per share (including premium) and the first and final
call of Rs. 2 per share. The amount overpaid on application was adjusted towards allotment. 300 of the
forfeited shares were reissued to Rohit at the maximum discount allowed by law. Pass necessary entries
regarding forfeiture and reissue of shares.
OR
'Nexon Ltd.' is registered with an authorized capital of Rs. 10,00,000, divided into 1,00,000 shares of Rs.
10 each. The company issued 1,00,000 shares for subscriptions to the public at a premium of Rs. 2 per
share. The amount was payable as follows: On Application and Allotment Rs. 3 per share
On 1st Call Rs. 4 per share (including premium Rs. 1)
On 2nd and Final Call Rs. 5 per share (including premium Rs. 1)
Applications were received for 1,40,000 shares and allotment was made pro-rata to all applicants. All
calls were made and were duly received except the 2nd and final call on 1,000 shares held by Raju. His
shares were forfeited and afterwards 800 of the forfeited shares were re-issued at Rs. 8 per share as fully
paid up.
Present 'Share Capital' in the Balance Sheet of the company as per Schedule III Part I of the Companies
Act, 2013. Also prepare Notes to accounts for the same.
20. Preeti and Niti are partners in a firm sharing profits in the ratio of 2:3. On April 1, 2022 they admit Shruti 3
as a new partner and the profit sharing ratio of Preeti, Niti and Shruti is agreed to be 3: 3:2. Shruti
contributed the following assets towards her capital and for her share of goodwill: Stock Rs. 70,000;
Debtors Rs. 1,40,000; Vehicle Rs. 3,00,000 and Computers Rs. 1,20,000. On the date of admission of
Shruti, the goodwill of the firm was valued at Rs. 6,40,000. Record necessary journal entries in the books
of the firm on Shruti's admission.
21. Give the necessary journal entries for the following transactions on dissolution of the firm of Aman and 4
Rajat on 31st March, 2016, after the transfer of various assets (other than cash) and third party liabilities
to Realisation Account. They shared profits and losses in the ratio of 2:1.
a) There was a bill of exchange of Rs. 10,000 under discount. The bill was received from Derek
who became insolvent.
b) Creditors of Rs. 30,000 took over stock of Rs. 10,000 at 10% discount and the balance was paid
to them in cash.
c) There was an old typewriter which had been written off completely. It was estimated to realize
Rs. 600. It was taken away by Rajat at 25% less than the estimated price.
d) Aman agreed to take over the responsibility of completing the dissolution at an agreed
remuneration of Rs. 1,000 and to bear all realisation expenses. Actual realisation expenses Rs.

78
 800 were paid by the firm.
22. Kochi Fabrics Ltd. was registered with a nominal capital of Rs. 1,00,000 in shares of Rs. 10 each, 9,000 4
of which were issued payable as: Rs. 1 on application, Rs. 2 on allotment, Rs. 3 on the first call and the
balance on the final call. All the shares were applied for and allotted and all the cash was received on the
due dates except that one shareholder holding 100 shares failed to pay the allotment money and another
shareholder holding 200 shares paid the first and the final call together with the allotment money.
You are required to journalize the above transactions in the books of the company up to allotment
through the Calls-in-Arrear Account and Calls-in-Advance Account as and when necessary.
23. Manvet Ltd. invited applications for issuing 10,00,000 equity shares of Rs. 10 each payable as follows: 6
On Application and Allotment Rs. 4 per share (including premium Rs. 1)
On first call Rs. 4 per share On second and final call Rs. 3 per share.
Applications for 15,00,000 shares were received and pro-rata allotment was made to all the applicants.
Excess application money was adjusted on the sums due on calls. A shareholder who had applied for
6,000 shares did not pay the first call, and the second and final call. His shares were forfeited. 90% of the
forfeited shares were re-issued at Rs. 8 per share fully paid up.
Pass necessary journal entries for the above transaction in the books of the company.
OR
a) Ravi Ltd. forfeited 800 shares of Rs. 10 each, Rs. 7.50 paid, for non-payment of Final Call of Rs.
2.50 per share. Out of these, 600 shares were re-issued as fully paid up in such a way that Rs.
2100 were transferred to capital reserve. Pass necessary journal entries.
b) X Ltd. forfeited 800 shares of Rs. 10 each, Rs. 7.50 called up, for non-payment of First Call of
Rs. 2.50 per share. Out of these, 600 shares were re-issued for Rs. 6 per share as Rs. 7.50 paid up.
Pass necessary journal entries.
24. A, B and C are partners sharing profits and losses in the ratio of 2:2: 1. Their balance sheet as at 31st 6
March, 2022 was as follows:
Liabilities Rs. Assets Rs.
Creditors 1,50,000 Cash 18,000
Outstanding Expenses 8000 Debtors 1,00,000
Reserves 60,000 Less: Provision for
Workmen's Compensation doubtful debts 5,000 95,000
Reserve 25,000 Stock 140,000
Capital Accounts: Plant 150,000
A 4,00,000 Building 6,00,000
B 3,00,000 Advertisement Suspense A/c 40,000
C 1,00,000 8,00,000
10,43,000 10,43,000
The partners agreed that from 1st April, 2022 they will share profits and losses equally.
They agreed that:
i. Stock is to be valued at 90%.
ii. Provision for doubtful debts to be increased to 6% of debtors.
iii. Outstanding Expenses are to be increased by Rs. 12,000.
iv. Building is to be valued at Rs. 7,00,000.
v. Goodwill is valued at Rs. 1,20,000.
vi. Claim for Workmen Compensation is Rs. 40,000.
Partners decided to record the altered values of assets and liabilities in the books. However, they want to
leave the reserves undisturbed. You are required record necessary journal entries & prepare Partner's
capital accounts.
OR
X, Y and Z are sharing profits in the ratio of 1/2:1/3 and 1/6. Following is their balance sheet as at 31st
March, 2022:
Liabilities Rs. Assets Rs.
Sundry Credinors 1.10,000 Machinery 3,00,000
Capital Accounts: Patents Stock 40,000
X 3,20,000 Debtors 1,20,000
X 2,00,000 Less: Provision for
Z 1,70,000 6,90,000 Doubtful Debts 10,000 1,10,000

79
 Cash at Bank 40,000
Profit & Loss Account 30,000
8,00,000 8,00,000
Y' retires and X and Z decide to share future profits in the ratio of 2:1. It was agreed that:
i. Value of patents is to be reduced by 40% and that of machinery to 90%.
ii. The Provision for Doubtful Debts to be maintained @5% on Debtors.
iii. Rent Outstanding was Rs. 15,000.
iv. A liability for claim, included in creditors for Rs. 20,000 is settled at Rs. 15,000.
v. Accrued income of Rs. 10,000 is to be recorded in the books.
vi. Goodwill of the firm is valued at Rs. 1,20,000.
Prepare Revaluation Account & Partner's Capital Accounts.
25. The following is the Balance Sheet of Punita, Rashi and Seema who are sharing profits in the ratio 2:1:2 6
as on 31at March 2018:
Liabilities Rs. Assets Rs.

Creditors 38,000 Building 2,40,000

Bills Payable 2,000 Stock 65,000
Capitals: Debtors 30,000
Punita 1,44,000 Cash at Bank 5,000
Rashi 92,000 Profit and Loss A/c 60,000
Seema 1,24,000 3,60,000

4,00,000 4,00,000

Punita died on 30th September 2018. She had withdrawn Rs. 44,000 from her capital on July1, 2018.
According to partnership agreement, she was entitled to interest on capital @ 8% p. a. Her share of
profits till the date of death was to be calculated on the basis of average profit of last three years.
Goodwill was to be calculated on the basis of three times of average profits of last four years. The profits
for the year ended 2014-15, 2015-16 and 2016-17 were Rs. 30,000, Rs. 70,000 and Rs. 80,000
respectively.
Prepare Punita‘s account to be rendered to her executors.
26. Ram and Rahim Ltd. had share capital of Rs. 80,00,000 divided in shares of Rs. 100 each and 20,000, 8% 6
Debentures of Rs. 100 each as part of capital employed. The company need additional funds of Rs.
55,00,000 for which they decided to issue debentures in such a way that they got required funds after
issuing debentures of the same class as earlier, at 10% premium. These debentures were to be redeemed
at 20% premium after 4 years. These debentures were issued on 01 October, 2021.
You are required to
a) Pass entries for issue of Debentures.
b) Prepare Loss on Issue of Debentures Account assuming there was existing balance of Securities
Premium Account of Rs. 2,80,000.
Pass entries for Interest on debentures on March 31, 2022 assuming interest is payable on 30 September
and 31 March every year.
(Part B)
Financial Statement Analysis
27 On the basis of following data, the proprietary ratio of a Company will be: Equity Share Capital Rs. 1
3,00,000; Debentures Rs. 90,000; Current Liabilities Rs. 30,000; Statement of Profit & Loss Debit
Balance Rs. 20,000.
(A) 75% (B) 80% (C) 70% (D) 82%
28. Opening Inventory Rs. 2,00,000; Closing Inventory Rs. 2,40,000, Purchases Rs. 42,00,000, Wages Rs. 1
5,20,000, Carriage Inwards Rs. 60,000; Selling Exp. Rs. 1,20,000; Revenue from Operations Rs.
60,00,000, Gross Profit Ratio will be:
(A) 26% (B) 29% (C) 21% (D) 19%
OR

