Accounting for Partnership Basic Concepts

1. Atul, Beena and Sita were partners in a firm sharing profits and losses in the
ratio of 8 : 7 : 5. Damini was admitted as a new partner for 1/5 th share in the
profits which she acquired entirely from Atul. The new profit sharing ratio after
Damini's admission will be: (2024)
(A) 7:7:5:1
(B) 4:7:5:4
(C) 8:7:5:4
(D) 7:5:8:4
Ans. (B) 4:7:5:4
2. Rushil and Abheer were partners in a firm sharing profits and losses in the
ratio of 4 : 3. They admitted Sunil as a new partner for 3/7 th share in the profits
of firm, which he acquired 2/7 th share from Rushil and 1/7 th share from Abheer.
The new profit sharing ratio of Rushil, Abheer and Sunil will be : (2024)
(A) 4 : 3 : 3
(B) 2 : 1 : 3
(C) 2 : 2 : 3
(D) 4 : 3 : 1
Ans. (C) 2 : 2 : 3
3. Abhay, Boris and Chetan were partners in a firm sharing profits in the ratio of 5
: 3 : 2. Boris was guaranteed a profit of ₹ 95,000. Any deficiency on account of this
was to be borne by Abhay and Chetan equally. The firm earned a profit of ₹
2,00,000 for the year ended 31st March, 2023. The amount given by Abhay to
Boris as guaranteed amount will be : (2024)
(A) ₹ 17,500
(B) ₹ 35,000
(C) ₹ 25,000
(D) ₹ 10,000
Ans. (A) ₹ 17,500
4. Assertion (A) : Each partner is a principal as well as an agent for all the other
partners.
Reason (R) : As per the definition of Partnership Act, partnership business may
be carried on by all the partners or any of them acting for all. (2024)
Choose the correct option from the following :
(A) Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the
correct explanation of Assertion (A).
(B) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct
explanation of Assertion (A).
(C) Assertion (A) is correct, but Reason (R) is incorrect.
(D) Assertion (A) is incorrect, but Reason (R) is correct.
Ans. (B) Both Assertion (A) and Reason (R) are correct and Reason (R) is the
correct explanation of Assertion (A).
Read the following hypothetical situation and answer questions No. 5 and 6 on
the basis of the given information. (2024)
Abha and Babita were partners in a clay toy making firm sharing profits in the
ratio of 2 : 1. On 1st April, 2023, their capital accounts showed balances of ₹
5,00,000 and ₹ 10,00,000 respectively. The partnership deed provides for interest
on capital @ 10% p.a. The firm earned a profit of ₹ 90,000 during the year.
5. The amount of interest on capital allowed to Abha will be :
(A) ₹ 50,000
(B) ₹ 1,00,000
(C) ₹ 60,000
(D) ₹ 30,000
Ans. (D) ₹ 30,000
6. Babita's share in profit will be:
(A) ₹ 60,000
(B) ₹ 30,000
(C) Nil
(D) ₹ 1,00,000
Ans. (C) Nil
7. The transaction 'Acquisition of machinery by issue of equity shares of ₹
5,00,00,000' will result in : (2024)
(A) Cash inflow of ₹ 5,00,00,000 from financing activities
(B) Cash outflow of ₹ 5,00,00,000 from financing activities
(C) Cash outflow of ₹ 5,00,00,000 from investing activities
(D) No flow of cash
Ans. (D) No flow of cash
8. The transaction 'Capital Gains Tax paid on sale of fixed assets' is classified
under which of the following: (2024)
(A) Operating Activities
(B) Investing Activities
(C) Financing Activities
(D) Cash and Cash Equivalents
Ans. (B) Investing Activities
 Concepts of Partnership & Partnership Deed
1 Mark Questions

1. The partnership deed is silent on payment of salary to partners. Anita, a

partner, claimed that, since she managed the business, she should get a monthly
salary of Rs 10,000. Is she entitled for the salary? Give reason. (Compartment
2014)

Ans. No, Anita is not entitled for the salary. Since, the partnership deed is silent on the
payment of salary to partners, in that case provisions of Partnership Act will be followed,
which prohibit payment of remuneration of any kind to the partners.

2. State the provisions of Indian Partnership Act, 1932 regarding the payment
of remuneration to a partner for the services rendered. (Delhi 2012)
Ans. In the absence of partnership deed, a partner is not entitled to get any
remuneration from the firm.

3. What share of profit would a ‘sleeping partner’, who has contributed 75% of the
total capital, get in the absence of a deed? (Delhi 2011; hots)

Ans. In the absence of partnership deed, sleeping partner will get equal share of profit,
no matter how much share of total capital he has contributed.

4. Is a sleeping partner liable for the acts of other partners? (Delhi 2011 c; hots)

Ans. Yes, a sleeping partner is also liable for the acts of other partners.

5. Would a ‘charitable dispensary’ run by 8 members be deemed a partnership

firm? Give reason in support of your answer. (All India 2011; hots)

Ans. No, a ‘charitable dispensary’ run by 8 members cannot be deemed to be a

partnership firm because:
(i) For partnership, there must be a business.
(ii) There must be sharing of profits among the partners from such business.
In this case, there is no business and no sharing of profits.

6. What is meant by a partnership deed? (Delhi 2011, 2010; All India 2010)

Ans. Partnership deed is a document which contains the terms and conditions of
partnership agreement.
7. Why should a firm have a partnership deed? (All India 2011; Delhi 2009)

Ans. A firm should have a partnership deed because:

(i) It regulates the rights, duties and liabilities of the partners.
(ii) It avoids disputes in future by acting as a proof.

8. What is meant by ‘unlimited liability of a partner’? (Delhi 2010)

Ans. Unlimited liability of a partner means that each partner is liable jointly and also
severally with all the other partners to the third party for all the acts of the firm done,
while he is a partner. His private assets can also be used for paying off the firm’s debts.

9. A, B and C decided that interest on capitals will be provided to each partner @

5% per annum, but after one year C wants that no interest on capital is to be
provided to any partner. State how ‘C’ can do this? (Delhi 2010; Hots)

Ans. C can do this only when all partners agree to it or if there is no partnership deed.

10. State the provisions of Indian Partnership Act, 1932 regarding interest on
partners’ capital and interest on partners’ loan when there is no partnership deed.
(All India 2010)

Ans. According to Indian Partnership Act, 1932, in the absence of partnership deed no
interest on’ partners’ capital is allowed and interest on partners’ loan will be allowed @
6% per annum.

11. Can a partner be exempted from sharing the losses in a firm? If yes, under
what circumstances? (All India 2009; Foreign 2009; HOTS)

Ans. As per Indian Partnership Act, 1932, if a partner is a minor then he is exempted
from sharing the losses of a firm.

12. State two elements of the partnership deed. (All India 2009)

Ans. Two elements of the partnership deed are:

(i) Amount of capital contributed by each partner.
(ii) Ratio in which profits or losses are to be shared.

13. Do all firms need a deed and registration? (Foreign 2009; hots)

Ans. No, it is not compulsory to have a deed and registration.

14. A and B are partners in a firm without a partnership deed. A is an active

partner and claims a salary of Rs 18,000 per month. State with reasons whether
the claim is valid or not. (Delhi 2008; HOTS)

Ans. According to Indian Partnership Act, 1932, no salary is allowed to partners in the
absence of partnership deed. So, the claim of A for salary of 7 18,000 per month is not
valid.

15. Suresh and Ramesh are partners in a firm with capitals of t 3, 00,000 and? 4,
00,000 respectively. They do not have a partnership deed. Ramesh wants to share
the profits in the ratio of capitals. State with reason whether the claim is valid.
(Delhi 2008; All India 2008; HOTS)

Ans. According to Indian Partnership Act, 1932, in the absence of partnership deed
profits are shared equally among the partners. So, the claim of Ramesh to share the
profits in the ratio of capitals is not valid.

16. R, S and T entered into a partnership for manufacturing and

distributing educational CDs on 1st April, 2006. R looked after the business
development, S content development and T financed the project. At the end of the
year (31st March, 2007), R wanted a salary of? 5,000 per month for the additional
work he did. The other partners were not inclined to this. How would you reduce
this within the ambit of the Indian Partnership Act, 1932? (Delhi 2008 C; hots)

Ans. According to Indian Partnership Act, 1932, ‘No salary for the additional work will
be allowed to R in the absence of partnership deed’.
 Computation of Appropriation Items & Change Items

1 Mark Questions

1. A partnership deed provides for the payment of interest on capital but there
was a loss instead of profit during the year 2010-2011. At what rate will the
interest on capital be allowed? (All India 2012)

Ans. No interest on capital will be allowed as there was loss in the firm.

2. Give the average period in months for charging interest on drawings for the
same amount withdrawn at the beginning of each quarter. (All India 2011)

Ans. The average period for charging interest on drawings for the same amount
withdrawn at the beginning of each quarter is 7 1/2 months which can be computed as
follows = 12+3 /2=15/2=7.5
Interest on Drawings =Total Drawings x Rate/100 x 7 1/2 /12

3.How is interest on drawings calculated, if the drawings are made at regular

intervals, as on the first day of each month? (Delhi 2009)

Ans. If the drawings are made regularly on the first day of each month, the interest on
drawings will be calculated for 6-^ months which can be computed as follows:
= 12+1 /2 = 13/2 =6.5

Interest on Drawings = Total Drawings x Rate/100 x 6 1/2 /12

Maintenance of Capital Accounts of Partner: Fixed & Fluctuating capital

1 Mark Questions

1. Name the accounts which are maintained for the partners when capitals of the partners
are fixed. (Compartment 2014)

Ans. When capitals of the partners are fixed, following accounts are required to be maintained:
(i) Partner’s fixed capital accounts (ii) Partner’s current capital accounts.

2. Distinguish between fixed and fluctuating capital accounts.

(Compartment 2014) (Delhi; All India 2011)

Ans. Difference between fixed and fluctuating capital accounts

3. When the partners’ capitals are fixed, where the drawings made by a partner will
be recorded? (Delhi; All India 2013)

Ans. When the partners’ capitals are fixed, the drawings made by a partner will be recorded in
partners’ current account (debit side).

4. State the conditions under which the capital balances may change under the system of
fixed capital account.(All India 2009,2008; Delhi 2009 c)

Ans. The conditions under which the capital balances may change under the system of a fixed
capital ‘accounts are:
(i) When additional capital is introduced.
(ii) When capital is withdrawn.
 Profit & Loss Appropriation Account

1 Mark Question

1. The firm XYZ earned a profit of Rs. 2,75,000 during the year ending on 31st
March, 2009. 10% of this profit was to be transferred to general reserve. Pass
necessary journal entry for the same. (Delhi 2010c)

4 Mark Questions

2. Singh and Gupta decided to start a partnership firm to manufacture low cost
jute bags as plastic bags were creating many environmental problems. They
contributed capitals of Rs. 1,00,000 and Rs. 50,000 on 1st April, 2012 for this.
Singh expressed his willingness to admit Shakti as a partner without capital, who
is specially abled but a very creative and intelligent friend of his. Gupta agreed to
this. The terms of partnership were as follows

(i) Singh, Gupta and Shakti will share profits in the ratio of 2 : 2 : 1.
(ii) Interest on capital will be provided @ 6% per annum.

Due to shortage of capital, Singh contributed Rs. 25,000 on 30th September, 2012
and Gupta contributed Rs. 10,000 on 1st January, 2013 as additional capital. The
profit of the firm for the year ended 31st March, 2013 was Rs. 1,68,900.

(i) Prepare profit and loss appropriation account for the year ending 31st March,
2013.
(ii) Identify any two values which the firm wants to communicate to the society.
(All India 2014)
3. Lalan and Balan were partners in a firm sharing profits in the ratio of 3: 2. Their
fixed capitals on 1st April, 2010 were Lalan Rs. 1, 00,000 and Balan Rs. 2,00,000.

They agreed to allow interest on capital @ 12% per annum and charge on
drawings @ 15% per annum. The firm earned a profit, before all above
adjustments, of Rs. 30,000 for the year ended 31st March, 2011.

The drawings of Lalan and Balan during the year were Rs. 3,000 and Rs. 5,000
respectively. Showing your calculation clearly, prepare profit and loss
appropriation account of Lalan and Balan. The interest on capital will be allowed
even if the firm incurs loss. (All India 2012)
4. A and B entered into partnership on 1st April, 2009 without any partnership
deed. They introduced capital of Rs. 5,00,000 and Rs. 3,00,000 respectively. On
31st October, 2009, A advanced Rs. 2,00,000 by way of loan to the firm without
any agreement as to interest.

The profit and loss accounts for the year ended 31st March, 2010 showed a profit
of Rs. 4,30,000, but the partners could not agree upon the amount of interest on
loan to be charged and the basis of division of profits.

Pass a journal entry for the distribution of the profit between the partners and
prepare the capital accounts of both the partners and loan account of ‘A’. (All
India 2011)
5. G, H and R were partners in a firm sharing profits in the ratio of 7: 4: 9. Their
fixed capitals were G Rs. 2,00,000, H Rs. 75,000 and R Rs. 3,50,000. Their
partnership deed provided for the following

(i) Interest on capital @ 9% per annum.

(ii) Salary of Rs. 6,000 per month to H.
(iii) Interest on drawings @ 6% per annum.

During the year ended 31st December, 2009 the firm earned a profit of
Rs. 1,70,000. Interest on G’s drawings was Rs. 750, on H’s drawings Rs. 450 and
on R’s drawings Rs. 1,250.

Prepare profit and loss appropriation account for the year ended 31st December,
2009. (Delhi 2010C)

Working Mote

(i) As capitals are fixed, therefore interest, salary and share of profits will be
transferred to partners’ current accounts.
(ii) When interest on drawings is given, then there is no need to calculate it.
(iii) Interest on capital
6. L, M and N were partners in firm sharing profits in the ratio of 3 : 4 : 5. Their
fixed capitals were L Rs.4,00,000, M Rs. 5,00,000 and N Rs. 6,00,000 respectively.
The partnership deed provided for the following

(i) Interest on capital @ 6% per annum.

(ii) Salary of Rs. 30,000 per annum to N.
(iii) Interest on partner’s drawings will be charged @ 12% per annum.

During the year ended 31st March, 2008 the firm earned a profit of Rs. 2,70,000. L
withdrew Rs. 10,000 on 1st April, 2008, M withdrew Rs. 12,000 on 31st September,
2008 and N withdrew Rs. 15,000 on 31st December, 2008.

Prepare profit and loss appropriation account for the year ended 31st March, 2009
7. A, B and C were partners in a firm having capitals of Rs. 60,000, Rs. 60,000
and? 80,000 respectively. Their current account balances were A Rs.10,000, B Rs.
5,000 and C Rs. 2,000 (Dr).

According to the partnership deed, the partners were entitled to interest on

capital @ 5% per annum C being the working partner was also entitled to a salary
of Rs 6,000 per annum. The profits were to be divided as follows

(i) The first Rs. 20,000 in proportion to their capitals.

(ii) Next Rs. 30,000 in the ratio of 5: 3: 2.
(iii) Remaining profits to be shared equally.
The firm made a profit of Rs. 1,56,000 before charging any of the above items.

Prepare the profit and loss appropriation account and pass necessary journal
entry for appropriation of profit. (All India 2009; Foreign 2009; Delhi
2009,2008)
8. A and B were partners in a firm sharing profits and losses in the ratio of their
capitals which were Rs. 5,00,000 and Rs. 4,00,000 respectively. The partnership
agreement provided a salary of Rs. 20,000 per annum to B and 10% per annum
interest on partner’s capitals.

The profit of the firm for the year ended 31st March, 2008 was Rs. 1,46,000.
Prepare profit and loss appropriation account of A and B for the year ended 31st
March, 2008. (Delhi 2009c)

9. Sharma and Verma were partners in a firm sharing profits in the ratio of 4: 1.
Their capitals on 1st April, 2006 were Sharma Rs. 5,00,000 and Verma
Rs. 1,00,000. The partnership deed provided that Sharma will get a commission
of 10% on the net profit after allowing a salary of Rs. 5,000 per month to Verma.

The profits of the firm for the year ended 31st March, 2007 was Rs. 2,80,000.
Prepare profit and loss appropriation account of Sharma and Verma for the year
ended 31st March, 2007.
 Past Adjustments & Guarantee of profits to a partner
3 Marks Questions

1. Mukesh and Ramesh are partners sharing profits and losses in the ratio of 2: 1
respectively. They admit Rupesh as a partner with 1/4 share in profits with a
guarantee that his share of profit shall be at least Rs 55,000. The net profit of the
firm for the year ending 31st March, 2013 was Rs. 1,60,000. Prepare profit and
loss appropriation account. (Compartment 2014)
2. Mona, Nisha and Priyanka are partners in a firm. They contributed Rs. 50,000
each as capital three years ago. At that time, Priyanka agreed to look after the
business as Mona and Nisha were busy. The profits for the past three years were
Rs. 15,000, Rs. 15,000 and Rs. 50,000 respectively. While going through the books
of accounts, Mona noticed that the profit had been distributed in the ratio of 1: 1:
2. When she enquired from Priyanka about this, Priyanka answered that since she
looked after the business she should get more profit. Mona disagreed and it was
decided to distribute profit equally retrospectively for the last three years.
(i) You are required to make necessary correction in the books of accounts of
Mona, Nisha and Priyanka by passing an adjustment entry.
(ii) Identify the value which was not practised by Priyanka while distributing
profits

(ii) Value not practised by Priyanka while distributing profits is (Any one)
(a) Honesty Priyanka has not shown honesty towards co-partners by not
distributing profits as per the provision of Partnership Act.
(b) Transparency Priyanka has not shown transparency while distributing profits
as per her wish and not communicating the same to other partners.
(c) Equity Priyanka has not shown equity in profit distribution.
(d) Team work Priyanka has not shown team work by hiding profit sharing ratio
from other partners.

3. Mohan, Neeraj and Peeyush are partners in a firm. They contributed Rs. 75,000
each as capital three years ago. At that time, Peeyush agreed to look after the
business as Mohan and Neeraj were busy. The profits for the past three years
were Rs. 45,000, Rs. 30,000 and Rs. 60,000 respectively. While going through the
books of accounts, Mohan noticed that profit had been distributed in 1 : 1 : 2
ratio. When he enquired from Peeyush about this, Peeyush answered that since
he looked after the business he should get more profit. Mohan disagreed and it
was decided to distributed profits equally with respectively effect for the last
three years.

(i) You are required to make necessary corrections in the books of accounts of
Mohan, Neeraj and Peeyush by passing an adjustment entry.
(ii) Identify the value which is being ignored by Peeyush.
(All India 2013; VBQ)

(ii) Value not followed by Peeyush while distributing profits is (Any one)
(a) Honesty Peeyush has not shown honesty towards co-partners by not distributing
profits as per Partnership Act.
(b) Transparency Peeyush has not shown transparency while distributing profits as per
his wish and not communicating the same to other partners.
(c) Equity Peeyush has not shown equity in profits distribution.
(d) Team work Peeyush has not shown team work by hiding profit sharing ratio from
other partners.

4 Marks Questions

4. P,Q and R are partners sharing profits in the ratio of 3 : 2 : 1. However, R is

guaranteed Rs. 20,000 as his share of profits every year. Deficiency if any would
be borne by the other partners. The profits for the two years ending 31st March,
2008 and 31st March, 2009 had been Rs. 75,000 and Rs. 80,000 respectively. Show
the profit and loss appropriation account for the two years.
5. A and B are partners in a firm sharing profit and losses in the ratio of 3 : 2. The
following was the balance sheet of the firm as at 31st March, 2010.