80
 Which of the following is not a limitation of financial statements analysis:
(A) Affected by Window Dressing (B) Ignores Quantitative aspects
(C) Do not Reflect Price Level Changes (D) Ignores Qualitative aspects
29. Quick Ratio of a company is 0.75: 1. State giving reason whether sale of goods costing Rs. 1,50,000 for 1
Rs. 1,40,000 would improve, reduce or not alter the quick ratio.
30. If a machine whose original cost is Rs. 40,000 having accumulated depreciation Rs. 12,000, were sold for 1
Rs. 34,000 then while preparing cash flow statements its effect on cash flow will be:
(A) Cash Flow from Financing Activities Rs. 34,000
(B) Cash Flow from Financing Activities Rs. 6,000
(C) Cash Flow from Investing Activities Rs. 34,000
(D) Cash Flow from Investing Activities Rs. 6,000
OR
Which of the following transactions would not create a cash flow?
(A) A company purchased some of its own stock from a stockholder
(B) Sale of equipment at book value (C) Payment of a Cash Dividend
(D) Depreciation charged on Machinery
31. From the given information, calculate the inventory turnover ratio: Revenue from Operations: Rs. 3
6,00,000, GP: 20% on cost; Opening Inventory was 2/3rd of the value of Closing Inventory. Closing
Inventory was 25% of Revenue from Operations.
32. Under which head will you show the following items in the Balance Sheet of a Company: 3
i. Calls in Arrear ii. Raw Materials
iii. Calls in Advance iv. Unpaid Dividends
v. Trade Marks Vi Computer and Related Equipments
33. Calculate (i) Debs-Equity Ratio and (ii) Proprietory Ratio from the following data: 4
Equity Share Capital Rs.15,00,000 Current Liabilities Rs. 4.00,000
General Reserve Rs.10,00,000 Goodwill Rs.5,00,000
Profit & Loss Balance Rs. (1,00,000) Other Non Current Assets Rs.22,00,000
10% Debentures Rs.10,00,000 Current Assets Rs.18,00,000
Loan from IDBI Rs.7,00,000 Fictitious Assets Rs.2,75,000
OR
The Gross Profit Ratio of a Company is 30%. State giving reason, which of the following
transactions will (a) increase, (b) decrease or (c) not change the Gross Profit Ratio:
(1) Purchase of goods Rs. 50,000.
(ii) Goods costing Rs. 20,000 withdrawn for personal use.
(ii) Goods costing Rs. 25,000 distributed as free samples.
(iv) Goods costing Rs. 54,000 sold for Rs. 90,000.
34. Read the following hypothetical text and answer the given questions on the basis of the same: 6
XYZ company started to provide finance training in online and offline mode in 2019. The main objective
was to improve financial literacy in India. It has acquired funding through equity and borrowing from
banks. Balance sheets for year ending 31st March 2021 and 2022 are as follows:
Particulars Note. 31st March, 31st March,
No. 2021(Rs.) 2022 (Rs.)
I. EQUITY AND LIABILITIES
1. Shareholders' Funds:
(a) Share Capital 2,00,000 2,50,000
(b) Reserves and Surplus 50,000 70,000
2. Non-Current Liabilities:
Long-term Borrowings 1,00,000 80,000
3. Current Liabilities:
(a) Trade Payables 60,000 1,60,000
(b) Other Current Liabilities 25,000 20,000
Total 4,35,000 5,80,000
II. ASSETS
1. Non-Current Assets:
(a) Property, Plant and Equipments and

81
 Intangible Assets
(i) Property, Plant and Equipments:
Tangible Assets 1,50,000 2,00,000
(ii) Intangible Assets 10,000 2,000
(b) Long-term Loans and Advances 1,00,000 1,30,000
2. Current Assets:
(a) Inventories 70,000 90,000
(b) Trade Receivables 40,000 60,000
(c) Cash and Cash Equivalents 65,000 98,000
Total 4,35,000 5,80,000

Notes to Accounts:
Particulars 31st March, 31st March,
2021(Rs.) 2022 (Rs.)
1. Reserves and Surplus
General Reserve 50,000 70,000
2. Long-term Borrowings
12% Debentures 1,00,000 80,000
3. Trade Payables 40,000 60,000
Creditors 20,000 1,00,000
Bills Payable 60,000 1,60,000
4. Other Current Liabilities
Outstanding Expenses 25,000 20,000
5. Property, Plant and Equipments
Machinery 2,00,000 2,60,000
Less: Provision for Depreciation (50,000) (60,000)
1,50,000 2,00,000
6. Intangible Fixed Assets
Goodwill 10,000 2,000
Additional Information:
a) During the year a piece of machinery with a book value of Rs. 30,000; provision for depreciation
on it Rs. 10,000 was sold at a loss of 50% on book value.
b) Debentures were redeemed on 31st March 2022.
You are required to calculate
i. Operating profit before working capital changes
ii. Cash flow from operating activities
iii. Cash flow from investing activities
iv. Cash flow from financing activities
Closing cash and cash equivalents

82
 Marking Scheme
1. (A) 7:2:3 2. (A) (A) is correct but (R) is wrong. 3.(A) Rs.1,00,000 OR (C) Rs. 11,400

4. (C) Rs. 1,09,000 5. (D) 7:5 OR (C) 1:2

6. (C) It can be used for writing off capital losses. OR (A) Redeemable Equity Shares

7. Date Particulars L.F. Amount Amount

Realisation A/c Dr. 20,000
To Monika‘s Capital A/c 15,000
To Bank A/c 5,000
8. (B) Rs. 90,000

9. (D) (i) (b), (ii) (c), (iii) (a)

10. Rs.
Total Remuneration to Ruchi 1,30,000
Less: Salary (Rs. 20,000x4) 80,000
Commission 50,000
Net profit for the year before commission =50,000x110/10= Rs. 5,50,000
Profit before charging salary and commission = 5,50,000+80,000= Rs. 6,30,000
11. (A) Capital Accounts of Old Partners.

12. (C) 13/60 OR (A) Rs. 5,00,000

13. (B) Location of customers.

14. (B) Rs. 40 per share.

15. (A) Rs. 30,00,000.

16. (C) 6% OR (D) 4%

17. (i) Number of days from March 31 to June 12 = 73.

B‘s share of profit = 6,30,000x 73/365x2/6= Rs. 42,000
(ii) Gaining Ratio = New Ratio – Old Ratio
A: 5/9 – 3/6 = 10-9/18 = 1/18
B: 4/9 – 1/6 = 8-3/18 = 5/18
Gaining Ratio = 1/18: 5/18 or 1:5
Date Particulars L.F. Amount Amount
A‘s Capital A/c Dr. 7,000
C‘s Capital A/c Dr. 35,000
To B‘s Capital A/c 42,000
(B‘s share of profit up to the date of death
adjusted to remaining partner‘s capital in their
gaining ratio)
18. PROFIT AND LOSS APPROPRIATION ACCOUNT
For the year ended31st March,2015
Particulars Rs. Particulars Rs.

83
 To Transfer of profit: By Profit & Loss A/c
P‘s Capital A/c 2,18,750 (Net Profit) 4,00,000
Less: Deficiency 15,000 2,03,750
Q‘s Capital A/c 1,31,000
Less: Deficiency 10,000 1,21,250
R‘s Capital A/c 50,000
Add: From P 15,000
From Q 10,000 75,000

4,00,000 4,00,000
Working Note: Rs.
Profit of the firm 4,00,000
R‘s share of profit = 4,00,000x1/8 50,000
Balance to be divided between P&Q
P‘s share of Profit = Rs. 3,50,000 x 5/8 = Rs. 2,18,750
Q‘s share of profit = Rs.3,50,000 x 3/8 = Rs. 1,31,250
R‘s deficiency = Rs. 75,000 – Rs. 50,000 = Rs. 25,000
P‘s contribution to R‘s deficiency = 25,000 x 3/5 = Rs. 15,000
Q‘s contribution to R‘s deficiency = 25,000 x 2/5 = Rs. 10,000
OR
Particulars A B C
Capitals as on 31.03.2022 4,00,000 3,00,000 2,00,000
Less: Share of Profit (which has already added)
6,00,000 shared in the ratio of 3:2:1 3,00,000 2,00,000 1,00,000
1,00,000 1,00,000 1,00,000
Add: Drawings (which were previously
deducted) 1,00,000 75,000 45,000
2,00,000 1,75,000 1,45,000
Interest on Capital:
A 5% on Rs. 2,00,000 = Rs. 10,000
B 5% on Rs. 1,75,000 = Rs. 8,750
C 5% on Rs. 1,45,000 = Rs. 7,250
ADJUSTMENT TABLE
Particulars A B C Total
Interest on Opening Capitals 10,000 8,750 7,250 26,000
Less: Interest on Drawing (-)2,500 (-)1,800 (-)1,000 (-) 5,300
Balance (Cr.) 7,500 6,950 6,250 20,700
Division of firm‘s loss in ratio 3:2:1 (-) 10,350 (-) 6,900 (-)3,450
(Dr) 2,850 (Cr.) 50 (Cr)2,800
Adjustment Entry:
Date Particulars L.F. Amount Amount
2020 A‘s Capital A/c Dr. 2,850
April,1 To B‘s Capital A/c 50
To C‘s Capital A/c 2,800
(Adjustment on interest on capital and drawing)
19. Date Particulars L.F. Amount Amount
Share Capital A/c Dr. 5,000
Securities Premium A/c Dr. 1,000
To Share Allotment A/c 2,600
To Share First & Final Call A/c 1,000
To Share Forfeiture A/c 2,400
(Forfeiture of 500 shares)

84
 Bank A/c Dr. 1,560
Share Forfeiture A/c Dr. 1,440
To Share Capital A/c 3,000
(Reissue of 300 shares)
Working Note:
(1) Excess application money received:
600 shares – 500 shares = 100 shares x Rs. 4 = Rs. 400
Rs.
Amount due on Allotment = 500 shares x Rs. 6 = 3,000
Less: Excess received on Application 400
Allotment money not received = 2,600
(2) Amount forfeited on 500 shares = Rs. 2,400
Discount on reissue = 2,400/500x300= 1,440
Reissue amount = Rs. 3,000 – Rs. 1,440= Rs. 1,560
OR Nexon Ltd. Balance Sheet as at
Particulars Note. Current Previous
No. Year Year
EQUITY AND LIABILITIES:
Shareholder’s Funds:
(i) Share Capital 1 9,99,200
Notes to Account:
Particulars Rs.
1 Share Capital:
Authorised Capital: 1,00,000 Equity shares of Rs. 10 each 10,00,000
Issued Capital: 1,00,000 Equity Shares of Rs. 10 each 10,00,000
Subscribed & Fully Paid Capital:
99,800 Equity Share of Rs. 10 each 9,98,000
Share forfeiture A/c (200 shares x Rs. 6) 1,200
9,99,200
20. Date Particulars L.F. Amount Amount
2022 Stock A/c Dr. 70,000
April,1 Debtors A/c Dr. 1,40,000
Vehicle A/c Dr. 3,00,000
Office Equipment (Computers) A/c Dr. 1,20,000
To Shruti‘s Capital A/c 4,70,000
To Premium for Goodwill A/c 1,60,000
( Assets contributed by Shruti for her capital and
share of goodwill premium)
1,60,000
Premium for Goodwill A/c Dr.
16,000
To Preeti‘s Capital A/c
1,44,000
To Neeti‘s Capital A/c
(Premium for Goodwill distributed)
21. Date Particulars L.F. Amount Amount
Realisation A/c Dr. 10,000
To Bank A/c 10,000
Realisation A/c Dr.
To Bank A/c
Rajat‘s Capital A/c Dr. 450
To Realisation A/c 450
Realisation A/c Dr. 1,000
To Bank A/c 800
To Aman‘s Capital A/c 200
22. In the Books of Kochi Fabrics Ltd.
JOURNAL

85
 Date Particulars L.F. Amount Amount
Bank A/c (9,000x Rs.1) Dr. 9,000
To Share Application A/c 9,000
(Application money received)
Share Application A/c Dr. 9,000
To Share Capital A/c 9,000
(Application money transferred to share capital
account)
18,000
Share Allotment A/c Dr. 18,000
To Share Capital A/c
(Allotment money due)
Bank A/c Dr. 19,200
Calls in Arrear A/c Dr. 200 18,000
To Share Allotment A/c 1,400
To Calls in Advance A/c
(Allotment money received and calls in advance
received ,allotment money due in arrear
transferred to calls in arrear account)

23. Date Particulars L.F. Amount Amount

(i) Bank A/c Dr. 60,00,000
To Eq. Share Application & Allotment 60,00,000
(ii) Eq. Share Application &Allotment A/c Dr. 60,00,000
To Eq. Share Capital 30,00,000
To Securities Premium Reserve 10,00,000
To Calls in Advance 20,00,000
(iii) 40,00,000
Eq. Share First Call A/c Dr. 40,00,000
(iv) To Eq. Share Capital 19,92,000
Bank A/c Dr. 20,00,000
Calls in Advance A/c Dr. 39,92,000
(v) To Eq. Share First Call 30,00,000
Eq. Share 2nd & Final call A/c Dr. 30,00,000
(vi) To Eq. Share Capital 29,88,000
Bank A/c Dr. 29,88,000
(vii) To Eq. Share 2nd & Final Call A/c 40,000
Equity Share Capital A/c Dr. 20,000
To Calls in Arrear A/c 20,000
To Forfeited Shares 28,800
(viii) Bank A/c Dr. 7,200
Forfeited Shares A/c Dr. 36,000
To Equity Share Capital A/c 10,800
(ix) Forfeited shares A/c Dr. 10,800
To Capital Reserve

Working Note:
(A) Applicant for 6,000 shares have been allotted 10,00,000/15,00,000x6,000
= 4,000 shares
Excess amount receive from him on application
= 2,000 shares x Rs.4
= Rs. 8,000
(B) Amount due from him on First Call = 16,000
Less: Excess received on Application = 8,000
Amount not paid on First Call 8,000

86
 (C) Total amount due on First Call: = 40,00,000
Less: Excess application money = 20,00,000
20,00,000
Less: Not received on First Call = 8,000
Net amount received on First Call = 19,92,000

(2) Amount transferred to Capital Reserve:

Forfeited amount on 4,000 shares = 20,000
Forfeited amount on 36,00 shares = 18,000 (20,000x3,600/4,000)
Less: Loss on re-issue 7,200
Transferred to Capital Reserve = 10,800
OR
(A) JOURNAL
Date Particulars L.F. Amount Amount
Share Capital A/c Dr. 8,000
To Share Final Call A/c 2,000
To Share Forfeiture A/c 6,000
(Forfeiture of Share)
Bank A/c Dr. 3,600
Share Forfeiture A/c Dr. 2,400
To Share Capital A/c 6,000
(Re-issue of 600 share as fully paid up)
2,100
Share Forfeiture A/c Dr. 2,100
To Capital Reserve A/c
(Profit on 600 re-issued shares transferred to
Capital Reserve)
Note(1):
Forfeited amount on 800 shares = Rs. 6,000
Forfeited amount on 600 shares = 6,000/800 x 600 = Rs. 4,500
Less: Transferred to Capital Reserve = Rs. 2,100
Loss on Re-issue 2,400

Per share loss on re-issue = 2,400/600 = Rs. 4 per share

Hence, Shares are re-issued at Rs. 10 – Rs. 4 = Rs. 6 per share.
(B) JOURNAL
Date Particulars L.F. Amount Amount
Share Capital A/c Dr. 6,000
To Share First Call A/c 2,000
To Share Forfeiture A/c 4,000
(Forfeiture of 800 shares)
Bank A/c Dr. 3,600
Share Forfeiture A/c Dr. 900
To Share Capital A/c 4,500
(Re-issue of share)
2,100
Share Forfeiture A/c Dr. 2,100
To Capital Reserve A/c
( Profit on re-issue transferred to Capital Reserve)

Note (2):
Forfeited amount on 800 shares = Rs. 8,000
Forfeited amount on 600 shares = Rs. 4,000 x 600/800 = 3,000
Less: Loss on re-issue of 600 shares = 900
2,100
24. Date Particulars L.F. Amount Amount

87
 Revaluation A/c Dr. 27,000
To Stock A/c 14,000
To Provision for Doubtful Debts A/c 1,000
To Outstanding Exp. A/c 12,000
(Decrease in value of assets & increase in
outstanding expenses)
1,00,000
Building A/c Dr. 1,00,000
To Revaluation A/c
(Increase in value of Building) 25,000
Workmen Compensation Reserve A/c Dr. 15,000
Revaluation A/c Dr. 40,000
To Provision for WCC A/c
(Shortfall in provision for claim charged to
revaluation A/c) 58,000
23,200
Revaluation A/c Dr.
23,200
To A‘s Capital A/c
11,600
To B‘s Capital A/c
To C‘s Capital A/c
16,000
(Profit distribution on revaluation)
16,000
A‘s Capital A/c Dr. 8,000
B‘s Capital A/c Dr. 40,000
C‘s Capital A/c Dr.
To Advertisement Suspense A/c
(Advertisement suspense written off) 24,000
12,000
C‘s Capital A/c Dr.
12,000
To A‘s Capital A/c
To B‘s Capital A/c
(Adjustment of reserve and goodwill on change
in profit sharing ratio)
CAPITAL ACCOUNTS
Particulars A B C Particulars A B C
To By Balance
Advertise- 16,000 16,000 8,000 b/d 4,00,000 3,00,000 1,00,000
Ment 12,000 By 23,200 23,200 11,600
suspense 12,000 Revaluation 12,000 12,000 ------
To A‘s 4,19,200 3,19,200 79,600 By C‘s
Capital 4,35,200 3,35,200 1,11,600 Capital 4,35,200 3,35,200 1,11,600
To B‘s
Capital
To Balance
c/d

Working Note: (1) REVALUATION A/C

Particulars Rs. Particulars Rs.
To Stock 14,000 By Building 1,00,000
To Provision for DD 1,000
To Outstanding Exp. 12,000
To Provision for WCC 15,000
To Profit transferred:
A‘s Capital 23,200
B‘s Capital 23,200
C‘s Capital 11,600 58,000

88
 1,00,000 1,00,000
(2) Value of Goodwill Rs. 1,20,000
Reserves Rs. 60,000

Old Ratio of A, B and C 2:2:1

New Ratio of A,B and C 1:1:1
Sacrifice or Gain
A: 2/5-1/3= 6-5/15= 1/15 (Sacrifice)
B: 2/5-1/3= 6-5/15= 1/15 (Sacrifice)
C: 1/5-1/3= 3-5/15= 2/15 (Gain)
OR
REVALUATION A/C
Particulars Rs. Particulars Rs.
To Patents A/c 16,000 By Prov. for Bad Debts 4,000
To Machinery A/c 30,000 By Sundry Creditors A/c 5,000
To Rent Outstanding A/c 15,000 By Accrued Income A/c 10,000
By Loss transferred to:
X‘s Capital 21,000
Y‘s Capital 14,000
Z‘s Capital 7,000 42,000

61,000 61,000
PARTNER‘S CAPITAL ACCOUNT
Particulars A B C Particulars A B C
To P&L A/c 5,000 By Balance 1,70,000
To 15,000 10,000 b/d 3,20,000 2,00,000
Revaluation 7,000 By X‘s
(loss) 20,000 Capital 20,000
To Y‘s 21,000 14,000 By Z‘s
Capital 1,38,000 Capital 20,000
To Y‘s Loan 20,000
To Balance 2,16,000
c/d
2,64,000
1,70,000 1,70,000
3,20,000 2,40,000 3,20,000 2,40,000
Working Note:
Y‘s share of Goodwill = 1,20,000x 1/3 = Rs. 40,000
X Gains = 2/3-1/2 = 4-3/6 = 1/6
Z Gains = 1/3-1/6 = 2-1/6 = 1/6
Gaining Ratio = 1/6:1/6 = 1:1
Hence, X‘s Capital A/c and Z‘s Capital A/c will be debited by Rs. 20,000 each.
25. PUNITA‘S CAPITAL ACCOUNT
Particulars Rs. Particulars Rs.
To Bank (Drawings) 44,000 By Balance b/d 1,44,000
To P&L A/c (60,000x2/5) 24,000 By Interest on Capital 4,880
To Punita‘s Executor‘s A/c 1,22,880 By P&L Suspense A/c 6,000
By Rashi‘s Capital (Goodwill) 12,000
By Seema‘s Capital (Goodwill) 24,000
1,90,880 1,90,880
Working Note:
(i) Interest on Capital:
On Rs. 1,44,000 for 3 months = 1,44,000x8/100x3/12 = 2,880
On Rs. 1,00,000 for 3 months = 1,00,000x8/100x3/12 = 2,000
4,880