The profits Rs. 30,000 for the year ended 31st March, 2010 were divided between
the partners without allowing interest on capital @ 12% per annum and salary to
A @ Rs. 1,000 per month. During the year, A withdrew Rs. 10,000 and B Rs.
20,000. Pass the necessary adjustment journal entry and show your working
clearly. (Delhi 2011)
6. A, B, C and D are partners sharing profits and losses in the ratio of 4 : 3 : 3 : 2.
Their respective fixed capitals on 31st March, 2010 were Rs. 60,000, Rs. 90,000,
Rs. 1,20,000 and Rs. 90,000 respectively. After preparing the final accounts for the
year ended 31st March, 2010, it was discovered that interest on capital @ 12% per
annum was not allowed and interest on drawings amounting to Rs. 2,000, Rs.
2,500, Rs. 1,500 and Rs. 1,000 respectively was also not charged.
Pass the necessary adjustment journal entry showing your working clearly. (All
India 2011)
7. A, B and C were partners in a firm. On 1st April, 2008, their fixed capitals stood
at Rs. 50,000, Rs. 25,000 and Rs. 25,000 respectively.
As per the provisions of the partnership deed
(i) B was entitled for a salary of Rs. 5,000 per annum.
(ii) All the partners were entitled to interest on capital at 5% per annum.
(iii) Profits were to be shared in the ratio of capitals.
The net profit for the year ending 31st March, 2009 of Rs. 33,000 and 31st March,
2010 of Rs. 45,000 was divided equally without providing for the above terms.
Pass an adjustment journal entry to rectify the above error. (All India 2011)
8. A, B and C were partners. Their capitals were Rs. 30,000, Rs. 20,000 and
Rs. 10,000 respectively. According to the partnership deed, they were entitled to
interest on capital @ 5% per annum. In addition, B was also entitled to draw a
salary of Rs. 500 per month. C was entitled to a commission of 5% on the profits
after charging the interest on capitals but before charging the salary payable to B.
The net profits for the year were Rs. 30,000 distributed in the ratio of their capitals
without providing for any of the above adjustments. The profits were to be shared
in the ratio of 2 : 2 :1. Pass the necessary adjustment entry showing the working
clearly. (Delhi 2010)

9. Ravi and Mohan were partners in a firm sharing profits in the ratio of
7: 5. Their respective fixed capitals were Ravi Rs. 10,00,000 and Mohan Rs.
7,00,000.
The partnership deed provided for the following
(i) Interest on capital @ 12% per annum.
(ii) Ravi’s salary Rs. 6,000 per month and Mohan’s salary Rs. 60,000 per year.
The profit for the year ended 31st March, 2007 was Rs. 5,04,000 which was
distributed equally, without providing for the above. Pass an adjustment
entry. (Delhi 2008)
10. R and S were partners in a firm sharing profits in the ratio of 3: 2. Their
respective fixed capitals were R Rs. 10,00,000 and S Rs. 15,00,000. The
partnership deed provided the following
(i) Interest on capital @ 10% per annum.
(ii) Interest on drawings @ 12% per annum.

During the year ended 31st March, 2007, R’s drawings were Rs. 1,000 per month
drawn at the end of every month and S’s drawings were Rs. 2,000 per month
drawn in the beginning of the every month. After the preparation of final accounts
for the year ended 31st March, 2007, it was discovered that interest on R’s
drawings were not taken into consideration.
Calculate interest on R’s drawings and give necessary adjustment entry for the
The profit for the year ended 31st March, 2007 was Rs. 2,78,000. Which was
distributed equally without treating the above adjustments.

11. Kumar and Raja were partners in a firm sharing profits in the ratio of 7 : 3.
Their fixed capitals were Kumar ? 9,00,000 and Raja ? 4,00,000. The partnership
deed provided for the following but the profit for the year was distributed without
providing for:
(i) Interest on capital @ 9% per annum.
(ii) Kumar’s salary Rs. 50,000 per year and Raja’s salary Rs. 3,000 per month.
Pass the adjustment entry. (All India 2008)
12. A, B and C were partners in a firm. They had no partnership deed. They had
been in business for 4 years and their profit and loss for this period was, year
ended March 2004 Rs. 39,000, March 2005 Rs. 54,000, March 2006 Rs. 18,000
(loss) and March 2007 Rs. 75,000. During the year 2007-08, they agreed to share
profits and losses in the ratio of 2 : 2 : 1 with retrospective effect from the year
2003-04. It was also decided that an interest (charge) of 5% per annum was to be
provided on capitals (fixed). Their capitals were Rs. 80,000, Rs. 60,000 and
Rs. 60,000 respectively. Pass a single adjustment entry to adjust the capital
accounts of the partners. (All India 2008)
6 Marks Questions

13. Seema, Tanuja and Tripti were partners in a firm trading in garments. They
were sharing profits in the ratio of 5 : 3 : 2. Their capitals on 1st April, 2012 were
Rs. 3,00,000, Rs. 4,00,000 and Rs. 8,00,000 respectively. After the flood in
Uttarakhand, all partners decided to help the flood victims personally.
For this, Seema withdrew Rs. 20,000 from the firm on 15th September, 2012. On
the same date, Tanuja instead of withdrawing cash from the firm, took garments
amounting to Rs. 24,000 from the firm and distributed those to the flood victims.
On the other hand, Tripti withdrew Rs. 2,00,000 from her capital on 1st January,
2013 and provided a mobile medical van in the flood affected area.
The partnership deed provides for charging interest on drawings @ 6% per
annum. After the final accounts were prepared, it was discovered that interest on
drawings had not been charged. Give the necessary adjusting journal entry and
show the working notes clearly. Also, state any two values which the partners
wanted to communicate to the society. (Modified; All India 2014)
The values which partners wanted to communicate to the society are
(i) Concern and care towards flood victims By donating garments and providing
medical facilities to the flood victims partners have shown care and concern towards
them.
(ii) Doing your best and compassion Partners have done their best and have shown
compassionate behaviour by helping the flood victims.
NOTE It has been assumed that Tanuja has made drawings on the same date as of
Seema.

14. A, B and C were partners. They started business in one of the remote tribal
areas of Odisha. They were interested in the development of the tribal community
by providing good education and health.
On 31st March, 2013, after making adjustments for profits and drawings their
capitals were A – Rs. 4,00,000, B – Rs. 3,00,000 and C Rs. 2,00,000. The drawings
of the partners were A – Rs. 4,000 per month, B – Rs. 3,000 per month and C –
Rs. 2,000 per month.
The profit of the firm for the year ended 31st March, 2013 was ? 6,00,000.
Subsequently it was found that the interest on capital @ 6% per annum due, had
been omitted.
Showing your working notes clearly, pass necessary adjustment entry for the
above. Also, identify any two values highlighted in the above question.
(Compartment 2014)
Values highlighted in the above question are
(i) Development of remote tribal area, by providing employment opportunities.
(ii) Equity, even though capital contributions are unequal, still the partners are sharing
profits equally, thereby promoting harmony and brotherhood.

15. A, B and C were partners in a firm. On 1st April, 2012 their capitals stood as
Rs. 5,00,000; Rs. 2,50,000 and Rs. 2,50,000 respectively.
As per provisions of the partnership deed
(i) C was entitled for a salary of Rs. 5,000 per month.
(ii) A was entitled for a commission of Rs. 80,000 per annum.
(iii) Partners were entitled to interest on capital @ 6% per annum.
(iv) Partners will share profits in the ratio of capitals.
Net profit for the year ended 31st March, 2013 was Rs. 3,00,000 which was
distributed equally, without taking into consideration the above provisions.
Showing your working clearly, pass necessary adjustment entry for the
above. (Compartment 2014)
16. Ali, Bimal and Deepak are partners in a firm. On 1st April, 2011 their capital
accounts stood at Rs. 4,00,000, Rs. 3,00,000 and Rs. 2,00,000 respectively. They
shared profits and losses in the ratio of 5 :3 : 2 respectively. Partners are entitled
to interest on capital @ 10% per annum and salary to Bimal and Deepak @ 12,000
per month and Rs. 3,000 per quarter respectively as per the provisions of the
partnership deed.
Bimal’s share of profit (excluding interest on capital but including salary) is
guaranteed at a minimum of Rs. 50,000 per annum. Any deficiency arising on that
account shall be met by Deepak. The profits of the firm for the year ended 31st
March, 2012 amount to Rs. 2,00,000. Prepare profit and loss appropriation
account for the year ended on 31st March, 2012. (Delhi 2013)

17. Anwar, Biswas and Divya are partners in a firm. Their capital accounts stood
at Rs. 8,00,000, Rs. 6,00,000 and Rs. 4,00,000 respectively on 1st April, 2011. They
shared profits and losses in the ratio of 3 : 2 :1 respectively. Partners are entitled
to interest on capital @ 6% per annum and salary to Biswas and Divya @
Rs. 4,000 per month and Rs. 6,000 per quarter respectively as per the provisions
of partnership deed.
Biswas’s share of profit (including interest on capital but excluding salary) is
guaranteed at a minimum of ?82,000 per annum. Any deficiency arising on that
account shall be met by Divya. The profits for the year ended 31st March, 2012
amounted to Rs. 3,12,000. Prepare profit and loss appropriation account for the
year ended 31st March,2012. (Deihi 2013)

18. Anand, Bhaskar and Dinkar are partners in a firm. On 1st April, 2011, the
balance in their capital accounts stood at Rs. 10,00,000, Rs. 8,00,000 and Rs.
6,00,000 respectively. They shared profits in the proportion of 5 : 4 : 3
respectively. Partners are entitled to interest on capital @10% per annum and
salary to Bhaskar @ Rs. 4,000 per month and a commission of Rs. 16,000 per
quarter to Dinkar as per the provisions of the partnership deed.
Anand’s share of profit (excluding interest on capital) is guaranteed at not less
than Rs. 1,90,000 per annum. Bhaskar’s share of profit (including interest on
capital but excluding salary) is guaranteed at not less than Rs. 2,45,000 per
annum. Any deficiency arising on that account shall be met by Dinkar. The profits
of the firm for the year ended 31st March, 2012 amounted to Rs 8,32,000. Prepare
‘profit and loss appropriation account’ for the year ended 31st March, 2012. (All
India 2013)
 Valuation & Treatment of Goodwill

1 Marks Questions

1. How does the nature of business affect the value of goodwill of a firm? (All
India 2011)

Ans. The firm that produces high value products and has stabilised demand, will be
able to earn more profit and more goodwill.

2. What are super profits? (Delhi 2011c)

Ans. Super profit is the excess of actual average profit over the normal profit.
i.e. Super Profit = Actual Profit – Normal Profit

3. How does the factor ‘quality of product’ affect the goodwill of a firm? (Delhi
2010)

Ans. If the firm enjoys good reputation for its product quality, there will be higher sales
and the value of its goodwill will increase.

4. How does the factor ‘efficiency of management’ affect the goodwill of a

firm? (All India 2010)

Ans. When the management of a firm is capable and competent, the firm will earn
higher profits therefore the ‘efficiency of management’ surely will affect or increase the
goodwill.

5. How does the factor location affect the goodwill of a firm? (Delhi 2010)

Ans. The value of business will be more, if it is located in a convenient or prominent

locality.

6. Define goodwill? (All India 2008)

Ans. Goodwill means the good name or reputation earned by a businessman through
his hard work and honesty. This helps the business to earn more profit.

2 Marks Question

7. Explain any two methods for valuation of goodwill. (Delhi 2008C)

Ans. The two methods for valuation of goodwill are as follows

(i) Average Profit Method of Valuation of Goodwill Under average profit method,
goodwill is valued on the basis of simple average or weighted average profits of the
firm, multiplied by the number of years’ of purchase.
Average Profit =Total Profit (after adjustments) / Number of Years
Goodwill = Average Profit x Number of Years’ of Purchase.

(ii) Valuation of Goodwill by Capitalisation of Super Profit Method Under this

method, goodwill is the capitalised value of super profits. For calculating goodwill, the
following steps are followed

(a) Ascertain the average profits based on the past few years’ performance.
(b) Calculate normal profit on capital employed by applying normal rate of return.
(c) Calculate super profits by deducting normal profit from average profits.
Goodwill = Super Profit x 100 / Normal Rate of Return

3/4 Marks Questions

8. A business earned average profits of Rs. 1,00,000 during the last few years.
The normal rate of return in similar type of business is 10%. The assets of the
business were Rs. 10,00,000 and external liabilities was Rs. 1,80,000. Calculate
the value of goodwill of the firm by super profit method, if the goodwill is valued
at 2. 1/2 years’ purchase of super profits.

9. A business has earned average profits of Rs. 1,00,000 during the last few years
and the normal rate of return in similar business is 10%. Find out the value of
goodwill by
(i) Capitalisation of super profit method.
(ii) Super profit method, if the goodwill is valued at 3 years’ purchase of super
profit. The assets of the business were Rs. 10,00,000 and its external liabilities
Rs. 1,80,000. (Delhi 2011)

10. A partnership firm earned net profits during the last 3 years as follows

The capital employed in the firm throughout the above mentioned period has
been Rs. 4,00,000. Having regard to the risk involved, 15% is considered to be a
fair return on the capital. The remuneration of all the partners during this period
is estimated to be Rs. 1,00,000 per annum.

Calculate the value of goodwill on the basis of

(i) 2 years’ purchase of super profits earned on average basis during the above
mentioned 3 years and
(ii) By capitalisation method.
 Reconstitution of a partnership Firm:
1 Marks Questions

1. Give the meaning of ‘reconstitution of a partnership firm’. (All India; Delhi2014)

Ans Change in the existing agreement of partnership is considered as reconstitution of

a partnership firm. Due to this, existing agreement comes to an end and the new
agreement comes into existence and the firm continues.

2. State the ratio in which the partners share the accumulated profits when there
is a change in the profit sharing ratio amongst existing partners. (All India
2013)

Ans. Accumulated profits are distributed in old profit sharing ratio, at the time of change
in profit sharing ratio amongst the existing partners.

3.State the ratio in which the partners share profits or losses on revaluation of
assets and liabilities, when there is a change in profit sharing ratio amongst
existing partners. (Delhi 2013)

Ans. Revaluation profits or losses are distributed in old profit sharing ratio, at the time of
change in profit sharing ratio amongst the existing partners.

4. State any two occasions on which a firm can be reconstituted.

(Delhi 2012,2008; All India 2011)

Ans. A firm can be reconstituted on the following occasions (Any two)

(i) When there is a change in the profit sharing ratio of existing partners.
(ii) When a new partner is admitted.
(iii) When an existing partner retires.
(iv) When an existing partner dies.

5. Why are ‘reserves and surplus’ distributed at the time of reconstitution of the
firm? (Delhi, All India 2010)

Ans. At the time of reconstitution of the firm, reserves and surplus should be transferred
to old partners’ capital/current accounts in their old profit sharing ratio because the new
partner is not entitled to any share in such undistributed profits or losses as these are
earned/accrued by the old partners.
4 Marks Questions

6. Anita, Asha and Amrit are partners sharing profits in the ratio of 3:2:1
respectively From 1st January, 2010, they decided to share profits in the ratio of
1:1:1. The partnership deed provided that in the event of any change in profit
sharing ratio, the goodwill should be valued at three years’ purchase of the
average of five years’ profits. The profits and losses of the preceding five years
are

Showing the working clearly, give the necessary journal entry to record the above
change
 Reconstitution of a Partnership Firm – Admission of a Partner

1. Piyush, Rajesh and Avinash were partners in a firm sharing profits and losses
equally. Shiva was admitted as a new partner for an equal share. Shiva brought
his share of capital and premium for goodwill in cash. The premium for goodwill
amount will be divided among : (2024)
(A) Old partners in old ratio
(B) New partners in new ratio
(C) New partners in sacrificing ratio
(D) Old partners in sacrificing ratio
Ans. (D) Old partners in sacrificing ratio
2. Alex, Benn and Cole were partners in a firm sharing profits and losses in the
ratio of 5 : 3 : 2. They admitted Dona as a new partner for 1/5 th share in the
future profits. Dona agreed to contribute proportionate capital. On the date of
admission, capitals of Alex, Benn and Cole after all adjustments were ₹ 1,20,000;
₹ 80,000 and ₹ 1,00,000 respectively. (2024)
The amount of capital brought in by Dona will be :
(A) ₹ 75,000
(B) ₹ 60,000
(C) ₹ 65,000
(D) ₹ 70,000
Ans. (A) ₹ 75,000
3. Aamir, Bashir and Chirag were partners in a firm sharing profits and losses in
the ratio of 3 : 3 : 2. Chirag retired. Aamir and Bashir decided to share profits and
losses in future in the ratio of 1 : 2. On the day of Chirag's retirement, goodwill of
the firm was valued at ₹ 5,40,000. Calculate gaining ratio and pass necessary
journal entry to record the treatment of goodwill (without opening goodwill
account) on Chirag's retirement. (2024)
Ans. Gain = New share – Old Share
Aamir’s Gain = 1/ 3 - 3/8 = -1/24 (sacrifice)
Bashir’s Gain = 2/3 - 3/8 = 7/24 (gain)
4. Pearl and Ruby were partners in a firm with a combined capital of ₹ 2,50,000.
The normal rate of return was 10%. The profits of the last four years were as
follows: (2024)

The closing stock for the year 2022 - 23 was overvalued by ₹ 5,000.
Calculate goodwill of the firm based on three years' purchase of the last four
years' average super profit.
Ans. Calculation of Normal Adjusted Profit
5. Archana, Vandana and Arti were partners in a firm sharing profits and losses in
the ratio of 5 : 3 : 2. Their Balance Sheet on 31st March, 2023 was as follows :
Balance Sheet of Archana, Vandana and Arti as at 31st March, 2023

The firm was dissolved on the above date.

(i) Assets were realised as follows :
Debtors — ₹ 40,000
Stock — ₹ 50,000
Plant — ₹ 60,000
(ii) 25% of the Investments were taken over by Vandana at ₹ 18,000. Remaining
Investments were taken over by Archana at 10% less than its book value.
(iii) Expenses of realisation ₹ 20,000 were paid by Arti.
Prepare Realisation Account. (2024)
Ans.
 Introduction & New profit Sharing
Ratio & Sacrificing Ratio
1 Mark Questions

1. State the right acquired by a newly admitted partner. (All India 2014,2009; Delhi
2008)

Ans. The right acquired by a newly admitted partner is (Any one):

(i) Share in the future profits of the firm.
(ii) Share in the assets of the firm.

2. What is meant by sacrificing ratio? (Compartment 2014)

or State the meaning of sacrificing ratio. (All India 2011)

Ans. It is the ratio in which the old partners have agreed to sacrifice their share of
profits in favour of new or incoming partner.
Sacrificing Ratio = Old Ratio – New Ratio

3. List any two items that need adjustments in the books of accounts of a
firm at the time of admission of a partner. (Compartment 2014)

Ans. Two items that need adjustment at the time of admission are:
(i) Goodwill of the firm.
(ii) Reserves and accumulated profits/losses.

4. X and Y are partners. Y wants to admit his son K into business. Can K become
the partner of the firm? Give reason. (Compartment 2014)

Ans. K can be admitted as a partner with the consent of X, and that to if he is a major.

5. State any one purpose for admitting a new partner in a firm. (All India 2012)

Ans. A new partner may be admitted for the following purpose (Any one)
(i) For procuring additional capital.
(ii) For acquiring additional managerial skills.

6. How is a new partner admitted to a firm?

Ans. A new partner is admitted to a firm with the consent of all the existing partners.
7. State the other rights which a newly admitted partner acquires besides the
right to share the profits of the firm. (All India 2009)

Ans. The rights that a newly admitted partner acquires besides the right to share the
profits of the firm are: (Any two)
(i) Right to share in the assets of the firm.
(ii) Right to take part in the business.
(iii) Right to inspect the books of account.

8. A and B are partners sharing profits in the ratio of 5 : 4. They admit C for l/9 th
share, which he acquires from A. Find the new profit sharing
ratio. (Delhi 2008C)

2 Marks Questions

9. A and B are partners sharing profits in the ratio of 5 : 4. They admit C for 1/1
Oth share of profit which he acquires in equal proportion from both. Find the new
profit sharing ratio. (Delhi 2011c, 2009)
10. A and B are partners sharing profits in the ratio of 5 : 4. They admit C for
l/3rd share, which he acquires in equal proportion from both. Find the new profit
sharing ratio. (All India 2011)

11. A and B are partners sharing profits in the ratio of 7 : 3. They admit C for
l/5th share, which he acquires in equal proportion from both. Find the new profit
sharing ratio. (All India 2009)

4 Marks Questions

12. (i) Rajeev and Sanjeev are partners in a firm sharing profits in the ratio of 3 : 2
respectively. They admit Vijay as a new partner. Rajeev surrenders 1/4 of his
share and Sanjeev 1/3 of his share in favour of Vijay. Calculate new profit sharing
ratio of Rajeev, Sanjeev and Vijay.