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 (ii) Share of profit till the date of death:

Profit 2010-11 70,000

Profit 2011-12 80,000
Loss 2012-13 (60,000)
90,000
Average Profit = 90,000/3 = 30,000
Profit for six months(till September 30,2013)= 30,000/2 = 15,000
Punita‘s share of profit = 15,000x2/5= Rs. 6,000
(iii) Goodwill :
Average Profit = 1,20,000/4 = 30,000
Total Goodwill = 30,000x3 = 90,000
Punita‘s share of goodwill= 90,000x2/5= 36,000

Rs. 36,000 will be borne by Rashi and Seema in their profit sharing ratio.
26. (a) Journal Entries Books of Health2Wealth Ltd.
Date Particulars L.F Debit Credit
(Rs.) (Rs.)
i) Bank A/c Dr. 55,00,000
To Debenture Application & Allotment A/c 55,00,000
(Aplication money received)
ii) Debenture Application and Allotment A/c Dr. 55,00,000
Loss on issue of Debentures A/c Dr. 10,00,000
To 8% Debentures A/c 50,00,000
To Securities Premium Reserve A/c 5,00,000
To Premium on Redemption of Debentures 10,00,000
(Debentures issued at Premium , to be redeemed at
Premium)
(b)
Dr. Loss on Issue of Debentures A/c Cr.
Date Particulars Rs. Date Particulars Rs.
2021, To Premium on 2022, By Securities Premium
1 Oct Redemption of 10,00,000 31 A/c 7,80,000
Debenture March By Statement of Profit &
Loss 2,20,000
10,00,000 10,00,000
(c) Journal Entries
Date Particulars L.F Debit Credit
(Rs.) (Rs.)
31 Debenture Interest A/c Dr. 2,00,000
March, To Debenture holders A/c 2,00,000
2022 (Interest due on Debentures)
31 Debenture holders A/c Dr. 2,00,000
March, To Bank A/c 2,00,000
2022 (Interest paid to Debentures)
31 Statement of Profit and Loss A/c Dr. 2,00,000
March, To Debenture Interest A/c 2,00,000
2022 (interest on Debentures charged to Statement of
Profit & Loss)
Part: B
Financial Statement Analysis
27. (C) 70% 28. (C) 21% OR (B) Ignores Quantitative aspects.

29. Quick ratio will increase because current liabilities remain unchanged where as liquid assets are
increased.

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30. (C) Cash Flow from Investing Activity Rs. 34,000 OR (D)

31. Selling Price = 100+20= Rs. 120

Cost of Revenue from Operations= 100/120x 6,00,000 = 5,00,000
Closing Inventory = 25/100x 6,00,000= Rs. 1,50,000
Opening Inventory = 2/3x 1,50,000 = Rs. 1,00,000
Average Inventory = Opening Inventory + Closing Inventory /2
= 1,00,000 + 1,50,000/2 = Rs. 1,25,000
Inventory Turnover Ratio = Cost of Revenue from Operations/ Average Inventory
= 5,00,000/1,25,000= 4 Times.
32. Items Major Head Sub-heading (if any)
(i) Calls in Arrears Shareholder‘s Fund Deducted from Subscribed but not
fully paid capital
(ii) Calls in Advance Current Liabilities Other Current Liabilities
(iii) Trade Marks Non-Current Asset Intangible Assets
(iv) Raw Material Current Assets Inventory
(v) Unpaid Dividend Current Liabilities Other Current Liabilities
(vi) Computer & Related Non-Current Plant and Equipment and Intangible
Equipments Assets Assets
33. (i) Debt-Equity Ratio = Debt/Equity = Long term Debts/Shareholder‘s Fund
Long term Debts = 10% Debentures + Loan from IDBI
= Rs. 10,00,000 + 7,00,000
= Rs. 17,00,000
Shareholder‘s Fund = Equity Share Capital + General Reserve – P&L Balance (Loss) –
Fictitious Assets
= 15,00,000 + 10,00,000 – 1,00,000 – 2,75,000
= Rs. 21,25,000
Debt-Equity Ratio = 17,00,000/21,25,000 = 0.8 : 1
(ii) Proprietary Ratio = Equity/Total Assets
Total Assets = Goodwill + Other Non-Current Assets + Current Assets
= 5,00,000 + 22,00,000 + 18,00,000
= Rs. 45,00,000
Proprietary Ratio = 21,25,000/45,00,000 = 0.472 or 47.2%
OR
Effect on G.P Reason
Ratio
(i) No Change There will be equal increase in Purchases & Closing Inventory &
hence cost of Revenue from Operation remains unchanged.
(ii) No Change There will be equal decrease in Purchase & Closing Inventory &
hence Cost of Revenue from Operations remain unchanged.
(iii) No Change There will be equal decrease in Purchase & Closing Inventory &
hence Cost of Revenue from Operations remain unchanged.
(iv) Incease Gross Profit = 90,000 – 54,000
= 36,000
G.P Ratio = 36,000/90,000 x 100 = 40%
Since the existing G.P. Ratio of the company is 30%, it will
increase.

34. (i) Profit before tax and Extraordinary items 20,000

Add: Loss on Sale of Machinery 15,000
Depreciation Charged on Machinery 20,000
Goodwill amortized 8,000
Interest on Debentures 12,000
Operating Profit before working capital changes 75,000
(ii) Operating profit before changes in working capital changes 75,000
Add: Increase in creditors 20,000

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 Increase in Bills Payable 80,000
Less: Decrease in outstanding expenses (5,000)
Increase in inventories (20,000)
Increase in trade receivables (20,000)
Cash Flow from Operating Activities (Inflow) 1,30,000
(iii) Sale of Machinery 15,000
Less: Purchase of Machinery (1,00,000)
Loans advanced (30,000)
Cash flow from Investing Activities (Outflow) (1,15,000)
(iv) Issue of shares 50,000
Less: Debentures Redeemed (20,000)
Interest on Debentures (12,000)
Cash flow from Financing Activities (Inflow) 18,000
(v) Net Cash inflow during the year (1,30,000 - 1,15,000+ 18,000) 33,000
Add: Opening Cash and cash equivalents 65,000
Closing Cash and Cash equivalents 98,000
Working Notes:
Dr. Property Plant and Equipments (Machinery) A/c Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 2,00,000 By Bank A/c 15,000
To Bank A/c (Balancing figure) 1,00,000 By Profit & Loss A/c 15,000
By Provision for Depreciation
A/c 10,000
By Balance c/d 2,60,000
3,00,000 3,00,000
Dr. Provision for Depreciation A/c Cr.
Particulars Rs. Particulars Rs.
To Machinery A/c 10,000 By Balance b/d 50,000
To Balance c/d 60,000 By Depreciation A/c
( Balancing Fig.) 20,000
70,000 70,000

Kendriya Vidyalaya Sangathan

PATNA REGION
Sample paper - 2
CLASS 12 – ACCOUNTANCY
Time Allowed :180 mins Maximum Marks :80

Part A:- Accounting for Partnership Firms and Companies

1.The incoming partner cannot acquire his share of profits:

a) From one or more partners (not from all partners)
b) From the old partners in their old profit sharing ratio
c) From the old partners in their new profit sharing ratio
d) From the old partners in some agreed ratio

2. Assertion (A): Commission payable to the partner on Sales ORon the net profit of the firm, will be shown in Profit and
Loss Appropriation Account.
Reason (R): All appropriations are shown in the Profit and Loss Appropriation Account
a) Both A and R are true and R is the correct explanation of A.
b) Both A and R are true but R is not the correct explanation of A.
c) A is true but R is false.
d) A is false but R is true.

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3. Rohan Ltd. forfeited 4,000 shares of 10 each, 7 called up, issued at a premium of 20% (to be paid at the time of
allotment) for non - payment of first call of 2 per share. Out of these, 3,000 shares were re - issued as 7 paid up, for
5 per share. Amount transferred to Capital Reserve Account will be:
a) 9,000 b) Nil c)18,000 d) 15,000
OR
When the debenture of face value 100 is issued at 100 is called, issue of debenture at:
a) Par b) None of these c) Discount d) Premium
4. X, Y and Z are sharing profits in the ratio of 50%,40% and 10% respectively. Now, they have decided to share future
profits equally. Identify the gainer partner.
a) Y is gainer b) Both X and Y are gainer c) Z is gainer d) X is gainer
OR
When guarantee is given to partner by some partners, deficiency on such guarantee is borne by
a) None of the partners b) Partner who gave the guarantee
c) All of the other partners d) Partnership firm
5. Relationship between the partners is of.
a) Senior - Subordinate Relationship. b) Junior - Senior Relationship.
c) Close relatives. d) Agent and Principal.
6. Vinod Limited invited applications for 2,000, 11% Debentures @ 100 each. The subscription was five times more than
application invited . What is this situation called?
a) Pro - rata Allotment b) Under Subscription c) Full Subscription d) Over Subscription
OR
LMN Limited acquired assets of Rs.18,00,000and took over creditors of 2,00,000 from VidhiEnterprises. LMN Limited
issued 8% Debenture of Rs.100 each at par as purchase consideration. Find out how many debentures issued by the
company?
a) 16,000 b) 2,000 c) 18,000 d) 16,00,000

7. Assertion (A): Incorporation Expenses Account or Preliminary Expenses Account is to be opened when shares are
issued to the promoter Reason (R): A company may issue shares to its promoters for their services rendered to the
company.
a) Both A and R are true and R is the correct explanation of A.
b) Both A and R are true but R is not the correct explanation of A.
c) A is true but R is false.
d) A is false but R is true.