(ii)Anita and Sunita are partners in a firm sharing profits in the ratio of 3 :
2 respectively. They admitted Vinita as a new partner for1/4 share. The new
profit sharing ratio between Anita and Sunita will be 2 : 1. Calculate their
sacrificing ratio. (Compartment 2014)

13. i) Rohan and Mohan are partners in a firm sharing profits in the ratio of 5 :
3 respectively. They admit Bhim as a partner for 1/7 share in the profit. The new
profit sharing ratio will be 4 : 2 : 1. Calculate the sacrificing ratio of Rohan and
Mohan.
(ii) Amla and Kamla are partners in a firm sharing profits in the ratio of 4 :
1 respectively. They admitted Bimla as a new partner for1/4 share in the profits,
which she acquired wholly from Amla. Determine the new profit sharing ratio of
the partners. (Compartment 2014)

14. A and B are partners sharing profits and losses in the ratio of 2 : 1. They admit
C for l/3 rd share which he acquires in equal proportion from both. Find the new
profit sharing ratio. (Foreign 2009)
 Treatment of Goodwill
1 Mark Questions

1. Under what circumstances will the premium for goodwill paid by the incoming
partner not be recorded in the books of accounts. (Compartment 2014)

Ans. When the incoming partner pays his share of goodwill privately to the
sacrificing partners, outside the business, then no entry is passed in the books of
the firm.

2. State the need for treatment of goodwill on admission of a partner. (Delhi 2010)

Ans. When a new partner is admitted, his share in future profits of the firm is equal to
the sacrifice of profit by an existing partner or partners of the firm. The amount he pays
to compensate this sacrifice, is in the form of goodwill. Therefore, it is important to treat
goodwill at the time of admission of a partner.

2 Marks Question

3. A and B are partners with capitals of Rs. 90,000 and Rs. 1,00,000 respectively.
They decide to admit C into the partnership for 1/4 th share in the future profits. C
is to bring a sum of Rs. 80,000 as his capital. Calculate the amount of
goodwill. (All India 2008)
4. Hemant and Nishant were partners in a firm sharing profits in the ratio of 3 : 2.
Their capitals were Rs. 1,60,000 and Rs. 1,00,000 respectively. They admitted
Somesh on 1st April, 2013 as a new partner for 1/5 share in the future profits.
Somesh brought Rs. 1,20,000 as his capital. Calculate the value of goodwill of the
firm and record necessary journal entries for the above transactions on Somesh’s
admission.
(All India 2014)

5. Abhay and Beena are partners in a firm. They admit Chetan as a partner with
l/4th share in the profits of the firm. Chetan brings Rs. 2,00,000 as his share of
capital. The value of the total assets of the firm is Rs. 5,40,000 and outside
liabilities are valued at Rs. 1,00,000 on that date. Give the necessary entry to
record goodwill at the time of Chetan’s admission. Also show your working
notes.
6. Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with
l/5th share in the profits of the firm. Ajay brings Rs. 5,00,000 as his share of
capital. The value of the total assets of the firm was Rs. 15,00,000 and outside
liabilities were valued at Rs. 5,00,000 on that date. Give the necessary journal
entry to record goodwill at the time of Ajay’s admission. Also, show your
workings. (All India 2013)
7. A and B were partners in a firm sharing profits and losses in the ratio of 3 : 2.
They admitted C as a new partner for 3/7th share in the profits and the new profit
sharing ratio will be 2 : 2 : 3. C bought tRs. 2,00,000 as his capital and
Rs. 1,50,000 as premium for goodwill. Half of their share of premium was
withdrawn by A and B from the firm. Calculate sacrificing ratio and pass
necessary journal entries for the above transactions in the books of the firm. (All
India 2009)

8. A and B were partners in a firm sharing profits in the ratio of 4 : 3. They

admitted C as a new partner for 3/7th share in the profits of the firm. The new
profit sharing ratio will be 2 : 2 : 3. C brought Rs. 2,00,000 as his capital and
Rs. 60,000 for his share of premium as goodwill, half of which was withdrawn by
A and B from the firm. Calculate sacrificing ratio and pass necessary journal
entries in the books of the firm for the above transactions. (All India 2009)
6 Marks Question

9. A and B were partners in a firm sharing profits and losses in the ratio of 5 : 3.
They admitted C as a new partner. A surrendered l/3rd of his share in favour of C
and B surrendered 1/4 th of his share in favour of C. C brought Rs. 1,50,000 for
his capital and Rs. 58,000 for his share of goodwill. Calculate new profit sharing
ratio of A, B and C, sacrificing ratio of A and B and pass necessary journal entries
for the above transactions on C’s admission. (Delhi 2008)
10. B and C were partners in a firm sharing profits and losses in the ratio of 4 : 3.
They admitted D as a new partner for l/4th share in the profits which he acquired
from B and C in 3 : 4 ratio. D brought Rs. 1,80,000 for his capital and Rs. 42,000
for his 1/4th share in goodwill. Calculate new profit sharing ratio of B, C and D
and pass necessary journal entries for the above transactions on D’s admission
in the books of the firm. (Delhi 2008)
11. K and Y were partners in a firm sharing profits in 3 : 2 ratio. They admitted Z
as a new partner for l/3rd share in the profits of the firm. Z acquired his share
from K and Y in 2 : 3 ratio. Z brought Rs. 80,000 for his capital and Rs. 30,000 for
his l/3rd share as premium. Calculate the new profits sharing ratio of K, Y and Z
and pass necessary journal entries for the above transactions in the books of the
firm. (All India 2008)
 Revaluation of Assets & Re-assessment of liabilities

1 Mark Question

1. Why are assets and liabilities revalued at the time of admission of a

partner? (Compartment 2014)

Ans. Assets and liabilities are revalued at the time of admission of a partner, so that
profit or loss arising on account of revaluation, may be adjusted among old partners in
their old profit sharing ratio, since it belongs to them.

2 Mark Question

2. State any two reasons for the preparation of revaluation account on the
admission
of a partner. (All India 2008)

Ans. At the time of admitting a new partner, revaluation account is prepared for the
below stated reasons:
(i) An incoming partner will not likely to suffer any loss relating to the period prior to his
admission.
(ii) Old partners will not like to share the gain relating to the period prior to his
admission.

3. What is a revaluation account? (All India 2008)

Ans. The account which is prepared to record changes in the value of assets and
liabilities at the time of admission, retirement, death and change in profit sharing ratio is
called revaluation account.

8 Marks Questions

4. W and R were partners in a firm sharing profits in the ratio of 3 : 2 respectively.

On 31st March, 2013, their balance sheet was as follows
B was admitted as a new partner on the following conditions:
(i) B will get 4/15th share of profits.
(ii) B had to bring Rs. 15,000 as his capital.
(iii) B would pay cash for his share of goodwill based on 2.5 years purchase of
average profit of last 4 years.
(iv) The profits of the firm for the years ending 31st March, 2010, 2011, 2012 and
2013 were Rs. 10,000, Rs. 7,000 , Rs. 8,500, and Rs. 7,500 respectively.
(v) Stock was valued at Rs. 10,000 and provision for doubtful debts was raised up
to X
(vi) Plant was revalued at Rs. 20,000.
Prepare revaluation account, partners’ capital account and the balance sheet of
the new firm. (Compartment 2014)
5. Alfa and Beta were partners in a firm. They were trading in artificial limbs. On
1st April, 2013 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, 2013 was as follows.
Gama was admitted in the firm on the following terms:
(i) Gama will bring Rs. 4,00,000 as his share of capital, but he was unable to bring
any amount for goodwill.
(ii) The new profit sharing ratio between Alfa, Beta and Gamma will be 3 : 2 : 1.
(iii) Claim on account of workmen compensation was Rs. 30,000.
(iv) To write off bad debts amounted to Rs. 40,000.

(v) Creditors were paid Rs. 20,000 more.

(vi) Outstanding expenses be brought down to Rs. 12,000.
(vii) Rs. 20,000 be provided for an unforeseen liability.
(viii) Goodwill of the firm was valued at Rs. 1,80,000.

Prepare revaluation account, capital accounts of partners and the opening

balance sheet of the new firm. Also, identify any one value which the partners
wanted to communicate to the Society. (Compartment 2014; VBQ)
Value conveyed by the partners
Care and concern towards differently abled persons.
NOTE (i) In the absence of any information, old ratio is assumed to be equal.
(ii) Bad debts are written-off from provision for doubtful debt.
(iii) Only Beta sacrifices on Gamma’s admission.

6. Murari and Vohra were partners in a firm with capitals of Rs. 1,20,000 and
Rs. 1,60,000 respectively. On 1st April, 2010 they admitted Yadav as a partner for
l/4th share in profits on his payment of Rs. 2,00,000 as his capital and Rs. 90,000
for his l/4th share of goodwill. On that date, the creditors of Murari and Vohra
wereRs. 60,000 and bank overdraft was Rs. 15,000. Their assets apart from cash
included stock Rs. 10,000; debtors Rs. 40,000; plant and machinery Rs. 80,000;
land and building Rs. 2,00,000. It was agreed that stock should be depreciated by
Rs. 2,000; plant and machinery by 20%, Rs. 5,000 should be written-off as bad
debts and land and building should be appreciated by 25%.
Prepare revaluation account, capital accounts of Murari, Vohra and Yadav and the
balance sheet of the new firm. (All India 2011)
 Adjustment of Capital
3/4 Marks Questions

1. Nandan, John and Rosa are partners sharing profits in the ratio of 4 : 3: 2. On
1st April, 2012, John gave a notice to retire from the firm. Nandan and Rosa
decided to share future profits in the ratio of 1 : 1. The capital accounts of Nandan
and Rosa after all adjustments showed a balance of Rs. 43,000 and Rs. 80,500
respectively. The total amount to be paid to John was Rs. 95,500. This amount
was to be paid by Nandan and Rosa in such a way that their capitals become
proportionate to their new profit sharing ratio. Pass necessary journal entries in
the books of the firm for the above transactions. Show your working clearly. (All
India 2013)

2. X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 2 : 1. On 1st

April, 2009, X retires from the firm, Y and Z agrees that the capital of the new firm
shall be fixed Rs. 2,10,000 in the profit sharing ratio. The capital accounts of Y
and Z after all adjustment on the date of retirement showed balances of Rs.
1,45,000 and Rs. 63,000 respectively. State the amount of actual cash to be
brought in or to be paid to the partners. (Delhi 2010)
3. X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 2 : 1. On 1st
April, 2009, Y retires form the firm. X and Z agree that the capital of the new firm
shall be fixed at Rs.2,10,000 in the profit sharing ratio. The capital accounts of X
and Z after all adjustments on the date of retirement showed balances of
Rs. 1,45,000 and Rs. 63,000 respectively. State the amount of actual cash to be
brought in or to be paid of partners. (All India 2010)

8 Marks Questions

4. L, M and N were partners in a firm sharing profits in the ratio of 2 : 1 :1. On 1st
April, 2013 their balance sheet was as follows.
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
Rs. 1,60,000.
(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. (All India 2014)
5. A, B and C were in partnership sharing profits in proportion to their capitals.
Their balance sheet on 31st March, 2008 was as follows

On the above date B retired owing to ill health and the following
adjustments were agreed upon

(i) Buildings to be appreciated by 10%.

(ii) Provision for doubtful debts to be increased to 5% of debtors.
(iii) Machinery to be depreciated by 15%.
(iv) Goodwill of the firm be valued at Rs. 36,000 and be adjusted into the capital
accounts of A and C who will share profits in future in the ratio of 3 : 1.
(v) A provision to be made for outstanding repairs bill of Rs. 3,000.
(vi) Included in the value of creditors is Rs. 1,800 for an outstanding legal claim,
which is not likely to arise.

(vii) Out of the insurance premium paid Rs. 2,000 is for the next year. The amount
was debited to profit and loss account.
(viii) The partners decide to fix the capital of the new firm as Rs. 1,20,000 in the
profit sharing ratio.
(ix) B to be paid Rs. 9,000 in cash and balance to be transferred to his loan
account.
Prepare the revaluation account, partners’ capital account and the balance
sheet of the new firm after B1 s retirement. (Delhi; All India; Foreign 2009)
6. The balance sheet of A, B and C on 31st March, 2007 was as follows

The following terms were agreed upon for As retirement

(i) Goodwill to be valued at Rs. 42,000 and not to be shown in the books of the
firm after A’s retirement.
(ii)Land and building to be appreciated by Rs. 20,000.
(iii) Plant and machinery to be reduced to Rs. 46,000.
(iv) Provision for doubtful debts to be created at 5% on debtors.
(v) Create a provision of Rs. 1,400 for discount on creditors.
(vii) The sum payable to A to be brought in by B and C in such a manner that their
capitals are in proportion to their new profit sharing ratio.
Prepare the revaluation account, partners’ capital account and the balance sheet
of the new firm to give effect to the above terms. (All India 2008)
 Reconstitution of a Partnership Firm – Retirement –
Death of a Partner

1. Shivalik Limited was registered with an authorized capital of ₹ 10,00,000

divided into equity shares of ₹ 10 each.
It offered 50,000 equity shares to the public. The amount was payable as follows :
On Application — ₹ 2 per share
On Allotment — ₹ 6 per share
On First and Final call — Balance
The issue was fully subscribed. All the amounts were duly received except the
allotment and first and final call money on 4,000 equity shares. These equity
shares were forfeited.
Present the 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.

(2024)
Ans.

Notes to Accounts:
 Introduction & New profit Sharing Ratio/Gaining Ratio
1 Mark Questions

1. X, Y and Z are partners sharing profits in the ratio of 1/2, 2/5 and 1/10. Find the
new ratio of remaining partners, if Z retires. (Delhi 2014)

Ans. Old ratio of X: V : Z = 1/2: 2/5: 1/10 or 5/10: 4/10: 1/10 or 5:4:1
Z retires, after striking of the retiring partner’s ratio, remaining ratio will be new profit
sharing ratio, i.e. 5 :4.

2. Why heirs of a retiring/deceased partner are entitled to a share of goodwill of

the firm? (Delhi 2014)

Ans. The retiring or deceased partner is entitled to his share of goodwill at the time of
retirement/death because the goodwill has been earned by the firm at the time when he
was a partner.

3. X, Y and Z were partners sharing profits in the ratio of 1/2, 3/10, and 1/5. X
retired from the firm. Calculate the gaining ratio of the remaining partners. (All
India 2014)

Ans. Old ratio of X:Y:Z =1/2: 3/10 :1/5 or 5/10 : 3/10 : 2/10= 5:3:2
X retired, after striking of the retiring partner’s ratio, remaining ratio will be new profit
sharing ratio,i.e. 3:2
New profit sharing ratio = Y : Z = 3:2
Gaining Ratio = New Ratio – Old Ratio
Y = 3/5-3/10 = 6-3/10=3/10; Z=2/5-2/10 =4-2/10 =2/10
Gaining ratio = 3:2

4. Ram, Mohan and Sohan were partners in a firm sharing profits in the ratio of
4:3:2. Mohan retired. His share was taken over equally by Ram and Sohan. In
which ratio will the profit or loss on revaluation of assets and liabilities on the
retirement of Mohan be transferred to the capital accounts of the partners? (Delhi
2010C)

Ans. The profit or loss on revaluation of assets and liabilities on the retirement of
Mohan will be transferred to the capital accounts of the partners in their old ratio, i.e.
4:3:2.

5. How can a partner retire from a firm? (Foreign 2009)

Ans. A partner can retire
(i) With the consent of all the partners.
(ii) By giving notice in writing, in case of partnership at will.
6. A, B and C were partners in a firm sharing profits in the ratio of 8 : 4 :3. B
retires and his share is taken up equally by A and C. Find the new profit sharing
ratio. (Delhi 2009)

7. Define gaining ratio. (Delhi 2008)

Ans. The ratio in which the continuing partners have acquired the share from the
retiring partner’s share of the profit is termed as gaining ratio.
Gaining Ratio = New Ratio – Old Ratio

8. A, B and C are partners sharing profits in the ratio of 3 : 2 :1. B retires and new
profit sharing ratio between A and C is 3 : 1. State the gaining ratio. (All India
2008)

2 Marks Questions

9. (i) K, L and Z are partners sharing profits in the ratio of 4 : 3 : 2 respectively. L

retired and surrendered 1/9 of his share of profit to K and remaining in favour of
Z. Calculate the new profit sharing ratio of K and Z.
(ii) Arun, Varun and Charan are partners sharing profits in the ratio of 1/2,
3/10 and 1/5 respectively. Varun retired from the firm and Arun and Charan
decided to share future profits in 3 : 2 ratio. Calculate gaining ratio of Arun and
Charan. (Compartment 2014)

Ans. (i) Old ratio between K, L and Z = 4 : 3 : 2.

Share surrendered in favour of K by L = 3/9 x 1/9 = 3/81
Share surrendered in favour of Z by L = 3/9-3/81 = 27-3/81 = 24/81

10. R, S and M are partners sharing profits in the ratio of 2/5, 2/5 and 1/5. M
decides to retire from business, and his share is taken by R and S in the ratio of
2: 1. Calculate the new profit sharing ratio. (All India 2011)

11. A, B and C were partners in a firm sharing profits in the ratio of 5 : 4:3. B
retires and his share is taken up equally by A and C. Find the new profit sharing
ratio. (All India 2009)
12. A, B and C were partners in a firm sharing profits in the ratio of 6 : 5:4. C
retires and his share is taken up equally by A and B. Find the new profit sharing
ratio. (Foreign 2009)
 Treatment of Goodwill & Revaluation of Assets &
Re-assessment of liabilities
1 Mark Questions

1. P, Q and R were partners in a firm sharing profits in the ratio of 5 : 4 : 3

respectively. Their capitals were Rs. 50,000, Rs. 40,000 and Rs. 30,000
respectively. State the ratio in which the goodwill of the firm, amounting to Rs.
6,00,000, will be adjusted in the capital accounts of the remaining partners on the
retirement of Q. (Compartment 2014)

Ans. The goodwill will be adjusted in the gaining ratio of the continuing partners.

2. Give the journal entry to distribute ‘workmen compensation reserve’

of Rs. 60,000 at the time of retirement of Sajjan, when there is no claim against it.
The firm has three partners Rajat, Sajjan and Kavita. (Delhi 2013)

3. Give the journal entry to distribute workmen compensation reserve of Rs.

70,000 at the time of retirement of Neeti when there is a claim of Rs. 25,000
against it. The firm has three partners Raveena, Neeti and Rajat. (All India 2013)
4. For which share of goodwill a partner is entitled at the time of his
retirement? (Delhi 2012)

Ans. At the time of retirement, a partner is entitled to get an amount equal to his share
out of firm’s goodwill.

5. P, Q and R were partners in a firm sharing profits in the ratio of 5 : 4 :3. Their
capitals were Rs. 40,000, Rs. 50,000 and Rs.1,00,000 respectively. State the ratio
in which the goodwill of the firm amounting to Rs.1,20,000 will be adjusted on the
retirement Of R. (All India 2010,2008C)

Ans. R’s share of goodwill, i.e. Rs. 30,000 (1,20,000 x 3/12) will be contributed by P
and Q in their gaining ratio, i.e. 5 : 4.

6. A, B and C are partners sharing profits in the ratio of 4 : 3 : 2. B retires and the
goodwill of the firm is valued at Rs.18,000. Pass journal entry for the treatment of
goodwill on B’s retirement. (Delhi 2008C)

4 Marks Questions

7. Arjun, Bheem and Nakul are partners sharing profits and losses in the ratio of
14 : 5: 6 respectively. Bheem retires and surrenders his 5/25th share in favour of
Arjun. The goodwill of the firm is valued at 2 years’ purchase of super profits
based on average profits of last 3 years. The profits of the last three years are Rs.
50,000, Rs.55,000 and Rs. 60,000 respectively. The normal profits of the similar
firms are Rs. 30,000. Goodwill already appears in the books of the firm at
Rs. 75,000. The profit for the first year after the Bheem’s retirement was
Rs.1,00,000.
Give necessary journal entries to adjust goodwill and distribute profits showing
your workings. (Delhi 2012)
8. A, B, C and D are partners sharing profits in the ratio of 3 : 3 : 2 : 2 respectively.
D retires and A, B and C decide to share the future profits in the ratio of 3 : 2 : 1.
Goodwill of the firm is valued at Rs. 6,00,000. Goodwill already appears in the
books at Rs. 4,50,000. The profit for the 1st year after D’s retirement amount
to Rs. 1,20,000. Give the necessary journal entries to record goodwill and to
distribute the profits. Show your calculations clearly. (All India 2012)
9. A, B and C were partners sharing profits in the ratio of 6: 4: 5. Their capitals
were A Rs. 1, 00,000, B Rs. 80,000 and C Rs. 60,000. On 1st April, 2009 B retired
from the firm and the new profit sharing ratio between A and C was decided as
11: 4. On B’s retirement, the goodwill of the firm was valued at Rs. 1, 80,000.
Showing your calculations clearly, pass necessary journal entry for the treatment
of goodwill on B’s retirement. (Delhi 2010)
10. A, B and C were partners in a firm sharing profits in the ratio of 6 : 5 : 4. Their
capitals were A, Rs. 1,00,000, B Rs. 80,000 and C Rs. 60,000 respectively. On 1st
April, 2009, C retired from the firm and the new profit sharing ratio between A and
B was decided as 11: 4. On C’s retirement the goodwill of the firm was valued at
Rs. 90,000. Showing your calculations clearly, pass necessary journal entry for
the treatment of goodwill on C’s retirement. (All India 2010)
 Settlement of Amount Due to Retiring partner

4 Marks Question

1. Sita, Geeta and Rita were partners sharing profits in the ratio of 2:2:1
respectively. Following was their balance sheet as at 31st March, 2013.

On the above date Sita retired and following were agreed

(i) Stock was valued at Rs. 59,000; debtors Rs. 40,000; building Rs. 2,10,000;
plant Rs. 70,000 and creditors Rs. 50,000.
(ii) Amount due to Sita will be transferred to Sita’s loan account. Prepare
revaluation account and Sita’s capital account. (Compartment 2014)
6 Marks Questions

2. Following is the balance sheet of X, Y and Z as on 31st March, 2008. They

shared profits in the ratio of 3 : 3 : 2

On 1st April, 2008, Y decided to retire from the firm on the following terms
(i) Stock to be depreciated by Rs. 12,000.
(ii) Advertisement suspense account to be written-off.
(iii) Fixed assets to be appreciated by 10%.
(iv) Provision for doubtful debts to be increased to Rs. 6,000.
(v) Goodwill of the firm valued at Rs. 80,000 and the amount due to the retiring
partner be adjusted in X’s and Z’s capital account.
Prepare revaluation account, partners’ capital account and the balance sheet to
give effect to the above. (All India 2009)
3. R, S and T were partners in a firm sharing profits in 2 : 2 : 1 ratio. On 1st April,
2004, their balance sheet was as follows

S retired from the firm on 1st April, 2004 and his share was ascertained on the
revaluation of assets as follows; stock Rs. 40,000, furniture Rs. 6,000, plant and
machinery Rs. 18,000, building Rs. 40,000; Rs. 1,700 were to be provided for
doubtful debts. The goodwill of the firm was valued at Rs. 12,000.
S was to be paid Rs. 18,080 in cash on retirement and the balance in three equal
yearly instalments.
Prepare revaluation account, partners’ capital account, S’s loan account and
balance sheet on 1st April, 2004. (All India 2008)
4. The balance sheet of A, B and C who were sharing profits and losses in the
ratio of 1/2, 1/3 and 1/6 respectively, was as follows on 1st April, 2004

A retired from the business on 1st April, 2004 and his share in the firm was to be
ascertained on the revaluation of the assets as follows Stock Rs. 20,000; furniture
Rs. 3,000; plant and machinery Rs. 9,000; building Rs. 20,000; Rs. 850 was to be
provided for doubtful debts. The goodwill of the firm was valued at Rs. 6,000.
A was to paid Rs. 11,500 in cash on retirement and the balance in three equal
yearly instalments with interest at 9% per annum. Prepare revaluation account,
partners’ capital account and As loan account on the date of his retirement. (Delhi
2008)
 Adjustment of capital
3/4 Marks Questions

1. Nandan, John and Rosa are partners sharing profits in the ratio of 4 : 3: 2. On
1st April, 2012, John gave a notice to retire from the firm. Nandan and Rosa
decided to share future profits in the ratio of 1 : 1. The capital accounts of Nandan
and Rosa after all adjustments showed a balance of Rs. 43,000 and Rs. 80,500
respectively. The total amount to be paid to John was Rs. 95,500. This amount
was to be paid by Nandan and Rosa in such a way that their capitals become
proportionate to their new profit sharing ratio. Pass necessary journal entries in
the books of the firm for the above transactions. Show your working clearly. (All
India 2013)

2. X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 2 : 1. On 1st

April, 2009, X retires from the firm, Y and Z agrees that the capital of the new firm
shall be fixed Rs. 2,10,000 in the profit sharing ratio. The capital accounts of Y
and Z after all adjustment on the date of retirement showed balances of Rs.
1,45,000 and Rs. 63,000 respectively. State the amount of actual cash to be
brought in or to be paid to the partners. (Delhi 2010)
3. X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 2 : 1. On 1st
April, 2009, Y retires form the firm. X and Z agree that the capital of the new firm
shall be fixed at Rs.2,10,000 in the profit sharing ratio. The capital accounts of X
and Z after all adjustments on the date of retirement showed balances of
Rs. 1,45,000 and Rs. 63,000 respectively. State the amount of actual cash to be
brought in or to be paid of partners. (All India 2010)

8 Marks Questions

4. L, M and N were partners in a firm sharing profits in the ratio of 2 : 1 :1. On 1st
April, 2013 their balance sheet was as follows.
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
Rs. 1,60,000.
(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. (All India 2014)
5. A, B and C were in partnership sharing profits in proportion to their capitals.
Their balance sheet on 31st March, 2008 was as follows

On the above date B retired owing to ill health and the following
adjustments were agreed upon

(i) Buildings to be appreciated by 10%.

(ii) Provision for doubtful debts to be increased to 5% of debtors.
(iii) Machinery to be depreciated by 15%.
(iv) Goodwill of the firm be valued at Rs. 36,000 and be adjusted into the capital
accounts of A and C who will share profits in future in the ratio of 3 : 1.
(v) A provision to be made for outstanding repairs bill of Rs. 3,000.

(vi) Included in the value of creditors is Rs. 1,800 for an outstanding legal claim,
which is not likely to arise.
(vii) Out of the insurance premium paid Rs. 2,000 is for the next year. The amount
was debited to profit and loss account.
(viii) The partners decide to fix the capital of the new firm as Rs. 1,20,000 in the
profit sharing ratio.

(ix) B to be paid Rs. 9,000 in cash and balance to be transferred to his loan
account.
Prepare the revaluation account, partners’ capital account and the balance
sheet of the new firm after B1 s retirement. (Delhi; All India; Foreign 2009)
6. The balance sheet of A, B and C on 31st March, 2007 was as follows
The following terms were agreed upon for As retirement
(i) Goodwill to be valued at Rs. 42,000 and not to be shown in the books of the
firm after A’s retirement.
(ii)Land and building to be appreciated by Rs. 20,000.
(iii) Plant and machinery to be reduced to Rs. 46,000.
(iv) Provision for doubtful debts to be created at 5% on debtors.
(v) Create a provision of Rs. 1,400 for discount on creditors.
(vii) The sum payable to A to be brought in by B and C in such a manner that their
capitals are in proportion to their new profit sharing ratio.
Prepare the revaluation account, partners’ capital account and the balance sheet
of the new firm to give effect to the above terms. (All India 2008)
 Death of a partner
1 Mark Questions

1. A, T and R were partners in a firm sharing profits in the ratio of 5 : 6 : 7

respectively. Their capitals were Rs. 5,00,000; Rs. 6,00,000 and Rs. 7,00,000
respectively. State the ratio in which the goodwill of the firm amounting to
Rs. 16,00,000 will be adjusted in the capital accounts of A and T in case of R’s
death. (Compartment 2014)

Ans. Goodwill of the firm, at the time of R’s death, will be adjusted among A and T in
gaining ratio.

2. At what rate is interest payable on the amount remaining unpaid to the

executor of deceased partner? (All India 2013; hots)

Ans. Interest is payable @ 6% per annum on the amount remaining unpaid to the
executor of deceased partner.

3. Name the account which is opened to credit the share of profit of the
deceased partner, till the time of his death to his capital
account. (Delhi 2013; HOTS)

Ans. ‘Profit and loss suspense account’ is opened, to credit the share of profit of the
deceased partner.

4. State any two deductions that may have to be made from the amount payable
to the legal representative of a deceased partner. (All India 2009)

Ans. (i) Deceased partner’s share of loss on revaluation of assets and liabilities.
(ii) Drawings made by deceased partner till the date of death.

3 Marks Question

5. A, B and C are partners in a firm whose books are closed on 31st March each
year. B died on 30th June, 2009 and according to the agreement, the share of
profit of a deceased partner up to the date of the death is to be calculated on the
basis of the average profits for the last five years. The net profits for the last 5
years have been 2005 : Rs. 14,000; 2006 : Rs. 18,000; 2007 : Rs. 16,000; 2008 :
Rs. 10,000 (loss) and 2009 : Rs. 16,000. Calculate B’s share of profits upto the
date of death and pass necessary journal entry. (All India 2010)
Ans. Calculation of B’s Share of Profit
Last 5 years’ total profit = 14,000 +18,000 +16,000 -10,000 +16,000 =Rs. 54,000
Average profit = 54,000 / 5 = Rs. 10,800
B’s share of profit = 10,800 x 1/3 x 3/12 = Rs. 900

4 Marks Questions

6. Monika, Sonika and Manisha were partners in a firm sharing profits in the ratio
of 2:2:1 On 31st March, 2013 their balance sheet was as under

Sonika died on 30th June, 2013. It was agreed between her executors and the
remaining partners that

(i) Goodwill of the firm be valued at 3 years’ purchase of average profits for the
last four years. The average profits were Rs. 2,00,000.
(ii) Interest on capital be provided at 12% per annum.
(iii) Her share in the profits upto the date of death will be calculated on the basis
of average profits for the last 4 years.
Prepare Sonika’s capital as on 30th June, 2013. (All India
2014)
7. A, B and C were partners in a firm sharing profits in 3 : 2 :1 ratio. The firm
closes its books on 31st March every year. B died on 12th June, 2007. On B’s
death the goodwill of the firm was valued at Rs. 60,000. 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. 1,50,000, Calculate B’s share in the profit of
the firm. Pass necessary journal entries for the treatment of goodwill and B’s
share of profit at the time of his death. (Delhi 2008)
8. P, Q and R were partners in a firm sharing profits in 2 : 2 : 1 ratio. The firm
closes its book on 31st March every year. P died three months after the last
accounts were prepared. On that date, the goodwill of the firm was valued at
Rs. 90,000. On the death of a partner his share of profits in the year of death was
to be calculated on the basis of the average profits of the last four years.
The profit of last four years were
9. Hari, Mohan and Sohan were partners in a firm sharing profits in 2 : 2 : 1 ratio.
The firm closes its books on 31st March every year. Mohan died on 24th August,
2007. On Mohan’s death, the goodwill of the firm was valued at Rs. 75,000, The
partnership deed provided that on the death of a partner his share in the profit of
the firm in the year of his death will be calculated on the basis of last years profit.
The profit of the firm for the year ended 31st March, 2007 was Rs. 2,00,000.
Calculate Mohan’s share of profit till the time of his death and pass the necessary
journal entries for the treatment of goodwill and his share of profit. (All India
2008)
6 Marks Questions

10. Ram, Rahim and Robert were partners sharing profits in 2: 3: 1 ratio
respectively. The partnership deed provided that in case of death of a partner the
deceased partner’s share of capital will be donated for the construction of a
hospital in the tribal area.
Due to ill health Robert died on 30th September, 2013. The balance sheet of Ram,
Rahim and Robert on 31st March, 2013 was as follows.
On the date of Robert’s death i.e. 30th September, 2013, the following was agreed
upon
(i) Goodwill is to be valued at two years’ purchase of average profits of last three
completed years i.e., 2010-2011 – Rs. 45,000; 2011-2012 – Rs. 90,000 and 2012-
2013 -Rs. 1,35,000.
(ii) Robert’s share of profits till the date of his death will be calculated the basis of
average profits of last three years.
(iii) Land was undervalued by Rs. 25,000 and stock overvalued by Rs. 8,000.
(iv) Provision for doubtful debts is to be made at 5% of Debtors.
(v) Claim of workmen compensation estimated at Rs. 5,000.
Prepare Robert’ capital account to be presented to his executors. Also, identify a
value that Ram, Rahim and Robert wanted to communicate to the
society.(Compartment 2014)
11. A, B and C are partners in a firm sharing profits in the ratio of 5 : 3 : 2
respectively. Their balance sheet as on 31st December, 2012 was as
follows

A died on 1st October, 2013, due to illness. It was agreed between the firm and A’
sexecutors that the amount due to A will be used for construction of a Charitable
hospital in a village. As per the agreement.
(i) Goodwill was valued at 2 years’ purchase of average profits of last 4 years,
which were : 2009-Rs. 1,00,000; 20101,60,000; 2011 -Rs. 1,80,000 and 2012-Rs.
2,00,000.
(ii) Patents were revalued at Rs. 90,000; Machinery at Rs. 2,80,000 and Building at
Rs. 2,50,000.
(iii) A’s share of profit till the date of his death will be calculated on the basis of
the profit of the year 2012.
(iv) Interest on capital will be provided at 10% per annum.
(v) Amount due to A’s executors will be transferred to charity account.
(a) Prepare A’s capital account to be presented to his executor.
(b) Identify any one value being highlighted in the question. (Compartment 2014)
12. The balance sheet of Radha, Sohan and Madan, who were sharing profits in
the ratio of 4 : 3 : 1 respectively, as on 31st March, 2012 was as follows

Madan died on 1st September, 2012. The partnership deed provided for the
following on the death of a partner

(i) Goodwill of the firm to be valued at two years’ purchase of average profits for
the last three years which were Rs.64,000.

(ii) Madan’s share of profit till the date of his death was to be calculated on the
basis of sales. Sales for the year ended 31st March, 2012 amounted to Rs.
1,50,000 and that from 1st April to 1st September, 2012 Rs. 90,000. The profit for
the year ended 31st March, 2012 was Rs. 50,000.

(iii) Interest on capital was to be provided @10% per annum.

(iv) According to Madan’s will, the executors should donate his share to ‘Matri
Chhaya, an orphanage for girls’.

Prepare Madan’s capital account to be rendered to his executor. Also identify the
value being highlighted in the question. (All India 2013; VBQ)
13. The balance sheet of Sadhna, Mohit and Rohit who were sharing profits in the
ratio of 1 : 2 : 3 as on 31st March, 2012 was as follows

Rohit died on 1st September, 2012. The partnership deed provided for
the following on the death of a partner

(i) Goodwill of the firm to be valued at two years’ purchase of average profits for
the last three years.

(ii) Rohit’s share of profit or loss till the date of death was to be calculated on the
basis of sales. Sales for the year ended 31st March, 2012 amounted to Rs.
6,00,000 and that from 1st April to 1st September, 2012 to Rs. 3,50,000. The profit
for the year ended 31st March, 2012 was calculated as Rs. 1,50,000.

(iii) Interest on capital was to be provided @ 8% per annum.

(iv) The average profits of the last three years were Rs. 72,000.

(v) According to Rohit’s will, the executors should donate his share to ‘Matri
Chhaya an orphanage for girls’.

Prepare Rohit’s capital account to be rendered to his executor. Also identify

the value being highlighted in the question. (Delhi 2013;VBQ)
NOTE The balance in Rohit’s capital account is transferred to Rohit’s executions
account. Donation to Matri Chhaya will be given through the executor’s account.
Values being highlighted in the question are (Any one)
(i) Social responsibility Rohit showed responsibility and care towards underprivileged
sections of the society.
(ii) Women empowerment Donation to Matri Chhaya is an endeavour towards women
empowerment.
(iii) Doing your best Rohit did his best by donating his property for the betterment of
the society and upliftment of poor. He has set a great example for the society to follow.
14. A, B and C are partners in a trading firm. The firm has a fixed total capital of
Rs. 60,000 held equally by all the partners. Under the partnership deed the
partners were entitled to

(i) A and B to a salary of Rs. 1,800 and Rs. 1,600 per month respectively.
(ii) In the event of the death of a partner, goodwill was to be valued at 2 years’
purchase of the average profit of the last 3 years.
(iii) Profit upto the date of death based on the profits of the previous year.

(iv) Partners were to be charged interest on drawings @ 5% per annum and

allowed interest on capital @ 6% per annum.

A died on 1st January, 2011. His drawings to the date of death were Rs. 2,000 and
the interest thereon was Rs. 60. The profits for the three years ending 31st March,
2008, 2009 and 2010 were Rs. 21,200, Rs. 3,200 (Dr) and Rs. 9,000 respectively.
Prepare As capital account to calculate the amount to be paid to his
executors. (All India 2011)
15. Shiv, Ashok and Vinod were partners in a firm sharing profits in the ratio of
2:2:1. On 31st December, 2008 their balance sheet was as follows

Ashok died on 31st March, 2009. The partnership deed provided for the following
on death of a partner.

(i) Goodwill of the firm was to be valued at 2 years’ purchase of the average
profits of the firm for the last 5 years. The total profits of file firm for the last 5
years were Rs. 3,60,000.

(ii) Ashok’s share of profit or loss till the date of his death was to be calculated on
the basis of the profit or loss for the year ending 31st December, 2008.

You are required to calculate the following

(i) Goodwill of the firm and Ashok’s share of goodwill at the time of his death.

(ii) Ashok’s share in the profit and loss of the firm till date of his death.

Prepare Ashok’s capital account at the time of his death to be presented to his
executors. (Delhi 2010C)
16. B, C and D were partners in a firm sharing profits in the ratio of 5 : 3 : 2. On
31st December, 2008 their balance sheet was as follows

B died on 31st March, 2009. The partnership deed provided for the following on
the death of a partner.

(i) Goodwill of the firm was to be valued at 3 years purchase of the average profits
of last 5 years. The total profits for the years ending 31st December, 2007, 31st
December, 2006 31st December, 2005 and 31st December, 2004 were Rs. 70,000;
Rs. 60,000; Rs. 50,000 and Rs. 40,000 respectively.
(ii) B’s share of profit or loss till the date of his death was to be calculated on the
basis of the profits or loss for the year ending 31st December, 2008.

You are required to calculate the following

(i) Goodwill of the firm and B’s share of goodwill at the time of his death.

(ii) B’s share in the profit and loss of the firm till the date of his death.

(iii) Prepare B’s capital account at the time of his death to be presented to his
executor. (All India 2010)

17. P, Q and R were partners in a firm sharing profits in the ratio of 5 : 4 : 1. Their
capitals were P Rs. 4,00,000, Q Rs. 3,00,000 and R Rs. 50,000. The firm closes its
books on 31st March every year. On 31st March, 2006, Q died. According to the
partnership deed, the executor of a deceased partner was entitled to
(i) Interest on capital from the first day on the accounting year till the date of his
death @ 10% per annum.

(ii) His share of goodwill — The goodwill of the firm on Q’s death was valued
at Rs. 6,00,000.

(iii) His share of profit — The profit of the firm for the year ended 31st March, 2006
was Rs. 3,00,000.

Q’s executor was paid the sum due in two annual instalments with interest @ 10%
per annum.

Prepare Q’s capital account at the time of his death on 31st March, 2006 to be
presented to his executor and his executor’s loan account for the year ended 31st
March, 2007 and 2008. (Delhi 2009C)
18. Ramesh, Suresh and Dinesh were partners in a firm sharing profits in the ratio
of 3:3:4. Their capitals were Rs. 5,00,000; Rs. 4,00,000 and Rs. 5,00,000
respectively. The firm closes its books on 31st March every year. On 31st March,
2006, Ramesh died. The executor of the deceased partners according to the
agreement was entitled for the following

(i) Interest on capital from the first day of the accounting year till the date of his
death @ 9% per annum.