8. At the time of retirement of a partner Loss on Revaluation is debited:

a) to the capital accounts of all the partners in their old profit sharing ratio
b) only to the capital account of the retiring partner
c) to the capital accounts of remaining partners in their old profit sharing ratio
d) to the capital accounts of the remaining partners in their new profit sharing ratio
OR
A, B and C are partners in the ratio of 5 : 3 : 2. Before B‘s salary of 1,700 firm‘s profit is 9,700. How much in total B
will receive from the firm?
a) 4,000 b) 2,400 c) 4,100 d) 1,700

Question No. 9 to 10 are based on the given text. Read the text carefully and answer the questions: Mohit and Sonu are
equal partner Their capitals as on 1st April, 2020 are 1,00,000 and 2,00,000 respectively. Profits for the year 2020 - 21
were 90,000. As per the agreement, interest on capitals was 10,000 and 20,000 respectively and interest on drawings
was 6,000 and 10,000 respectively. Mohit‘s salary was 2,000 p.m. and Sonu‘s salary was 5,000 p.a. Accountant,
however, committed the mistake and credited the profit in the capital ratio, Without interest on capitals, drawings and
salary.

9. With what amount was Sonu‘s account credited with initially?

a) 45,000 b) 30,000 c) 60,000 d) 90,000

10. What was the total salary required to be credited (i-70000 OR ii-84000 OR iii-29000 OR iv-48000)

93
a) Option (iv) b) Option (ii) c) Option (i) d) Option (iii)

11. X, Y and Z are partners in 5 : 4 : 1. Z is guaranteed that his share of profit will not be less than 80,000. Any
deficiency will be borne by X and Y in 3 : 2. Firm‘s profit was 5,60,000. How much deficiency will be borne by Y?
a) 2,09,600 b)9,600 c)14,400 d) 2,14,400

12. Ifa company purchases any fixed asset or a running business and makes payment to the vendor in form of issue of
shares in place of cash it is called ________.
a) issue of sharesother than cash b) issue of shares in form of assets
c) issue of shares for cash d) private placement of shares

13. 800 shares of 100 each issued at a premium of 20 each were forfeited for non payment of allotment money of 20
per share (including premium 10 per share) and first call of 30 per share (including premium 10 per share). Final call
on these shared at 30 per share was not made. 75% of the forfeited shares were re - issued @ 95 per share fully paid.
Amount transferred to Capital Reserve will be:
a) 24,000 b) 39,000 c) 9,000 d) 21,000

14. How would you close the partner‘s drawings account?

a) None of these b) By transfer to capital account credit side
c) By transfer to current account credit side d) By transfer to capital or current account debit side
15. How would you show unrecorded liability towards suppliers of 4,000?
a) Cr. Revaluation A/c and Assets side of Balance Sheet
b) Dr. Revaluation A/c and Liabilities side of Balance Sheet
c) Dr. Revaluation A/c and Assets side of Balance Sheet
d) Cr. Revaluation A/c and Assets side of Balance Sheet
OR
A and B are partners in a firm having capitals of 54,000 and 36,000 respectively. They admitted C for 1/3 share in the
profits. C brought proportionate amount of capital. The Capital brought in by C would be:
a) 54,000 b) 45,000 c) 36,000 d) 90,000
16. Amount received from sale of unrecorded asset at the time of dissolution of the firm is credited to:
a) Partners‘ Capital Accounts b) Realisation Account
c) Cash Account d) Profit and Loss Account
17. Aman, Sonu and Kavita were partners in a firm sharing profits in the ratio of 5 : 3 : 2. From 1st April, 2023, they
decided to share the profits equally. For this purpose, the goodwill of the firm was valued at 2,40,000. Pass necessary
journal entry for the treatment of goodwill on change in the profit - sharing ratio of Aman, Sonu and Kavita.
18. A and B are partners in a business sharing profits and losses in the ratio of 3 : 2. Their capitals on 31st March, 2023,
after the adjustment of net profits and drawings amounted to 2,00,000 and 1,50,000. respectively. Later on, it was
discovered that interest on Capital at 8% per annum, as provided for in the partnership deed, had not been credited to the
partner‘s capital accounts before the distribution of profits. The year‘s net profit amounted to 75,000 and the partners
had withdrawn 24,000 each. Instead of altering the signed balance sheet, it was decided to make an adjustment entry at
the beginning of the new year crediting or debiting the Partner‘s Accounts. Give the necessary adjusting journal entry.
OR
The net profit of a firm for the year ended 31𝑠𝑡 March 2023, was 30,000, which has been duly distributed amongst its
three partners A, B and C in their agreed proportions of 3 : 1 : 1 respectively. It was discovered on 10th April, 2022that the
undermentioned transactions were not passed through the books of accounts of the firm for the year ended 31 𝑠𝑡 March,
2023, which stood duly closed on that date:
Interest on capital at 10% p.a.
Interest on drawings: A - 350; B - 250; C - 150.
Salary of 5,000 to A and 7,500 to B.
Commission due to A on a special transaction, 3,000.
The capital accounts of the partners on 1𝑠𝑡 April, 2022were: A 25,000; B 20,000; C 15,000. You are required to
suggest a journal entry to be passed on 10th April, 2022which will not affect the Profit and Loss Appropriation Account of
the firm for the year ended 31 𝑠𝑡 March, 2023 and at the same time will rectify the position of the partners.

19. Distinguish between Shares and Debentures (any three).

94
 OR
Light Lamps Ltd. issued 50,000 shares of 10 each as fully paid - up to the promoters for their services to set - up the
company. It also issued 2,000 shares of 10 each credited as fully paid - up to the underwriters of shares for their
services. Journalise these transactions.
20. A and B are partners sharing profits and losses in the ratio of 3 : 2. They agree to take C into a partnership for 1/3
share. For this purpose, goodwill is to be valued at two year‘s purchase of the average profit of last four years which were
as follows:
YEAR RS.
Year ending on 31st March 2020 50,000 (Profit)
Year ending on 31st March 2021 1,20,000 (Profit)
Year ending on 31st March 2022 1,80,000 (Profit)
Year ending on 31st March 2023 70,000 (Loss)
On 1𝑠𝑡 April, 2022a Motor bike costing 50,000 was purchased and debited to travelling expenses account, on which
depreciation is to be charged @ 20% p.a. The firm also paid an annual insurance premium of 20,000 which had already
been charged to Profit and Loss Account for all the years. Calculate the value of goodwill.
21. X Ltd. was registered with an authorised capital of 2,00,000 shares of 10 each. It purchased assets of Y Ltd. for
3,00,000 and issued fully paid shares for purchase consideration. It also invited applications for 1,20,000 shares payable
as under: 2.50 on application 2.50 on allotment 2 on first call and 3 on final call. Amount due on allotment and
first call was duly received. However, a shareholder holding 400 shares did not pay the final call. Directors forfeited the
shares of defaulting shareholderand re - issued at 8.50 per share as fully paid up. Pass entries in the Cash Book and
Journal. Show the Share Capital in the Balance Sheet of the Company.
22. J, K and L were partners in a firm sharing profits in the ratio of 4 : 5 : 1. On 31st March, 2023 their firm was
dissolved. On this date the Balance Sheet showed a balance of 1,34,000 in debtors account and a balance of 14,000 in
provision for bad debts account. Both the accounts were closed by transferring their balances to realisation account.
4,000 of the debtors became bad and nothing could be realised from them on dissolution. K agreed to look after the
dissolution work for which he was allowed a remuneration of 16,000. K also agreed to bear dissolution expenses for
which he was allowed a lumpsum payment of 4,000. Actual dissolution expenses were 6,500 and the same were paid
from the firm‘s cash. Loss on dissolution amounted to 37,000. Pass necessary journal entries for the above transactions
in the books of the firm on its dissolution.
23. Super Star Ltd. issued a prospectus inviting applications for 2,000 shares of 10 each at a premium of 2 per share,
payable as: On application - ₹ 3 per share (including ₹ 1 premium), On allotment - ₹ 4 per share (including ₹ 1 premium),
On first call - ₹ 3 per share On second and final call - ₹ 2 per share.
Applications were received for 3,000 shares and pro rata allotment was made on the applications for 2,400 shares . It was
decided to utilise excess application money towards the amount due on allotment .Ramesh, to whom 40 shares were
allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited.
Rajesh, who applied for 72 shares failed to pay the two calls and on such failure, his shares were forfeited . Of the shares
forfeited, 80 shares were sold to Krishan credited as fully paid - up for 9 per share, the whole of Ramesh‘s shares being
included. Give journal entries to record the above transactions (including cash transactions).
OR
Pass journal entries for the Forfeiture and Re - issue in the following cases:
X Ltd. forfeited 200 shares of Rohit of 10 each 8 called up, on which he had paid application and allotment money of
3 per share. Out of these, 100 shares were re - issued as fully paid up for 8 per share.
Y Ltd. forfeited 300 shares of 10 each, 7 called up, for non - payment of First Call of 2 per share. Out of these, 100
shares were immediately re - issued at 6 per share.
Z Ltd. forfeited 600 shares of 10 each, on which first call of 3 per share was not received; the second and final call of
2 per share has not yet been called. Out of these, 200 shares were re - issued as 8 paid - up for 7 per share.
X Ltd. forfeited 100 shares of 10 each, 7 called up on which the shareholder had paid application and allotment money
of 5 per share. Out of these, 80 shares were re - issued to Y for 8 per share as 8 paid up per share. Record the journal
entries for forfeiture and re - issue of shares by opening calls in arrear account.
24. Alfa and Beta were partners in a firm. They were trading in artificial limbs. On 1st April, 2023 they admitted Gama, a
good friend of Beta into the partnership, Gama lost his one hand in accident and Alfa and Beta decided to give one
artificial hand free of cost to Gama. The balance sheet of Alfa and Beta as at 31st March, 2023 was as follows
Balance Sheet as at 31st March, 2023