(ii) His share of qoodwill — The qoodwill of the firm on Ramesh’s death was
valued at Rs. 1,80,000.

(iii) His share of profits — The profit of the firm for the year ended 31 st March,
2006 was Rs. 1,20,000.

Ramesh’s executor was paid the sum due in two annual instalments with interest
@ 10% per annum.

Prepare Ramesh’s capital account as on 31st March, 2006 to be presented to his

executor (All India 2009)
19.X, Y and Z were partners sharing profits in the ratio 3:2:1. On 31st March, 2008,
their balance sheet stood as under

X died on 31st May, 2008. It was agreed that

(i) Goodwill was valued at 3 years’ purchase of the average profit of the last five
years, which were, 2003 Rs. 40,000; 2004 Rs. 40,000; 2005 Rs. 30,000; 2006 :
Rs. 40,000 and 2007 Rs. 50,000.

(ii) Machinery was valued at Rs. 70,000, patents at Rs. 20,000 and buildings at
Rs. 66,000.
(iii) For the purpose of calculating X’s share of profits till the date of death, it was
agreed that the same be calculated based on the average profits for the last 2
years.

(iv) The executor of the deceased partner is to be paid the entire amount due by
means of a cheque.

Prepare X’s capital account to be rendered to the executor and also a journal

entry for the settlement of the amount due to the executor. (All India 2009)
20. Babul and Vinay were partners. The partnership deed provided for

(i) Profits to be divided as Babul 1/2, Vinay 1/3 and l/6th to be transferred to
reserves.

(ii) The accounts are closed on 31st March each year.

(iii) In the event of the death of a partner, the executors will be entitled to the
following

(a) Capital to be credited on the date of the death.

(b) Interest on capital at 12% per annum.

(c) Proportion of profits to the date of death based on the average profits credited
for the last 3 years.

(d) Share of goodwill based on three years’ purchase of the average profits of the
preceding 3 years.

The following information is provided to you

Babul’s capital Rs. 90,000; Vinay’s capital Rs. 60,000; reserves Rs. 30,000; cash
Rs. 1,10,000; investment Rs. 70,000.

Prepare Vinay’s account to be presented to his executor, as he died on 30th April,

2007. The profits for the three preceding years were Rs. 48,000, Rs. 42,000
and Rs. 45,000. (All India 2008)
8 Marks Questions

21. G, E and F were partners in a firm sharing profits in the ratio of 7 :2 : 1. The
balance sheet of the firm as on 31st March, 2011 was as follows
E died on 24th August, 2011. Partnership deed provides for the settlement of
claims on the death of a partner in addition to his capital as under.

(i) The share of profit of deceased partner to be computed upto the date of
death’on the basis of average profits of the past three years which was ? 80,000.

(ii) His share in profit/loss on revaluation of assets and re-assessment of

liabilities which were as follows

Land and building were revalued atRs. 94,000. Machinery at Rs. 38,000 and stock
at Rs. 5,000. A provision of 2.5% was to be created on debtors for doubtful debts.

(iii) The net amount payable to E’s executors was transferred to his loan account,
to be paid later on.

Prepare revaluation account, partners’ capital account, E’s executor account and
balance sheet of ‘G’ and ‘F’ who decided to continue the business keeping their
capital balances in their new profit sharing ratio. Any surplus or deficit to be
transferred to current account of the partners. (Delhi 2012)
22. Khanna, Seth and Mehta were partners in a firm sharing profits in the ratio of
3 : 2 : 5. On 31st December, 2010 the balance sheet of Khanna, Seth and Mehta
was as follows

On 14th March 2011, Seth died. The partnership deed provided that on the death
of a partner the executor of the deceased partner is entitled to

(i) Balance in capital account.

(ii) Share in profits upto the date of death on the basis of last year’s profit.

(iii) His share in profit/loss on revaluation of assets and re-assessment of

liabilities which were as follows

(a) Land and building was to be appreciated by Rs. 1,20,000.

(b) Machinery was to be depreciated to Rs. 1,35,000 and stock toRs. 25,000.

(c) A provision of 2.5% for bad and doubtful debts was to be created on debtors.

(d) The net amount payable to Seth’s executors was transferred to his loan
account which was to be paid later.

Prepare revaluation account, partners’ capital account, Seth’s executor’s account

and balance sheet of Khanna and Mehta who decided to continue the business
keeping their capital balances in their new profit sharing ratio. Any surplus or
deficit to be transferred to current accounts of the partners. (All India 2012)
23. M, N and O were partners in a firm sharing profits and losses equally. Their
balance sheet on 31st December, 2009 was as follows

N died on 14th March, 2010. According to the partnership deed, executors of the
deceased partner are entitled to

(i) Balance of partner’s capital account.

(ii) Interest on capital @ 5% per annum.

(iii) Share of goodwill calculated on.the basis of twice the average of past three
years’ profit.

(iv) Share of profits from the closure of the last accounting year till the date of
death on the basis of twice the average of three completed years’ profits before
death. Profits of 2007, 2008 and 2009 were Rs. 80,000, Rs. 90,000 and Rs. 1,00,000
respectively. Show the working for deceased partner’s share of goodwill and
profits till the date of his death. Pass the necessary journal entries and prepare
N’s capital account to be rendered to his executor. (Delhi 2011)
24. X,Y and Z were partners in a firm sharing profits and losses in the ratio of 5 : 3
: 2 on 31st March, 2010 their balance sheet was as follows

Z died on 31July, 2010, It was agreed that

(i) Goodwill be valued at 2.5 years’ purchase of the average profit of the last four
years, which were as follows

(ii) Machinery to be valued at Rs. 70,000, patents at Rs. 20,000 and building at
Rs. 62,500.

(iii) For the purpose of calculating Z’s share of profit in the year of his death the
profits in 2010-2011 should be taken to have been accured on the same scale as
in 2009-2010.

(iii) A sum of Rs. 17,500 was paid immediately to the executors of Z and the
balance was paid in four half yearly instalments together with interest at 12% per
annum starting from 31st January, 2011.

Given necessary journal entries to record the above transactions and Z’s
executor’s account till the payment due on 31st January, 2011. (All India 2011)
Dissolution of Partnership Firm
 Introduction
1 Mark Questions

1. D Ltd invited applications for issuing 10,00,000 equity shares of ? 10 each.

The public applied for 8,55,000 shares. Can the company proceed for the
allotment of shares? Give reason in support of your answer (All India 2014)

Ans. No, the shares cannot be allotted because subscribed shares are less than 90%
i.e. minimum subscription.

2. What is meant by paid-up capital? (Compartment 2014)

Ans. It is the amount that the shareholder has paid and the company has received
against the amount called-up against the shares towards share capital.

3. What is meant by ‘undersubscription’? (Compartment 2014)

Ans. Undersubscription means that number of shares applied for is less than the
number of shares issued

4. What is meant by authorised capital of a company? (Compartment 2014;

Foreign 2011)

Ans. According to Section 2 (8) of the Companies Act, 2013, ‘authorised capital’ means
such capital as is authorised by the memorandum of a company to be the maximum
amount of share capital of a company.

5. What is the name given to the part of capital of a company which is called-up
only on winding up? (All India 2011; hots)

Ans. Part of capital of a company which is called-up only on winding up is called

‘reserve capital’.

6. What are preliminary expenses? (Delhi 2010)

Ans. The expenses incurred in the promotion and formation of the company are known
as preliminary expenses, such as registration fee paid to registrar of the companies,
stamp duty, legal expenses, expenses regarding preparation and issue of prospectus,
etc.
7. What is meant by ‘capital reserve’? (All India 2010)

Ans. ‘Capital reserve’ is the reserve which is not free for distribution as dividend. It is
mandatory to create capital reserve in case of capital profits earned by the company.

8. Give the meaning of minimum subscription? (All India 2008)

Ans. It is the amount stated in the prospectus as the minimum amount that must be
subscribed. Unless the sum payable on application for the sum so stated (minimum
subscription) has been paid to and received by the company by cheque or other
instrument, security cannot be allotted.
 Accounting Treatment of Issue Shares
1 Mark Questions

1.What is the maximum amount of discount at which forfeited shares can be re-
issued? (Delhi 2014)
Ans. When forfeited shares are re-issued at a discount, the discount cannot exceed the
amount forfeited on re-issued shares.

2.Give any one purpose for which the amount received as ‘securities
premium reserve’ may be utilised. (Compartment 2014)
Ans. Securities premium can be utilised in writing-off preliminary expenses of the
company.

3.A Ltd forfeited 100 equity shares of Rs 10 each issued at premium of 20% for
the non-payment of final call of Rs 5 including premium. State the maximum
amount of discount at which these shares can be re-issued. (All India 2014)
Ans. Maximum amount of discount that can be allowed at the time of re-issue is the
amount forfeited on re-issued shares, i.e. Rs 7.

4.What is meant by private placement of shares? (Compartment 2014)

Ans. Private placement of shares means selling of shares to a relatively small number
of select investors. Private placement is the opposite of a public issue, in which
securities are made available for sale in the open market.

5.Give the meaning of forfeiture of shares. (All India 2014(c), 2010)

Ans. Forfeiture of shares means cancellation of shares and seizure of the amount
received from the defaulting shareholders, whose shares have been forfeited. Upon
forfeiture, the name of original shareholder must be removed from the register of
members. Forfeiture results in reduction of share capital.

6.What is meant by ‘calls-in-arrears’? (All India 2013)

Ans. If shareholders make default in paying the money due on allotment or any call, the
money not so paid is called calls-in-arrears.

7.What rate of interest the company pays on calls-in-advance, if it has not

prepared its own Articles of Association?(Delhi 2013)
Ans. As per Table F, of the Companies Act, interest on calls-in-advance is payable @
12% per annum by the company.

8.What is meant by’securities premium reserve’? (Delhi 2013)

Ans. A company can issue its shares at more than its face value. Excess of issue price
of shares over its face value is termed as securities premium.
9.What is meant by calls-in-advance? (All India 2012; Delhi 2008)
Ans. Calls-in-advance means the amount paid by shareholders in excess of the amount
due from them. The company may receive calls-in-advance if the articles permit. It is
shown as a current liability in the balance sheet.

10.State the steps other than rejecting applications that a company can take in
case of over subscription. (Delhi 2011c)
or
Give any two alternatives available to a company for the allotment of shares in
case of over subscription. (Delhi 2009 c)
Ans. The step’s other than rejecting applications that a company can take in case of
over subscription are:
(i) All applicants are allotted shares on pro-rata basis.
(ii) Some applicants are allotted shares in full and some are allotted shares on pro-rata
basis.

11.Can securities premium be used as working capital? Give reason in support of

your answer.(All India 2011; HOTS)
Ans. Securities premium cannot be used as working capital.
According to Section 52 (2) of the Companies Act, 2013, the securities premium can be
applied only for the following purposes:
(i) Issuing fully paid bonus shares to the members.
(ii) Writing-off the preliminary expenses of the company.
(iii) Writing-off the expenses on issue of shares, commission paid on any issue of
shares or debentures of the company and discount allowed on any issues of shares and
debentures.
(iv) Providing for the premium payable on the redemption of redeemable preference
shares or debentures of the company.

12.What is meant by pro-rata allotment of shares? (All India 2010)

Ans. In the case of over subscription, it is not possible to allot shares to all applicants.
Applicants may be allotted less number of shares than they have applied for. This type
of allotment of shares is known as pro-rata allotment of shares, e.g. if company allots
50,000 shares to applicants of 75,000 shares, it is pro-rata allotment in proportion of 2 :
3.

13.Give the meaning of over subscription. (All India 2008)

Ans. Over subscription is a situation in which applications received are for more shares
than the number of shares offered to the public for subscription through prospectus by a
company.
3 Marks Questions

14. Sundram Ltd purchased furniture for Rs 3,00,000 from Ravindram Ltd, Rs
1,00,000 were paid by drawing a promissory note in favour of Ravindram Ltd. The
balance was paid by issue of equity shares of Rs 10 each at a premium of 25%.
Pass journal entries in the books of Sundram Ltd. (All India 2012)
Ans.

15.Z Ltd purchased furniture costing Rs 2,20,000 from CD Ltd. The payment was
to be made by issuing of 9% preference share of Rs 100 each at a premium of Rs
10 per share.Pass necessary journal entries in the books of Z Ltd. (Delhi 2011)
Ans.
16.Goodluck Ltd purchased machinery costing Rs 10,00,000 from Fair Deals Ltd.
The company paid the price by issue of equity shares of Rs 10 each at a premium
of 25%. Pass necessary journal entries for above transactions in the books of
Goodluck Ltd.(All India 2011)
Ans.

17.SSP Ltd forfeited 300 shares of Rs 10 each issued at a premium of Rs 2 per

share for the non-payment of allotment of Rs 4 per share (including premium).
The first and final call of Rs 3 per share has not been made yet, 50% of forfeited
shares were re-issued at Rs 8 per share fully paid-up. Pass necessary journal
entries for the forfeiture and re-issue of shares. (Delhi 2011)
Ans.
18.TAG Ltd forfeited 400 shares of Rs 10 each issued at a premium of Rs 1 per
share for the non-payment of allotment of Rs 4 per share (including premium).
The first and final call of Rs 3 per share has not been made yet. 50% of forfeited
shares were re-issued at Rs 8 per share fully paid-up. Pass necessary journal
entries for the forfeiture and re-issue of shares. (All India 2011)
Ans.

19. DN Ltd issued 50,000 shares of 110 each payable as Rs 2 per share on
application, Rs 3 per share on allotment and Rs 5 on first and final call.
Applications were received for It was decided that
(i)Refuse allotment to the applicants of 10,000 shares.
(ii)Allot 20,000 shares to Mohan who had applied for similar number.
(iii)Allot the remaining shares on pro-rata basis.
Mohan failed to pay the allotment money and Sohan who belonged to the
category (iii) and was allotted 3,000 shares paid both the calls with allotment.
Calculate the amount received on allotment. (All India; Delhi 2010)
Ans.
20.Shanker Ltd purchased machinery for Rs 1,98,000 from Parvati Ltd. The
payment of Parvati Ltd was made by issue of equity shares of Rs 100 each.
Pass necessary journal entries in the books of Shanker Ltd for the above
transactions when shares were issued at 10% premium.(All India 2010)

Ans.

21. MCS. Ttd issued 40,000 shares of Rs 10 each payable at Rs 2 on application,

Rs 4 on allotment arid’ balance, in two equal instalments.
Applications were received for 80,000 shares and the allotment was made as
follows: *

(i)Applications of 50,000 shares were allotted 30,000 shares.

(ii)Applications of 30,000 shares were allotted 10,000 shares.
Neeraj to whom 600 shares were allotted from category (i), failed to pay the
allotment money.
Pass the necessary journal entries upto allotment only. (Delhi 2010c; All India
2009)
Ans.
22.SSS Ltd has a paid-up share capital of % 60,00,000 and a balance of Rs
15,00,000 in the securities premium account. The companies management do not
want to carry over this balance. State the purpose for which this balance can be
utilised. (Delhi 2010; HOTS)
or
State the purposes for which the securities premium can be utilised under
Section 52 (2) of the Companies Act, 2013. (All India 2009)

Ans. According to Section 52 (2) of the Companies Act, 2013, SSS Ltd can utiiise the
securities premium of Rs 15,00,000, only for the following purposes
(i) Issuing fully paid bonus shares to the members.
(ii) Writing off the preliminary expenses of the company.
(iii) Writing off the expenses of or the commission paid or the discount allowed on any
issue of secuiries or debentures of the company.
(iv) Providing for the premium payable on the redemption of any redeemable preference
shares or or any debentures of the company.
(v) In purchasing its own shares (Buy back).

23.The directors of a company forfeited 200 shares of Rs 10 each issued at a

premium of Rs 3 per share, for the non-payment of the first call money of Rs 3 per
share. The final call of Rs 2 per share has not been made. Half the forfeited
shares were re-issued at Rs 1,000 fully paid. Record the journal entries for the
forfeited shares and re-issue of (Delhi 2009)

Ans.
24.Meena Ltd issued 60,000 shares of Rs 10 each at a premium of Rs 2 per share
payable as Rs 3 on application, Rs 5 on allotment (including premium) and
balance on the first and final call. Applications were received for 1,02,000 shares.
The directors resolved to allot as follows
(i)Applicants of 60,000 shares — 30,000 shares
(ii) Applicants of 40,000 shares — 30,000 shares
(iii)Applicants of 2,000 shares — Nil
Nikhil who had applied for 1,000 shares in category (i) and Vish, who was allotted
600 shares in category (ii) failed to pay the allotment money. Calculate the
amount received on allotment.(Delhi 200s)

Ans.
25.Jaya Ltd issued 60,000 shares of Rs 10 each at a premium of Rs 2 per share
payable as Rs 3 on application, Rs 5 (including premium) on allotment and
balance on the first and final call. Applications were received for 82,000 shares.
The directors resolved to allot as follows

(i)Applicants of 30,000 shares — allotted 20,000 shares

(ii)Applicants of 50,000 shares — allotted 40,000 shares

(iii)Applicants of 2,000 shares — Nil

Ramesh who had applied for 900 shares in category (i) and Suresh who was
allotted 600 shares in category (ii) failed to pay the allotment money. Calculate
the amount received on allotment. (All India 2009)

Ans.
26.The directors of a company forfeited 500 shares of Rs 10 each issued at a
premium of Rs 3 per share, for the non-payment of the first call money of Rs 3 per
share. The final call of Rs 2 per share has not been made. Half the forfeited
shares were re-issued at Rs 2,500 fully paid. Record the journal entries for the
forfeited shares and re-issue of shares. (All India 2009)
Ans.

27.PS Ltd forfeited 500 shares of Rs 100 each for the non-payment of first call of
Rs 30 per share. The final call of Rs 10 per share was not yet made. The forfeited
shares were re-issued for Rs 65,000 fully paid-up. Pass necessary journal entries
for the books of the company. (Delhi 2008)
Ans.
28.Samta Ltd forfeited 800 equity shares of 1100 each for the non-payment of first
call of Rs 30 per share. The final call of Rs 20 per share was not yet made. Out of
the forfeited shares 400 were re-issued at the rate of Rs 105 per share fully paid-
up. Pass necessary journal entries in the books of Samta Ltd for the above
transactions.(All India 2008)
Ans.

29.Gagan Ltd forfeited 1,500 equity shares of Rs 10 each for the non-payment of
first call of Rs 2 per share. The final call of Rs 1 per share was not yet made. The
forfeited shares were re-issued for Rs 21,000 fully paid-up.Pass necessary journal
entries in the books of the company for forfeiture and re-issue of the
shares. (All India 2008)
Ans.

4 Marks Questions

30.Pass necessary journal entries for the following transactions in the books of
Gopal Ltd
(i)Purchased furniture for Rs 2,50,000 from M/s Furniture Mart. The payment to
M/s Furniture Mart was made by issuing equity shares of Rs 10 each at a premium
of 25%.
(ii)Purchased a running business from Aman Ltd for a sum of Rs 15,00,000.
The payment of Rs 12,00,000 was made by issue of fully paid equity shares of Rs
10 each and balance by a bank draft. The assets and liabilities consisted of the
following plant Rs 3,50,000; stock Rs 4,50,000; land and building Rs 6,00,000;
sundry creditors Rs 1,00,000. (All India 2014)

Ans.
31.On 1st April, 2012, Vishwas Ltd was formed with an authorised capital of Rs
10,00,000 divided into 1,00,000 equity shares of Rs 10 each. The company issued
prospectus inviting applications for 90,000 equity shares. The company received
applications for 85,000 equity shares.

During the first year, Rs 8 per share were called. Ram holding 1,000 shares and
Shyam holding 2,000 shares did not pay the first call of Rs 2 per share. Shyam’s
shares were forfeited after the first call and later on 1,500 of the forfeited shares
were re-issued at Rs 6 per share, Rs 8 called up. Show the following

(i)Share capital in the balance sheet of the company as per Revised Schedule VI
Part I of the Companies Act, 1956.

(ii)Also prepare ‘notes to accounts’ for the same. (All India 2014)

Ans.
Ans.

33.Nikhil Ltd purchased a running business from Sonia Ltd for a sum of Rs
22,00,000 by issuing 20,000 fully paid equity shares of Rs 100 each at a premium
of 10%. The assets and liabilities consisted of the following Machinery Rs
7,00,000, debtors Rs 2,50,000, stock Rs 5,00,000, budding Rs 11,50,000 and bills
payable Rs 2,50,000.Pass necessary journal entries in the books of Nikhil Ltd for
the above transactions. (All India 2013)
Ans.

34.The authorised capital of Suhas Ltd is Rs 50,00,000 divided into 25,000 shares
of Rs 200 each. Out of these, the company issued 12,000 shares of Rs 200 each at
a premium of 10%. The amount per share was payable as follows Rs 60 on
application Rs 60 on allotment (including premium) Rs 30 on first call and balance
on final call.Public applied for 11,000 shares. All the money was duly
received.Prepare an extract of balance sheet of Suhas Ltd as per Revised
Schedule VI, Part I of the Companies Act, 1956 disclosing the above information.
Also prepare ‘notes to accounts’ for the same. (All India 2013)
Ans.
35.S Ltd registered with an authorised capital of Rs 4,00,000 divided into 40,000
equity shares of Rs 10 each. The company offered to the public for subscription
30,000 equity shares. Applications for 28,000 equity shares were received and
allotment was made to all the applicants. All calls were made and were duly
received except the final call of Rs 2 per share on 200 shares. Prepare the balance
sheet of the company showing the different categories of share capital. (Delhi
2008)
Ans.
36.Sagar Ltd was registered with an authorised capital of Rs 1,00,00,000 divided
into Rs 1,00,000 equity shares of Rs 100 each. The company offered for public
subscription 60,000 equity shares. Applications for 56,000 equity shares were
received and allotment was made to all the applicants. All calls were made and
were duly received except the second and final call of Rs 20 per share on 700
shares. Prepare the balance sheet of the company showing the different types of
share capital.
Ans.

37.Poonam Ltd was registered with an authorised capital of Rs 4,00,00,000

divided into 4,00,000 equity shares of Rs 100 each. The company offered for
public subscription 3,00,000 equity shares. The public applied for 2,80,000 shares
and all were allotted.
The company did not make the second and final call of Rs 10 per share. The first
call of Rs 20 per share was not received on 1,000 shares. Prepare the balance
sheet of the company showing the different types of share capital. (All India
2008)
Ans.

8 Marks Questions

38.X Ltd invited applications for issuing 75,000 equity shares of Rs 10 each at a
premium of Rs 5 per share. The amount was payable as follows On application
and allotment — Rs 9 per share (including premium) On first and final call —
Balance amount.
Applications for 3,00,000 shares were received. Applications for 2,00,000 shares
were rejected and money refunded. Shares were allotted on pro-rata basis to the
remaining applicants. The first and final call was made. The amount was duly
received except on 1,500 shares applied by Ravi. His shares were forfeited. The
forfeited shares were re-issued at a discount of Rs 4 per share. Pass necessary
journal entries for the above transactions in the books of X Ltd. (All India
2014)
Ans.
39.L Ltd forfeited 470 equity shares of Rs 20 each issues at a premium of Rs 3 per
share for the non-payment of allotment money of Rs 8 (including premium Rs 3)
and first call of Rs 5 per share. Final call of Rs 5 per share was not made. Out of
these 235 shares were reissued at Rs 19 each fully paid. Pass necessary journal
entries for the above transactions in the books of L Ltd. (Compartment 2014)

Ans.
40.(i)A company forfeited 200 shares of Rs 20 each, Rs 15 per share called-up on
which Rs 10 per share had been paid. Directors reissued all the forfeited shares
to B as Rs 15 per share paid up for a payment of Rs 10 each. Give journal entries
in the books of the company for forfeiture and re-issue of shares.
(ii)A Ltd forfeited 100 equity shares of the face value of Rs 10 each, for the non-
payment of first call of Rs 2 per share Rs 6 per share had already been called and
paid. These shares were subsequently re-issued as fully paid at the rate of Rs 7
per share. Give journal entries in the books of the company for forfeiture and re-
issue of shares.(Compartment 2014)

Ans.
41. Bhagwati Ltd invited applications for issuing 2,00,000 equity shares of Rs 10
each. The amounts were payable as follows:
On application — Rs 3 per share
On allotment — Rs 5 per share ,
On first and final call — Rs 2 per share
Applications were received for 3,00,000 shares and pro-rata allotment was made
to all the applicants. Money overpaid on application was adjusted towards
allotment. B, who was allotted 3,000 shares, failed to pay the first and final call
money. His shares were forfeited. Out of the forfeited shares, 2,500 shares were
re-issued as fully paid up @ Rs 8 per share. Pass necessary journal entries to
record the above transactions in the books of Bhagwati Ltd. (Compartment
2014)

Ans.
42.A Ltd purchased running business from B Ltd for a sum of Rs 1,50,000 payable
by issue of 10,000 equity shares of Rs 10 each at a premium of Rs 2 per share and
balance in cash. The assets and liabilities taken over were:
Plant — Rs 40,000; building — Rs 40,000; debtors — Rs 30,000 ;
Stock — Rs 50,000; furniture — Rs 20,000; creditors — Rs 20,000
You are required to pass necessary journal entries for the above transactions in
the books of A Ltd. (Compartment 2014)
Ans.

43.A Ltd was registered with an authorised capital of Rs 10,00,000 divided into
equity shares of Rs 10 each. The company invited applications for the issue of
50,000 shares. Applications for 48,000 shares were received. All calls were made
and were duly received except the final call of Rs 2 per share on 1,000 shares. All
these shares were forfeited and later on re-issued at Rs 9,000 as fully paid.
(i)Show how ‘share capital’ will appear in the balance sheet of A Ltd. as per
Schedule VI, Part I of the Companies Act, 1956. (Compartment 2014)
(ii)Also prepare ‘notes to accounts’ for the same.
Ans.

44.Record the journal entries for forfeiture and re-issue in the following cases
(i)X Ltd forfeited 200 shares of Rs 100 each, Rs 70 called up, on which the
shareholders had paid application and allotment money of Rs 50 per share. Out of
these, 150 shares were re-issued to Naresh as Rs 70 paid-up for Rs 80 per share.
(ii)Y Ltd forfeited 180 shares of Rs 10 each, Rs 8 called-up, issued at a premium of
Rs 2 per
share to R for non-payment of allotment money of Rs 5 per share (including
premium). Out of these, 160 shares were re-issued to Sanjay as Rs 8 called up for
110 per share fully paid-up.(All India 2013)
Ans.
45.Record the journal entries for forfeiture and re-issue of shares in the following
cases
(i) X Ltd forfeited 20 shares of Rs 10 each,Rs 7 called up on which the
shareholder had paid application and allotment money of Rs 5 per share. Out of
these, 15 shares were re-issued to Naresh as Rs 7 per share paid up for Rs 8 per
share.
(ii) Y Ltd forfeited 90 shares of Rs 10 each, Rs 8 called up issued at a premium of
Rs 2 per share to ’R’ for non-payment of allotment money of Rs 5 per share
(including premium). Out of these, 80 shares were re-issued to Sanjay as Rs 8
called up for Rs 10 per share.(Delhi 2013)
Ans.
46.Shyam Ltd invited applications for issuing 80,000 equity shares of Rs 10 each
at a premium of Rs 40 per share. The amount was payable as follows
On application — Rs 35 per share (including Rs 30 premium)
On allotment — Rs 8 per share (including Rs 4 premium)
On first and final call — Balance

Applications for 77,000 shares were received. Shares were allotted to all the
applicants. Sundram to whom 7,000 shares were allotted failed to pay the
allotment money. His shares were forfeited immediately after allotment.
Afterwards the first and final call was made. Satyam, the holder of 500 shares
failed to pay the first and final call. His shares were also forfeited. Out of the
forfeited shares 1,000 shares were re-issued at Rs 50 per share fully paid-up. The
re-issued shares included all the shares of Satyam. Pass necessary journal
entries for the above transactions in the books of Shyam Ltd. (Delhi 2012)

Ans.
47.RK Ltd invited applications for issuing 70,000 equity shares of Rs 10 each at a
premium of Rs 35 per share. The amount was payable as follows On application –
Rs 15 per share (including Rs 12 premium)
On Allotment – Rs 10 per share (including Rs 8 premium)
On first and final call – Balance
Applications for 65,000 shares were received and allotment was made to all
applicants. A shareholder Ram, who was allotted 2,000 shares, failed to pay the
allotment money. His shares were forfeited immediately after allotment.
Afterwards the first and final call was made. Sohan, who had 3,000 shares, failed
to pay the first and final call. His shares were also forfeited. Out of the forfeited
shares 4,000 shares were re-issued @ Rs 50 per share fully paid-up. The re-
issued shares included all the shares of Ram. Pass necessary journal entries for
the above transactions in the books of RK Ltd.(All India 2012)

Ans.
48.X Ltd issued 40,000 equity shares of Rs 10 each at a premium of Rs 2.50 per
share. The amount was payable as follows
On application Rs 2 per share
On allotment Rs 4.50 per share (including premium)
and on call Balance Rs 6 per share
Owing to heavy subscription the allotment was made on pro-rata basis as follows
(i)Applications for 20,000 shares were allotted 10,000 shares.
(ii)Applications for 56,000 shares were allotted 14,000 shares.
(ii)Applications for 48,000 shares were allotted 16,000 shares.
It was decided that excess amount received on applications would be utilised on
allotment and the surplus would be refunded.
Ram, to whom 1,000 shares were allotted, who belongs to category (i), failed to
pay allotment money. His shares were forfeited after the call.
Pass necessary journal entries in the books of X Ltd for the above
transactions.(Delhi 2011)
Ans.
49.Give journal entries to record the following transactions of forfeiture and re-
issue of shares and open share forfeiture account in the books of the respective
companies. L Ltd forfeited 470 equity shares of Rs 10 each issued at premium of
Rs 5 per share for non-payment of allotment money Rs 8 per share (including
share premium Rs 5 per share) and the first and final call of Rs 5 per share. Out of
these, 60 equity shares were subsequently re-issued @ Rs 14 per shares. (Delhi
2011)
Ans.
50.Dinesh Ltd invited applications for issuing 10,000 equity shares of Rs 10 each.
The amount was payable as follows
On application Rs 1
On application Rs 2
On first call Rs 3
On second and final call Balance
The issue was fully subscribed. Ram, to whom 100 shares were allotted, failed to
pay the allotment money and his shares were forfeited immediately after
allotment. Shyam to whom 150 shares were allotted, failed to pay the first call. His
shares were also forfeited after the first call. Afterwards the second and final call
was made. Mohan to whom 50 shares were allotted failed to pay the second and
final call. His shares were also forfeited. All the forfeited shares were re-issued @
Rs 9 per share fully paid-up. The re-issued shares included all the shares of
Ram.Pass necessary journal entries in the books of Dinesh Ltd. (All India 2011)

Ans.
51.Moti Ltd invited applications for issuing 10,00,000 equity shares of Rs 10 each
at a premium of Rs 2 per share. The amount was payable as follows On
application Rs 5 (including premium)
On allotment Rs 4
On first and final call Rs 3
Applications for 15,00,000 shares were received. Applications for 3,00,000 shares
were rejected and the pro-rata allotment was made to the remaining applicants.
Excess application money was utilised towards sum due on allotment. Giri, who
had applied for 24,000 shares, failed to pay allotment and call money. His shares
were forfeited. Out of the forfeited shares, 10,000 shares were re-issued for Rs 8
per share fully paid-up.Pass necessary journal entries in the books of Moti
Ltd. (All India 2011)
Ans.
52.Bhamashah Company Ltd made an issue of 1,00,000 equity shares of Rs 10
each at a premium of 20%, payable as follows
On application Rs 2.50 per share
On allotment Rs 4.50 per share
On first and final call Balance
Applications were received for 2,00,000 equity shares and the directors made pro-
rata allotment.
Ranu, who had applied for 800 shares, did not pay the allotment and final call
money; with the result his shares were forfeited. Later on, 80% of the forfeited
shares were re-issued @ Rs 8 per share fully paid-up.Pass necessary journal
entries for the above mentioned transactions in the books of the
company. (Delhi 2011 c)
Ans.
53.DP Shah Company Ltd made an issue of 1,00,000 equity shares of Rs 10 each
at a premium of 30% payable as follows
On application Rs 3.50 per share
On allotment Rs 6.50 per share
On first and final call Balance
Applications were received for 2,00,000 equity shares and the directors made pro-
rata allotment. Harsh who had applied for 1,600 shares did not pay the allotment
and final call money. With the result his shares were forfeited. Later on 60% of the
forfeited shares were re-issued at Rs 8 per share fully paid-up. Pass necessary
journal entries for the mentioned transactions in the books of the
company. (All India 2011)
Ans.
54.X Ltd issued 50,000 shares of Rs 10 each at a premium of Rs 2 per share,
payable as follows Rs 3 on application Rs 6 on allotment (including premium) and
Rs 3 on call Applications were received for 75,000 shares and a pro-rata allotment
was made as follows.
To the applicants of 40,000 shares, 30,000 shares were issued and for the rest
20,000 shares were issued. All money due were received except the allotment and
call money from Ram who had applied for 1,200 shares (out of group of 40,000
shares). All his shares were forfeited. The forfeited shares were re-issued for Rs 7
per share fully paid-up.Pass necessary journal entries for the above
transactions.(All India 2011)
Ans.
55.Som Ltd invited applications for issuing 60,000 equity shares of Rs 100 each at
a premium of Rs 50 per share. The amount was payable as follows
On application Rs 75 per share (including Rs 25 premium)
On allotment Rs 50 per share (including Rs 25 premium)
On first and final call Balance amount
Applications for 55,000 shares were received. Allotment was made to all
applicants and the company received all money due on allotment except ‘K’ who
was allotted 500 share and his shares were immediately forfeited. Afterwards the
first and final call was made. ‘Lr to whom 300 shares were allotted, failed to pay
the first and final call. His shares were also forfeited. 300 shares of ‘K’ and 200
shares of ‘L’ were re-issued for 75,000 fully paid-up.Pass necessary journal
entries in the books of Som Ltd for the above transactions.(Delhi 2010 C)
Ans.
56.Shiva Ltd invited applications for issuing 2,00,000 equity shares of Rs 100
each at a premium of Rs 60 per share. The amount was payable as follows On
application Rs 30 per share (including premium t10)
On allotment Rs 70 per share (including premium Rs 50)
On first and final call Balance amount
Applications for 1,90,000 shares were received. Shares were allotted to all the
applicants and the company received all money due on allotment except Jain who
had been allotted 1,000 shares, and his shares were immediately forfeited.
Afterwards the first and final call was made. Gupta did not pay the first and final
call on his 2,000 allotted shares. His shares were also forfeited. 50% of the
forfeited shares of both Jain and Gupta were re-issued @ Rs 90 per share fully
paid-up.Pass necessary journal entries in the books of Shiva Ltd for the above
transactions.(All India 2010)
Ans.
57.Petromax Ltd issued 50,000 shares of Rs 10 each at a premium of Rs 2 per
share payable as Rs 3 on application, Rs 5 including premium on allotment and
balance in equal instalments over two calls. Applications were received for 92,000
shares and the allotment was done as under
(i)Applications of 40,000 shares – Allotted 30,000 shares
(ii)Applications of 40,000 shares – Allotted 20,000 shares
(iii)Applications of 12,000 shares – Nil
Suresh who had applied for 2,000 shares (category (i) did not pay any money
other than application money. Chandar who was allotted 800 shares (category (ii)
paid the call money due along with allotment.
All other allottes paid their dues as per schedule.Pass necessary journal entries
in the books of Petromax Ltd for the above transactions. (Delhi; All India 2009)
Ans.
58.Veer Ltd invited applications for issuing 1,00,000 equity shares of Rs 500 each
at a premium of Rs 100 per share. The amount was payable as follows On
application Rs 200 per share
On allotment Rs 300 per share (including premium)
On first and final call Balance amount
Applications for 2,00,000 shares were received. Applications for 50,000 shares
were rejected and the application money was refunded. Pro-rata allotment was
made to the remaining applicants. Amount overpaid with application was
adjusted towards sums due on allotment. All calls were made and were duly
received except the first and final call on 100 shares allotted to Vasu. There
shares were forfeited. The forfeited shares re-issued to Ravi for 60,000 fully paid-
up.Pass necessary journal entries in the books of Veer Ltd for the above
transactions.(Delhi 2009 C)
Ans.
59.Bharat Ltd invited applications for 40,000 equity shares of Rs 100 each at a
premium of Rs 20 per share. The amount was payable as follows On application
Rs 30 per share
On allotment Rs 70 per share (including premium)
On first and final call Balance amount
Applications for 60,000 shares were received. Applications for 10,000 shares were
rejected and the application money on these shares was refunded. Pro-rata
allotment was made to the remaining applicants and excess money received from
them with applications was adjusted towards sums due on allotment.
All calls were made and were duly received except the first and final call on 500
shares allotted to Rajan. These shares were for feited. The forfeited shares were
afterwards re-issued for Rs 51,000 fully paid-up.Pass necessary journal entries in
the books of the compa ly for the above transactions. (All India 2009)
Ans.
60.X Ltd invited applications for issuing 80,000 equity shares of Rs 10 each at a
premium of Rs 2 per share. The amount was payable as follows On application Rs
6 per share (including premium)
On allotment Rs 3 per share
On first and final call Balance amount
Applications for 90,000 shares were received. Applications for 5,000 shares were
rejected and pro-rata allotment was made to the remaining applicant.
Overpayment received on application was adjusted towards sum due on
allotment. All calls were made and were duly received except the allotment and
final call on 1,600 shares allotted to Vijay. These shares were forfeited and the
forfeited shares were re-issued for Rs 18,400 fully paid-up.Pass necessary journal
entries for the above transactions in the books of the company. (Delhi 2008)

Ans.
61.Janta Ltd invited applications for issuing 70,000 equity shares of Rs 10 each at
a ’ premium of Rs 2 per share. The amount was payables as follows
On application Rs 4 per share (including premium)
On allotment Rs 3 per share
On first and final call Balance
Applications for 1,00,000 shares were received. Applications for 10,000 shares
were rejected. Shares were allotted to the remaining applicants on pro-rata basis.
Excess money received with applications was adjusted towards sum due on
allotment. All calls were made and were duly received except first and final call on
700 shares , allotted to Kanwar. His shares were for feited. The forfeited shares
were re-issued for
Rs 7,700 fully paid-up.Pass necessary journal entries in the books of the
company for the above transactions. (All India 2008)
Ans.
 Issue and Redemption of Debentures

1. Assertion (A) : Irredeemable debentures are also known as perpetual

debentures.
Reason (R) : The company does not give any undertaking for the repayment of
money borrowed by issuing such debentures. They are repayable on the winding
up of the company or on the expiry of a long period. (2024)
Choose the correct option from the following :
(A) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct
explanation of Assertion (A).
(B) Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the
correct explanation of Assertion (A).
(C) Assertion (A) is incorrect, but Reason (R) is correct.
(D) Assertion (A) is correct, but Reason (R) is incorrect.
Ans. (A) Both Assertion (A) and Reason (R) are correct and Reason (R) is the
correct explanation of Assertion (A).
2. Analysis of Financial Statements is useful and significant to different users.
Which of the following users is particularly interested in the firm's ability to meet
their claims over a very short period of time? (2024)
(A) Labour Unions
(B) Trade Payables
(C) Top Management
(D) Finance Manager
Ans. (B) Trade Payables
3. ___________ ratios are calculated to determine the ability of the business to
service its debt in the long run. (2024)
(A) Liquidity
(B) Turnover
(C) Solvency
(D) Profitability
Ans. (C) Solvency
4. On 1st April, 2022, Zubian Ltd. issued ₹ 10,00,000, 7% Debentures of ₹ 100
each at a premium of 6%, redeemable at a premium of 4% after five years. The
company had a balance of ₹ 30,000 in Securities Premium Account. (2024)
(a) Pass necessary journal entries for issue of debentures and for writing off
'Loss on Issue of Debentures' utilising Securities Premium Account at the end of
the first year itself.
Ans. Books of Zubian Ltd.