95
 Liabilities Amount Assets Amount
Provision for Doubtful Debts 40,000 Cash 1,00,000
Workmen's Compensation Fund 56,000 Sundry Debtors 8,00,000
Outstanding Expenses 30,000 Stock 2,00,000
Creditors 3,00,000 Machinery 3,86,000
Capital A/cs Profit and Loss A/c 40,000
Alfa 5,00,000
Beta 6,00,000 11,00,000
15,26,000 15,26,000

Gama was admitted in the firm on the following terms:

Gama will bring 4,00,000 as his share of capital, but he was unable to bring any amount for goodwill.
The new profit sharing ratio between Alfa, Beta and Gamma will be 3 : 2 : 1.
Claim on account of workmen compensation was 30,000. To write off bad debts amounted to 40,000. Creditors were
paid 20,000 more. Outstanding expenses be brought down to 12,000. 20,000 be provided for an unforeseen liability.
Goodwill of the firm was valued at 1,80,000. Prepare revaluation account, capital accounts of partners and the opening
balance sheet of the new firm. Also, identify anyone value which the partners wanted to communicate to the society.
OR
Ankush, Bhuvesh and Mukul were partners in a firm sharing profits in the proportion of 2 , and 6 respectively. Mukul
retired on 1 𝑠𝑡 April, 2023. The balance sheet of the firm on the date of Mukul‘s retirement was as follows:

BALANCE SHEET as on 1 𝑠𝑡 April, 2023

Liabilities Amount Assets Amount
Sundry Creditors 12,600 Bank 4,100
Employee's Provident Fund 3,000 Debtors 30,000
General Reserve 9,000 Less: Provision for Doubtful Debts 29000
Capital A/c's (1,000) 25,000
Ankush 40,000 Stock 10,000
Bhuvesh 36,500 Investments 5,000
Mukul 20,000 96,500 Patents 48,000
Machinery
1,21,100 1,21,100
It was agreed that:
Goodwill will be valued at 27,000. Depreciation of 10% was to be provided on machinery.
Patents were to be reduced by 20%. An old photocopier previously written off was sold for 600
Mukul took over investments for 15,800. Ankush and Bhuvesh decided to adjust their capitals in proportion of their
profit sharing ratio by opening current accounts.
Prepare revaluation account and partners‘ capital accounts on Mukul‘s retirement.

25. X, Y,and Z were partners in thefirm sharing profits and losses in the ratio of 5: 3: 2. On31.3.2023, their Balance Sheet
was as follows:
BALANCE SHEET as on 31.03.2023
Liabilities Amount Assets Amount
Capital Accounts: Building 50,000
X 75,000 Patents 15,000
Y 62,000 Machinery 75,000
Z 37,500 1,75,000 Stock 37,500
Creditors 42,500 Debtors 20,000
Cash at Bank 20,000
2,17,500 2,17,500
Z died on 31st July 2023. It was agreed that :
1. Goodwill is valued at 22 year‘s purchase of the average profits of the last four years, which were as follows :
2019- 2020 32,500

96
 2020 – 2021 30,000
2021 – 2022 40,000
2022 – 2023 37,500
2.M achinery be valued at Rs 70,000; Patents at Rs 20,000 and Building at Rs 62,500.
3.For the purpose of calculating Z‘s share of profits in the year of his death, the profits in 2023 - 2024 should be taken to
have been accrued on the same scale as in 2022 - 2023.
4.A sum of Rs 17,500 was paid immediately to the executors of Z and the balance was paid in four half yearly
installments together with interest at 12% p.a. starting from 31.1.2024.
Give necessary journal entries to record the above transactions and Z‘s executors‘ account till the payment of installments
due on 31.1.2024.
26. Ravi Ltd. issued 5,000, 12% Debentures of 100 each, payable as follows: 10 on application, 15 on allotment, 30
on first call and 45 on second and final call. A person who holds 400 debentures paid the amount of first and second
calls with the allotment. Another person who is holding 100 debentures failed to pay the amount due on allotment. He,
however, pays this amount along with the first call money. Pass entries.
Part B :- Analysis of Financial Statements
27. Which of the following is not a limitation of analysis of financial statement?
a) Lack of qualitative analysis b) To know the financial strength
c) Affected by personal bias d) Based on accounting concepts
OR
A liability is classified as current when it satisfies the following conditions except:
A. It is due to be settled beyond 12 months B. It is held for the purpose of being traded
C. It is expected to be settled in the company‘s normal operating cycle
D. The company does not have an unconditional right to offer settlement of the liability for at least 12 months after the
reporting date
a) (C) b) (B) c) (D) d) (A)
28. Working Capital 2,50,000; Current ratio 2.6 : 1; Prepaid expense 6,250. Liquid ratio will be:
a) 2.56 : 1 b) 2.6 : 1 c) 1.56 : 1 d) 1.6 : 1
29. Interest paid by an investment company will come under which kind of activity while preparing cash flow statement?
a) Cash Flow from Financing Activities b) Cash Flow from Operating Activities
c) No Cash Flow d) Cash Flow from Investing Activities
OR
Which of the following is not considered with operating activities:
a) Loss on sale of assetsb) Issue of Equity shares c) Income taxd) General Reserve
30. Which of the following is not an investing cash flow?
a) Sales of land for 28,000 cash
b) Purchase of marketable securities for 25,000 cash
c) Purchase of equipment for 500 cash
d) Sale of 2,500 shares (held as investment) for 15 each
31. Z Ltd. has the following balances on 1st April, 2022:
General Reserve 2,50,000 Capital Reserve 1,50,000 Statement of Profit & Loss 2,00,000
During the year ended 31st March, 2023, it incurred a loss of 7,10,000. Show how these items will appear in the Balance
Sheet and notes to accounts?
32. Calculate Inventory - turnover Ratio from the following information, when gross - profit ratio is 25%:
Credit Sales 2,70,000 Cash Sales 1,50,000
Return Inward 20,000 Opening Inventory 55,000
Closing Inventory 45,000
33. Prepare a Comparative Statement of Profit & Loss from the following:
31st March 2022 31st March 2023
Revenue from Operations 10,00,000 12,50,000
Cost of Materials Consumed 5,00,000 6,50,000
Other Expenses 50,000 60,000
Interest on investments @ 30,000 each year.
OR

97
From the following Balance Sheet of Sun Ltd. as at 31st March 2023, prepare Common - Size Balance Sheet:
Particulars Note No. 31st March, 2023 31st March, 2022
I.EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital 80,00,000 60,00,000
(b) Reserves and Surplus 12,00,000 8,00,000
2. Non-Current Liabilities
Long-term Borrowings 24,00,000 20,00,000
3. Current Liabilities
Short-term Borrowings 4,00,000 12,00,000

Total 1,20,00,000 1,00,00,000

II. ASSETS
1. Non-Current Assets
Fixed Assets:
(i) Tangible Assets 80,00,000 60,00,000
(ii) Intangible Assets 4,00,000 12,00,000
2. Current Assets
(a) inventories 24,00,000 20,00,000
(b) Cash and Cash Equivalents 12,00,000 8,00,000
Total 1,20,00,000 1,00,00,000

34. Following are the Balance Sheets of KLtd. for the years ended31st March, 2023and 2022:
Particulars Note No. 31st March, 2023 31st March, 2022
I.EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital 12,00,000 8,00,000
(b) Reserves and Surplus (Profit and Loss 3,50,000 4,00,000
Balance)
2. Non-Current Liabilities
Long-term Borrowings 4,40,000 3,50,000
3. Current Liabilities
Trade Payables 60,000 50,000
Total 20,50,000 16,00,000
II. ASSETS
1. Non-Current Assets
(a) Property, Plant and Equipment and
Intangible Assets
(i) Property, Plant and Equipment (Machinery) 12,00,000 9,00,000
2. Current Assets
(a) inventories
(b) Trade Receivables 2,00,000 1,00,000
(C) Cash and Cash Equivalents 3,10,000 2,30,000
3,40,000 3,70,000
Total 20,50,000 16,00,000
Prepare a Cash Flow Statement after taking into account the following adjustments:
i.The company paid interest ₹ 36,000 on its long-term borrowings.
ii. Depreciation charged on machinery was ₹ 1,20,000.

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 Kendriya Vidyalaya Sangathan
PATNA REGION
Sample paper - 3
CLASS 12 – ACCOUNTANCY
Time Allowed : 180 mins Maximum Marks :80

Part A:- Accounting for Partnership Firms and Companies

1. What treatment should be given to Employee‘s Provident Fund appearing in the liabilities side of the Balance Sheet in
case of admission of a partner?
a) Not to be distributed b) Should be distributed in equal ratio
c) Should be distributed as a part of reserve d) Both treatment can be done

2. Assertion (A): Fixed Capital Accounts of a partner never show a debit balance in spite of regular and consistent losses
year after year.
Reason (R): When Capital Accounts are fixed, losses are recorded in the Partners' Current Account.

a) Both A and R are true and R is the correct explanation of A.

b) Both A and R are true but R is not the correct explanation of A.
c) A is true but R is false.
d) A is false but R is true.
3. A Company forfeited 1,000 shares of ₹ 10 each fully paid on which ₹ 7,000 has been paid. Out of these 800 shares were
reissued upon payment of ₹ 7,600. Amount transferred to Capital Reserve will be:
a) ₹ 7,600 b) ₹ 6,600 c) ₹ 9,000 d) ₹ 5,200
OR
MP Ltd. issued 5,000, 8% Debentures of ₹ 100 each at ₹ 95. It will credit 8% Debentures Account by
a) ₹ 5,00,000 or ₹ 4,75,000 as it decides b) ₹ 4,75,000 c) ₹ 5,00,000 d) ₹ 5,25,000
4. A, B and C are sharing profits and losses in the ratio 10:6:4, with effect from 01/04/2023 they decide to share profit and
losses equally. Which partner has tosacrifice?
a) A b) C c) B d) All the partners
OR
Under what circumstances interest on loan will be debited to profit and loss account?
a) When there is no partnership deed b) When there is profit
c) When there is loss d) All of these
5. A and B are partners with ratio 6/15 and 9/15 with capitals of ₹ 50,000 and ₹ 25,000. Partnership deed provides
interestoncapital @10% p.a. The trading loss for the year was ₹ 3,000.
a) Loss to A 1,800; B 2,700 b) Loss to A 1,500; B 1,500
c) Loss to A 4,200; B 6,300 d) Loss to A 1,200; B 1,800
6. Debentures for a longer period which are secured by either fixed charge or floating charge on assets they are called___.
a) Secured Debentures b) Unsecured Debentures c) Un-registered Debentures d) Bearer Debentures
OR
Among the following which statements are incorrect?
a) Debentures can be issued at maximum 25% discount
b) Debenture of the company is issued with a fixed rate of interest
c) A debenture is issued under the common seal of the company
d) Interest on Debenture is a charge against profits of thecompany
7. Assertion (A): Forfeited shares may be reissued by the company at a discountalso.
Reason (R): Amount of discount on reissue of forfeited shares cannot exceed the amount forfeited on reissued shares.
a) Both A and R are true and R is the correct explanation of A.
b) Both A and R are true but R is not the correct explanation of A.
c) A is true but R is false.

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 d) A is false but R is true.
8. What should be recorded in the balance sheet after retirement if the retiring partner not paid fully immediately on
retirement?
a) His Loan account on the assets side
b) Creditors account on liabilities side
c) Capital account on liabilities side
d) Retiring partner loan account is shown in the liabilities side of the balance sheet.
OR
A, B and C were partners in a firm. On 1-4-2022 their capitals stood at ₹ 5,00,000, ₹ 2,50,000 and ₹ 2,50,000
respectively. As per the provisions of the partnership deed:
a. Partners were entitled to interest on capital at 6% p.a.
b. Profits were to be shared in the ratios of capitals.
The net profit for the year ended 31.3.2023 of ₹ 3,00,000 was divided equally without providing for the above items. In
the adjustment entry to rectify the error:
a) Cr. A ₹ 40,000; Dr. B ₹ 20,000 and Dr. C ₹20,000 b) Dr. A ₹ 50,000; Cr. B ₹ 25,000 and Cr. C ₹25,000
c) Cr. A ₹ 50,000; Dr. B ₹ 25,000 and Dr. C ₹25,000 d) Cr. A ₹ 10,000; Dr. B ₹ 5,000 and Dr. C ₹ 5,000
Question No. 9 to 10 are based on the given text. Read the text carefully and answer the questions:
M, N and O entered into partnership firm on 1st July, 2022 and decided to share profits and losses in the ratio of 3:2:1.
M guaranteed that O‘s share of profit after charging interest on capitals @ 6% p.a. would not be less than ₹ 36,000 p.a.
The capital contributed by M: ₹ 2,00,000, N: ₹ 1,00,000 and O: ₹ 1,00,000 respectively. Profit for the year ended 31st
March, 2023 was ₹ 1,38,000.
9. What is the total amount of interest on capital?
a) ₹ 18,000 b) ₹ 24,000 c) ₹ 12,000 d) ₹ 9,000
10. What is the distributable amount of profit?
a) ₹ 1,20,000 b) ₹ 1,00,000 c) ₹ 90,000 d) ₹ 1,10,000
11. When partners‘ capital accounts are fixed, which one of the following items will be written in the partner‘s capital
account?
a) Partner's drawings b) Loan advanced by partner to the firm
c) Loan taken by partner from the firm d) Additional capital introduced by the partner in the firm
12. NeemaToys invited applications for issuing 2,00,000 shares of ₹ 10 each at par. The amount was payable as follows: On
Application ₹ 4, On Allotment ₹ 3, On First and Final Call ₹ 3.
Applications were received for 2,40,000 shares. Applications for 10,000 shares were rejected and pro-rata allotment was
made to the remaining applicants. All calls were made and were duly received except first and final call from
ashareholder who applied for 6,900 shares and was allotted shares on pro-rata basis. His shares were forfeited. Amount
Credited to Share Forfeiture Account will be:
a) ₹ 38,400 b) ₹ 48,300 c) ₹ 45,600 d) ₹ 42,000
13. Is there any limit of Securities Premium on the issue of shares. If yes then what is the limit.
a) 25% b) 10% c) 20% d) Unlimited
14. X and Y are partners in the ratio of 3 : 2. Their capitals are ₹ 2,00,000 and ₹ 1,00,000 respectively. Interest on capitals is
allowed @ 8% p.a. Firm incurred a loss of ₹ 60,000 for the year ended 31stMarch 2023. Interest on Capital willbe
a) X ₹ 16,000; Y ₹ 8,000 b) X ₹ 14,400; Y ₹ 9,600 c) No Interest will be allowed d) X ₹ 8,000; Y ₹ 4,000
15. Incoming partner may acquire his share from the old partners
A. In their old profit sharing ratio
B. In a particular ratio
C. In particular fraction from some of the partners
a) Only A b) A and B c) All of these d) A and C

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 OR
Ravi and Gaurav are partners in a firm. They want to admit Dhruv for 1/4th share in profit. For this, they revalued their
machinery from ₹ 30,000 to ₹ 40,000 and creditors from ₹ 1,10,000 to ₹ 1,00,000. What journal entry will be passed:
a) Machinery A/c Dr. - Revaluation A/c Dr. - To Creditors A/c-
b) Machinery A/c Dr. - To Revaluation A/c - To Creditors A/c-
c) Machinery A/c Dr. - Creditors A/c Dr. -To Revaluation A/c -
d) None of these
16. On firm‘s dissolution, a partner undertook firm‘s creditors at ₹ 17,000. In this case the account will be credited:
a) Creditors A/c b) Realsation A/c a) Cash A/c b) Partner's Capital A/c

17. The average profits of a firm is ₹ 48,000. The total assets of the firm are ₹ 8,00,000. Value of other liabilities is ₹
5,00,000. Average rate of return in the same business is12%.Calculate the value of goodwill according to capitalisation
of Super Profits Method.
18. Yadu, Madhu and Viduare partners sharing profits and losses in the ratio of 2 : 2 : 1. There fixed capitals on April 01,
2022 were; Yadu₹ 5,00,000, Madhu ₹ 4,00,000 and Vidhu₹ 3,50,000. As per the partnership deed, partners are entitled
to interest on capital @ 5% p.a., and Yaduhas to be paid a salary of ₹ 2,000 per month while Viduwould be receiving a
commission of ₹ 18,000. Net loss of the firm as per profit and loss account for the year ending March 31, 2023amounted
to ₹ 75,000 on the basis of above information prepare profit and loss appropriation account. Prepare profit and loss
appropriation account for the year ending March 31, 2023.
OR
Sunflower and Pink Rose started partnership business on April 01, 2022 with capitals of ₹ 2,50,000 and ₹ 1,50,000,
respectively. On October 01, 2022, they decided that their capitals should be ₹ 2,00,000 each. The necessary adjustments
in the capitals are made by introducing or withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate
interest on capital as on March 31, 2023.
19. Joy Ltd. company bought a Building for ₹9,00,000 and the consideration was paid by issuing 10% Debentures of the
nominal (face) value of ₹100 each at a discount of 10%. Give Journal entries.
OR
Citizen Watches Ltd. invited applications for 50,000 shares of ₹ 10 each payable ₹ 3 on application, ₹ 4 on allotment and
balance on first and final call. Applications were received for 60,000 shares. Applications were accepted for 50,000
shares and remaining applications were rejected. All calls were made and received except First and Final call on 500
shares. Pass the journal entries in the books of Citizen Watches Ltd.
20. The total capital of the firm of Seema, Muskan and Heena is ₹ 1,00,000 and the market rate of interest is 15%. The net
profits for the last 3 years were ₹ 30,000; ₹ 36,000 and ₹ 42,000. Goodwill is to be valued at 2 year‘s purchase of the last
3 years‘ super-profits. Calculate the goodwill of thefirm.
21. VikramLtd. issued 50,000 shares of ₹10 each at a premium of ₹1 per share payable asfollows:
₹3 on Application ₹4 on Allotment (including premium) ₹2 on 1st Call Balance when required
Applications were received for 46,000 shares and all of these were accepted. Directors did not make the final call. A
shareholder holding 800 shares did not pay the amount due on the first call. The shares were forfeited and re-issued at ₹7
per share, ₹8 per share paid. Prepare Cash Book and pass Journal Entries.
22. Balance Sheet of P, Q and R as at March 31, 2023 who were sharing profits in the ratio of 5 : 3:1
Liabilities ₹ Assets ₹
Bills Payable 40,000 Building 40,000
Loan from Bank 30,000 Plant and Machinery 40,000
General Reserve 9,000 Stock 19,000
Capitals A/cs: Sundry Debtors 42,000
P 44,000 Less : Provision for Doubtful Debts 2,000 40,000
Q 36,000 Cash at Bank 40,000
R 20,000
1,79,000 1,79,000