(b) Prepare 'Loss on Issue of Debentures Account' for the year ended 31st March,
2023.
Ans.
 Redemption of Debentures
2 Marks Questions

1. Pass necessary journal entries for the redemption of debentures in the

following case in the books of Jain Ltd. Purchased for immediate cancellation
930, 12% debentures of Rs 1,000 each at Rs 975 each. (All India 2009)
Ans.

2. Pass necessary journal entries for the following transactions Purchased 3000,
9% own debentures of Rs 100 each at Rs 97 each for immediate
cancellation.(Delhi 2008)
Ans.

3.Pass necessary journal entries in the books of Rachana Ltd for the following
transactions Purchased 800, 9% own debentures of Rs 100 each for Rs 95 per
debenture for redemption. (All India 2008)
Ans.

3 Marks Questions

4.Maharana Ltd main business is manufacturing of tyres. The company is very

particular about the observation of the provisions of the Companies Act and SEBI
guidelines. On 1st April, 2010 the company issued Rs 18,00,000, 8% debentures
of Rs 100 each. The debentures were redeemable at a premium of 5%. On 31st
March, 2013, all the debentures were redeemed. Since, the manufacturing of tyres
results in air pollution, the company had installed a plant for its effective control.
Pass necessary journal entries for the redemption of debentures. Also, identify
the value observed by Maharana Ltd. It is assumed that the company has
adequate balance in Debenture Redemption Reserve Account. (Compartment
2014)
Ans.

5.Manish Ltd issued Rs 38,00,000, 8% debentures of 1100 each on 1st April, 2007.
The terms of issue stated that the debentures were to be redeemed at a premium
of 5% on 30th June, 2009. The company decided to transfer out of profits t
5,00,000 to debenture redemption reserve on 31st March, 2008 and Rs 4,50,000 on
31st March, 2009.Pass necessary journal entries regarding the issue and
redemption of debentures, without providing for either the interest or loss on
issue of debentures. (AH India 2011)
Ans.

6.On 1st April, 2005 Rohim Ltd had made an issue of 3,000, 6% debentures of Rs
100 each. The company during the year 2006-07 purchased for cancellation 600 of
these debentures. The company paid Rs 95 per debenture for 500 Debentures and
Rs 98 per debenture for the rest.The expenses on purchase amounted to Rs
400.Pass journal entries in the books of the company for the period 2006-07. (All
India 2008)
Ans.

4 Marks Questions

7. Sarvottam Ltd decided to redeem its 1,250, 12% debentures of Rs 100 each. It
purchased 850 debentures from the open market at Rs 96 per debenture. The
remaining debentures were redeemed out of profit. The company has already
made a provision for debenture redemption reserve in its books.Pass necessary
journal entries in the books of the company for the above transactions.(All India
2012)
Ans.
8.Pass the necessary journal entries for the issue and redemption of debentures
in the following cases:
(i)15,000,9% debentures of Rs 250 each issued at 5% premium, repayable at 15%
premium.
(ii)2,00,000,12% debentures of Rs 10 each issued at 8% premium, repayable at
par.(All India 2011)
Ans.
9.X Ltd has Rs 8,00,000, 9% debentures due to be redeemed out of profits on 1st October,
2009 at a premium of 5%. The company had a debenture redemption reserve of Rs
4,14,000. Pass necessary journal entries at the time of redemption. (Delhi 2010; Modified)
Ans.

10.F Ltd issued Rs 1,00,000, 15% debentures of Rs 100 each at a premium of 5%,
redeemable at a premium of 10% at the end of 4 years. The board of directors
decided to transfer the minimum required amount to debenture redemption
reserve account at the time of redemption. Pass journal entries at the time of
redemption of debentures. (All India 2010; Modified)
Ans.
11.On 1st January, 2009, Tanisha Ltd purchased 5,000, 15% own debentures of Rs
100 each for immediate cancellation Rs 98, the brokerage being 1%.Pass the
necessary journal entries. (Delhi 2010 c)
Ans.

12.On 1st January, 2009, NK Ltd purchased for immediate cancellation Rs 50,000
of its 15% debentures @ 97, the expenses being Rs 1,000.Pass the necessary
journal entries. (Delhi 2010 c)

Ans.

13.Mona Ltd has issued 20,000, 9% debentures of Rs 100 each of which half the
amount is due for redemption on 31st March, 2008. The company has in its
debenture redemption reserve account a balance of Rs 5,00,000. Record the
necessary journal entries at the time of redemption of debentures.
(Delhi 2009; Modified)
Ans.

14. Anupama Ltd had issued 10,000, 9% debentures of Rs 100 each which were
due for redemption on 31st March, 2008. The company has in its debenture
redemption reserve account a balance of Rs 2,50,000. Record the necessary
journal entries at the time of redemption of debentures. (All India 2009)
Ans.

6 Marks Questions

15.Pass necessary journal entries for the issue and redemption of debentures in
the following cases 20,000, 12% debentures of Rs 50 each were issued and to be
redeemed as follows

(i)Issued at par and redeemed at a premium of 10%.

(ii)Issued at a premium of 10% and redeemable at a premium of 20%.
(iii)Issued at par and 50% of the redemption to be made in cash, and the balance
to be redeemed at a premium of 20% through the issue of fresh debentures. (All
India 2011)
Ans.
16.On 1st January, 2007 a public limited company issued 15,000, 10% debentures
of Rs 100 each at par which were repayable at a premium of 15% on 31st
December, 2011. On the date of maturity, the company decided to redeem the
above mentioned 10% debentures as per the term of issue, out of profits. Surplus
i.e. Balance in Statement of Profit and Loss shows a credit balance of Rs
20,00,000 on this date. The offer was accepted by all the debenture holders and
all the debentures were redeemed. Pass the necessary journal entries in the
books of the company only for the redemption of debentures. (All India 2011;
Modified)
Ans.

17 . Suresh Ltd on 1st April, 2006 acquired assets of the value of Rs 6,00,000 and
liabilities worth Rs 70,000 from P & Co at an agreed value of Rs 5,50,000. Suresh
Ltd issued 12% debentures of Rs 100 each at a premium of 10% in full
satisfaction of purchase consideration. The debentures were redeemable 3 years
later at a premium of 5%. Pass entries to record the above including redemption
of debentures.(Delhi; All India 2010; Modified)
Ans.
 Financial Statements of a Company

1. Azhar, Sumit and Robit were partners in a firm sharing profits and losses in the
ratio of 3 : 1 : 1. Their Balance Sheet as at 31st March, 2023, was as follows :
(2024)
Balance Sheet of Azhar, Sumit and Robit as at 31st March, 2023

Robit died on 30th June, 2023. According to the Partnership deed, Robit's legal
representatives were entitled to :
(i) Balance in his Capital Account.
(ii) His share of General Reserve.
(iii) Interest on capital @ 10% p.a.
(iv) His share of goodwill. Goodwill of the firm was valued on the basis of thrice
the average of the past four years' profits.
(v) His share in profits up to the date of death on the basis of the profit for the
last year.
Profit for the previous years were :

Prepare Robit's Capital Account to be rendered to his legal representatives.

Ans.

Working Notes:
(i) Goodwill = 3 x 56,000/4 = 42,000
Robit’s Share in firm’s Goodwill = 42,000 x 1/5 = 8,400
Gaining ratio between Azhar and Sumit = 3:1
(ii) Robit’s Share in the Profit upto the date of death = 15,000 x 1/5 x 3/12
= 750
 Introduction to Financial Statement Analysis
1 Mark Questions

1.State any one limitation of financial statement analysis.(Delhi 2014,2013,2010;

All India 2014,2014(C), 2013,2010)
Ans. Qualitative aspect is ignored Qualitative aspects like quality of management,
quality of labour force,public relations are ignored while carrying out the analysis of
financial statements, as financial statements are confined to monetary matters only.

2.State any one objective of financial statement analysis. (All India 2013; Delhi
2013,2010)
Ans. Inter-firm comparison With the help of financial statement analysis inter-firm
comparison become easy. It helps in assessing own performance as well as that of
others.

3.State one advantage of financial statements analysis. (Delhi, 2013)

Ans. Financial statement analysis helps the management to judge the overall as well as
segmentwise operational efficiency of the business.

4.Explain how financial statements analysis ignores qualitative elements. (All

India 2013)
Or

State how qualitative aspects are ignored in financial statements analysis. (Delhi
2011C)
Ans. Financial statements analysis ignore qualitative elements as it is confined to the
monetary matters only because quality cannot be measured in monetary terms.

5.State the significance of analysis of financial statements to ‘top

management’.(All India 2012)
Ans. Financial statement analysis enables the ‘top management’ to evaluate the overall
efficiency of the business. It provides adequate information for planning, budgeting and
controlling the affairs of the business.

6.State the significance of analysis of financial statements to ‘lenders’? (Delhi

2012)
Ans. Lenders can judge long-term and short-term solvency of the business or its ability
to repay debts and interest through analysis of financial statements.

7.How is the financial statements analysis useful to finance manager? (All India
2011)
Ans. Financial statements analysis is useful to finance manager for taking financial
decisions for the business. It provides adequate information for financial planning.
8.State the interest of tax authorities in the analysis of financial statements.(All
India 2011; HOTS)
Ans. Tax authorities are interested to analyse the financial statements to know about
the revenue of business firm and for the collection of various types of taxes.

9.How is ‘window dressing’ a limitation of financial statements analysis? (All

India 2010)
Ans. ‘Window dressing’ refers to displaying the rosy picture of an enterprise through
financial statements. Sometimes material information is concealed in financial
statements due to ‘window dressing’.

10.How the solvency of a business is assessed by financial statements

analysis?(Delhi 2010)
Ans. The solvency of a business is assessed by financial statements analysis through
long-term and short-term solvency ratios.

3 Marks Questions

11.Explain advantages or objectives of financial statements analysis.(Delhi 2010;

All India 2010)
Ans. Advantages of financial statements analysis are as follows:
(i) Financial statements analysis helps the management to judge the overall as well as
segment wise operational efficiency of the business.
(ii) Financial statements analysis measures the short-term and long-term financial
position of the business.
(iii) Financial statements analysis assesses the growth potential of the business.

12. What is meant by analysis of financial statements? State any two limitations
of
analysis of it. (Delhi 2010 C, 2009 C, All India 2009)
or
Explain any three limitations of analysis of financial statements.(Delhi 2010 C,
2009 C; All India 2009)

Ans. Analysis of financial statements is the systematic numerical representation of the

relationship of one financial fact with the other to measure the profitability, operational
efficiency, solvency and the growth potential of the business. Various items of statement
of profit and loss and balance sheet are compared and their inter-relationship is
established. Limitations of analysis of financial statements are as follows:
(i) Financial statement analysis ignores qualitative aspects like quality of management,
labour force and public relations.
(ii) Suffering from the limitations of financial statements.
(iii) Financial statements are historical in nature.
13. Why is analysis of financial statements important to creditors? (All India 2009;
hots)
Ans. Creditors supplying goods to the business are interested to know as to whether
the business would be in a position to pay their amount on due date. For getting such
information, financial analysis can be used. Financial statements help to know the
liquidity and short-term solvency position of the firm.

14. What is vertical analysis of financial statements? (All India 2009)

Ans. Also called as static analysis, this analysis is made to review and analyse the
financial statements of one particular year only. Such analysis is useful in comparing the
performance of several companies of the same types or divisions or departments in one
enterprise. Ratio anal/sis and common size statements are examples of this type of
analysis.

15. What is horizontal analysis of financial statements? (Delhi2009)

Ans. Also called as dynamic analysis, this analysis is made to review and analyse the
financial statements of a number of year-. and therefore, based on financial data taken
for those years. It shows comparison of finam sal data for several years against a
chosen base year. It is very useful for long-term trend analysis and planning.

16. What is the importance of financial statements analysis? (Delhi 2009)

Ans. Importance of financial statements analysis are as follows:

(i) judging the operational efficiency of the business It is very significant that the
company must know the operational effic iency of its business. The financial statements
analyst can judge the operational efficiency of the business by calculating profitability
ratios.

(ii) Measuring the profitability Financial statements show the gross profit, net profit and
other expenses. The relationship of these items can be established with sales. Gross
profit, net profit, expenses and operating ratios may be calculated and the profitability of
the business can be ascertained.

(iii) Measuring short-term and long-term financial position The financial statements
analyst can judge long-term and short-term solvency of the firm or its ability to repay
debts and interest thereon through analysis of financial statements.
(iv) Indicating the trend of achievements Financial statements of the previous years can
be compared and the trend regarding various expense, purchase, sales, gross profit
and net profit can be ascertained, cost of goods sold, values of assets and liabilities can
be compared and the future prospects of the business can be indicated.
(v)Assessing the growth potential of the business The trend and dynamic analysis of the
business provides sufficient information indicating the growth potential of the business.
(vi)Inter-firm comparison With the help of financial statement analysis, inter-firm
comparison becomes easy. It helps in assessing own performance as well as that of
other, if mergers and acquisition are to be considered.
 Tools of Financial Statements Analysis
1 Mark Questions

1. Which item is assumed to be 100 while preparing common size statement of

profit
and loss? (Compartment 2014)
Ans. Revenue from operations are assumed to be 100 while preparing common size
statement of profit and loss.

2.Name any two tools of analysis of financial statements. (Compartment 2014)

Ans. Two tools of analysis of financial statements are:
(i) Ratio analysis (ii) Cash flow statement

3.What is meant by a common size statements? (Delhi 2011)

Ans. The statement wherein figures reported are converted into percentage to some
common base are known are common size statements. Each percentage shows the
relation of the individual item to its respective total. In common size income statement,
net sales figure is assumed to be 100 and all other figures of expenses are expressed
as a percentage of sales. In common size balance sheet, the total of assets or liabilities
is assumed to be 100 and figures are expressed as a percentage of the total.

3 Marks Questions

4. From the following information, prepare a comparative statement of profit and

loss for the year 2009-2010

Other Information
(i)Income tax is calculated @ 50%.
(ii)Manufacturing expenses are 50% of the total of that category. (All India 2011;
Modified)
Ans.

5.From the following information, prepare a comparative statement of profit and

loss for the years 2009 and 2010

Other Information
(i) Income tax is calculated @ 50%.
(ii) Manufacturing expenses are 50% of the total of that category. (Delhi 2011 C;
Modified)

Ans.
6. What are common size statements? State any two uses of common size
statements.(All India 2008)
Ans. Common size statement The statement wherein figures reported are converted
into percentage to some common base are known are common size statements. Each
percentage shows the relation of the individual item to its respective total. In common
size income statement, net sales figure is assumed to be 100 and all other figures of
expenses are expressed as a percentage of sales. In common size balance sheet, the
total of assets or liabilities is assumed to be 100 and figures are expressed as a
percentage of the total.
Uses of common size statements are as follows:
(i) It helps in comparing the relative values of various items of income statement and
position statement over two or more accounting periods. Thus, financial managers
prepare common size statements for business reporting and decision-making purposes.
(ii) Common size statements prepared by the firm over the years would highlight the
relative change in each group of income, expenses, assets and liabilities.
4 Marks Questions

7.From the following statement of profit and loss of Fenox Ltd for the year ended
31st March, 2013, prepare a comparative statement of profit and loss

Ans.

8. On the basis of the following information extracted from the statement of profit
and loss for the year ended 31st March, 2012 and 2013, prepare a comparative
statement of profit and loss:
Ans.

9.From the following statement of profit and loss of Suntrack Ltd, for the years
ended 31st March, 2011 and 2012, prepare a ‘comparative statement of profit and
loss’.

Ans.

10. From the following statement of profit and loss of Moon track Ltd., for the
years ended 31st March, 2011 and 2012, prepare a ‘comparative statement of
profit and loss.
Ans.

11. From the following income statement, prepare a common size statement of
profit and loss Jayant Ltd for the year ended 31st March, 2011
Ans.

12.Followings is the statement of profit and loss of Raj Ltd for the year ended
31st March, 2011

Prepare a common size statement of profit and loss of Raj Ltd for the year ended
31st March, 2011.(Delhi 2012; Modified)
Ans.

13.Prepare a comparative statement of profit and loss from the following

information’s

Ans.
NOTE Wages paid are a part of direct expenses and they are already included in cost of
goods sold.

14. Prepare a comparative statement of profit and loss from the following
information

Ans.
NOTE Carriage inwards are a part of direct expenses and they are already included in
cost of goods sold.

15. From the following information given below, prepare a comparative statement
of profit and loss

Ans.
NOTE Purchase is a part of cost of goods sold and thus not shown separately

16. From the following information given below, prepare a comparative income
statement of profit and loss
Ans.

17.Prepare a comparative statement of profit and loss from the following

Ans.
NOTE Purchase is a part of cost of goods sold and thus not shown separately.

18. Prepare a comparative statement of profit and loss from the following

Ans.
NOTE Purchase is a part of cost of goods sold and thus not shown separately.

19. From the following information provided, prepare a comparative statement for
the period 2008 and 2009

Ans.
20. From the following information provided, prepare a comparative statement of
profit and loss for the period 2008 and 2009.

Ans.

21. Prepare a comparative statement of profit and loss from the following
Ans.

22. From the following information, prepare a comparative statement of profit and
loss Vimal Ltd.

Ans.
23. From the following information, prepare a comparative statement of profit and
loss Victor Ltd.
Ans.
Accounting Ratios
 Introduction
1 Mark Questions

1. State how personal bias can get reflected in ratio analysis. (All India 2011)

Ans. In many situations, the accountant has to make the choice out of various
alternatives available e.g. choice in the method of depreciation (straight line or written
down), choice in the method of inventory valuation (LIFO, FIFO or HIFO). Since the
subjectivity is inherent in personal judgement, the financial statements are therefore not
free from personal bias. As a result, ratio analysis cannot be said to be free from bias.

2. State any two limitations of ratio analysis. (All India 2010)

Ans. The two limitations of ratio analysis are:

(i) Accounting ratios ignore qualitative factors.
(ii) Impressed by personal bias and ability of the analyst.

3. What is meant by accounting ratios? (Delhi 2010 c)

Ans. An accounting ratio is a mathematical expression of the relationship between two

items or group of items shown in the financial statements.
 Classification of Accounting Ratios
1 Mark Questions

1. State with reason whether repayment of long-term loan will result in increase,
decrease or no change of debt equity ratio. (All India 2012; hots)

Ans. Repayment of long-term loan will reduce the long-term debt but the share holders’
funds will remain same. Therefore, the debt-equity ratio will decrease.

2. What will be the operating profit ratio, if operating ratio is 83.64%? (Delhi 2009)
Ans. Operating Profit Ratio = 100 – Operating Ratio
= 100- 83.64 = 16.36%

3. What will be the operating profit ratio, if operating ratio is 88.94%? (Delhi 2009)
Ans. Operating Profit Ratio = 100 – Operating Ratio
= 100- 88.94 = 11.06%

4. What will be the operating profit ratio, if operating ratio is 81.38%? (All India
2009)
Ans. Operating Profit Ratio = 100 – Operating Ratio
= 100- 81.38 =18.62%

5. What will be the operating profit ratio, if operating ratio is 88.34%? (All India
2009)
Ans. Operating Profit Ratio = 100 – Operating Ratio = 100- 88.34 = 11.66%.

6. The gross profit ratio of a company is 50%. State with reason whether the
decrease in rent received by Rs 15,000 will increase, decrease or not change the
ratio.(Delhi 2009; HOTS)
Ans. Decrease in rent received by Rs 15,000 will not change the gross profit because
rent received is a non-operating income.

7. The current ratio of a company is 3: 1. State with reason, whether the payment
of? 20,000 to the creditors will increase, decrease or not change the ratio.(All
India 2009; HOTS)
Ans. After the payment of? 20,000 to the creditors, both the total of current assets and
total of current liabilities will be reduced by the same amount. Therefore, the current
ratio will increase.

8. Quick ratio of a company is 1.5:1. State giving reason whether the ratio will
improve, decline or not change on payment of dividend by the company. (Delhi
2008; hots)
Ans. Ratio will increase as both the current assets and current liabilities will decrease
on the payment of dividend.

9. The inventory turnover ratio of a company is 3 times. State giving reason,

whether the ratio will improve, decline or not change because of increase in the
value of closing Inventory by ? 5,000. (Delhi 2008; hots)
Ans. Stock turnover ratio will decline because increase in the value of closing stock by
?5,000 will increase the value of average Inventory and decrease the cost of goods
sold.

10. The debt-equity ratio of a company is 0.8:1. State whether the long-term loan
obtained by the company will improve, decrease or not change the ratio. (All India
2008; hots)
Ans. Debt equity ratio will improve as the long-term debts will decrease, but total
shareholders’ funds remain unchanged.

3 Marks Questions

11.OM Ltd has a current ratio of 3.5 : 1 and quick ratio of 2 : 1. If the excess of
current assets over quick assets as represented by inventory is Rs 1,50,000,
calculate current assets and current liabilities. (Delhi2012)

Ans.
12. X Ltd has a current ratio of 3: 1 and quick ratio of 2 :1. If the excess of current
assets over quick assets as represented by inventory is Rs 40,000, calculate
current assets and current liabilities. (All India 2012)
Ans.

13.From the following information, calculate any two of the following ratios
(i) Debt-equity ratio
(ii) Working capital turnover ratio (iii) Return on investment
Information Equity share capital Rs 10,00,000, general reserve Rs 1,00,000,
balance of statement of profit and loss after interest and tax Rs 3,00,000, 12%
debentures Rs 4,00,000, creditors Rs 3,00,000, land and buildings Rs 13,00,000,
furniture Rs 3,00,000, debtors 12,90,000, cash Rs 1,10,000.Revenue from
operations i.e. sales for the year ended 31st March, 2011 was Rs 30,00,000. Tax
rate is 50%. (All India 2012; Modified)

Ans.
14.On basis of the following information, calculate
(i)Debt equity ratio
(ii)Working capital turnover ratio

Ans.
15.On the basis of the following information, calculate
(i)Debt equity ratio (ii) Working capital turnover ratio
Ans.

Ans.
17. The quick ratio of a company is 2 : 1. State giving reasons, (for any four)
which of the following would improve, reduce or not change the ratio

(i)Purchase of machinery for cash

(ii)Purchase of goods on credit (iii) Sale of furniture at cost
(iv)Sale of goods at a profit
(v)Cash received from debtors (Delhi 2011 c)

Ans. (i) Purchase of machinery for cash

Effect Reduce
Reason Purchase of machinery for cash will decrease the quick assets, but the current
liabilities remain unchanged.

(ii) Purchase of goods on credit

Effect Reduce
Reason Purchase of goods on credit will increase the current liabilities, but the quick
assets remain unchanged.

(iii) Sale of furniture at cost

Effect Improve
Reason Sale of furniture at cost will increase the quick assets, but the current liabilities
remain unchanged.

(iv)Sale of goods at a profit

Effect Improve
Reason Sale of goods at a profit will increase the quick assets, but the current liabilities
remain unchanged.

(v)Cash received from debtors

Effect No change
Reason Cash received from debtors will not change the quick assets because the quick
assets are increased and decreased with the same amount, and the current liabilities
remain unchanged.

18.The debt equity ratio of a company is 1:1 state giving reasons, (any four)
which of the following would improve, reduce or not change the ratio
(i)Purchase, of machinery for cash
(ii)Purchase of goods on credit (iii) Sale of furniture at cost
(iv)Sale of goods at a profit
(v)Redemption of debentures at a premium (All India 2011)

Ans. (i) Purchase of machinery for cash

Effect No change
Reason Neither the long-term debt nor the shareholders’ funds are affected by
purchasing of machinery for cash.
(ii)Purchase of goods on credit
Effect No change
Reason Neither the long-term debt nor the shareholders’ funds are affected by
purchasing of goods on credit.

(iii)Sale of furniture at cost

Effect No change
Reason Neither the long-term debt nor the shareholders’ funds are affected by selling
of furniture at cost.

(iv)Sale of goods at a profit

Effect Reduce
Reason Shareholders’ funds are increased by the amount of profit on sale of goods, but
the long-term debts remain unchanged.

(v)Redemption of debentures at a premium

Effect Reduce
Reason Redemption of debentures will reduce the long-term debts, but shareholders’
funds remain unchanged. Here,it is assumed that premium payable on redemption of
debenture is written-off through existing securities premium.

19.(i)A business has a current ratio of 3 : 1 and quick ratio of 1.2 : 1. If the working
capital is Rs 1,80,000. Calculate the total current assets and value of inventory.
(ii) From the given information calculate the inventory turnover ratio. Revenue
from operations (Sales) Rs 2,00,000, gross profit 25% on cost, inventory at the
beginning is 1/3 of the inventory at the end which was 30% of sales. (Delhi
2010; All India 2010)

Ans.
20. Assuming that the debt equity ratio is 2. State giving reasons whether this
ratio would increase, decrease or remain unchanged in the following cases. (Any
four)
(i)Purchase of fixed assets on a credit of two months
(ii)Purchase of fixed assets on long-term deferred payment basis
(iii)Issue of new shares for cash
(iv)Issue of bonus shares
(v)Sale of fixed assets at a loss of 13,000. (Delhi 2010; All India 2010)
Ans. (i) Purchase of fixed assets on a credit of two months
Effect No change
Reason Neither the long-term debt nor the shareholders’ funds are affected by
purchasing of fixed assets on a credit of two months.

(ii) Purchase of fixed assets on a long-term deferred payment basis

Effect Increase
Reason The long-term debts are increased by the purchasing of fixed assets on a long-
term deferred payment basis, but the shareholders’ fund remains unchanged.

(iii)Issue of new shares for cash

Effect Decrease
Reason Shareholders’ funds are increased by the issue of new shares for cash, but the
long-term debts remain unchanged.

(iv) Issue of bonus shares

Effect No change
Reason Shareholders’ funds increase and decrease by the same amount.

(v) Sale of fixed assets at a loss of Rs 3,000

Effect Increase
Reason The shareholders’ funds will reduce by the amount of loss of 3,000, but the
long-term debt remain unchanged.

21.From the following information, calculate any two of the following ratios
(i)Current ratio
(ii)Debt equity ratio
(iii)Inventory turnover ratio
Information

Revenue from operations (Net sales) Rs 5,00,000, opening inventory Rs 7,000,

closing inventory Rs 4,000 more than the opening inventory, net purchase Rs
1,00,000 less than revenue from operations, operating expenses Rs 30,000, liquid
assets Rs 75,000, prepaid expenses Rs 2,000, current liabilities Rs 60,000, 9%
debentures Rs 3,00,000, long-term loan from bank Rs 1,00,000 equity share
capital Rs 10,00,000 and 8% preference share capital Rs 2,00,000. (Delhi 2010 c)

Ans.
22.From the following information, calculate any two of the following ratios (i)
Liquid ratio (ii) Gross profit ratio (iii)Debt equity ratio
Information
Revenue from operations (Net sales) Rs 4,00,000, opening inventory Rs 10,000,
closing inventory Rs 3,000 less than the opening inventory, net purchase 80% of
revenue from operations, direct expenses Rs 20,000, current assets Rs 1,00,000,
prepaid expenses Rs 3,000, current liabilities Rs 60,000, 9% debentures Rs
4,00,000, long-term loan from bank Rs 1,50,000, equity share capital Rs 8,00,000
and 8% preference share capital Rs 3,00,000. (All india 2010)
Ans.

23.(i) Net profit after interest but before tax Rs 1,40,000, 15% long-term debts Rs
4,00,000,shareholders’ funds Rs 2,40,000 and tax rate 50%. Calculate return on
capital employed.
(ii) Opening inventory Rs 60,000, closing inventory Rs 1,00,000, inventory
turnover ratio 8 times and selling price 25% above cost. Calculate the gross profit
ratio.
Ans.

24. From the following information, calculate the following ratios

(i)Liquid ratio
(ii)Proprietary ratio
Ans.

25. From the following information, calculate any two of the following ratios
(i) Operating ratio (ii) Inventory turnover ratio (iii) Proprietary ratio
Ans.
26.From the following information, calculate any two of the following ratios (i)
Liquid ratio (ii) Debt equity ratio

Ans.

27.From the following information, calculate any two of the following ratios (i) Net
profit ratio (ii) Debt equity ratio
Ans.

4 Marks Questions

28. From the following calculate the ‘gross profit ratio’ and ‘working capital
turnover ratio’:
Ans.

29.(i)From the following information, compute ‘debt equity ratio’

(ii) The current ratio of X Ltd is 2 : 1. State with reason which of the following
transaction would increase, decrease or not change the ratio
(a) Included in the trade payables was a bills payable of Rs 9,000 which was met
on maturity.
(b)Company issued 1,00,000 equity shares of Rs 10 each to the vendors of
machinery purchased. (Delhi 2014)

Ans.

30.The quick ratio of a company is 1.5 : 1. State with reason which of the
following
transactions would (a) increase (b) decrease or (c) not change the ratio
(a)Paid rent Rs 3,000 in advance.
(b)Trade receivables included a debtor Shri Ashok who paid his entire amount
due Rs 9,700.
(ii) From the following information compute ‘proprietary ratio’

Ans. (i) (a) Not change the ratio

Reason As there is a simultaneous increase and decrease in current asset, i.e. prepaid
expenses and cash, therefore it will not affect the value of current asset.
(b) Not change the ratio
Reason As there is a simultaneous increase and decrease it will not affect the value of
current asset.

31.From the following calculate:

(i) Operating profit ratio; and (if) Working capital turnover ratio

Ans.
32. (i) Compute ‘debtors turnover ratio’ from the following information Revenue
from operations (Total sales) Rs 5,20,000, cash revenue from operations 60% of
the credit revenue from operations closing debtors Rs 80,000, opening debtors
are 3/4th of closing debtors.
(ii) Current liabilities of a company are Rs 1,60,000. Its liquid ratio is 1.5 : 1 and
current ratio is 2.5 : 1. Calculate quick assets and current assets. (All India 2013)

Ans.
33.(i)Compute ‘working capital turnover ratio’ from the following
information Cash revenue from operations Rs 1,30,000, credit revenue from
operations Rs 3,80,000, sales returns Rs 10,000, liquid assets Rs 1,40,000,
current liabilities Rs 1,05,000 and inventory Rs 90,000.
(ii) Calculate ‘debt equity ratio’ from the following information Total assets Rs
3,50,000, total debt Rs 2,50,000 and current liabilities Rs 80,000.(Delhi 2013)
Ans.

34.From the following information, calculate any two of the following ratios
(i)Gross profit ratio
(ii)Working capital turnover ratio
(iii)Proprietary ratio

Ans.
 Cash Flow Statement

1. Classify the following items under major heads and sub-heads (if any) in the
Balance Sheet of the company as per Schedule III Part I of the Companies Act,
2013 : (2024)
(a) Long Term Loans from Bank
(b) Loose Tools
(c) Outstanding Expenses
Ans.
Item Major Heads Sub heads
(a) Long Term Loans Non–Current Liabilities Long Term Borrowings
from Bank
(b) Loose Tools Current Assets Inventories
(c) Outstanding Expenses Current Liabilities Other Current Liabilities

2. From the given Balance Sheet of Geox Ltd., prepare Common Size Balance
Sheet: (2024)
Ans. Geox Ltd

3. From the following information, prepare a Comparative Statement of Profit and

Loss for the year ended 31st March, 2022 and 2023 : (2024)
Particulars Note No. 2022 – 23 (₹) 2021 – 22 (₹)
Revenue from operations 10,00,000 8,00,000
Employee benefit expenses 2,50,000 1,00,000
Other expenses 5,50,000 4,00,000
Tax rate 50%

Ans. Comparative Statement of Profit & Loss

 Accounting for Share Capital

1. Alfa Ltd. invited applications for 50,000 equity shares of ₹ 10 each at a

premium of 30 %. The whole amount was payable on application. Applications
were received for 2,50,000 shares. The company decided to allot the shares on a
pro-rata basis to all the applicants. The amount refunded by the company was :
(2024)
(A) ₹ 32,50,000
(B) ₹ 15,60,000
(C) ₹ 39,00,000
(D) ₹ 26,00,000
Ans. (D) ₹ 26,00,000
2. Reserve capital is that part of _______________ capital which cannot be called
except at the time of winding up of the company. (2024)
(A) Issued
(B) Called up
(C) Uncalled
(D) Nominal
Ans. (C) Uncalled
3. Xeno Ltd. issued 25,000 equity shares of ₹ 10 each. The amount was payable as
follows : (2024)
On Application - ₹ 4 per share
On Allotment - ₹ 5 per share
On First and Final call - Balance
All the shares offered were applied for and allotted. All the money due on
allotment was received except on 1,500 shares. These shares were forfeited
immediately after allotment. First and final call was not yet made. At the time of
forfeiture, Share Capital Account will be debited by :
(A) ₹ 15,000 (B) ₹ 24,000
(C) ₹ 13,500 (D) ₹ 18,000
Ans. (C) ₹ 13,500
4. Money received in advance from shareholders before it is actually called up by
the directors is : (2024)
(A) debited to calls in advance account
(B) credited to calls in advance account
(C) debited to share capital account
(D) credited to share capital account
Ans. (B) credited to calls in advance account
5. An offer of securities or invitation to subscribe securities to a select group of
persons is termed as : (2024)
(A) Buy back of shares
(B) Employee stock option plan
(C) Private placement of shares
(D) Sweat Equity
Ans. (C) Private placement of shares
6. A share of ₹ 100 on which ₹ 80 is received is forfeited for non-payment of final
call of ₹ 20. The minimum price at which this share can be reissued is : (2024)
(A) ₹ 120
(B) ₹ 100
(C) ₹ 80
(D) ₹ 20
Ans. (D) ₹ 20
7. Shiv Ltd. forfeited 500 shares of ₹ 10 each on which ₹ 7 per share was paid.
These shares were reissued for ₹ 9 per share fully paid. Amount transferred to
Capital Reserve Account will be : (2024)
(A) ₹ 3,000
(B) ₹ 5,000
(C) ₹ 4,500
(D) ₹ 3,500
Ans. (A) ₹ 3,000
8. Dan, Elf and Furhan were partners in a firm sharing profits in the ratio of 5 : 3 :
2. With effect from 1st April, 2023, they decided to change their profit sharing
ratio to 2 : 3 : 5. There existed a General Reserve of ₹ 90,000 on the date of
change in profit sharing ratio. The partners decided not to distribute General
Reserve.
The necessary adjustment entry to show the effect of the above will be :
(2024)

Ans.

9. Sia, Tom and Vidhi were partners in a firm sharing profits in the ratio of 3 : 2 :
1. With effect from 1st April, 2023, they decided to share profits and losses in the
future in the ratio of 1 : 2 : 3. There existed a Debit Balance of ₹ 60,000 in Profit
and Loss Account on that date.
The necessary journal entry for distribution of the balance in the Profit and Loss
Account will be :
(2024)
Ans.

10. Anju, Divya and Bobby were partners in a firm sharing profits and losses in
the ratio of 3 : 2 : 1. Bobby retired. The new profit sharing ratio between Anju and
Divya after Bobby's retirement was 5 : 3.
The gaining ratio of remaining partners will be : (2024)
(A) 3 : 2
(B) 5 : 3
(C) 3 : 1
(D) 2 : 3
Ans. (C) 3 : 1
11. Mita, Veena and Atul were partners in a firm sharing profits and losses in the
ratio of 3 : 2 : 1. Atul retired and his share was taken over by Mita and Veena in
the ratio of 1 : 4. The new profit sharing ratio between Mita and Veena after Atul's
retirement will be: (2024)
(A) 3 : 2
(B) 8 : 7
(C) 7 : 3
(D) 2 : 3
Ans. (B) 8 : 7
12. Mohan, Suhaan and Adit were partners in a firm sharing profits and losses in
the ratio of 3 : 2 : 1. Their fixed capitals were : ₹ 2,00,000, ₹ 1,00,000 and ₹
1,00,000 respectively. For the year ended 31st March, 2023, interest on capital
was credited to their accounts @ 8% p.a. instead of 5% p.a.
Pass necessary adjusting journal entry. Show your workings clearly. (2024)
Ans. Solution:

Working Notes:

13. Manoj and Nitin were partners in a firm sharing profits and losses in the ratio
of 2 : 1. On 31st March, 2023, the balances in their capital accounts after making
adjustments for profits and drawings were ₹ 90,000 and ₹ 80,000 respectively.
The net profit for the year ended 31st March, 2023 amounted to ₹ 30,000. During
the year Manoj withdrew ₹ 40,000 and Nitin withdrew ₹ 20,000. Subsequently, it
was noticed that Interest on Capital @ 10% p.a. was not provided to the partners.
Also Interest on Drawings to Manoj ₹ 3,000 and to Nitin ₹ 2,000 was not charged.
Pass necessary adjusting journal entry. Show your workings clearly. (2024)
Ans.

Working Notes:
Calculation of Opening Capital
14. Shubhi and Revanshi were partners in a firm sharing profits and losses in the
ratio of 3 : 2. Their Balance Sheet as at 31st March, 2023 was as follows : (2024)
Balance Sheet of Shubhi and Revanshi as at 31st March, 2023

On 1st April, 2023 they admitted Pari into the partnership on the following
terms:
(i) Pari will bring ₹ 50,000 as her capital and ₹ 50,000 for her share of premium
for goodwill for 1/4 th share in the profits of the firm.
(ii) Fixed assets were depreciated @ 30%.
(iii) Stock was valued at < 45,000.
(iv) Bank loan was paid off.
(v) After all adjustments capitals of Shubhi and Revanshi were to be adjusted
taking Pari's capital as the base. Actual cash was to be paid off or brought in by
the old partners as the case may be.
Prepare Revaluation Account and Partners' Capital Accounts.
Ans.
15. Rishi, Shashi and Trishi were partners in a firm sharing profits and losses in
proportion of 1/2, 1/6 and 1/3 respectively. Their Balance Sheet as at 31 st March,
2023 was as follows : (2024)
Balance Sheet of Rishi, Shashi and Trishi as at 31st March, 2023

Shashi retired from the firm on 1st April, 2023 on the following terms :
(i) Fixed Assets were valued at ₹ 56,000.
(ii) Stock was taken over by Shashi at ₹ 26,000.
(iii) Goodwill of the firm was valued at ₹ 18,000 on Shashi's retirement
(iv) Balance in Shashi's Capital Account was transferred to her loan account.
Prepare Revaluation Account and Partners' Capital Accounts.
Ans.

16. The Quick Ratio of a company is 1 : 2. Which of the following transactions will
result in an increase in this ratio ? (2024)
(A) Cash received from debtors
(B) Sold goods on credit
(C) Purchased goods on credit
(D) Purchased goods on cash
Ans. (B) Sold goods on credit
17. Identify which of the following transactions will result in 'Cash Inflow From
Operating Activities': (2024)
(A) Payment to creditors
(B) Interest received by a non-finance company
(C) Dividend received by a non-finance company
(D) Amount received from debtors
Ans. (D) Amount received from debtors
Issues of Redemption of Debentures
 Analysis of Financial Statements

1. From the given information, calculate : (2024)

(a) Quick Ratio
(b) Inventory Turnover Ratio
Particulars Amount (₹)
Current Assets 4,00,000
Inventory 1,00,000
Current Liabilities 2,00,000
Net Profit Before Tax 7,20,000
Revenue from 10,00,000
Operations
Gross Profit Ratio 20%

Ans.
2. From the following information, calculate 'Cash Flows From Operating
Activities': (2024)
Particulars Amount (₹)
Surplus i.e. Balance in Statement of Profit and Loss 6,28,000
Provision for Tax 1,50,000
Proposed Dividend for the previous year 72,000
Depreciation 1,40,000
Loss on Sale of Machinery 30,000
Gain on Sale of Investments 20,000
Dividend Received on Investments 6,000
Increase in Current Liabilities 1,61,000
Increase in Current Assets (other than cash and cash 6,00,000
equivalents)
64,000
Decrease in Current Liabilities
1,18,000
Income Tax Paid

Ans.