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 The Partners dissolved the business. Total assets realised-Stock ₹ 23,400. Debtors 50%, Fixed Assets 10% less than their
book value. Bills Payable were settled for ₹ 32,000. There was an outstanding Bill of Electricity ₹ 800 which was paid
off. Realisation expenses ₹ 1,250 were also paid. Prepare Realisation Account, Bank Account and Partners Capital
Accounts.
23. Raja Ltd. invited applications for issuing 50,000 Equity Shares of₹ 10 each. The amount was payable as follows: On
application - ₹ 3 per share, On allotment - ₹ 5 per share, On first and final call -Balance.
Applications for 70,000 shares were received. Allotment was made to all applicants on pro-rata basis. Excess money
received on application was adjusted towards sums due on allotment. Ramesh, who had applied for 700 shares, did not
pay the allotment money and on his failure to pay the allotment money his shares were forfeited. Afterwards, the first
and the final call was made. Adhar, who had been allotted 500 shares, did not pay the first and final call. His shares were
also forfeited. Out of the forfeited shares 900 shares were reissued at₹ 8 per share as fully paid-up. The reissued shares
included all the shares of Ramesh. Pass necessary journal entries for the above transactions in the books of the company.
OR
X Ltd. issued 10,000 Equity Shares of ₹ 100 each at a premium of ₹ 20 per share payable as ₹ 30 on application, ₹ 50 on
allotment including premium and ₹ 40 on first and final call. All the shares were subscribed, amount due on all shares
was received except from Asha, holding 100 shares were subscribed, amount due on all shares was received except from
Asha, holding 100 shares who did not pay allotment and call money and Neeru holding 200 shares did not pay the first
and final call money. These 300 shares were forfeited. Out of the shares forfeited, 150 shares (including all shares of
Asha) were reissued to Raja @ ₹ 80 per share as fully paid-up.
Pass Journal entries in the books of the company to record the forfeiture and reissue only. Also, show Shareholders'
Funds in the Balance Sheet.
24. A and B are partners sharing profits in the ratio of 2 : 3. Their balance sheet as at 31stMarch, 2023 was as follows:
Liabilities ₹ Assets ₹
Bank Overdraft 32,000 Cash in Hand 3,000
Creditors 25,000 Cash at Bank 12,000
P & L Account 10,000 Debtors 40,000
Capitals: Less: Provision 5,000 35,000
A 1,00,000 Furniture 40,000
B 1,05,000 2,05,000 Building 80,000
Machinery 1,00,000
Investments 2,000
2,, 72,000 2,,72,000
st
On 1 April, 2022 they admitted C for1/5 share in profits which he acquires wholly from B. The other terms of
agreement were:
i. Goodwill of the firm was to be valued at two year‘s purchase of the average of the last 3 year‘s profits. The profits for
the last 3 years were ₹ 58,000; ₹ 66,000 and ₹ 56,000respectively.
ii. Provision for Doubtful debts was found in excess by ₹ 2,000.
iii. Buildings were found undervalued by ₹ 20,000 and furniture overvalued by ₹ 5,000.
iv. ₹ 5,000 for damages claimed by a customer had been disputed by the firm. It was agreed at ₹ 2,000 by a compromise
between the customer and the firm.
v. C was to bring in ₹ 60,000 as his capital and the necessary amount for his share of goodwill.
vi. Capitals of A and B were to be adjusted in the new profit sharing ratio by opening necessary current accounts. Prepare
journal entries, capital accounts and the opening balance sheet.
OR
Arti, Bharti, and Seema are partners sharing profits in the proportion of 3 : 2 : 1 and their Balance Sheet as on March 31,
2023, stood as follows:
Liabilities Amount (₹) Assets Amount (₹)
Bills Payable 12,000 Buildings 21,000

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 Creditors 14,000 Cash in Hand 12,000
General Reserve 12,000 Bank 13,700
Capitals: Debtors 12,000
Arti 20,000 Bills Receivable 4,300
Bharti 12,000 Stock 1,750
Seema 8,000 40,000 Investment 13,250
78,000 78,000
Bharti died on June 12, 2022, and according to the deed of the said partnership, her executors are entitled to be paid as
under:
a. The capital to her credit at the time of her death and interest thereon @ 10% per annum.
b. Her proportionate share of reserve fund.
c. Her share of profits for the intervening period will be based on the sales during that period, which were calculated as
₹ 1,00,000. The rate of profit during past three years had been 10% on sales.
d. Goodwill according to her share of profit to be calculated by taking twice the amount of the average profit of the last
three years less 20%. The profits of the previous years were:
2021 – ₹ 8,200 2022 – ₹ 9,000 2023 – ₹ 9,800
The investments were sold for ₹ 16,200 and her executors were paid out. Pass the necessary journal entries and write the
account of the executors of Bharti.
25. L, M and N were partners in a firm sharing profits in the ratio of 2 : 1 : 1. On 1st April, 2023 their balance sheet was as
follows:
Balance Sheet as at 1st April, 2023
Liabilities Amount (₹) Assets Amount (₹)
General Reserve 4,40,000 Land 8,00,000
Workmen's Compensation Fund 3,60,000 Building 6,00,000
Creditors 2,40,000 Furniture 2,40,000
Capital A/cs Debtors 4,00,000
L 6,00,000 (-) Provision for DD 20,000 3,80,000
M 4,80,000 Stock 4,40,000
N 4,80,000 15,60,000 Cash 1,40,000
26,00,000 26,00,000
On the above date, N retired. The following were agreed:
i. Goodwill of the firm was valued at Rs 6,00,000.
ii. Land was to be appreciated by 40% and building was to be depreciated by Rs 1,00,000.
iii. Furniture was to be depreciated by Rs 30,000.
iv. The liabilities for workmen‘s compensation fund was determined at Rs1,60,000.
v. Amount payable to N was transferred to his loan account.
vi. Capitals of L and M were to be adjusted in their new profit sharing ratio and for this purpose current accounts of the
partners will be opened.
Prepare revaluation account, partner's capital accounts and the balance sheet of the new firm.
26. SSS Ltd. issued 25,000,10% debentures of 100 each. Give journal entries and the Balance Sheet in each of the following
cases when :
i. The debentures were issued at a premium of 20%
ii. The debentures were issued as a collateral security to bank against a loan of Rs.20,00,000.
iii. The debentures were issued to a supplier of machinery costing Rs.28,00,000 as his full and final payment.
Part B :- Analysis of Financial Statements

27. Why would public be interested in analyzing financial statement?

a) To know whether the business is able to pay debt b) To know the liquidity of business

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 c) To know the earning capacity d) to know information about the continuance of an enterprise

OR
Shares on which the company has called the entire nominal value but has not received final call of ₹ 2 on 500 shares, the
shares on which the final call is not received are shown in the Note to Accounts on Share Capital under Subscribed
Capital as:
a) Subscribed and fully paid-up b) Issued capital
c) Subscribed but not fully paid-up d) None of these

28.
₹
Current Assets (including prepaid expenses ₹ 20,000) 10,20,000
Trade Payables 3,00,000
Short-term Borrowings 1,40,000
8% Debentures 1,00,000
Provision for Tax 50,000
Calls in Advance 10,000
Current Ratio will be: a) 2.04 : 1 b) 2 : 1 c) 1.7 : 1 d) 1.67 : 1
29. Which of the following is not a cash inflow?
a) Sale of asset at loss b) Interest received on investment a) Goods purchased in cash b) Goods sold in cash
OR
Loose tools and Stores and spares are the part of
a) Inventory b) Current Assets c) Cash and Cash Equivalents d) Investment
30. How will you treat payment of dividend in a Cash flow statement?
a) Cash Flow from Financing Activities
b) Cash Flow from Operating Activities
c) Cash Flow from Investing Activities
d) Cash Equivalent
31. Give the headings under which the following items will be shown in a Company‘s BalanceSheet:
i. Mining Rights
ii. Debtors
iii. Interest on Calls in Advance
iv. Work-in-progress
v. Mortgage Loan
vi. Bonds issued by the Company
32. Comparison with the help of ratios is not possible if different firms follow different accounting policies.Comment.
33. From the following information, prepare a Comparative Statement of Profit and Loss:
Particulars Note No. 31st March 2023 31st March 2022
Revenue from Operations ₹ 24,00,000 ₹ 18,00,000
Other Incomes (% of Revenue from Operations) 15% 25%
Expenses (% of Revenue from Operations) 60% 50%
Tax Rate 40% 40%
OR
From the following Statement of Profit and Loss, prepare Common-size Statement of Profit and Loss of Jayant Ltd. for
the year ended 31st March 2023:
Statement of Profit And Loss of Jayant Ltd.
for the year ended 31st March 2023

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 Particulars (Rs.)
Income
Revenue from Operations 25,28,000
Other Income 38,000
Total Revenue 25,66,000
Expenses
Cost of Materials Consumed 14,00,000
Other Expenses 5,00,000
Total Expenses 19,00,000
Tax 3,38,000
34. From the following information calculate cash flow from investing activities:
Particulars 31.03.2022 (₹) 31.03.2023(₹)
Machinery (at Cost) 5,00,000 5,50,000
Accumulated Depreciation 1,00,000 1,20,000
Patents 2,00,000 1,20,000
Goodwill 1,50,000 1,00,000
Investment 2,50,000 5,00,000
Additional Information:
i. During the year, a machine costing Rs. 50,000 with its accumulated depreciation of Rs. 25,000 was sold for Rs. 20,000.
ii. Patents were written off to the extent of Rs. 60,000 and some patents were sold at a profit of Rs.10,000.
iii. 40% of the investments held in the beginning of the year were sold at 10% Profit.
iv. Interest received on investment Rs. 25,500.
v. Dividend received on investment Rs. 8,500.
vi. Rent received Rs. 5,000.

THE END OF EDUCATION IS CHARACTER AND CHARACTER CONSIST OF EAGERNESS TO

RENOUNCE ONE’S SELFISH GREED

*****************************************************

ALL THE BEST FOR YOUR BOARD EXAMS

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